Abimael Guzmán’s death leaves several questions for Peru

Not least as Pedro Castillo, the new president, has several allies with links to Shining Path

For a dozen years from 1980 a malign, invisible presence haunted Peru, acquiring ever greater menace. 

Abimael Guzmán, a Marxist philosopher who created a shadowy terrorist army called Sendero Luminoso (Shining Path), ordered massacres, murders, car bombs and the destruction of police stations. 

Yet he never appeared in public. His capture in 1992, through old-fashioned detective work, meant he spent the rest of his life in a maximum-security prison. 

By the time he died, on September 11th, aged 86, many Peruvians had little memory of him. 

His death leaves several unanswered questions.

Sendero was unlike any other guerrilla movement in Latin America. 

Mr Guzmán was inspired by Maoist China, which he visited twice during the Cultural Revolution, rather than Cuba. 

He founded Sendero as a splinter of a splinter of the Peruvian Communist Party in Ayacucho, the capital of an impoverished region in the Andes where he taught at the university. 

He recruited his students, most of them women; many became teachers who, once qualified, fanned out to schools in towns and villages. 

Just as Peru was returning to democracy, he launched his Maoist “protracted people’s war to surround the cities from the countryside”. 

To avoid dependence on outsiders, Sendero’s weapons were machetes, stones and dynamite, until they stole guns from the security forces.

Mr Guzmán, too, was unique. 

His moral dissonance made him one of the 20th century’s last monsters. 

He lived in an absolutist ideological bubble, immune from reality, including the cruelty and suffering he ordered. 

Sendero killed some 38,000 people, according to an investigation by a Truth and Reconciliation Commission. 

Yet Mr Guzmán was indirectly responsible, too, for more than 30,000 killings by the armed forces and self-defence militias. 

The majority of the victims were Quechua-speaking villagers in the Andes—those in whose name his war was supposedly being fought.

He erected a preposterous personality cult around himself: he styled himself President Gonzalo, the “fourth sword of Marxism”. 

Sendero’s ideology became “Marxism-Leninism-Maoism-Gonzalo Thought”. 

When operations went wrong, those responsible were subject to long, humiliating sessions of self-criticism at party meetings. 

He told his followers that their deaths were glorious, playing on Andean millenarianism.

His techniques foreshadowed those of jihadist terrorism. But Mr Guzmán ran no physical risks himself. 

He was no Che Guevara. 

Throughout the war he lived in safe houses in the posher neighbourhoods of Lima. 

When the police burst in, he offered no resistance. 

He immediately called on his followers to give up, turning Sendero into a non-violent political movement (called Movadef) whose purpose was to campaign for his release.

This psychotic narcissism went hand in hand with extraordinary powers of persuasion. 

Psychiatrists might point to a complicated childhood to explain what turned a theoretician into an indirect mass murderer. 

Mr Guzmán was the illegitimate son of an estate administrator and a poor mother who later abandoned him. 

Thanks to his stepmother he acquired a university education—and an uncertain place in the social order.

In explaining Sendero’s bloody appeal sociologists noted Peru’s frailties. 

Many in the Andes hated abusive officials and police, and initially welcomed the Maoists until their totalitarian demands to restrict crops and recruit children prompted a rebellion. 

A fragile state, undermined by the debt crisis of the 1980s and hyperinflation, flailed in its response. 

Brutalised armed forces took far too long to realise that peasant farmers were allies not enemies. 

Some upper-class Peruvians, racked by guilt about their country’s inequalities, sympathised with Sendero.

“There is a powerful capacity in Peruvian society for hatred and destruction,” Alberto Flores Galindo, a historian, told Bello in Lima in 1989. 

Three decades later this capacity has revealed itself in a bitterly polarised election and the victory, by a narrow margin, of Pedro Castillo, a far-leftist—a result that Sendero long made unthinkable. 

The new president is a rural teacher, like many of Mr Guzmán’s recruits, and has several allies with ties either to Sendero or to Movadef. 

Mr Guzmán took to extremes the belief of many communists that the end justifies the means. 

That such zealotry still echoes in Peru ought to bring self-criticism from those in power who are equivocating over the history of terror.

Big Banks Are Funding Climate Disaster. Business Needs to Push Back.

By Paul Polman

         Illustration by Maria Corte

We now have confirmation that humankind is causing runaway climate change. 

The world’s most authoritative climate science body, the United Nations’ Intergovernmental Panel on Climate Change, or IPCC, says unequivocally that we are headed toward catastrophe within two decades, and that extreme weather and ensuing chaos are already with us.

In light of this knowledge, it is staggering the degree to which the global banking sector continues to fund the crisis.

In the five years since the Paris Agreement, our 60 biggest banks have increased their investment in coal, oil, and gas to nearly $4 trillion. 

This is compared with the $203 billion in bonds and loans that has gone toward renewable projects—just 5% of what has gone into fossil-fuel financing.

True, there are sincere and impressive efforts, including from some major banks and insurers, to decarbonize. 

A growing number of investors are demanding greater transparency over their exposure to climate risk.

But across the sector, progress is narrow and slow. 

On average each day, Wall Street’s banks funnel $1 of every $10 they hold into fossil fuels. 

Undoubtedly, they are motivated more by the interests of a few shareholders than the future of humanity.

The IPCC’s report isn’t without hope. 

The one upside of knowing for certain that climate change is man-made is knowing that the future is in our hands. 

Deep cuts in greenhouse-gas emissions could still stabilize rising temperatures. 

But it cannot happen, irrespective of the actions of governments, industry, and society, if the so-called masters of the universe continue to fund planetary suicide.

Shifting finance won’t be easy. 

Big banks don’t need fossil fuels. 

These investments carry numerous risks, from reputational damage to legal exposure and the imposition of new regulations that will leave assets stranded. 

Indeed, renewables now offer a considerably more attractive return. 

But a toxic combination of vested interest, greed, laziness, and frankly a lack of moral leadership is conspiring against change.

An important and underused tactic can help: CEO activism. 

Responsible business leaders can and must start making greater demands of irresponsible banks.

Anything else is an abdication of corporate duty. 

It is good news that so many companies have introduced targets to reduce their direct emissions (known as “scope 1 and 2” emissions), and some, their indirect emissions (scope 3). 

But responsibility goes further, extending to all partners in a company’s value chain, including the banks it deals with. 

If your business banks with an institution that finances global warming, it rightly reflects badly on you.

Most big firms apply some sort of standard to the partners they hire for other services. 

Too few have used this power to raise standards in finance. 

If you wouldn’t bring on a public-relations firm that helps sell tobacco, why prop up a bank whose investments are propelling us toward climate disaster? 

Why indirectly support lending to a fossil-fuel industry that will render your own climate commitments impossible to achieve?

When I was CEO of Unilever, we were the first in the consumer-goods sector to issue green bonds, given to projects that cut carbon, water usage, and waste. 

We were already recognized as a leader in sustainable business, and we wanted to spur better behavior in banks, encouraging lending on the basis of environmental impact. 

We set equivalent conditions with partners across our value chain, not just as sticks but also as carrots to support those we worked with to realize their values.

It is a different way to conceive of corporate responsibility: taking ownership of all your social and environmental impacts, not just the most obvious consequences of your actions. 

The climate crisis demands this wider frame.

Taking full ownership of your actions is a core characteristic of what sustainability guru Andrew Winston and I call a “net positive” company in our new book. 

These courageous businesses thrive by giving more than they take, ultimately profiting by fixing problems rather than creating them.

Imagine a set of six concentric circles. 

Each is a sphere of influence, or Impact Level, starting with a core of direct operations and moving out to include a company’s indirect operations—its choice of value-chain partners; its relationships with the rest of the sector; its role in bigger systems, including policy-making; and its imprint on the wider world.

The stakeholders that businesses rely on increasingly expect leadership at each level even if they recognize that a company’s power diminishes as it moves outward. 

This is true for employees, customers, suppliers, and governments,and it’s especially true for the next generation, which frankly won’t care what your purpose statement says about protecting the environment if you’re teaming up with the financial institutions helping to wreck their future.

The latest climate science, not matter how sobering, doesn’t automatically lead us to despair. 

But it does require every big player to quit carbon and become a force for a healthy, regenerative economy and a safer world. 

The big banks come top of this list. 

Big business needs to give them a push. 

About the author: Paul Polman is the former CEO of Unilever and a U.N.-appointed sustainable-development goals advocate. He is the author of the forthcoming book, Net Positive: How Courageous Companies Thrive by Giving More Than They Take.

Should we worry about corporate debt levels?

Here’s a chart you might worry about, if you were in a worrying mood. From the national accounts: 

 No alt provided

Corporate debt has never been higher, neither in absolute terms nor relative to GDP. 

From 2010 to 2020, corporate debt grew at over 6 per cent a year, almost twice the rate of the economy. 

This seems a little spooky. 

At finance school, they teach you that as companies depend more on debt for financing, their returns and earnings per share rise, but they become less stable in the face of financial stress, because debt costs are rigid, and debt has to be paid back. 

So in theory we should be worried that all this debt will make the next recession or financial crisis worse. 

And recently people mention this risk quite often. 

But Hans Mikkelsen, credit strategist with Bank of America, thinks that we can relax a little, because of this chart: No alt provided

Stock prices have risen even faster than levels of debt. 

Mikkelsen writes that “claims of US corporate bond and loan investors have never been backed by more equity value”.

That doesn’t strike me as at all reassuring. 

If a company, or companies in general, get into a nasty situation where servicing or rolling over their debt is a worry, that equity value is going to disappear fast. 

It is an umbrella companies can only use when the sun is shining. 

Mikkelsen goes on:

Providing an offset to that benefit, the bar is set really high for companies to justify equity valuations organically without leveraging up. 

That means large BBBs [companies rated at the bottom rung of investment grade] and financials, for which maintaining ratings is important, are the sweet spots in investment grade credit. 

Finally note that both equities and credit struggled following prior lows in this leverage ratio (end of 4Q-72, 1Q-00 and 2Q-07).

Mikkelsen likes the debt of companies that are constrained from adding even more debt, suggesting he isn’t all that reassured by equity value, either. 

And his reference to the fact that stocks and debt struggled after what he calls the “leverage ratio” hit lows shows exactly why. 

The ratio gets low when stocks are really expensive, that changes when bad things happen (1972, 2000, 2007, where the little red circles on his chart are), and when bad things happen is when defaults becomes a problem. 

But there is another way to look at this. 

Here is total corporate debt as a percentage of corporate net worth, that is, equity value in the balance sheet rather than the stock market sense:

No alt provided

Leverage in this sense is higher than in Mikkelsen’s sense, but it is right at its 30-year average. 

And isn’t this the kind of leverage we should be worried about? 

The problems start when your debt is almost as much as, or more than, your assets. 

Looking at that last chart, it doesn’t look like US companies have that problem right now. 

So I’m not terribly inclined to put corporate debt on my list of pressing worries. 

Am I missing something?

Median and mean valuations

Among the investment cognoscenti/Twitterati, reading Barron’s is not considered cool. 

It’s your dad’s investment magazine, basically, and talking about something you read there risks people thinking that you wear suspenders, believe the Dow is a good index to follow, and still think in eighths. 

Well, I like Barron’s, whatever kids today think, the little punks. 

Reading it this weekend, I was struck by this interview with Doug Ramsey, who manages the Leuthold Core Investment Fund. 

He said:

I was of the view that the late-1990s stock mania was a once-in-my-lifetime event, and here we are just 21 years later and I would argue that this market is, broadly speaking, more expensive than what we saw in the tech bubble. Back then, the high valuations were concentrated in the top 40 to 50 stocks. Today, the median stock valuation across the market is the highest it has ever been. At the end of July, the S&P 500 median normalised price/earnings ratio was 34.2. In February of 2000, the month-end peak of the tech bubble, it was 22.2.

The idea that the market now is expensive everywhere, rather than being top-heavy, is interesting for a couple of reasons. 

One, it’s not what I would have expected, given how high-valuation tech companies have led the market upwards in this cycle. 

Two, for people like me who received their basic financial training as value investors, it’s bad news. 

We cling to the (possibly irrational) hope that if we search out reasonably priced stocks this will protect us when the market finally falls. 

So I decided to give the data a look myself. 

I took the valuations of the companies in the S&P every year over the last ten years and calculated the mean and the median, on the theory that if the mean is rising further and further above the median, we have an increasingly top-heavy market, which could be vulnerable to changes in fortunes of a relatively small number of stocks, but where value still might be found. 

Alternatively, if the median is rising toward the mean over time, overvaluation is reaching every corner of the market. 

What I found, instead, was hardly any change at all in the relationship of the mean and median (data from S&P Capital IQ): 

 No alt provided

The ratio of mean to median moves a bit, but only within a tight range, from 1.3 to 1.4. 

It doesn’t look like we are getting more top-heavy in the last decade. 

But I have to admit an embarrassing shortcoming of my data. 

It measures the valuation, over the last ten years, of the companies that are in the S&P now (I can’t figure out to make Capital IQ adjust for historical changes in the index constituents; if you know how to do this, email me). 

So it is possible that adjusting for changes in the index over the years would give a different result. 

That said, I find the stability of the ratio interesting.

Mind the Mind Gap

While developing countries have been catching up to their richer counterparts on some key metrics, they appear to be falling behind on others. Most worrisome is a growing gap in the local capabilities needed to make the most of new technological innovations.

Ricardo Hausmann

CAMBRIDGE – Over the past 60 years, some development gaps across countries have narrowed impressively. 

But others have persisted. And one has widened, with ominous implications for the future.

On the positive side, life expectancy in low-income countries has risen from 55% of US levels in 1960 (when it was 70 years) to over 80% now (when it is 78.5 years), while in many middle-income countries – including Chile, Costa Rica, and Lebanon – people live longer than Americans do.

A similar story can be told about education. Even as tertiary school enrollment in the United States increased from 47% in 1970 to 88% in 2018, many countries have dramatically narrowed the gap. 

Latin America, for example, went from less than 15% of the US level in 1970 to 60% of today’s much higher US enrollment rate, with some countries (such as Argentina and Chile) reporting enrollment rates higher than the US. 

In the same period, Arab countries went from less than 13% of US levels to more than 36% today.

But other gaps remain stubbornly large. 

While US per capita income more than tripled between 1960 and 2019 (at purchasing power parities), the income gap between it and Latin America, South Africa, and the Arab world did not narrow. 

Incomes in these regions are less than one-quarter of US levels (after adjusting for differences in purchasing power). 

Sub-Saharan Africa has remained at about 6% of US levels, and India at about one-tenth. 

Only in some East Asian and East European countries have income gaps narrowed significantly vis-à-vis the US.

That brings us to the problem with ominous implications. 

A narrowing education gap without a narrowing income gap suggests a widening technological gap: the world is developing technology at a rate faster than many countries can adopt it or adapt it to their needs. 

Economists often disregard this issue, because they think of technology as something that is embedded in machines and thus capable of flowing naturally into countries unless governments do things like restrict trade, competition, or property rights.

But technology is better understood as a set of answers to “how-to” questions. 

And because different people do things differently, technological adoption requires some adaptation to local conditions, which in turn requires local capabilities.

One metric of such capabilities is the rate at which countries file patents. 

As with all metrics, this one is imperfect for many reasons (not all solutions to how-to questions get patented; not all patents are equally useful; and not all industries are equally likely to patent their innovations). 

Nonetheless, the numbers are so stark that they cannot be dismissed as mere measurement quirks.

For its part, the US patent rate has more than tripled over the past 40 years, from around 270 patents per million people per year in 1980 to around 900 in recent years. 

And it is not even the world leader. 

South Korea’s patent rate has increased by a factor of almost 100 in the past 40 years, from 33 to 3,150 per million; it is now patenting at a rate over three times higher than that of the US.

Japan patents at twice the US rate, and China has increased its patenting rate by a factor of more than 250 – going from less than four per million in 1980 to more than 1,000 today. 

Countries like Austria, Germany, Denmark, France, Great Britain, Norway, New Zealand, and Singapore patent at a rate at least one-quarter that of the US. 

And other countries, such as Australia, Canada, Switzerland, Iran, Israel, Italy, the Netherlands, Poland, and Slovenia, come in at just above one-seventh the US rate.

In this context, it is remarkable just how low patenting rates can be in some middle-income parts of the world. 

In Latin America and South Africa, for example, the patenting rate is 70 times lower than in the US, while in the Arab world it is 100 times lower.

These incredibly low rates are notable for three reasons. 

First, they far exceed the gaps in university enrollment. 

Second, the patenting gap is huge relative to the gaps in scientific publications. 

One would expect very low rates of scientific publications if the problem was a lack of scientists. 

But in Latin America, the Arab world, and South Africa, the patent gap is, respectively, nine, ten, and 13 times larger than the gap in scientific publications vis-à-vis the US.

Finally, these gaps are large relative to other countries that, until recently, were less developed in terms of income, university enrollment, or scientific development. 

China, Malaysia, Thailand, and even Vietnam now outrank Latin America, South Africa, and the Arab world in the World Intellectual Property Organization’s Global Innovation Index.

It is always convenient to blame governments for bad outcomes. 

But, in this case, the dearth of patents in middle-income countries with large university systems seems to be the fault of businesses and universities themselves. 

It is a symptom of an unexploited synergy between these two domains.

Universities in middle-income countries tend to be focused on teaching, because they are concerned with keeping education costs down. 

Their better research scholars direct their efforts toward scientific publications, because they prefer that to dirtying their minds with worldly practical problems on behalf of for-profit firms.

At the same time, businesses, especially large ones, invest astonishingly little in research and development, partly because they never have made such investments before, but also because they assume that they will not have any university partners with whom they can transform money into innovations. 

They may not be wrong in that belief: most universities are not set up to accommodate this kind of work. 

But in a properly functioning innovation ecosystem, business investment in R&D would translate into large cashflows that universities could use to fund a significant and effective R&D capacity, without raising tuition fees.

For that ecosystem to emerge, universities in middle-income countries need to change their mindset, structure, governance, and hiring practices; and businesses need to learn the value of investments in R&D from their more successful colleagues in other countries. 

Unless business and university leaders can drive new thinking about technological adoption, adaptation, and innovation, the income gap between countries and the rich world will persist.

Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard's John F. Kennedy School of Government and Director of the Harvard Growth Lab.