Hyperinflation in Hungary: 1945-1946

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about the hyperinflation in Hungary during the period 1945-46.

Introduction

Hungary was affected by one of the most severe hyperinflation episodes ever seen, which was caused by the aftermath of World War II. During this time, from August 1945 to July 1946, the monthly inflation rate exceeded 19,000 percent as prices skyrocketed.

Causes Of Hyperinflation

Certain factors contributed to the economic and social catastrophe the country experienced:

War Devastation

The Economy of Hungary was in a very poor place due to the physical damage experienced in World War II. The war resulted in lost factories, bridges, railways, as well as the land that was destroyed rendered the supply chain and industrial output even further crippled. Many farms were also affected as huge portions of the land went wild and a lot of the required equipment was decimated as well.

Reparations & Occupation

Hungary was obligated to pay reparations to the Soviet Union, placing a significant strain on its economy. The Soviet occupation further exacerbated the situation by extracting resources, including raw materials and industrial goods, which were sent to the Soviet Union.

Excessive Money Printing

As a response to the economic issues, the Hungarian government drastically increased the money supply in an attempt to address economic concerns, which worsened the situation revealing the deficiencies of the Hungarian pengő. The central government continuously introduced bigger and bigger banknotes into the economy, but this only made the situation worse. The peak of this chaos ended in the introduction of the 100 quintillion pengo banknote which happened at the end of the hyperinflation period.

Figure 1. Banknotes In Circulation 1945-1946.

Source: Peter Z. Grossman – Butler Digital Commons

The Extent of Hyperinflation

Hyperinflation peaked in July 1946, with prices doubling approximately every 15 hours. The highest inflation rate was estimated to be at 350% in the worst day and in its course, the value of the pengo began to lessen and when this era came to an end, it meant that 1 dollar was almost equivalent to 59 billion pengos. The sad case was that inflation bred poverty, this cycle would leave the masses struggling.

Impact on Society

The hyperinflation had devastating effects on Hungarian society:

Savings Wiped Out

People’s life savings were rendered worthless almost overnight. Many individuals who had saved diligently for years found themselves destitute. The middle class, in particular, was hit hard, as their financial security evaporated in a matter of months.

Barter System

The trade of products and services through the bartering system saw a massive resurgence. All sorts of markets began to trade items such as foodstuff, clothing and tools directly, thus avoiding the worthless currency. In this way, the barter system remained inefficient and further made daily life more difficult to manage.

Economic Instability

Businesses struggled to operate in such an unpredictable economic environment, leading to widespread closures and unemployment. Employers could not pay their workers in stable currency, and many businesses went bankrupt. The lack of a stable currency also hindered investment and economic planning.

Efforts To Stabilize The Situation

On August 1, 1946, the Hungarian government attempted to curb hyperinflation by introducing forint currency, substituting pengõ at rate of four hundred octillion pengos per unit of forint. The introduction of this currency was a major step towards the reclamation of the economy, yet it must be noted that the currency was coupled with other very important factors of the economy as well.

Monetary Reform

Through monetary reform, the government put in place restrictions that were aimed at minimizing the money supply, and thereby inflation. This included an end to printing money to the extreme and guaranteeing that the new currency is fully backed by tangible assets. These were necessary conditions for enhancing public confidence in the currency and in managing inflation.

Pengő tax reform

In the hyperinflationary context, a temporary measure, designated “tax pengő index,” was implemented. Operating on a daily basis, this system served to smoothen the conversion rates with the changes in the prices which helped the transactions to be adequately organized and the control over the economy to some extent restored.

Economic Reforms

In combination with the monetary reform, the government undertook much more comprehensive measures with the goal of directing the rebuilding of the economy. It included actions intended to boost industrial output, increase agricultural production and restore hidden economy. These reforms were significant in setting the stage for enduring and efficient economic policies.

4. International Aid and Cooperation

Hungary also received assistance from international organizations and allied nations. This aid was vital in providing the necessary resources for economic recovery and in supporting the stabilization efforts. International cooperation played a significant role in Hungary’s ability to overcome the hyperinflation crisis.

Impact On Today’s Hungarian Economy

The hyperinflation that went through Hungary in the years of 1945-46 shaped the country turning it into what can be viewed as today’s Hungary, and many of those changes became more obvious.

A. Key Economic Takeaway

1. Monetary Policy Awareness

The onslaught of hyperinflation was a serious lesson learnt by Hungary in managing the basics of monetary policy. Even this single historical experience of the country has changed how it thinks about inflation and more so about currency stability as it makes them very conscious about the chances of inflation and printing of money beyond acceptable limits.

2. Economic Reforms and Stability

The time of hyperinflation masqueraded the need for deep economic reforms including the inception of the new currency the forint and monetary dispensations. These reforms transformed the prospects of the Hungarian economy as one seeking sound management and policy measures to avert crises.

3. Institutional Strengthening

The lesson from the crisis was strong financial institutions and supervision is essential. In the last decades, Hungary has tried to create such capable institutions in order to cope with future economic shocks and secure their economy.

B. Social and Cultural Aspects

1. Public Trust In Currency

The hyperinflation phase notably diminished public confidence in its domestic currency, a sentiment that was difficult to restore. Such memories of history have made Hungarians very sensitive to episodes of inflation and depreciation of their currency. This makes Hungarians have an unpredictable attitude regarding policies concerning economic aspects and management of money.

2. Economic Resilience

The economic culture prevailing in Hungary after hyperinflation shows understanding economics and having a variety of ways to adjust in the economy. These experiences of the past are helping an entire generation in restructuring their businesses and household models.

C. Modern Economic Policies

1. Inflation Targeting

The central bank of Hungary ‘Magyar Nemzeti Bank’ (MNB) has adopted an approach of inflation targeting which has become part of its monetary policy framework. This was aimed at maintaining inflation at or between specified levels and focused also on maintaining other aspects of economic growth as well.

2. Fiscal Discipline

Hyperinflation has made Hungarians economically sound. They did learn after the painful experience of economic chaos. The nation is careful to prevent these situations from occurring again by first approaching the problem of balancing the budget while ensuring their public debt stays low.

Conclusion

The hyperinflation which took place in Hungary between 1945 and 1946 is perhaps the single most striking example of what can happen when economic management techniques are not employed and more pertinently how consequential the effects of war can be. While it is often recognized as one of the most severe cases of hyperinflation, only a handful of other instances throughout the world rival it. The key point to be understood from this episode is the significance of having a sound economic policy framework as well as international coordination, particularly for post-war rebuilding purposes.

The years 1945-1946 will be marked in history as the years of hyperinflation in Hungary, and it was devastating for the economy of Hungary. The memories of these years are still fresh and remain close to the countries monetary and fiscal policies. The cost of hyperinflation is now taken care of as many years have gone past, but the impact of hyperinflation can still be seen as ravage in the economy of Hungary. Hungary seems to have adopted a very watchful and strategic approach towards its economy.

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Useful Resources

Econlib: Hyperinflation

JSTOR: The Hungarian Hyperinflation

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About The Author

The article was written in May 2025 by Anant JAIN ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Bank Of Japan’s 2024 Policy Shift: Ushering In A New Era Of Monetary Policy

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about Bank Of Japan’s policy shift in 2024.

Introduction

In a significant alteration in its policy in 2024, the Bank of Japan (BoJ) has announced the abandonment of its long- held negative interest rate policy alongside the discontinuation of its Quantitative and Qualitative Monetary Easing (QQE) program with Yield Curve Control (YCC). Having made this announcement in September 2024, it is indeed a historic occasion in the economic history of Japan because it mirrors the growth potential of the economy while demonstrating the central banks trust in Japan’s economic recovery and the ability to revert back to a traditional, arms’ length monetary policy stance.

Understanding QQE With Yield Curve Control

Quantitative and Qualitative Monetary Easing (QQE)

Quantitative Easing (QE) involves central banks purchasing financial assets (like government bonds) from the market to increase money supply and stimulate economic activity.

Qualitative Easing (QE) focuses on the types of assets purchased, often including riskier assets (like corporate bonds or equities) rather than just government bonds. The idea is to influence not just the quantity of money but also the quality of the central bank’s balance sheet.

Yield Curve Control (YCC)

YCC involves targeting specific interest rates along the yield curve, typically focusing on short-term and long-term government bond yields. The central bank commits to buying or selling bonds in the market as necessary to keep these yields at or below the target levels.

QQE With Yield Curve Control

In the year 2013, the Bank of Japan incorporated the adoption of QQE With Yield Curve Control as a bold measure to address deflation issues and spur the economy in what was the introduction of its new strategy. It further aimed to influence borrowing and investments through lower interest rates across the entire yield curve by enhancing liquidity in the economy through large upwards shifts in the purchases of government issued bonds and other financial instruments.

The BoJ (on 21st September, 2016) expanded its efforts to implement monetary easing by adding the ability to control the entire yield curve by making appropriate adjustments to the interest rate of Japan’s 10-year government bonds. As a result, this policy resulted in the expansion of high liquidity in the country as Japan’s economy was already forecasted to face deflationary pressures. The policy was aimed at eventually pushing Japan’s economy to higher longer-term interest rates which in turn, would allow for greater economic stability in Japan.

The End Of Negative Interest Rates

Implemented in 2016, the BOJ’s negative interest rate policy was an unconventional measure aimed at stimulating economic activity by imposing a negative rate of -0.1% on excess reserves held by commercial banks. This policy was intended to encourage banks to lend more and invest, thereby boosting consumption and economic growth. However, after 8 years, the BOJ has decided to raise the short-term interest rate to a range of 0% to 0.1%. This shift towards normalization reflects the central bank’s recognition of improving economic conditions and the need to mitigate potential negative effects of prolonged negative rates, such as financial imbalances and reduced bank profitability.

Figure 1: Interest Rates In Japan (X Axis = Years & Y Axis = Interest Rates).

Source: LSEG DataStream | Fathom Consulting

Discontinuation Of QQE With Yield Curve Control

While opting to end the negative interest policy, the BoJ has also opted for the gradual phasing out of its QQE with YCC program. This program, a central part of the BoJ’s approach to achieving its inflation target of 2% in the medium term, was of a gradual practice of large scale buying of assets and managing the yield curve in order to contain long term interest rates. The decision to discontinue this program indicates the BoJ’s belief that the economy is self-sustainable and does not require extraordinary measures to support growth and stable inflation.

Implications For The Japanese Economy

BoJ policy adjustment is likely to yield several changes with regards to different facets of the Japanese economy:

Interest Rates And Borrowing Costs

The removal of negative interest rates suggests that the cost of borrowing for a firm and a consumer is expected to rise. Although this may withdraw consumption and investment at the beginning, it is anticipated that this change in interest rates will encourage a better interaction with money by mitigating chances of asset bubble.

Financial Markets

A gradual return to normal levels of monetary policy may cause turbulence in financial markets as the participants are able to slowly adapt to the changes. However, on the flip side, it does point towards a return of business conditions that are expected to be more stable and predictable which in the long run may boost the confidence of investors.

Banking Sector

The removal of negative rates can in one way enhance the profitability of banking institutions. These financial intermediaries have always been working at unpalatable margins during the prevailing negative rate policy and with the new norm they should be able to make a decent lend and participate more meaningfully at the level of the economy.

Inflation And Economic Growth

The BoJ is confident that inflation will remain on average close to its target rate of 2%. Some of these inflation expectations could allow for better and resistant economic growth as businesses and the general populace refer to the new inflationary tendencies to make more informed decisions.

Global Implications Of The Policy Change Of Bank of Japan

The policies that the Bank of Japan has changed from are vastly relevant not only to Japan but also to the global economic network in general.

Global Financial Markets

As one of the world’s largest economies, changes in Japan’s monetary policy are capable of affecting world financial markets. Countries can supplement their capital structure from Japan after the era of negative interest rates and pooling of assets into the country will take place upon normalization of policy.

Exchange Rates

The shift in policies may have a direct effect on the Japanese yen’s rate. The enhanced interest rates may lead to a more robust yen which would in turn have an effect on Japan’s balance of trade and the cost of their exports. This, in a sense, may modify international trade relations and the economic status of nations that trade with Japan.

Central Bank Policies

Japan’s turn towards normalization, might compel other central banks to reconsider their own money policies especially in view of recovery of economies and the behavior of inflation during the time of recovery. In this respect, one may expect a more widespread pattern of policy tightening of monetary conditions across the globe economy.

Investment Strategies

Investors across the world may be forced to realign their strategies as a result of the new measures put in place by Japan’s key decision makers. Any shifts in interest rates and or conditions within the financial markets in Japan may impact investment strategies in terms of portfolio management and even risk management.

Conclusion

The Bank of Japan’s 2024 policy change is indicative of the beginning of the end for its unconventional monetary policies and is the start of a new chapter in the economic history of Japan. The BOJ, through the removal of negative interest rates and by discontinuing QQE with YCC, is demonstrating its faith in the performance and strength of the economy and is willing to implement more orthodox solutions. It is perceived that this action will have serious ramifications not only for Japanese economy and its financial markets but also for the prevailing global economic environment, paving the way for a more balanced and healthy future economy.

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Useful Resources

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Twitter Bank of Japan

About The Author

The article was written in May 2025 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Top 10 Economies In The World In 2024: Dynamics Of Growth And Opportunities For Investment

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the top 10 economies in the world.

Introduction

As we near the end of 2024, the global economic landscape reflects different patterns of growth fostered by technology, demographics and other geopolitical changes. We take a closer look at the world’s ten largest economies in terms of their current Gross Domestic Product (GDP), change over the last five years, interesting facts and factors that provide countries with great investment opportunities in various sectors.

#1 United States (GDP: $27 trillion)

As of 2024, GDP in the United States is projected to reach nearly $27 trillion, solidifying its position as the largest economy in the world. This figure represents an approximate 12% increase from 2019, when the gross domestic product was around $24 trillion. This can be attributed in part to a strong job market, as the unemployment rate at the end of 2023 was 3.5%, along with healthy consumer expenditure which makes up around 70% of the total economic activity.

There are multiple attractive investment opportunities in the USA. The technology sector, more specifically the sub-sectors of artificial intelligence, cybersecurity, and fintech is expected to maintain a steady growth of above 15% CAGR (Compound Annual Growth Rate) until 2028. The renewables energy sector is gaining momentum with investments expected to be over $500 billion in the next ten years in line with the country’s aim of attaining net zero emissions by 2050. Real estate is also bringing in investment even in the metropolitan cities which are undergoing a rejuvenation.

Source: World Bank

#2 China (GDP: $19 trillion)

In terms of GDP, China is the second largest nation in the world. For 2024, its GDP is predicted to reach around $19 trillion which means an annual growth of about 9% from $17.4 trillion in 2019. There has been an increase in the rate of urbanization, with more than 64 % of the population being urban dwellers, improving internal consumption and demand.

China has a multitude of investment prospects. Annual growth rates for the technology sector, mainly in 5G, Artificial Intelligence and e-commerce, is expected to be above 20%. With a target to have non fossil fuels contribute 25% of its energy consumption by 2030, solar and wind sectors will encounter major investments. Also, the infrastructural opportunities provided by the ell and road initiative are pulling more and more international investors who are looking to exploit the upward trend of China.

Source: World Bank

#3 Japan (GDP – $5.1 trillion)

Japan’s economy is currently rated at around $5.1 trillion in 2024 and has been growing at a rate of about 7% from $4.75 trillion in the year 2019. The country has its share of demographic problems including an unfavorable aging population and relatively low amount of births. However, the country has sustained its superiority in technology and manufacturing industries, specifically in the robotics and healthcare manufacturing.

Japan is on the recovery path, and visible investment opportunities exist in some key sectors. Robotics, which is expected to grow at a compound annual rate of 15%, would be most useful in the case of healthcare and in automating manufacturing processes. The renewable energy sector hopes to increase the generation of renewables to 36% of its energy generation mix by 2030, creating opportunities in investments in solar and wind. In addition, Japan’s online retail trade is expected to grow to around $170 billion by the year 2025, which is mainly driven by Japan’s expanding digital economy in e-commerce and fintech.

Source: World Bank

#4 Germany (GDP: $4.7 trillion)

With an estimated GDP of about $4.7 trillion in 2024, Germany is the largest economy in Europe, showing a growth of approximately 8% over the past five years i.e., from $4.35 trillion GDP in 2019. Germany’s industrial sector remains important to the overall economy, where manufacturing industry alone accounts for approximately 20% of the GDP.

In light of investment opportunities in Germany, there especially stands out green technology and digital transformation. The German government aims to provide a funding of approximately $110 billion for renewable energy resources by the year 2030 and this has leveled up the solar and wind projects. The car industry also includes investments worth more than $20 billion by the year 2025 in battery technology and infrastructure for charging electric vehicles. As for the development of Industry 4.0 technologies in Germany, it presented perspectives of smart manufacturing and advanced automation.

Source: World Bank

#5 India (GDP: $4.1 trillion)

India is one of the fastest growing economies in the world. It is projected that India’s economy will have a GDP size of about $4.1 trillion by the end of 2024, showcasing about a 15% growth since 2019 when the GDP evolution stood at around $3.56 trillion. More than half of its total population is below the age of 25, this poses India to a crucial and growing consumer base.

India provides numerous opportunities for investments in different sectors. The information technology sector alone is expected to expand at an annual rate of 12% mostly due to the growth in IT services, e-commerce and Fintech. The rest of the investment will come from the government’s National Infrastructure Pipeline which aims to generate $1.5 trillion in investment by the year 2025. In addition to this, the renewable energy industry is expected to achieve 500 GW of renewable capacity by 2030 opening up vast opportunities for investment in solar and wind energy projects.

Source: World Bank

€6 United Kingdom (GDP: $3.7 trillion)

The economy of the United Kingdom has a GDP of about $3.7 trillion as of the year 2024 which indicates a 6% growth over the last five years from $3.5 trillion in 2019. London is also the larger financial center of the world with financial services accounting for around 7% of gross domestic product.

The opportunities for investment in the UK, especially in the fintech segment, which reached over £11 billion in the year 2022, remain great. The renewable energy market is growing, with the government’s aim of achieving up to 50 GW of incorporated offshore wind capacity by the year of 2030. Another attractive area is healthcare, which is in demand because of the increase in the elderly population, and the NHS budget is expected to reach over £200 billion each year by 2024. Furthermore, the creative industries, media and digital content, are anticipated to also grow considerably, thus increasing investment opportunities.

Source: World Bank

#7 France (GDP $3.4 trillion)

The economy of France, as estimated in 2024, is approximately $3.4 trillion, growing by about 5% over a period of 2019 to 2024. France enjoys a diversified economy with agricultural, technological and tourism sectors that are all notably important in terms of the contribution to GDP. Tourism alone represented approximately 7% of GDP in 2019 and welcomed more than 89 million tourists.

Investment opportunities in France however are not lacking, in particular the technological sphere which has had rapid growth in startup environments specializing in artificial intelligence and cybersecurity. In fact, the French government has pledged to invest almost 30 billion euros on digital transformation by 2025. This market segment, further, has plans to provide 40% of electricity from renewable sources by 2030. France has a great potential for investors due to its policies on sustainability and innovation.

Source: World Bank

#8 Canada (GDP: $2.3 trillion)

Canadas GDP is approximated at $2.3 trillion as of 2024, this has seen a step up of about 10% from 2019 where their GDP’s stood at $2.09 trillion. The country possesses a stable political environment, vast natural resources and a developed banking industry.

Investment opportunities in Canada, particularly in oil and gas natural resources where Canada ranks amongst the top three countries in proven oil reserves are quite high. The technology industry is currently booming with investment in software development, Artificial Intelligence, and clean technologies expected to grow in this sector to about 5 billion by 2025. Also, hydropower makes up more than 80% of Canada’s electricity generation with great opportunities for renewable energy investments.

Source: World Bank

#9 Italy (GDP: $2.2 trillion)

As we move closer to end of 2024, the GDP of Italy is estimated to be around $2.2 trillion which depicts an approximate growth of about 4% since the figure was around $2.12 trillion in 2019. In this country, culture and industry are well represented, especially in the field of luxury products and automobile production, which enables the economy to preserve its firm stability.

In Italy, investment opportunities are significant especially in the luxury goods industry that accounts for approximately 8% of GDP which is expected to grow at a CAGR of about 5% over 2026. The automotive industry is also changing as investments in electric vehicles are expected to reach €12 billion by 2025. Besides, the innovative transformation of the food sector is also possible due to the rich agricultural base of the country, as well as the increasing demand for organic and high-quality food. There are increasing investment opportunities in the highly innovative and sustainable business environment shaped by the government policies.

Source: World Bank

#10 Brazil (GDP: $2.1 trillion)

With a GDP of around $2.1 trillion in the year 2024 which is estimated to show a growth of about 9% since 2019 where it stood at 1.93 trillion dollars, Brazil as the largest economy in Latin America has truly made its mark. The country is blessed with plenty of resources whether it’s in the agricultural, mining or fuel fields and is vital in explaining the economy performance.

In Brazil, investment opportunities are present everywhere with especially agribusiness being one of its top exports. There’s huge potential for growth in the renewable energy sector, particularly hydropower and biofuels, with investments projected to exceed $30 billion in this sector by 2025. Moreover, infrastructure development has actually offered tremendous prospects, especially transportation and logistics, as the government is working to improve integration and efficiency. Additionally, Brazil’s geographical position in South America makes it even more interesting for international investors who wish to penetrate regional markets.

Source: World Bank

Conclusion

Looking ahead to the year 2025, the global economy appears to expand in all corners of the world while presenting a wide range of investment opportunities in the world’s largest markets. Countries such as the U.S. and China still remain global leaders, however, the case for emerging markets like India and Brazil is significant for investors. The patterns of economic growth, technology integration, sustainable development approaches as well as geo-political stability will to a large extent, determine the patterns of investment as well as economic strength in the future. Taking into consideration the above trends, will help investors be well positioned to benefit from the changes in the world economy that are likely to occur in the next few years.

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Useful Resources

World Bank Global Economic Prospects

World Bank Data about GDP

International Monetary Fund (IMF) World Economic Outlook

Organisation for Economic Co-operation and Development (OECD) Economic Outlook

McKinsey & Company – Global Economic Trends

About The Author

The article was written in February 2025 by Anant JAIN ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Hyperinflation In Argentina Since 2018: A Deep Dive Into The Economic Crisis

In this article, Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) talks about hyperinflation in Argentina.

Introduction

Starting from the year 2018, Argentina has been battling one of the unsurpassed economic setbacks in its history. The economy is facing hyperinflation, widespread poverty, and debts that are simply too vast to comprehend. Although Argentinian citizens have experienced chronic struggles with inflation, the crisis of 2018 onwards lingers with intensity. In this article, we’ll look at how and why hyperinflation occurred in Argentina.

Argentina’s Inflation Timeline

To understand the scale of the problem, it’s important to first look at how inflation in Argentina has evolved over the years.

2018: Argentina entered a period of acute economic stress, with inflation reaching 47.6% by the end of the year, up from 24.8% in 2017, according to the National Institute of Statistics and Census (INDEC). This sharp increase in inflation was a direct consequence of a currency crisis, triggered by a combination of poor economic policies, external debt, and an overreliance on foreign borrowing.

2019: Inflation accelerated further, hitting 53.8%. This made Argentina one of the highest-inflation economies in the world, surpassed only by Venezuela and Zimbabwe. The International Monetary Fund (IMF) played a significant role during this period by extending a record $57 billion bailout to stabilize the economy.

2020: Despite the global slowdown due to the COVID-19 pandemic, inflation in Argentina remained high, clocking in at 36.1%, as per INDEC data. The global pandemic worsened the country’s recession, leading to a 9.9% contraction in GDP, further exacerbating the economic crisis.

2021: Inflation surged again to 50.9%, reflecting ongoing macroeconomic imbalances and the effects of expansionary monetary policy that the government had implemented to stimulate a recovery post-pandemic.

2022: Argentina’s inflation skyrocketed to 94.8%, as the country struggled with soaring food prices, energy costs, and wage pressures. By comparison, the global inflation average was just 8.8%, according to the World Bank. Argentina’s inflation was driven by a devaluation of the peso, energy subsidies, and political uncertainty.

2023: By mid-2023, Argentina was firmly in the grips of hyperinflation, with an annual inflation rate of 114.5%. This has put millions of Argentinians in financial distress, as the purchasing power of the peso continues to erode at an alarming rate.

The figure below gives the evolution of the annual inflation rate in Argentina for the period 2010-2023 (data source: World Bank).

Figure 1. Inflation Rate In Argentina.

Source: World bank

Drivers of Hyperinflation

The causes which have led to hyperinflation in Argentina, can be pieced together from a variety of sources. It includes factors including unwise fiscal policies and global economic conditions as contributing elements of the country’s ever intractable monetary disorder.

Currency Depreciation

The Argentine peso has been sharply devalued since 2018. The exchange rate stood at around $20ARS:$1USD at the beginning of 2018, but by 2023, the black-market rate stood at more than $900 ARS:$1USD. This decline in the value of the currency in turn has led to inflation, as the cost of imports has significantly increased and hence raised cost in different industries.

Debt Crisis

Argentina’s debt-to-GDP ratio surged to 89.4% by 2020, up from 53.6% in 2017, according to the IMF. The country’s repeated reliance on foreign loans and failure to pay them back has led to a loss of investor confidence. Argentina defaulted on its debt in 2020, further complicating efforts to stabilize its economy.

Fiscal Deficits

Chronic fiscal deficits are a core reason for the hyperinflation that Argentina experiences. Between 2018 and 2023, Argentina ran persistent fiscal deficits that averaged 5.2% of GDP, according to the data from Trading Economics. Such deficits were financed through the printing press of the government, which served to worsens inflationary factors.

Political Instability

The political scene in Argentina has been chaotic that virtually every incumbent believes in different policies to resolve the economic crisis. Policies which Mauricio Macri (2015-2019) aimed at deficit reduction through austerity was not implemented due to opposition. In this regard, former president Alberto Fernández (2019-present) swayed the economy towards more expansionary policies which increased the level of inflation. Political fragmentation and lack of consensus around economic strategy has been the main contributor to lack of progress in national reforms.

External Shocks

Argentina is heavily reliant on commodities especially soybeans. The world market price of soybeans dramatically dropped in the year 2018, which adversely affected the revenue from exports and increased the balance of payment deficit. Additionally, the increase in global interest rate after 2021 made it too expensive for Argentina to borrow thus worsening its already bad debts.

Impact on Society

The consequences of hyperinflation are most acutely felt by the Argentine people. A few of the most significant impacts include:

Poverty

The World Bank estimates that Argentina has a poverty rate of over 40.1% in the year 2023. Inflation has impaired the purchasing capabilities of middle and lower scorers, pushing several millions into the poverty bracket. This is particularly worrying in a country where poverty dropped to 25.7% in 2017.

Real Wages

Real wages in Argentina have taken a drastic downward turn. The average wage in Argentine Workers’ Central Union (CTA) was about 20% lower in 2022 compared to 2017 figures. This is due to the faster rate of inflation meant that any growth in wages was eclipsed, cutting working peoples earnings and making basic needs more expensive.

Food Prices

Food inflation is one of the worst in the world at over 120% in the year 2023 according to INDEC. The prices of most basic staples such as bread, meat and vegetables have spiralled out of control leading to widespread food insecurity.

Social Unrest

The economic misadministration and the spiralling consumer prices have, for a long-time now, suffocated the economy and triggered a number of protests throughout the country. In July 2022, large scale protests emerged in Buenos Aires with protestors clamouring for wage increases and government action over inflation. A continued cycle of instability gave rise to fears of further violence.

Policy Responses

The government of Argentina has attempted many policies aimed at reducing inflation including price controls however the results have mostly been progressively ineffective.

Price Controls

The menace of runaway inflation had prompted the governments which succeeded the Macri’s administration to attempt implementing caps on the prices of basic needs. To the contrary, however, there was an increase in the demand for those goods which could not be satisfied in the market due to the proliferation of the black market which increased the prices of goods significantly.

Currency Exchange Controls

In an effort to contain the depreciation of the peso, rigid exchange control was administered over external currency within Argentine borders. These measures, while effective only in the short term, have never resolved the chronic deficits and dependence on external borrowing. It is known that since 2023, the unofficial rate of the peso serving black market transactions drifted a long way from the official one and in fact magnified other economic distortions.

IMF Bailouts

The last time the International Monetary Fund (IMF) came to Argentina’s aid was in 2018, when the Fund approved a record $57 billion package. The purpose of this package was to boost Argentina’s liquidity and promote fiscal discipline. Unfortunately, the loans’ provisions such as public expense cuts, have caused public outrage and it has been hard to enforce them politically. In 2022, the IMF and Argentina renegotiated the loan terms, extending repayment deadlines but without significant relief from the debt burden.

Interest rate

Attempts to reduce the inflation by increasing the interest rates were made by the Central Bank of Argentina. As of 2022, the central bank’s rate has been raised to 75%, which is considered one of the world’s highest, but this significantly controlled inflation, but rather increased borrowing and thereby inhibited growth.

Conclusion

Argentina’s hyperinflation since 2018 has been driven by a complex web of factors, including currency depreciation, external debt, fiscal deficits, and political instability. The human and social costs have been severe, with rising poverty, declining real wages, and widespread food insecurity.

To stabilize the economy, Argentina must focus on structural reforms, including improving fiscal responsibility, renegotiating its debt burden, and fostering political stability. However, the road ahead is fraught with challenges. Without a concerted effort to address the root causes of the crisis, Argentina risks continuing down the path of economic collapse, with hyperinflation threatening to erode the social fabric of the nation.

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▶ Anant JAIN Understanding Hyperinflation

▶ Anant JAIN The Ongoing Hyperinflation In Turkey And Its Ripple Effects On European Union

Useful Resources

International Monetary Fund (IMF) Argentina

World Bank Economic data for Argentina (inflation rate)

El País (12/01/2024) Argentina’s annual inflation soars to 211.4%, the highest in the world

International Banker (16/05/2023) Why Inflation in Argentina Is Above 100 Percent

About The Author

The article was written in February 2025 by Anant JAIN (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Mitigation Banking

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Mitigation Banking which is a mechanism to preserve the ecosystem.

Introduction

Mitigation banking is a system of credits and debits devised by regulatory agencies to ensure that development impacts on wetlands and streams by private companies, as well as rare species and habitats, are offset by the preservation, enhancement, restoration, or creation (PERC) of similar ecological features in nearby areas, ensuring that local ecosystems are not harmed. This system is mainly used in the United States. To ‘mitigate’ anything implies to lessen the severity of it, to compensate for a loss, in this case the environmental harm.

As per the statement by the Ecological Restoration Business Association (ERBA), “mitigation banks are highly regulated enterprises that have historically been proven to deliver the highest quality, most reliable offset to environmental impacts…and a private investment into ‘green infrastructure’ to help offset the impacts associated with economic growth.”

A mitigation bank is a place created specifically for this purpose. A mitigation banker is a person or company that does this type of business. Mitigation credits are assets that may be sold to persons who are striving to comply with particular environmental standards and balance ecological damage they are responsible for. These credits are known as “ecological assets” when they are sold on an active market. They may be likened to other extractable natural resources such as minerals, oil, and natural gas in this regard.

Individuals or businesses conducting commercial or industrial projects that must adhere to state and federal environmental standards are often the buyers of mitigation credits.

There are two types of mitigation banks which are mentioned below:

Wetland And Stream Banks

Wetland and stream banks provide credits to counteract wetlands and streams’ ecological damage. The USACE (Army Corps of Engineers) and the USEPA (United States Environmental Protection Agency) regulate and authorize these banks (Environmental Protection Agency). Wetland banks are still referred to as “mitigation banks” since they were the first sort of offset scheme to be established. However, wetland and stream banks, as well as conservation banks, are now referred to as Mitigation Banks.

Conversation Banks

Conservation banks provide credits to compensate for the loss of rare or unique species and/or their habitats, which are often categorized as threatened or endangered under state and federal regulations. USFWS (Fish and Wildlife Service) and NMFS (National Marine Fisheries Service) regulate and authorize these banks (National Marine Fisheries Service). Unlike wetland and stream banks that focus on a given area, conservation banks deals with species.

The Process Of Mitigation Banking

When a mitigation bank buys a degraded site that it wants to restore, it engages with regulatory bodies like the Mitigation Banking Review Team (MBRT) and the Conservation Banking Review Team (CBRT) to have plans approved for the bank’s construction, maintenance, and monitoring.

These organizations also provide their approval to the quantity of mitigation credits a bank can earn and sell in connection with a certain restoration project. These mitigation credits can be purchased by anybody planning commercial development on or near a wetland or stream in order to mitigate the detrimental impact of their project on the surrounding ecology. The mitigation banker is in charge of not only the mitigation bank’s development, but also its ongoing care and maintenance.

Figure 1. Mitigation Banking Process.

Source: EASI

As depicted above in Figure 1, the US Environmental Protection Agency has established four main components of a mitigation bank:

• The actual area that is repaired, developed, upgraded, or conserved is referred to as the bank site.
• The bank instrument is a written agreement between bank owners and regulators that establishes liabilities, performance criteria, management and monitoring requirements, and loan approval terms.
• The Interagency Assessment Team (IRT) is a multi-agency group that oversees the bank’s regulatory review, approval, and monitoring.
• The service area is the geographical region for which a development project can pay the bank for permissible damages.

Benefits Of Mitigation Banking

The following mentioned below are the benefits of mitigation banking:

Conservation And Protection Of The Environment

Mitigation banks create a permanent conservation easement on the site, with a trust fund committed to the long-term preservation of the bank’s natural resources. Many large landowners, including the government, are able to maintain a property in its current management state (for example, grazing, timber removal, low-impact recreation, or education) while retaining ecological functionality, also known as ecosystem services, by securing mitigation credits from neighboring ecosystems. As a result, mitigation banking contributes to the preservation of nature and its variety. Increased industrialization and urbanization will inevitably have an influence on natural ecosystems, streams, and wetlands. Mitigation banks offer a way to at least somewhat mitigate this effect.

Increased Efficiency

To counteract each specific development, a mitigation bank is more efficient than restoring a distinct biological location. This is because restoring a large, contiguous piece of land is easier than preserving a number of smaller locations. A mitigation bank’s economies of scale and technical competence make it more efficient not just in terms of cost, but also in terms of recovered acreage (an area of land usually used for agricultural purposes) quality.

Regulatory Ease And Reduced Time Lag

Buying credits from an approved mitigation bank is easier for developers than obtaining regulatory permissions, which may take months. Mitigation banks, on the other hand, have already restored impacted acreage units in the process of obtaining credits. As a result, there is little to no time between a service area’s environmental effect and its rehabilitation at a bank site.

Transfer Of Liability

The mitigation banking mechanism effectively transfers ecological loss obligation from the developer (also known as permittee) to the mitigation banker. Once the permittee has purchased the requisite credits, the mitigation banker is responsible for developing, maintaining, and monitoring the site on a long-term basis. If no qualifying mitigation bank exists in a given location, the developer might design their own mitigation project to compensate for environmental loss. Permittee-responsible mitigation is what it’s termed.

Challenges Of Mitigation Banking

The following mentioned below are the challenges of mitigation banking:

Incorrect Valuation Of Ecological Loss

The difficulty of accurately measuring ecological loss in monetary terms is the most significant barrier for successful mitigation banking. Regulators must price and analyze the credits granted to mitigation banks, but despite the adoption of a variety of environmental assessment tools by these agencies, it is difficult to adequately capture the economic cost of natural resource destruction.

Difference In The Quality Of Artificial VS Natural Wetlands

It is debatable if natural ecosystems like wetlands, which have evolved over generations, can be intentionally built in a matter of years. In certain situations, the quality of these intentionally created wetlands has been shown to be inferior to its wild counterparts in terms of floral and faunal richness.

Only Partial Replication Of Impacted Sites

Mitigation banks, as opposed to individual mitigation in which developers establish their own mitigation sites in the neighborhood of acres damaged, are thought to be positioned distant from the impact locations and hence unable to entirely recreate the impacted site.

Summarizing The Current Situation Of Mitigation Banks In The US

• Mitigation banking is a methodology that provides a system of credits and debits to transfer accountability for ecological harm from the permittee to the mitigation banker, all while adhering to regulatory rules. A mitigation banker builds, restores, maintains, and administers the land at a bank site in order to gain mitigation credits, which are then sold for a charge to a permittee or developer.
• Mitigation banking is a lengthy and complicated procedure. The most crucial aspect is site selection: the mitigation banker must conduct extensive study about the site’s watershed and service region, as well as identify ecosystems that require restoration and augmentation. The mitigation banker is in charge of maintaining and monitoring the restored environment once all of the permissions are in place.
• A wetland mitigation bank must be capable of restoring 100 acres of damaged wetlands, while a stream mitigation bank must be capable of restoring 4,000 linear feet of degraded streams. Sites that don’t fit these criteria can be grouped together with others in the same watershed to form an umbrella mitigation bank.
• Because only related ecosystems may mitigate development projects, the cost of mitigation bank credits will vary greatly depending on location and effect activities. An emerging wetland credit in Iowa, US, for example, might cost anywhere from $35,000 to $55,000 per acre, while a forested wetland credit can cost up to $75,000.
• In the United States, a number of mitigation banks have been approved. According to the U.S. Army Corps of Engineers’ (USACE) Regulatory In-Lieu Fee and Bank Information Tracking System (RIBITS), there were over 2,000 licensed banks as of July 2021.
• Despite regulations requiring no net loss of habitat value and function, agencies have struggled to manage mitigation efforts. Wetland mitigation initiatives, for example, have been approved in certain circumstances based on total acreage rather than ecological value or function equivalent. Simply assuming a similar number of acres isn’t enough to achieve real equivalence unless the replacement ecological services provided by those acres are also the same. Even with the application of environmental assessment tools, regulatory agencies confront a problem in determining the right economic or monetary value for ecological damage. Despite the fact that mitigation banks must be placed in the same watershed as the damage to be deemed acceptable compensation, mitigation banks are frequently located far from the actual impact location. As a result, retaining the original value and function is challenging.
• Despite some of its flaws, it nevertheless offers a number of benefits. The future of mitigation banking is bright for both project developers and nature, with increased private investment in the establishment of mitigation banks and ecosystem research, as well as reducing regulatory regulations.

Related Posts On The SimTrade Blog

Useful Resources

Ecological Restoration Business Association (ERBA)

USACE (Army Corps of Engineers)

USEPA (United States Environmental Protection Agency)

USFWS (Fish and Wildlife Service)

NMFS (National Marine Fisheries Service)

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Master in Management, 2019-2022).

Mission Statement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about Mission Statement.

Introduction

A mission statement explains an organization’s purpose of existence. A mission statement defines the organization’s values, ethics, culture, goals, and agenda. It describes the rationale for its existence, specifies its overall goals, and identifies the operational goals (including the product and/or service to deliver, its key clients or market, and the geographical region of operations) in basic and brief terms. A mission statement would be unique and distinct for every organization because every organization is different in terms of history, business, operations, vision, etc.

For example, the mission statement for United Airlines is as follows: “Connecting people. Uniting the world.”

In addition to this, a mission statement also entails how each and every component is applicable to the distinct and various stakeholders of an organization including its employees, customers, suppliers, investors, and society at large. Therefore, it can be used by various stakeholders to assess if an organization’s values and goals align with their own or not.

For example, Nike’s mission statement includes various stakeholder presented ahead: “To expand human potential by creating groundbreaking sport innovations, by making our products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where we live and work.”

A mission statement is an action-oriented declaration of an organization’s purpose to its target audience. A broad explanation of the organization, its role, and its goals is frequently included. As an organization expands, its aims and goals may be met, and they may alter as a result. When a result, as prior goals are fulfilled, mission statements should be amended as appropriate to reflect the organization’s new culture.

A commercial mission statement, according to Chris Bart, professor of strategy and governance at McMaster University, consists of three fundamental components:

• Key market: the target market for the organization
• Contribution: the product or service that has been provided
• Distinction: what distinguishes the product or why should the audience choose it over another

However, Bart (2006) estimates that only around 10 percent of mission statements are useful in practice. As a result, they are commonly viewed with contempt.

Examples Of Mission Statements

Please find below a list of mission statement for some of the most famous companies which I personally found to be concrete & impactful:

• IKEA: To create a better everyday life for the many people.
• Nordstrom: To give customers the most compelling shopping experience possible.
• JetBlue: To inspire humanity – both in the air and on the ground.
• Workday: To put people at the center of enterprise software.
• Tesla: To accelerate the world’s transition to sustainable energy.
• TED: Spread ideas.
• Chipotle: To provide “food with integrity.”
• Walmart: We save people money so they can live better.
• Starbucks: To inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.
• JP Morgan: To be the best financial services company in the world.
• ESSEC Business School: The mission of ESSEC Business School, a world school with French roots, is to infuse leadership with meaning in order to prepare leaders ready to address contemporary economic, environmental and social challenges. In order to do so, it produces innovative and relevant knowledge to equip the next generation of leaders with the skills, know-how and savoir-être that will make them truly responsible, inclusive and respectful of the environment. Convinced that knowledge provides a path to freedom – Per scientiam ad libertatem – ESSEC inculcates in its students critical thinking and creativity skills that prepare them to anticipate and address the challenges of an increasingly uncertain world. ESSEC supports students in making their actions both meaningful and impactful by relying on both technology and people. It also seeks to enlighten the actions of businesses and organizations in a world transformed by the new industrial revolution, the environmental crisis, a new world balance and other major societal changes.

Purpose Of A Mission Statement

Although the concept of an organization’s purpose may extend beyond that of a mission statement, the primary objective of a commercial mission statement is to define an organization’s core aim/agenda, and it outlines the same in simple words. Businesses use mission statements to communicate not just to themselves and their employees, but also to consumers and other stakeholders. An organization’s mission statement will change as it grows. This is to guarantee that the business stays on course and that the mission statement does not lose its luster and become uninteresting or stale.

Because all strategies are formed and executed with a strong objective as the foundation, being able to construct an impactful statement is the first step to commercial success. The mission statement directs the management team in developing strategies that enable the organization to reinforce its identity and achieve its objectives. It is necessary for:

• Employee motivation
• Customer inspiration
• Strategic planning
• Establishment of values
• Understanding why an organization operates

Advantages Of A Mission Statement

The following are some of the benefits of a mission statement:

Provides guidance and direction

Mission statement contributes to the organization’s ability to make better decisions, which can benefit them. Organizations may struggle to make decisions and prepare for the future if they don’t have a mission statement to guide them. This is why one of the most useful aspects of a goal statement is offering guidance.

Clear And Well-Defined Goal/Purpose

Having a defined mission might help to eliminate any potential uncertainties about an organization’s existence. People who are interested in the organization’s success, such as stakeholders, will want to know that the organization is making the correct decisions and moving closer to its objectives, which will assist to dispel any doubts the stakeholders may have.

A mission statement may be used as a motivator inside an organization, allowing employees to work together toward a common objective that benefits both the organization and the employees. Employee’s happiness and productivity may both benefit from this. It’s critical for employees to have a feeling of purpose. Giving them a feeling of purpose will allow them to concentrate more on their everyday activities while also assisting them in realizing the organizations and their own goals.

Disadvantages And Flaws Of Mission Statements

Even though a mission statement is generally useful to an organization, it does have a few drawbacks, which are listed below:

Unrealistic

Mission statements are frequently found to be unrealistic and too optimistic. A mission statement that is unrealistic can have a negative impact on staff performance and morale. Because an unachievable purpose statement reduces the possibility that employees will be able to reach this objective, it may demotivate employees in the long run. Unrealistic mission statements likewise serve no value and are a waste of effort for management. Another issue that might result from an unachievable mission statement is that in order to attain this objective, incorrect judgments may be made, which could hurt the organization.

Waste Of Resources And Time

Mission statements need planning. For individuals in charge of writing the mission statement, this requires time and effort. It may be result in ineffective use of tuime and resources. If the mission statement is not accomplished, the process of developing it might be viewed as a waste of time by all parties concerned. A strong mission statement may take a lot of effort and work to create, and organizations cannot afford to waste any of that time. The time may have been better spent on other vital responsibilities inside the organization, such as decision-making.

Mission Statement VS Vision Statement

An organization’s mission statement explains what it aims to accomplish, who it wants to help, and why it wants to support them. A vision statement, on the other hand, defines where the organization wants a community or the world to be as a result of its services. As a result, a mission statement serves as a road map for the organization’s goal.

A mission statement states what a brand or organization intends to accomplish. This informs the public about the product and service it offers, as well as who it serves and why it does so. A brand’s vision statement is a declaration that looks to the future and expresses what it aims to accomplish through its mission statement. This is more conceptual, since it shows what the brand may become in the eyes of the consumer, as well as the value it will provide in the long run.

To sum it up, the following are the fundamental distinctions between a mission and a vision statement:

• Mission statements define an organization’s present mission. A mission statement frequently includes information about the organization’s role, target audience, and significant offers.
• Vision statements are a glimpse into an organization’s future or a declaration of the organization’s overarching vision. A vision statement can have the same aspects as a mission statement; however, it will be expressed in the future tense.

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▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Shareholder

▶ Anant JAIN Writing A Mission Statement

Useful resources

Christpher K. Bart (2006) Sex, Lies and Mission Statements

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Writing A Mission Statement

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) talks about how to write a mission statement.

Introduction

A mission statement explains an organization’s purpose of existence. A mission statement defines the organization’s values, ethics, culture, goals, and agenda. It describes the rationale for its existence, specifies its overall goals, and identifies the operational goals (including the product and/or service to deliver, its key clients or market, and the geographical region of operations) in basic and brief terms. A mission statement would be unique and distinct for every organization because every organization is different in terms of history, business, operations, vision, etc.

In addition to this, a mission statement also entails how each and every component is applicable to the distinct and various stakeholders of an organization including its employees, customers, suppliers, investors, and society at large. Therefore, it can be used by various stakeholders to assess if an organization’s values and goals align with their own or not.

For example, United Airlines: “Connecting people. Uniting the world.”

A commercial mission statement, according to Chris Bart, professor of strategy and governance at McMaster University, consists of three fundamental components:

• Key market: the target market for the organization
• Contribution: the product or service that has been provided
• Distinction: what distinguishes the product or why should the audience choose it over another

Drafting A Mission Statement

While it may be tough to condense your organization’s emphasis into a single sentence, here are some pointers to help you draft an effective mission statement.

1. First, start by describing what the organization does. This may be a product you create or a service it offers to your customers—whatever it is that keeps the organization running.

2. Secondly, outline how the organization accomplishes its goals. Instead of becoming technical, consider what values are at the heart of the organization. Perhaps it places a premium on quality, customer service, or sustainability, or it encourage creativity and innovation. In its mission statement, it should include these crucial aspects.

3. Finally, in a mission statement, explain “why it does what it does”. This is crucial. It allows it to stand out as an organization by emphasizing what makes it unique in its field. Keep the mission statement succinct and to-the-point.

Remember to go over it, modify it, and have someone else look it over when you’ve finished it. It will need to find a method to include it anywhere you can after you’ve authorized it, such as on your website or in your marketing campaigns—anywhere that key stakeholders will see it.

As a result, an organization should undertake the following in order to produce a succinct and crisp mission statement:

• Describe the product or service that an organization provides.
• Find out what the organization’s essential values are.
• Make a connection between how your organization’s offering and your ideals.
• Combine these statements into a single statement.
• Make sure it is succinct, straightforward, and devoid of fluff.

4. Be inspiring. After drafting the mission statement, one should review each and every word again and question if every word has a meaning associated to the statement or not. Additionally, one should read the mission statement to check if it inspires to spring into action.

5. Use It. You should not spend time on the mission statement if it will not be utilized from your end and will end up becoming just a poster for the hanger wall. On the contrary, your mission statement must become a strong point of reference to analyze any possible future projects and analyze if they align with actualizing the vision.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Shareholder

▶ Anant JAIN Mission Statement

Useful Resources

Christpher K. Bart (2006) Sex, Lies and Mission Statements

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).

Stakeholder

In this article, Anant JAIN (ESSEC Business School, Master in Management, 2019-2022) explains the term “Stakeholder” used in management.

Introduction

As defined in a 1963 internal memorandum at the Stanford Research Institute, “In a company, a stakeholder is a member of groups without whose support the organization would cease to exist”. Edward Freeman later refined and promoted the idea of stakeholder in the 1980s.

In other words, a stakeholder is a person, a group, or an organization who is affected by a company, project, or business venture’s outcome. A stakeholder has an interest in a firm and can influence or be influenced by it.

Stakeholders are crucial because their decisions can have a favorable or negative impact on the project. Diverse stakeholders have different interests, and firms frequently have to make trade-offs in order to please every type of stakeholder.

Investors, employees, customers, and suppliers are the major stakeholders of a typical company. However, with the rise of corporate social responsibility, the notion of stakeholder has been expanded to encompass communities, governments, and trade groups.

Types Of Stakeholders

Stakeholders can be classified on the basis of their engagement and involvement with a company and its business. They can be classified as internal stakeholders and external stakeholders.

Internal Stakeholders

Internal stakeholders, also known as Primary stakeholders, are those who are engaged in economic and financial transactions with the company. Internal stakeholders are those who have a direct interest in the company via employment, ownership, or investment. Employees, owners, the board of directors, project managers, investors, and suppliers are just a few examples.

External Stakeholders

External stakeholders are those who are not engaged in direct economic or financial return with the company and are indirectly impacted by the company and its business activities. They do not actively work for a firm, but they are influenced by its activities and its’ consequences in some way. The government, the environment, society, communities, the general public, and the media are just a few examples.

List Of Stakeholders

As previously stated, there are several categories of stakeholders. There are internal and external stakeholders, and every stakeholder falls under either of these categories. Every type of stakeholder group is unique and their expectations are different. Therefore, some stakeholders will be simpler to handle than others. Please find a list of the most frequent stakeholders, as well as their specific needs and participation with a company, below:

• Customers

  Stake: Product/service quality and value
  Type of stakeholder: Internal
  These stakeholders desire the project’s product or service, and they want it to be of high quality and provide value for them. For instance, a customer staying at a hotel would expect his or her stay to be convenient and relaxing.

• Employees

  Stake: Employment income and safety
  Type of stakeholder: Internal
  Employees have a direct investment in the company since they earn a living wage and receive additional perks (both financial and non-monetary). Employees may also have health and safety interest, depending on the nature of the company. This is particularly true for companies in the transportation, mining, oil & gas, and construction sector.

• Investors

  Stake: Financial returns
  Type of stakeholder: Internal
  Shareholders and debtholders are both types of investors. Investors contribute money into the company with the expectation of getting a particular return on their investment. The idea of shareholder value is often a source of priority for investors. All shareholders are stakeholders by definition, however, the reverse is not true.

• Suppliers & Vendors

  Stake: Revenues and safety
  Type of stakeholder: External
  Suppliers and vendors offer goods and/or services to a company and rely on it for ongoing revenue and profits. Suppliers’ health and safety are at risk in many sectors, as they may be directly involved in the company’s activities.

• Communities

  Stake: Health, safety, economic development
  Type of stakeholder: External
  Communities have an important role in the success of significant companies that are based there. Employment opportunity, economic development, health, and safety are all factors that have an influence on them. When a large company moves into or out of a small town, it has an immediate and considerable influence on employment, income, and expenditure.

• Governments

  Stake: Taxes and GDP
  Type of stakeholder: External
  Governments may also be considered a big shareholder in a company since they collect taxes from the company (corporate income taxes), all the people it employs (payroll taxes), and other expenses the company incurs (sales taxes). Furthermore, companies contribute to the total Gross Domestic Product (GDP), which benefits the governments and as a result, the economy as well.

• Problems With Stakeholders

  Stakeholders are critical for several reasons. Internal stakeholders are crucial since the company’s operations rely on their ability to collaborate to achieve the company’s objectives. External stakeholders, on the other hand, might have an indirect impact on the company. Customers, for example, can alter their purchasing patterns, suppliers can alter their production and distribution processes, and governments can alter their laws and regulations.

  The various stakeholder interests may not align, which is a significant difficulty for companies with many stakeholders. In actuality, the interests of different stakeholders might be completely poles apart from each other. For example, from the perspective of its shareholders, a company’s principal purpose is to maximize earnings and increase shareholder value. Because labor expenses are inescapable for most businesses, a company may try to reduce them as low as possible as therefore, affecting its credibility with its employees. Ultimately, maintaining internal and external stakeholder relationships and their expectations is critical for a company’s long-term success.

  Stakeholders VS Shareholders

  Shareholders and stakeholders are not the same thing. A stakeholder might be affected by or invested in the project. A stakeholder can be a shareholder. However, stakeholders can also be employees, bondholders, consumers, suppliers, and vendors.

  A shareholder can be a stakeholder. A stakeholder is someone who has interest in a company and may affect or be affected by the company’s actions. A shareholder, on the other hand, is someone who has made a financial investment in a company. Because shareholders are also stakeholders, that company may begin initiatives in which the shareholder is also a stakeholder. However, stakeholders are not always shareholders. Because a shareholder buys stock in a public company, he or she owns a part of the company and therefore is concerned with the performance of the stock. On the other hand, a stakeholder has an interest in the company’s overall performance and not just the stock performance and financial returns.

  Shareholders are an essential form of stakeholder, but they are far from the only ones. Employees, consumers, suppliers, governments, and the general public are examples of other stakeholders. In recent years, there has been a movement toward thinking about who makes up a company’s stakeholders in a broader sense.

  Related Posts On The SimTrade Blog

  ▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

  ▶ Anant JAIN Shareholder

  ▶ Anant JAIN Mission Statement

  ▶ Anant JAIN Writing A Mission Statement

  Useful Resources

  Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

  Jack Welch (2009) Welch condemns share price focus Financial Times.

  About the author

  The article was written in August 2024 by Anant JAIN (ESSEC Business School, Master in Management, 2019-2022).

Shareholder

In this article, Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022) defines the term “Shareholders”.

Introduction

A shareholder, also known as a stockholder, is a person, company, institution, or any other legal entity that holds stock in a company and is registered as the legal owner of shares of a public or private company’s share capital. To be a partial owner of a company’s stock or mutual fund, a shareholder must hold at least one share. A person or legal entity becomes a shareholder in a company once its name and other details are registered in the company’s register of shareholders or members.

The ownership percentage held determines a shareholder’s influence on the company. A company’s shareholders are legally distinct from the company itself. They are normally not accountable for the company’s obligations, and their liability for business debts is restricted to the paid share price unless a shareholder has been offered guarantees. Since shareholders are technically the owner of the company, they benefit from the success, growth and profitability of a company. These benefits take the shape of higher stock prices and/or dividends. When a company loses money, the share price lowers, which can result in shareholders losing money or seeing their portfolios suffer losses.

Shareholders may have purchased their shares in the primary market by subscribing to initial public offerings (IPOs), and thereby given money to the company. Most shareholders, on the other hand, buy shares in the secondary market and do not contribute to the capital of the company directly. Depending on the share class, shareholders may be offered unique privileges.

Shareholders purchase stock in a firm with the goal of profiting from dividend payments or an increase in the market price of the stock. They may also purchase stock in order to take control of a company.

Shareholders have specific rights, including the ability to vote on certain company affairs, vote for the Board of Directors or be elected to a seat on the Board of Directors, receive dividends from the company, and receive its annual financial statements. A company’s board of directors supervises a company in general for the interest of its stockholders (fiduciary duty).

If the company is dissolved and its assets are sold, the shareholder may be entitled to a percentage of the proceeds (in proportion to the shares held by him or her), assuming all creditors have been paid. When this situation arises, a shareholder does have the obligation to bear the company’s debts and financial commitments, which means creditors cannot force stockholders to pay them.

A majority shareholder is a single shareholder who owns and controls more than 50% of a company’s outstanding shares. Minority shareholders, on the other hand, are individuals who own less than 50% of a corporation’s equity.

Typically, majority shareholders are the founders of companies, while majority shareholders in older companies are frequently descendants of company’s founders. In any scenario, majority shareholders hold more than 50% of the voting rights and as a result, wield enormous authority over important operational decisions, including the replacement of board members and the appopointments of C-level executives such as the chief executive officers (CEO) and other senior employees. Consequently, companies frequently strive to not have any majority shareholder amongst their ranks.

Types Of Shareholders

There are different types of share holders. They can be categorized on the basis of the kind of shares owned, the % of shared owned and ownership’s representation.

On The Basis Of The Kind Of Shares Owned

Common Shareholder

Those who own a company’s common shares (or regular shares) are called common shareholders. This is the most typical shareholding structure. They are the most common form of stockholder, and they have the ability to vote on company’s affairs. They have the right to participate in general meetings of the corporation, in the election of directors, and they can initiate class action lawsuits, when necessary, because they have authority over the governance of the company.

Preferred Shareholder

Preferred shareholders possess a share of the company’s preferred shares/stocks rather than regular shares. They have no voting rights or influence over how the company is operated. They are instead entitled to a predetermined yearly dividend, which will precede the payout before dividends are distributed among the common shareholders.

Therefore, while both common stock and preferred stock appreciate in value as the firm performs well, it is the former that enjoys greater capital gains or losses.

On The Basis Of The Percentage Of Shares Owned

Majority Shareholder

A majority shareholder is someone who actually owns more than 50 percent of a company’s stock. Company’s founders or their successors are typically this type of shareholder.

Minority Shareholder

Minority shareholders own less than 50% of a company’s shares, often as little as one share.

On The Basis Of Ownership’s Representation

Beneficial Shareholder

A person or legal entity that receives financial and economic benefit of ownership of the shares are called Beneficial Shareholders.

Nominee Shareholder

A nominee shareholder is a person or legal entity mentioned as the owner on the company’s register of members, but who, whether disclosed or not, operates for the benefit or at the direction of the beneficial shareholders.

The Rights Of Shareholders

Shareholders may have the following rights, subject to relevant legislation, corporate rules, and any shareholders’ agreement:

• The right to see and inspect the books and records of the company
• To file a lawsuit against the company for breach of fiduciary responsibility
• To nominate directors (though minority safeguards make this difficult in practice) and suggest shareholder resolutions
• To vote on the board of directors’ nominees for directors
• To vote on mergers and corporate charter alterations
• To receive dividends (in the case that they are announced)
• To participate in yearly meetings in person or via teleconferences
• To vote on important matters by proxy (if they are unable to attend voting meetings in person) either through mail-in ballots or digital voting platforms
• To liquidate or sell the shares owned by them
• To acquire the company’s newly issued shares
• To vote on shareholder resolutions and to file them
• To vote on proposed management styles

The rights described above can be divided into two categories: (1) cash-flow rights and (2) voting rights. While the cash-flow rights that come with shares, determine their value, voting rights may be significant as well.

Calculation Of The Value Of Cash-Flow Rights

Discounting future free cash flows can be used to calculate the value of shareholders’ cash-flow rights.

Calculation Of The Value Of Voting Rights

There are four ways to calculate the worth of a shareholder’s voting rights:

• The distinction between voting and non-voting stock (dual-class approach)
• The difference between the price paid in a block-trade transaction and the price paid in a subsequent exchange transaction (block-trade approach)
• The implied voting value obtained from option prices
• The excess lending fee over voting events

Role Of A Shareholder

Being a shareholder entails more than simply getting profits; it also entails certain duties. They are as follows:

• Deciding about and determining what powers they will be provided to the company’s directors, such as electing and dismissing them from the position.
• Setting a compensation for the directors. Shareholders must ensure that the sum given will cover the director’s cost of living in the city where he or she lives without jeopardizing the company’s finances.
• Making decisions on matters over which the board of directors has no authority, such as modifications to the company’s constitution.
• Examining the company’s financial accounts and approving them.

Shareholder VS Stakeholder

Many individuals mistakenly believe that shareholder and stakeholder are the same term. The terms, however, do not have the same meaning. A shareholder is a company’s owner based on the number of shares they possess. A stakeholder, unlike a shareholder, does not own a share of the company and yet is invested in its performance which may or may not be monetary in nature.

For example, a hotel chain in the United States has multiple stakeholders, including its employees, who rely on the company for their livelihood. Because of the taxes the company must pay each year, its stakeholders also include local and national governments.

Shareholder VS Subscriber

A company begins as a private limited company that is governed, founded, and structured by a group of people known as “subscribers” until becoming public. The subscribers are the company’s founding members, as their names appear in the memorandum of association. Their names are written in the public register after the firm goes public, and they remain there even if they leave the company.

Related Posts On The SimTrade Blog

▶ Anant JAIN Analysis Of “The Social Responsibility Of Business Is To Create Value For Stakeholders” Article By Freeman And Elms

▶ Anant JAIN Stakeholder

▶ Anant JAIN Mission Statement

▶ Anant JAIN Writing A Mission Statement

Useful Resources

Freeman E., H. Elms, 2018, The Social Responsibility of Business Is to Create Value for Stakeholders, MIT Sloan Management Review, 17/12/2020.

Jack Welch (2009) Welch condemns share price focus Financial Times.

About The Author

The article was written in August 2024 by Anant JAIN (ESSEC Business School, Grande Ecole – Master in Management, 2019-2022).