Financial investments like stocks can realign people’s incentives to have peaceful societies: Saumitra Jha

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Financial investments like stocks can realign people’s incentives to have peaceful societies: Saumitra Jha


Saumitra Jha teaches political economy at Stanford University’s Graduate School of Business (GSB). Speaking to Srijana Mitra Das, he discusses how investing in financial incentives can enable more harmonious societies:


Q. What is the core of your research?


A. I am an economist but a lot of my work focuses on questions of violence, polarisation and political risk. I look at how firms and citizens can manage political risk and ways that can enable people to build more peaceful societies.

Q. You work on financial innovations which can bring about peace in conflict situations — can you tell us about these?

A. I’m intrigued by how financial methods can help people envision sharing a common future in a peaceful community. Financial ideas can align parties that might otherwise believe violence is the only option — these incentives help people believe they can benefit from peace, a realisation which comes from exposure to markets that draw from stability.

There are strong historical precedents to this. Japan was very socially divided and politically fragmented in the 1860s, which isn’t how we think of it today. The samurai class was only five percent of the population but it had a monopoly on the right to be in government, to bear arms and it often treated other groups with discrimination. All this changed when there was a push to modernise Japan. Instead of giving the samurai traditional salaries, the government decided to give them bonds, allowing them to use these to capitalise banks. So, over a three-year-period, the former samurai, shedding many traditional privileges, now became bankers and investors in the national banking system. The project was called ‘Swords into Bank Shares’ where the traditional samurai were given a credible stake in a progressive and forward-looking future, which helped Japan grow stronger and richer.

This idea, of realigning the incentives of critical groups and making them pro-development, is very powerful — and financial markets are an excellent way to do this at scale.

Financial investments like stocks can realign people’s incentives to have peaceful societies: Saumitra Jha

Q. Are there contemporary examples of such a transformative social change?

A. Yes, some years ago, we did a field experiment with the University of Jerusalem. We were interested in whether exposure to financial markets as a little experiential intervention would help people become more financially literate and also put aside the emotional aspects of political debate, focusing on issues of mutual benefit. We randomly gave a number of Israeli citizens the chance to trade small amounts of stock, just enough to keep them interested, for about 47 weeks. Some people were randomly assigned Israeli stocks, some were randomly given Palestinian stocks and some were given stocks from elsewhere. We began to track how their financial awareness grew as well as whether their attitude towards the peace process and their voting decisions changed at all.

The findings showed that firstly, these people became much more financially literate and empowered — this happened particularly in the case of women who often lag behind in financial literacy worldwide. As these groups became more financially literate, they began to reassess the gains and costs of diverse policies — they started assessing policies from the perspective of the broader economy rather than from an emotive perspective. And this began to reflect in their voting decisions — they started to support parties which backed the peace process. The positive results of this intervention lasted even a year after this study was conducted.

This reflects the possibility that if such a method were to be designed well, conditions for financial empowerment can emerge — and as such financial awareness grows, people start evaluating sociopolitical dynamics from broader financial indices versus more slanted political perspectives. As more groups grow supportive of a stable and thriving economy, their attention evolves to the gains they can share together as a society. Having a non-partisan, objective financial measure like stocks is a very powerful way to reduce divisions in society.

Q. You teach business executives risk management — what is your advice about crises like the Ukraine situation and longer-term climate challenges?

A. The first key insight is, don’t avoid such situations. Many people feel these situations are too complex and beyond their control and therefore pretend they don’t exist. This approach doesn’t work. We teach a number of frameworks for executives to understand where such risks are and what can be done to manage them, from using financial methods to building up potential supporters to engaging in CSR. Apart from its ethical goodness, CSR is a critical hard-nosed element because this is a political management of risk which brings businesses powerful local support when they need it. An interesting example is of MTN, the South African telecom company which does business in very difficult environments — CSR is a critical part of that. Telecom companies often support the national football or cricket team because every citizen, no matter what their political stripe, stands with such a team. MTN generated great local goodwill doing this. Leveraging your customer base as a source of support is a very useful strategy, particularly in situations of risk which abound in this rapidly changing world.


Views expressed are personal.



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