The Political Comeuppance of Rupert Murdoch

I used to rule the world
Seas would rise when I gave the word
Now in the morning I sleep alone
Sweep the streets I used to own

[With apologies due to Coldplay.] For a long time now, I've grudgingly admired Rupert Murdoch's business acumen if not necessarily the fruits of his media empire [1, 2, 3, 4, 5, 6, 7]. Starting from Australia, he has literally made the world his oyster. Such is his influence that the rise of New Labour is said to not have been possible without him backing away from Tory support. Murdoch's UK titles are well-known: the Times of London, the Sunday Times, the Sun, and until a few hours ago, the News of the World. The latter two tabloids set the template for other lowbrow publications around the world owned by Murdoch alike the New York Post.

However, time moves on and the big money to be had in media has long since gone to more interactive forms such as cable services. Not that Murdoch has always struck gold; witness the ill-fated News Corporation purchase and subsequent fire sale of MySpace. Still, these occasional lapses have been more than offset by successes such as the Fox Channel and Fox News stateside. The success of the latter alongside other right-leaning publications and programmes has always made Murdoch an arch-conservative in the eyes of some, but a keener understanding is that he shifts with the political winds when it suits. Instead, more conservative governments have traditionally allowed him more leeway to operate his media empire when antitrust questions came up. Witness Fox News' much-parodied broadcasting style.

I used to roll the dice
Feel the fear in my enemy's eyes
Listen as the crowd would sing
"Now the old king is dead! Long live the king!"

It is certainly an open question if Murdoch is a kingmaker insofar as his media outlet's outsize influence is concerned. Forbes ranks him as the 13th most powerful person in the world ahead of several dozens of world leaders. Not only did Tony Blair fear offending Murdoch at all costs, but the current Tory-led coalition also values good relations with the media titan. Aping Blair's tactic of hiring Alastair Campbell--a former tabloid journalist from the Daily Mirror--as his director of communications, Cameron infamously appointed Andy Coulson from the News of the World to the same post when he became PM. Coulson subsequently being sacked over phone hacking allegations is well-known.

Yet having made strong inroads into Britain's political-economic elite over the decades, Murdoch is now in imminent danger of overplaying his hand. It's been a slow-burning story over the years of how the News of the World has been associated with phone hacking. (See a summary and timeline here.) Whereas previous controversies have surrounded the usual suspects of the rich and famous of typical tabloid fare--actors, celebrities, sports stars, politicians, and other public figures--in recent days things have become far more dramatic and constitute a tabloid story onto itself. In its hunger for the sensational story, it appears the News of the World phone hacking also targeted families of servicemen, crime victims, and those affected by the 7/7 attacks.

To be certain, not all right-leaning voices back Murdoch. Still, for a long time, it could count on those who mattered overall. Aside from Coulson, David Cameron is also chummy with Rebekah Brooks, CEO on News International--publisher of Murdoch's various UK publications. However, the recent news of phone hacking extending to regular folks who find themselves in difficult situations made News Corporation universally vilified in Westminster's halls even among Cameron's people as such odiousness is difficult to dispel.

One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand

Today, the seemingly unthinkable has happened: Rupert's son James Murdoch announced the closure of the News of the World, with its last edition to be published this Sunday--without advertising--after 168 years in operation. Prior to this announcement, it was the widest circulation newspaper (tabloid) in the UK.

In no small, part, this action is due to several previously loyal sponsors abandoning ship: Boots, O2, Halifax, Virgin Holidays, The Co-op, Butlins, Ford and Vauxhall all ditched it for fear of offending common decency. With many others potentially following suit, the writing on the wall became clear: NoW was no longer a commercially viable title for as long as these accusations were being contested in legal proceedings.

Revolutionaries wait
For my head on a silver plate
Just a puppet on a lonely string
Oh who would ever want to be king?

Aside from putting News Corporation stock under heavy pressure, the NoW endgame is also calling into question its other activities. As mentioned above, the rapid demise of print publications has shifted the battleground for this firm and many others. For many months, it was expected that News Corporation would acquire the remaining 61% stake in British Sky Broadcasting, the largest cable service in the UK with 10 million subscribers. It was once assumed that the Murdoch-friendly Tories would let this deal pass, but things have changed. Telecommunications regulator Ofcom has put out a statement on media concerns having to be "fit and proper" to broadcast with the target being rather obvious:

In the light of the current public debate about phone hacking and other allegations, Ofcom confirms that it has a duty to be satisfied on an ongoing basis that the holder of a broadcasting licence is ‘fit and proper’.

It is clearly not for Ofcom to investigate matters which properly lie in the hands of the police and the courts, however we are closely monitoring the situation and in particular the investigations by the relevant authorities into the alleged unlawful activities.

The general consensus is that NoW had become, due to the various phone hacking controversies, a sacrificial lamb. The possibility of creating a Sunday Sun or similar weekend tabloid removed of such blemishes exists. More importantly, while print media may be influential--especially in shaping politicians' perceptions of News Corporation--the real money at stake is with the pending bid for British Sky Broadcasting. Chris Hughes over at Reuters has more to say on what's really at stake:

But News Corp’s total UK newspaper operations contribute only about 4 percent of group sales and barely break even. London-based Enders Analysis puts the annual pre-tax profit contribution of the News of the World and its weekday sister paper The Sun at just 86 million pounds. News Corp could clearly cope with a loss of readers and ad revenue. The group will also have to swallow the expense of settling with victims of alleged phone hacking. The actress Sienna Miller was recently awarded 100,000 pounds ($160,000). Two hundred more settlements at the same rate would cost 20 million pounds.

But bigger potential costs come with News Corp’s ambitions to take full ownership of BSkyB. The price may now rise if the hacking row stiffens the resolve of the satellite broadcaster’s independent directors. A deal was previously expected at 900 pence to 950 pence a share. If Murdoch now has to pay 10 pounds a share, the extra cost would be 795 million pounds over the midpoint of the lower range.

Then there is a small risk that the UK regulator revokes BSkyB’s broadcasting license. It could if the outcome of the investigations now underway makes it believe that News Corp isn’t a “fit and proper” owner or part-owner. That in turn would lead to forced divestiture of BSkyB. But this looks unlikely given the regulator’s criteria are designed to exclude certain categories of owner — for example political groups — and focus on existing breaches of UK broadcasting law rather than criminality per se.

Slumping stock price aside, also consider the controversy discount on the value of News Corporation stock which may grow even larger if the NoW-killing gambit fails:

That leaves the costs of poor governance. News Corp stock already labours with a “Murdoch discount” of about 30 percent compared to peers on an enterprise value to EBITDA basis. This is a $10 billion burden which, in theory at least, reflects concern that Murdoch isn’t shareholder-friendly.

In cash terms the UK newspapers — which also include The Times and The Sunday Times — are little more than a rounding error for News Corp. Greater economic value may have come because they gave Murdoch power and influence in Britain, and that may have helped him establish his broadcasting operations. But if Murdoch overpays for BSkyB or loses the deal because he addresses the problems in UK print with weakness or sentimentality, the discount deserves to widen.

Lastly, I am particularly critical of the lousy tabloid NoW gating its content, as if its flotsam and jetsam were worth paying a premium price for. It isn't the WSJ or even the Times of London--two other Murdoch titles. Good riddance, you gated monstrosity. Now, if only something similar could bring down Fox News--perhaps the second most repugnant Murdoch property. It was not so long ago that Murdoch was regarded as invincible here in the UK, so things may change in Australia and the States as well . As matters unfold, it seems the mightiest of old school media barons is not as invincible as he thought to simple outrage.

UPDATE 1: As expected, Andy Coulson has just been arrested in connection with the latest phone hacking allegations.

UPDATE 2: The notion that print media was a political battering ram for News Corporation's more profitable interests is echoed by the FT:

For years, shareholders have indulged Mr Murdoch’s love of print “because the political clout was worth the marginal loss”, says someone close to the family. That could change “if these playthings cost us our reputation and our commercial relationships”.

UPDATE 3 (11/7): Instead of rubber-stamping the deal as expected prior to this debacle, News Corporation's bid for the remaining stake in BSkyB has now been sent by the government to the competition regulator.

Countering Rising Food Prices at the G-20 (Sort Of)

In case you missed it, the G-20 recently held a meeting of agricultural ministers in gay (as in happy) Paris. Given the wide range of global governance problems, focusing on things other than finance is welcome even if they ultimately return to matters of Mammon. France being the current head of the G-20 as well as the EU's largest agricultural producer and the world's second largest exporter of such products--its interest in the matter is evident. That said, we too came to an impasse over two important agricultural matters at the aforementioned meeting.

First, government subsidies for the production of biofuels remains a hot topic. Some blame diversion of food crops to biofuels as one reason for soaring food prices. Certainly, I would distinguish among the cost-effectiveness of such solutions. The US programme is a massive financial boondoggle, whereas that of Brazil has established its economic rationale for quite some time. At any rate, the UN Food and Agricultural Organization (FAO) believes that curtailing such subsidies should alleviate price rises hurting some of the countries hardest hit by rising food prices. A recent NY Times op-ed has this to say on the matter:

The price of agricultural commodities has surged by more than a third over the past year — cereal prices by 70 percent — surpassing even the levels that sparked widespread food riots in 2008. According to the World Bank, the rise in prices pushed 44 million more people into hunger in the second half of 2010.

It is disappointing that the agriculture ministers from the 20 large industrial economies who gathered last week in Paris failed to end two policies that are a big part of the problem: bans on agricultural exports by certain producers and government supports for food-based biofuel production.

A report for the Group of 20 meeting by the United Nations’ Food and Agriculture Organization, the World Bank and others noted that eliminating or curtailing these policies would help mitigate the spikes in prices that have deepened hunger in the poorest countries in the world.

The United States, Brazil and several other biofuel makers opposed an agreement to cut support for biofuels. This country is the world’s biggest ethanol producer. The 13.5 billion gallons made here last year used about 40 percent of the nation’s corn crop. Government supports include a nearly $6 billion annual subsidy for ethanol makers.

The ministers agreed only to further study the relation between biofuel production and food prices. That is just an excuse for continuing to protect these industries. The cost should be clear to all by this point. The report to the Group of 20 noted that biofuels consumed 20 percent of the global sugar cane crop between 2007 and 2009, when food prices soared, as well as 4 percent of the beet crop and 9 percent of the world’s production of coarse grains like corn.

There's also the matter of major agricultural producers refusing to export their products, also exacerbating high prices worldwide:

The ministers also failed to forbid the use of export barriers to hold down food prices at home. Argentina [see my earlier post on its soy export limits], Russia and more than two dozen others have adopted bans since prices began to surge, sending global prices even higher and discouraging investment in food producing regions. The ministers did agree that countries could not restrict sales to the World Food Program so it can continue to address crises. It is not enough.

That said, the speculation-wary Sarkozy has shown his influence in putting in place mechanisms for determining if rising prices are due less to supply and demand dynamics but trader profiteering, howsoever defined:

The agricultural summit meeting, the first of its kind, did make some progress. The participants agreed to set up a system to monitor world food stocks and production to prevent misinformation that can contribute to price fluctuations. They also agreed on a pilot program for an emergency food reserve system to respond to shortages in vulnerable countries.

The Guardian also has a summary of other areas discussed if you are further interested in this important topic.

Paul Martin, Father of the G-20 & Other Stories

Due to an unfortunate circumstance, I have had yet another miserable experience of coming across pseudo-anti-globalization figure Naomi Klein's typically inaccurate ramblings on how Larry Summers was the creator of the G-2o. In some scribblings prior to last year's G-20 gathering in Toronto, she wrote the G-20 is "a global menace invented by Larry Summers." As you would expect from a habitually factually challenged individual, this assertion is not true. Instead, the G-20 is the brainchild of a comparatively lesser known Canadian.

Is Larry "Wooden Racquets" Summers indeed the father of the G-20? I beg to differ. To be sure, he remains a most controversial character. From being one of the chief architects of high-era neoliberalism during the Clinton administration, he's become a deficit lubber par excellence as of late. As long as it was poor countries feeling the pinch of the standard gospel of liberalization, privatization and deregulation, there was no problem with it for him. But now that the United States has experienced being down in the dumps--probably for good, even--he's turned into the most avid cheerleader for Obamanite deliberalization, nationalization, and reregulation. Typical American hypocrisy.

That said, Larry Summers did not invent the G-20. Rather, proper attribution would give that honour--or dishonour if you're a Naomi Klein fanboy (poor you)--to former Canadian Finance and Prime Minister Paul Martin. Be forewarned that he is highly regarded in these parts, having first explained the rationale for and then implementing fiscal cuts in Canada that have spared it from American-style gridlock over budgetary matters.

In the interest of historical accuracy, the Globe and Mail has the authoritative story (which also came out during the time of last year's G-20 summit in Toronto) on how the G-20 came to be. Shortly after the Asian financial crisis, yes, Larry Summers recognized that there was a growing need to include more voices that the G-7 on matters of global economic governance. However, Summers did not come up with a workable idea until Martin suggested the creation of a diverse group of twenty countries. That done, Summers and Martin began drawing up the list of G-20 participants:

Paul Martin sat in Lawrence Summers' spacious office in the Greek-columned U.S. Treasury building in Washington, searching in vain for a piece of paper. With none in sight, the two men grabbed a brown manila envelope, put it on the table between them, and began sketching the framework of a new world order.

It was April 27, 1999. For the past five years, the global economy had shuddered under a string of massive debt defaults – first in Mexico, and then in Southeast Asia and Russia. In each case, Western leaders and bankers responded by prescribing harsh fixes, throwing one developing economy after another into recession.

As crisis followed crisis, Mr. Martin, then Canada's finance minister, became convinced that major developing nations had to be given a voice – not just an ultimatum – when it came to discussing their place in the global economy. But in the capitals of Europe and the corridors of Washington, the answer was always the same: It's our club, and there are no vacancies.

Or at least it was the same answer until that April day when Mr. Martin visited Mr. Summers, then Bill Clinton's nominee for treasury secretary, to press his case. He argued that they couldn't keep imposing solutions on developing countries. The G7 had to be expanded – at least at the finance-ministers' level. Mr. Summers quickly agreed. But that was the simple part. Much thornier was the issue of who would be admitted to the club.

With the manila envelope in hand, the two began jotting down countries. China, India, Brazil, Mexico – these were obvious choices. So was South Africa, the biggest economy on its continent. But who else? “I felt very strongly that it had to be the regional powers,” recalls Mr. Martin. “Larry felt that, and then he also had geopolitical concerns. I would love to say we sat down and ran the numbers on whose GDP was bigger, but we didn't. We both had a pretty good perspective on where things lay.

Thailand was the nexus of the Asian banking crisis, but Indonesia was more influential in the region. Indonesia in; Thailand out. Chile was tempting, because it was democratic and well-run, but Argentina was a bigger player. Argentina got the seat. Saudi Arabia was strategically important and a good friend of the United States. The Saudis would get an invite.

So it went until they had compiled a working list of roughly 20 countries – literally, a back-of-the-envelope blueprint for what would become, today, the most powerful forum on economic and political matters in the world: the G20.

I have just excerpted the introduction above; the rest is of course required reading for anyone with an interest in global governance. It is disconcerting that a supposedly more inclusive club representing about 80% of the world economy was effectively drawn up by two powerful white men, but that's indeed the case. Still, it's up to developing countries whether they can use their voices effectively in global governance matters such as IMF succession where they've squandered a perfectly good opportunity.

Also see Martin's 2005 article in Foreign Affairs that lays out his rationale for expanding mechanisms for global governance. To give credit (or blame) where it's due, Paul Martin is the father of the G-20.

Come 2050, Half of the World Will Live in Slums

Having published in a geography journal sometime ago, I take a natural interest in urban studies as a field of study. To be honest, I cannot determine what distinguishes a social science work from one in human geography. Being ever so pedantic, I like pointing out that social science research is inescapably grounded in spatial coordinates, hence the near-automaticity of it being "geographic."

That qualifier aside, urban studies should be of great interest to practically everyone interested in the social sciences. Sometime in 2008, more than half of the world's population lived in urban areas for the first time in human history. This shift necessitates thinking about how to make urban environs more liveable given that more and more persons now choose to live in closer proximity to one another. Civil engineering and urban planning are among the many applied sciences gaining practical interest in solving challenges facing urban dwellers. Not that they are particularly unique and now constitute a majority of the world's population as the demographic transition continues apace or arguably even accelerates.

While this ongoing shift to city life provides many with newfound opportunities, urban blight remains a particular concern. A few days ago, another research centre here, LSE Cities, launched its latest photo essay / statistical compilation entitled Living in the Endless City. (The previous volume was simply entitled Endless City.) Among other factoids like the one in the title, cities constitute 2% of the Earth's surface area but hold 53% of its population. An ever-worsening byproduct of this movement towards massive cities is the expansion of slums. Often lacking access to water, electricity, sanitation and other things we take for granted, they pose challenges to any urban planner. In the past, they used to be viewed entirely negatively, but more recent research now considers them in different ways. Though significant problems obviously remain, they offer some uniquely creative solutions to unavoidable problems alike space utilization and have often bred entrepreneurial activity.

Unfortunately perhaps, Living in the Endless City paints a rather more pessimistic view of what's to come that borders on the Malthusian. Why do people choose to live in conditions of increasingly shared misery exemplified by megacities? Although previous megalopolises were already impressive conurbations, the future portends--you guessed it--the endless city:

Fifty per cent of the world's population currently live in cities with 33 per cent of city dwellers currently living in slums. By 2050, 75 per cent will live in cities with half the world's population will be living in slums...

Cities and their designs matter. With half of the seven billion people on earth living in cities, a substantial portion of global GDP will be invested in energy and resources to accommodate new city dwellers over the next decades. The cities of the 21st century will see new waves of urban construction, and the shape of our cities will have profound impacts on the ecological balance of the planet, and on the human conditions of people growing up and growing old in cities.

Living in the Endless Cities sets out to address pressing issues, such as why are so many cities continuing to grow? What is the complex relationship between urban form and city life? How can we intervene at all levels to bring about positive change? Has the model for the western city become redundant in the face of globalisation?

The investigations of the Urban Age Project have found that cities are becoming more spatially fragmented, more socially divisive and more environmentally destructive. These are the challenges and threats faced by the next generation of urban leaders who are tasked with steering their cities through what will be complex and difficult times. But the narratives also suggest that cities are uniquely placed to harness their human and environmental potential, guiding urban growth towards greater social and environmental equity. This will be the main task for the mayors, governors and city leaders of the emerging cities in the future.

The future is still up in the air. As if global governance did not have enough challenges yet, add the milieu of urban sprawl on a previously unimaginable scale to everything else. From American-style gated communities to a gated planet (inequality); city dwellers living in close proximity who are virtual strangers to a world of strangers (social division); and infrequent municipal trash collection to planetary heaps of waste (pollution): cities will be the locations where the global human drama will unfold in the coming decades, for better or worse.

Of Arctic Oil Grabs and Greenland's Independence

Some rich men came and raped the land; nobody caught 'em
Put up a bunch of ugly boxes and Jesus people bought 'em
And they called it paradise--the place to be
They watched the hazy sun, sinking in the sea

[NOTE: I almost missed this one, but it's better late than never. Might as well cue up "The Last Resort" by The Eagles while you're at it.] There's something profoundly distasteful about the whole process of warming over Mother Earth to exploit her oil and gas resources in the Arctic. Which, when used, will further worsen global warming. As most of you know, melting of ice up North has prompted all sorts of manoeuvring to secure future exploration rights among the Nordic countries, Canada, the United States, and Russia. Recently, the major nations in the impending Arctic oil grab got together and signed the Nuuk Declaration. The World Policy Institute provides a brief description:

On May 12, the 7th Arctic Council Ministerial Meeting convened in Nuuk, Greenland. The Arctic Council is a high-level intergovernmental forum created to promote cooperation among the Arctic states. Its members are Canada, Denmark (via Greenland and the Faroe Islands), Finland, Iceland, Norway, Russian Federation, Sweden, and the United States. Permanent participants include indigenous organizations such as the Inuit Circumpolar Council (ICC) and the Saami Council. Unlike member states, permanent participants do not have voting rights.

The meeting, attended primarily by foreign ministers, produced the first legally binding agreement arrived at by the Arctic states since the formation of the Council in 1996. This agreement requires states to cooperate on search-and-rescue operations, including giving permission for all states to traverse foreign waters when necessary. The eight Arctic states also formally agreed to jointly develop measures for oil pollution preparedness. Finally, the Nuuk Declaration also noted that the Arctic sea ice is melting at a faster rate than previously predicted, accelerating access to oil and gas reserves and opening up new sea routes for commerce and tourism.

However, the more interesting behind-the-scenes story involves diplomatic manoeuvring by the main players. While the Nuuk Declaration was being negotiated, WikiLeaks published a series of cables online pertaining to US policies concerning the Arctic. We might as well use some "Internet Freedom" right here, ey? (This story involves our Canadian friends so the lingo should be accurate ;-) As it turns out, the haughty Americans who usually avoid intrusions on national sovereignty at the UN are now considering signing on to UN Convention on the Law of the Sea according to leaked cables. This to be better placed to economolest Mother Earth when the time comes. From the first cable:

4. (C) D said the Administration continued to urge the Senate to ratify the UN Convention on the Law of the Sea (UNCLOS), and had not given up all hope of achieving this during the Bush Administration. Ratification was clearly in the U.S. interest. [Danish Foreign Minister Per Stig] Moeller agreed, joking that "if you stay out, then the rest of us will have more to carve up in the Arctic."

Then there are predictions verging on the edge of conspiracy theory that future energy revenues will allow Greenland to become independent of Denmark. Naturally, major American energy firms are keen on approaching the players there for...future collaborations. These from Cable 129049 from the Copenhagen embassy in 2007:

2. (SBU) Summary: Greenland is on a clear track toward independence, which could come more quickly than most outside the Kingdom of Denmark realize.

3. (SBU) With Greenlandic independence glinting on the horizon, the U.S. has a unique opportunity to shape the circumstances in which an independent nation may emerge. We have real security and growing economic interests in Greenland, for which existing Joint and Permanent Committee mechanisms (described reftel A) may no longer be sufficient. American commercial investments, our continuing strategic military presence, and new high-level scientific and political interest in Greenland argue for establishing a small and seasonal American Presence Post in Greenland's capital as soon as practicable. End Summary.

14. (SBU) One senior Greenlandic official commented recently that his country (Greenlanders and many Danes alike routinely refer to Greenland as a ""country"") is "just one big oil strike away" from economic and political independence.

Chevron and ExxonMobil are part of an international consortium exploring off Greenland's western coast, and the U.S. Geological Survey is completing an assessment of Greenland's potential oil and gas reserves. Its initial findings suggest Greenland might have reserves to rival Alaska's North Slope. To help the Greenlanders secure the investments needed for such exploitation, I recently introduced Home Rule Premier Enoksen and Minister of Finance and Foreign Affairs Aleqa Hammond to some of our top U.S. financial institutions in New York.

Hence the US engaging in all sorts of public relations efforts in Greenland. This being the 21st century, there's even paranoia about the Chinese wanting in on the action and thus the need to ward them off:

Our international visitor invitations, English teaching programs and joint scientific/environmental projects have reinforced Greenlandic desires for a closer relationship with the United States, just as Greenland assumes ever-greater charge of its international relations and edges closer to full independence. Our intensified outreach to the Greenlanders will encourage them to resist any false choice between the United States and Europe. It will also strengthen our relationship with Greenland vis-a-vis the Chinese, who have shown increasing interest in Greenland's natural resources… While Greenland has long been believed to possess significant hydrocarbon and mineral stocks, only in the last three to four years -- with the rise in world oil prices -- have international investors have begun to seriously explore Greenland's potential. An American Presence Post in Greenland would provide us with the needed diplomatic platform to seek out new opportunities and advance growing USG interests in Greenland.

Just when I was going to reach for my hankie over how all these nations were concerned about "the conservation, sustainable use and protection of Arctic flora and fauna for the benefit and enjoyment of present and future generations, including local populations and indigenous peoples" as per the Nuuk Declaration, I was plunged back to naked reality. It's an Arctic land grab, plain and simple. Will Greenland really be the 194th country after South Sudan? A question worth pondering, perhaps.

Who will provide the grand design?
What is yours and what is mine?
Cause there is no more new frontier
We have got to make it here

We satisfy our endless needs and justify our bloody deeds
In the name of destiny and the name of God

Belarus is Forever IMF's (Unfaithfully)

[NOTE: It's been a long time since I've had a semi-trademark sing-along post, so without further ado, here's one.] With apologies to Journey:

Currency run, amid plunging sums
Debts go round and round
IMF's on my mind...

One of the most insightful books I've read concerning the remarkable durability of anti-developmental regimes is Nicolas van de Walle's African Economies and the Politics of Permanent Crisis, 1979-1999. Why is it that so many regimes are able to cling to power despite providing so little in terms of delivering a higher standard of living? Foreign Affairs provides a cogent summary of this book's main idea that international lenders inadvertently keep this situation going:

Then, in a devastating analysis of international aid programs, [Van de Walle] demonstrates how Western donors and lenders, including the World Bank and the International Monetary Fund, have systematically if unwittingly undermined the institutional capacity of African states to manage reform and growth. Nondevelopmental regimes, he argues, have thoroughly mastered the art of bait and switch, swallowing just enough reform medicine to keep aid flowing but not enough to end the "permanent crisis" of underdevelopment. Entrenched patterns persist even in states that have undergone promising democratic regime change. Genuine economic transformation, Van de Walle hypothesizes, ultimately depends on fundamental political changes that must come from within; meanwhile, the present aid regime remains counterproductive.

From here let us turn to a decidedly nondevelopmental regime in Belarus. Fresh from receiving emergency IMF funding at the end of 2008 when the global financial crisis was in full swing, it is once again lurching from one bad situation to another.

At present, Belarus has next to no foreign exchange reserves. It has a current account deficit that's 16% of GDP. Its currency has been devalued by 36% in an attempt to stave off the inevitable. In a little over two years, it has once again sought IMF support. You would think that such terrible economic stewardship would have ejected strongman Alexander Lukashenko by now. But no. As in many African nations, Belarus has its own version of the politics of permanent crisis that, contrary to what you would expect, may only serve to secure his position as it has in the past. Despite obvious financial mismanagement, Lukashenko manages to stay in power by keeping some semblance of reform.

Note that Belarus is also approaching Russia for emergency funding, though Russia is keen on promoting state asset sales before lending that one suspects would ultimately benefit Russian interests. Hence the IMF is oddly more attractive at present to a leadership keen on keeping its possessions intact. Conversely, you wouldn't expect the IMF to force privatizations given the criticisms it endured during the Asian financial crisis. End result? Don't expect Lukashenko to go despite everything. If push comes to shove, there's still Russia even with its "conditionalities":

Belarusian opposition members whose family members and colleagues have been sentenced to years in prison for protesting elections said a worsening economy may not herald the end of President Alexander Lukashenko’s regime. “If the economy crashed, Lukashenko wouldn’t have to turn to the West -- he could turn towards Russia instead,” Andrey Dmitriev, who was chief of staff for presidential candidate Vladimir Neklyaev in the run-up to the December 19 elections, said in an interview in Warsaw.

Despite a misfiring economy largely of his own making, Lukashenko is blaming foul play to eject him:

The IMF has warned the country must curtail spending, raise interest rates and liberalize its managed exchange-rate system as foreign reserves slide and the current-account deficit soared to 16 percent of gross domestic product.

Lukashenko, in an April 21 speech, said there were “efforts to spur panic buying in the foreign exchange and consumer markets, with the assistance of domestic and foreign analysts.” “It’s obvious that someone is eager to destabilize the country, and sow chaos and distrust of the government, and after the problems that ensue could later strangle our country and our independence,” Lukashenko said.

What has happened in the arena of international politics? The IMF team which descended on Minsk recently as Belarus cried for help noted that the problems which beleaguered the country a few years ago that necessitated IMF help remain unresolved:

What should be in the plan? The origins of the crisis lie in excessive credit growth and wage increases that the economy could not afford. The solutions lie in the same places [my emphasis]. The National Bank should restrain credit and money creation. This means limiting credit under government programs and increasing interest rates to at least the level of the expected rate of inflation, so that people can be confident that their savings are not being eroded. The government should reduce the fiscal deficit-—we would recommend bringing the budget into balance—-and should not increase government wages this year. It should also discourage large state enterprises from increasing wages. We know that prices are going up, and it is hard to manage without wage increases. But high wage increases will just drive prices even higher and the rubel lower in a vicious spiral.

The foreign exchange market is not working. Very few people are willing to sell foreign exchange at the official rate, and most people who want to buy foreign exchange have to pay for it at a much more depreciated exchange rate. We recommend floating the exchange rate—-allowing the official exchange rate to be set by market forces and allowing free trade in both the interbank market and the cash market.

Then there are the specific politics of permanent crisis wherein Belarus does just enough to keep the IMF sticking around and not abandoning it altogether:

The main purpose of this mission has been to assess the authorities’ economic policies. We have been pleased with some of the economic measures the government is taking [my emphasis]. The government is doing a good job in limiting the budget deficit and in setting limits to lending under government programs. We also welcome the government’s plans to help people who are unemployed and who are poor and are suffering from the effects of the crisis. We also welcome some of the steps the National Bank has taken, including increasing policy interest rates and the recent decision not to provide commercial banks with cheap loans to support their lending under government programs. But we think that both the government and the National Bank need to do more to promote economic and financial stability.

We have also initiated discussions on a possible IMF program. This has only been the beginning of our discussions and we still have a long way to go. We need to have further negotiations on macroeconomic policies. We will also need to agree on structural reforms to improve the efficiency of enterprises and the financial system so that in future growth will be strong and durable. Above all, the authorities have to be committed to macroeconomic stabilization and structural reforms. We will have to agree on strong stabilization and structural measures which would be implemented prior to the program and would demonstrate their commitment. The IMF staff will continue to work with the government and the National Bank to reach a strong agreement which would help the people of Belarus.”

And so the familiar cycle is set to begin anew: same problems, same actors, same prescriptions. Meanwhile, in the absence of real institutional reform--the sort of which should really come from Belarus' citizens instead of from IMF conditionalities--I remain pessimistic that the circle will be broken. Not that such action is likely forthcoming; when even Russian state media says so, you know Belarus is in deep trouble. If' I'm still blogging in a few years' time, I suspect that I'll be writing about very much the same things as Belarus heads for yet another crisis. These are not called the politics of permanent crisis for nothing.

It's a fine line: when does lending with conditionalities become intrusive a la the augmented Washington Consensus? Should encouraging regime change in cases such as Belarus be an objective of emergency lending? There's a path to negotiate between prodding a country in a desired direction and interfering with its internal affairs. Lest we forget, there's also Russia willing to help out; perhaps China as well that gives similarly short shrift to attaching strings concerning governance matters. Push too hard and the likes of Belarus may avoid IFIs altogether. Heaven knowns modern-day Russia and China have money to burn.

Somehow I'm sure the IMF doesn't look forward to the joy of rediscovering, er, Belarus.

Space, the Final Frontier for Governance

Remember when we did the moonshot and Pony Trekker led the way?
We'd move to the Canaveral moonstop and everynaut would dance and sway
We got music in our solar system; we're space truckin' round the stars
Come on...let's go...Space Truckin'!

How do we keep on space truckin' in the 21st century? It's not a hypothetical question. With real-estate here on earth becoming increasingly scarse and with climate change threatening to make things worse, it was perhaps natural that its denizens would search the heavens for relief. Among today's most interesting challenges for global governance are issues which do not map neatly onto national boundaries. Global warming is indifferent to where carbon emanates from. The Internet is compelling countries to quash notions of extraterritoriality when it suits them--ask Hillary "Internet Freedom" Clinton, for example.

And then there's the issue of carving up space. Earlier on, the Soviets were keen on extending the territorially-bound notion of airspace into further reaches until they too discovered the joys of satellite spying. With decades of space activity under the belt, we have now bumped up against limits of existing governance regimes: How can traffic jams be avoided in outer space? What areas can be used for orbiting satellites? What is to be done with space debris? To these questions we must now add a few more: What about mining rights... on the moon? Who will regulate space tourism? Certainly Sir Richard Branson of Virgin Galactic fame will have interest in responses to the latter.

These questions verging on--you guessed it--interstellar overdrive should be very interesting to IPE Zone readers who I assume are interested in global governance issues. Fortunately, there is a fine introductory article in our alumni newsletter LSE Connect that begins to tackle these questions from Jill Stuart on "cosmic governance" (gotta love the jargon). It is not only on earth with the emergence of major emerging economies that the status quo is being disputed:

Where next for issues of outer space ownership? Several questions promise to rear their head in the next decade. As more and more countries develop space-faring capabilities (and particularly developing countries leading in this area, such as China, India and Brazil), matters regarding orbital overcrowding, debris, and right-to-access will become more pressing. Space tourism into Low-Earth Orbit, by companies such as Virgin Galactic, will also likely require a clarification of the boundary between air- and outer-space – up until now planes flew low enough, and satellites high enough, to avoid addressing the question more thoroughly – but space tourism vehicles will fly/orbit in the grey area. Several private companies have also recently expressed an interest in mining the moon – and the introduction of non-state actors into outer space activities is likely to pattern future developments in legislation over the region. In short, a new treaty clarifying mining rights and obligations is needed.

Sputnik disintegrated in the Earth’s atmosphere in January 1958, after spending three months in orbit. The last American space shuttle mission is due to launch later this year, after which the entire fleet of vehicles will be retired. Landmark events such as these leave a legacy of legal, political and philosophical questions for humankind. In the near future we will need to readdress the question first raised 60 years ago: who owns outer space?

To boldly go where no regulator has gone before may not have the faded romance of naive American universalism, but it's an important activity nonetheless.

Christine Lagarde Answers Your Questions

OK, let me get this out of the way: I hold French Finance Minister Christine Lagarde in high regard, but chafe at the notion of her becoming the next IMF managing director. Do we need another European head when international financial institutions are striving to be in touch with the times when the world's economic centre of gravity is heading eastward? Also, do we need another French person heading another global or regional governance body when we already have WTO Director-General Pascal Lamy, Jean-Claude Trichet at the ECB, and a recently departed Dominique Strauss-Kahn? While the French are skilled diplomats, of that there's no doubt, it's way too much already.

Anyway, while reading a new WSJ article about her attempting to garner support in China and India--both remain noncommittal at present but surely would be even less likely to back Mexico's Agustin Carstens (the IPE Zone pick)--I read that she is quite handy with social media (or maybe her assistant[s] are). Given that many of my incoming links now come from Twitter and Facebook than from other blogs, I am not particularly surprised. Indeed, her skilled use of social media is now being touted as no small advantage. For the curious, she is soliciting questions today from the likes of you and me regarding her IMF bid:

Ms. Lagarde will also take questions on Twitter and Facebook on Thursday as she seeks every possible outlet to bolster her campaign. Readers of her Twitter feed and fans on Facebook can send in questions before the session officially begins at 1 p.m. ET Thursday. "An hour is not a long time!" her Facebook page says, adding she personally will answer the questions.

Ms. Lagarde has tweeted around 70 times to her burgeoning band of followers during her tour of emerging economies. "India seems willing to consider my candidacy," she tweeted Wednesday, despite no clear official backing from India's government after meetings with Ms. Lagarde in New Delhi. The meeting with India's Prime Minister and Finance Minister, who invited Ms. Lagarde to lunch, was "very friendly," she tweeted.

On Friday, Ms. Lagarde will meet African officials during an African Development Bank Conference in Portugal, before travelling to Saudi Arabia and Egypt on the weekend. Her choice of Twitter to keep up links to the rest of the world as she travels may turn out to be a savvy one.

At any rate, do visit her Twitter and Facebook accounts even if you don't raise questions. In addition to being a globetrotter pressing the flesh, the opponent is a cunning new media operator!

All Hail Sports Corruption: Euro 2012 in Ukraine

There appears to be something which just brings the worst out in people while attempting to land marquee sporting events alike the Olympics, the World Cup, and Formula One grands prix. Once the events are finally landed, however, there are yet more layers for corruption to occur during contractual bidding processes. Ah well, just as jingoism and sport often go together, so it seems do governance issues and sport.

Hot on the heels of the FIFA fiasco involving Sepp Blatter being chosen once more over his erstwhile rivals--it appears corruption allegations did little but eliminate erstwhile challengers to his authority--we have yet another episode on the immediate horizon. With the World Cup done and dusted, the next major international football tournament here in Europe will be Euro 2012 which various national teams are busy trying to qualify for at the moment. But alas, while those teams should be in fighting condition for next year, the same may not necessarily hold for co-host country Ukraine (the other being Poland). You see, some of its facilities are behind schedule and construction has been hampered by faulty bidding processes.

It may be the case that Ukraine is going for the double--bidding irregularities to host the event as well as faulty contracting. From the Evening Standard:

An investigation by this newspaper has uncovered claims of murky construction deals and backhanders in Ukraine - which will co-host the tournament with Poland - that have sent costs spiralling. Among the projects that have raised suspicions are the 10 wooden benches bought for £44,000 and the £6 million heliport for players built 150 miles from the nearest stadium.

The Olimpiyski stadium in Kiev, intended to take centre-stage, is still only half built. Although scheduled to have already staged a game, its first match is now planned for November, little more than eight months before the final. The stadium, however, is likely to be the least of Uefa's worries if corruption allegations made by opposition politicians are substantiated. Claims that votes for the winning bid - fronted by sports stars including former Chelsea striker Andriy Shevchenko - were bought resulted in a defamation case that still continues.

Yulia Tymoshenko--she of the famously otherworldly hairdo--has been at the forefront of the allegations:

Yet Yulia Tymoshenko, the former prime minister, claims the worst has yet to be uncovered. "When our government was in office we had an estimate that the cost (of the stadium in Kiev) would be £160 million. Now it has moved to £380 million." The total bill for hosting the tournament, including infrastructure improvements, is expected to reach £8.5 billion.

At the heart of allegations by Ms Tymoshenko and the opposition is a claim that projects have not been put out to tender properly. The European Commission has criticised planned changes to a law that would narrow further the publication of tender documents.

Opposition sports minister Ostap Semerak says the overspend is a result of this. He gives examples such as the purchase of the wooden benches from a sewer manhole manufacturer and the heliport, apparently in a hunting spot favoured by the ruling class. The price of a new stadium in Lviv, meanwhile, has more than doubled from £84 million to £183 million.,,

Ukraine's president, Viktor Yanukovich, elected a year ago, has conceded corruption is a major issue in the country. Uefa president Michel Platini was quoted as saying it was "perhaps an error" to award the event to Ukraine. The quote was quickly dismissed as taken out of context. Yesterday Uefa stressed it was not involved in tenders launched by the Ukrainian government.

This story still has room to run.

Education IPE: Gadhafi Brings Down LSE Director

Well, I hope they're happy now. They've succeeded in ousting a person of great managerial skill--a rare feat in academia. Go ask Larry Summers. The irony of it all, of course, is in academia you are often punished for sparing the tried and true of "tradition" (i.e., not doing anything much). Especially now that public support of academia is going to be much less than it was in recent years--especially for the social sciences--you need folks like these. Having actually gone out into the world and promoted the LSE name for many, many years, this is what Sir Howard Davies gets.

It's odd that I received this message by mass e-mail when the director's office is just one floor below mine, but the breaking news is that LSE Director Howard Davies has resigned over the school's relationship with the Gadhafi government. I won't recycle my thoughts on what occurred which I generally don't think were sufficient to force the ouster of someone who's done a lot for the LSE--from furthering its international reach (admittedly to mixed effect in this instance) to improving the school's premises [1, 2, 3]. All these of course while maintaining the LSE's status as perhaps the globe's premier social science institution. Certainly, it has no peer in hosting prominent speakers from all over the world.

At any rate, the press release which contains his letter of resignation cites the following matters which will be subject to independent investigation:
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An independent inquiry to establish the full facts of the School’s links with Libya, whether there have been errors made, and to establish clear guidelines for international donations to and links with the School. Lord Woolf is to make recommendations to the LSE Council as soon as possible. He is to have total discretion as to how he conducts the inquiry, and as to the matters on which he is to report.

The issues the Council will suggest he investigates include, but are not limited to, the following:

• The agreement to accept a £1.5 million donation from the Gaddafi International Charity and Development Foundation (GICDF) in 2009 to LSE Global Governance, £300,000 of which has been received to date
• The acceptance of $50,000 paid to the university in return for Sir Howard’s advice to Libya’s sovereign wealth fund in 2007
• The academic authenticity of Saif Gaddafi’s PhD thesis, awarded in 2008
• The agreement of a £2.2 million contract between LSE Enterprise and Libya’s Economic Development Board to train Libyan civil servants and professionals, £1.5 million of which has been received to date and payment of £20,000 for tuition of the head of the Libyan Investment Authority
• The acceptance of an award from GICDF of £22,857 to support travel costs, mainly airfares, for academic speakers to travel to Libya. Furthermore, the Council notes that LSE staff have co-operated with an investigation of an allegation of an assault during a protest at the LSE on 25th May 2010 when Saif Gaddafi visited the School to make a speech. This alleged assault, involving one of Gaddafi’s associates and a protestor, is currently sub judice and no further comment can be made.
• Finally, the Council will carry out its own investigation of the administration of LSE Global Governance.

Anarchy--or what passes for it in academia--has descended on us denizens of Houghton Street. If you're (somewhat oddly) further interested in the goings-on around here, our school paper has more on the LSE student protests which perhaps helped force Davies' hand and the accusations of plagiarism against Saif al-Islam Gadhafi.
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Godspeed to Sir Howard Davies. The abovementioned issues aside, he's done much for our school since coming on board in 2003. Why is Sir Howard Davies a casualty ahead of a guy who fires on religious buildings? In a fair world, I wouldn't have to ask such a question.

UPDATE: The FT expounds on the magnitude of the LSE's loss.

When Basel III Met the Yankee Bubblemeisters

In German, weltmeister is the world champion in English. But, when it comes to inflating asset price bubbles, perhaps we can relax the rules of grammar and syntax and declare our American friends the global bubblemeisters. Not being content with one housing bubble and its demise, let's just say the US in its own inimitable way is trying to inflate another one via shenanigans such as the $600 billion Fed bond purchase programme.

Now we come to another conundrum of international organization in the form of the upcoming Basel III macroprudential banking regulations. Interestingly enough, some of its framers propose including a mechanism for various countries to report that asset bubbles are afoot at home. In theory, the others would then be able to raise financial firms' capital requirements to guard against troubles in the said country spilling across borders via this early warning device.

It sounds great in theory, but what if the world's largest economy is so magnificently distorted already by, say, still-historically elevated housing prices as to preclude rational analysis in neat and tidy Basel III frameworks? Beats me, and nobody should be surprised to see the bubblemeisters push back at the global negotiating table for Basel III:

Banking regulators have quietly taken a major step towards harmonised global regulation by agreeing to raise worldwide capital requirements whenever an individual country declares a credit bubble. Part of the larger “Basel III” banking reform package, the “countercyclical capital buffer” heralds a step change in the way national banking regulators interact and is the first concrete example of “macroprudential” regulation that seeks to moderate the economic cycle.

In a nutshell, it works this way:

The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses. Regulators in every other country would have to follow suit and impose a proportional surcharge on their own banks, based on the size of those institutions’ exposure to the bubble country.

However, there are operational problems in verifying that the concerned developed countries apply these measures equally. There's a particularly large one that may feel it's being unfairly targeted based on its recent economic history. Its excuse is that their geographical spread is so large that so-called bubbles may be localized as to render such measures impracticable (as if Michigan compensated for Nevada circa 2007, but I digress):

Banking groups said they were concerned some nations would impose buffers more readily than others, creating an uneven playing field. They are also sceptical that once buffers are imposed, they will become permanent, either because regulators never cut them or investors react badly to a reduction.

“A country would have significant disincentives to impose the countercyclical capital buffer [because] ... the impact would likely be greater on its economy than on the banks,” said Greg Lyons, a US partner at law firm Debevoise. The US is said to be particularly reluctant because it would have to declare a country-wide bubble, even though there might be large variations between regions.

In essence, what if certain countries deliberately encourage such bubbles for short-term gain alike certain folks whose, ahem, "forward-looking perspectives" incorporate nearly infinite discount rates?

Khodorkovsky, Rule of Law & Russia Joining WTO

This is yet another entry in the long-running saga of Russian WTO accession [1, 2, 3, 4, 5, 6, 7]. I think you know how this story goes: the seemingly arbitrary (re-)incarceration of Vladimir Putin's political foe and onetime oligarch Mikhail Khodorkovsky bodes ill for Russia's attempts to join the WTO for obvious reasons. To Western eyes, the lack of stability and transparency in Russia are definite no-nos whose implications spill over into the trade realm. That is, how can the whims of a handful be the basis for its membership in a rule-based organization?

First we have a US trade official commenting on how this has set back Russia's chances (as if it were making significant strides, but I digress):

The sentencing handed down to former Russian tycoon Mikhail Khodorkovsky will complicate Russia's bid to join the World Trade Organization, a senior Obama administration official said on Thursday.

"It is not going to help their cause, it is only going to complicate their cause," the official said. "The WTO is a rules based, rule of law organization. Most countries around the world do not look at this verdict as a demonstration of the deepening of the rule of law in Russia. It will definitely have an effect on Russia's reputation," the official added.

Ah, but don't worry, says Vladimir Putin. He sees 2011 as the year it finally happens. In fact, he's rather less worried about governance than he is about keeping automobile tariffs intact:

Prime Minister Vladimir Putin said Wednesday that Russia can be expected to enter the World Trade Organization in 2011, but "questions still remain," Interfax reported.

Putin also said Moscow could use "the so-called technical regulations," used by the members of WTO, to protect its auto industry after entering the organization. "If we see that the auto industry gets into unequal conditions of competition, we will find the methods of protection," Putin said.

Putin makes it sound as if Russia would be doing the WTO a favour instead of the other way around IMHO.

'Indonesian & Filipino Corruption Compared'

With Christmas a few hours away, here's more lighthearted fare for you all. A few weeks ago, I attended an LSE event held by our colleagues here at the Asia Research Centre intriguingly titled "Where Have all the Bad Guys Gone? Governance in Indonesia Today." Since Southeast Asia is my area of interest for obvious reasons, governance matters are a matter near and dear to me. Needless to say, it was a very interesting discussion. After the event, Roger Montgomery told me the following joke about the difference between Indonesia and Filipino corruption, with the latter coming out worse and being the punch line.

So the Philippines ranks rather lower than Indonesia in corruption perceptions via the likes of Transparency International .The latter has made some strides towards combating corruption that the Philippines should investigate. Ah well, I just hope my retelling is reasonably accurate for now. Here it goes...

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A decade and a half ago, Dian and Renato were roommates at Harvard Business School studying for their MBAs. Reminiscing about their B-school days, Dian rung up his Filipino friend Renato from his office in Jakarta. When Renato had free time, Dian said, he should come visit Indonesia.

And so it came to pass that Renato found some time off work to accept the invitation of his old roommate. Upon arriving at Soekarno-Hatta International Airport, Renato was suitably impressed when Dian sent a Mercedes-Benz limousine to pick him up. Arriving at Dian's sprawling mansion in Jakarta's exclusive Kebayoran Beru residential district, Renato greeted his old friend warmly:

"I've got to hand it to you, Dian. You've really made it. Once we were just grad students struggling to get by. But look at you now, you're a wealthy industrialist--one of Indonesia's elite! What's the secret of your success?"

Dian just grinned, told Renato to get back in the car, and instructed his chauffeur to drive to the outskirts of Jakarta. While approaching a power plant, Dian asked Renato, "Do you see that geothermal plant?"

Renato nodded.

Dian smiled broadly at his friend and said, "ten percent!"

Renato gave Dian a big pat on the back and replied, "That's brilliant, Dian!" For the rest of his stay, Renato was treated to the finest entertainment money can buy in Jakarta. But, in the back of his mind, he was already plotting how to top his old schoolmate.

Four years later, Dian was at work when Renato rang him up and invited him to visit the Philippines. Renato assured him of a good time, and Dian found himself in Manila two months afterward.

Arriving at Ninoy Aquino International Airport, Dian was suitably impressed when Renato sent a stretched Mercedes-Benz limousine to pick him up, complete with a chauffeur wearing immaculate white gloves. Arriving at Renato's mansion in Manila's exclusive Forbes Park residential district, Dian greeted his old friend warmly:

"I've got to hand it to you, Renato. You've really made it. Not so long ago we were just MBA students scrounging for our meals. But wow, you're now the toast of the town --one of the Philippine elite! What's the secret of your success?"

Renato just grinned, told Dian to get back in the car, and instructed his chauffeur to drive to the outskirts of Manila. For two hours they talked about the good old days until they came upon an empty stretch of road. Renato pointed at nothing in particular and asked Dian, "Do you see that geothermal plant?"

Dian looked at the empty expanse, scratched his head and said, "I don't see anything."

Renato smiled broadly and said, "one-hundred percent!"
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This joke is probably based on the infamous Bataan Nuclear Power Plant that the US-based firm Westinghouse built under the rule of Ferdinand Marcos but was never used. (History buffs will also remember Bataan as the site of the infamous 1942 Bataan Death March.)

India, the IMF's Poster Child for Capital Flows

It's always one step forward, two steps back with the IMF moving into a post-Washington Consensus age, it seems. We've talked about it becoming kinder and gentler with regard to conditionalities--or maybe not. Today, let's revisit the tolerance of states implementing capital controls in contravention of the Washington Consensus--or maybe not. IMF Managing Director Dominique Strauss-Kahn seemed to raise more questions than answers in his recent speech in Delhi lauding India's approach to the subject matter. Unlike a certain even more populous neighbour, India does not actively clamp down on capital inflows (or at least so far). Unlike a certain nominally socialist regime, nor does it try to manage the level of its currency.

So, for what it's worth, this latest iteration of DSK is broadly in the Washington Consensus mould. (Hear that, China?)

Today, India is once again receiving strong capital inflows—more than $50 billion over the last year, or 4 percent of GDP. And while other countries facing surging capital inflows cry foul, India has neither undertaken massive intervention, nor further tightened its existing system of capital controls—in fact the limits on foreign investment in long-term debt were recently increased.

In my view, this approach is the right one. As noted by Prime Minister Singh at the Seoul Summit, “even as we try to avoid a destabilizing surge in volatile capital inflows, there is a strong case for supporting long-term flows to stimulate investment, especially in infrastructure.” He also pointed out that recycling surplus savings into investment helps address developmental imbalances. I am confident that with India’s strong track record of vigilance, capital flows can be put to good use without sacrificing financial stability.

Shifting focus to the medium term, how best to achieve strong global growth?

Rebalancing global demand holds the key. In economies with excess external deficits, public and private saving must increase. And in economies with excess current account surpluses—including many in Asia—domestic demand needs to increase. Stronger financial safety nets and financial market development can promote this shift from external to internal demand. In many emerging economies—including China—currency appreciation is also an important part of the solution. Finally, structural reforms remain essential in all countries to raise productivity and boost growth.

It could've come straight out of Bernanke's mouth if you ask me. And for those looking at more ammunition for the argument that the IMF remains an America-friendly institution first and foremost, DSK lauds the imminent $600 billion helicopter drop care of B-B-B-Bennie and the Feds:

Because public debt in the advanced economies is so high, the burden of this support falls on monetary policy. And because interest rates are already very low, less conventional measures may also be needed. In the U.S, for example, the Fed recently announced a $600 billion program of quantitative easing. It aims to prevent damaging deflation and support the recovery. Of course, the Fed’s actions carry implications for the global economy—and I will address the issue of capital flows shortly. This is why it is so important to have a collaborative approach to rebalancing the global economy.

I guess some things never change.

Stiglitz: US Patent System Fouls Global Innovation

If you think that this blog is overwhelmingly negative about America (I surely don't; call it "unvarnished reality"), you'd do wise to consider that Americans themselves are often those who are most negative with America. Today, let's have a look at innovation and innovation policy. While there have been any number of innovations to emanate from the US which have undoubtedly improved the global lot, they're becoming more dubious as of late. Moreover, the patent system that America has in its own way tried to globalize is itself in need of a rethink. In essence, disseminating and preserving rents from knowledge work should not be confined to parochial boundaries in an increasingly interconnected world.

In a new article in the LSE house journal Global Policy, Claude Henry and Joseph Stiglitz explain how a dyfunctional US patent system spells a dysfunctional global system for innovation. Here is the abstract:

We live in a knowledge economy. The production and dissemination of knowledge will be central to solving the problems of climate change and environmental sustainability, reducing global poverty and addressing other global problems. This article asks: do intellectual property rights – with their increasingly global reach –further or hinder the production and dissemination of knowledge? Experience with genetically modified organisms shows that a model markedly different from the current one is more likely to bring wider social benefits, both in the short and the long run. Indeed, the current system may impede both innovation and dissemination. There are reforms in the intellectual property regime, and more broadly in the way we finance, organize and incentivize innovation, that would increase the pace of innovation and its utilization. The spread of the current dysfunctional system owes much to the evolution of intellectual property rights in the US – and the influence of particular special interests there.

And here are the policy implications:

• A well-functioning patent system requires careful attention to a number of details, including: (1) what can be patented; (2) the breadth of a patent; and (3) the standards of novelty that determine whether an innovation is eligible for a patent. Corporate interests have resulted in a patent system which answers each of these questions in a way that may impede not only the utilization of knowledge, but even innovation.
• Among the details that matter is the process by which patents are granted. The current system grants too many ‘bad’ patents. Opening the process of examination of patent candidates to all parties that reveal themselves as having private information relevant to a thorough examination (in a process called opposition) should reduce the number of ‘bad’ patents.
• The patent system is only one part of a society’s innovation system, through which the production of knowledge is financed, incentivized and organized. Too much attention has been focused on IPR (intellectual property rights), and too little on alternatives, e.g. open source systems, publicly financed innovation and prizes.
• Providing more scope for compulsory licenses – making it easier for countries to issue them – would reduce some of the inefficiencies associated with the current patent system.

America, who loves ya, baby? As with many other things, getting things right in America as far as patents go means getting things right in the rest of the world, too. And therein lies the rub with "fixing what's wrong with America": dynamics in a country of a little over 300 million people affect so many stakeholders abroad.

Are IMF Reforms Favouring LDCs Truly 'Historic'?

So it has finally been agreed upon: In addition to the much-ballyhooed ceasefire of sorts on the international currency war front [1, 2], G-20 participants at the recently concluded finance ministers meeting in Gyeongju, South Korea also finalized plans to reallocate Executive Board seats and thus contributions to the International Monetary Fund. In effect, European countries that were prominent in the postwar world will vacate two seats at the IMF's Executive Board that developing countries will now occupy. The IMF write-up summarizes these changes and how it believes its legitimacy will be enhanced by virtue of representing more voices from the developing world that are undeniably gaining clout in the world economy:

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Meeting in Gyeongju, Korea, G-20 finance ministers and central bank governors agreed on a doubling of IMF members’ quotas—financial stakes that determine voting power in the institution—that will shift voting shares toward dynamic emerging market and developing countries. As a result of the quota rebalancing, the large, dynamic emerging market countries Brazil, China, India, and Russia move up to be among the top 10 shareholders of the IMF.

The ministers also agreed on a reshuffle of the IMF’s 24-member Executive Board that will raise the representation of dynamic emerging market and developing countries on the institution’s day-to-day decision-making body. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed as they are now. The size of the Board will remain at 24.

IMF Managing Director Dominique Strauss-Kahn, speaking to reporters after attending the Gyeongju meeting, said the move was “historic” and the most important decision on the governance of the IMF since its creation in 1944. “There will be other reforms, but what we did today puts an end to a discussion on legitimacy that had lasted for years, almost decades."

The Gyeongju ministerial meeting was held to prepare the agenda for the full summit of G-20 heads of state and government in Seoul, Korea, on November 11. The agreement reached at Gyeongju still has to be approved by the IMF’s Board. The target date for completion of the changes to IMF governance is the IMF-World Bank Annual Meetings in October 2012.

At their summit in Pittsburgh, United States in September 2009, G-20 leaders provided political support for a shift in country representation at the IMF. Leaders backed “a shift in quota share to dynamic emerging market and developing countries of at least 5 percent from over-represented to under-represented countries using the current quota formula as the basis to work from.” The leaders also stressed their commitment to protect the voting share of the poorest in the IMF. Currently, there is roughly a 60/40 percent split in the shares at the IMF between advanced countries and emerging market and developing countries.

While the Pittsburgh summit targeted a quota shifts of 5 percent from advanced countries to dynamic emerging market and developing countries and from over- to underrepresented countries, the Gyeongju deal achieves a shift of more than 6 percent in both cases.

The IMF head honcho is saying that his expectations were thus surpassed by what was achieved over the weekend:

Strauss-Kahn said the decision on IMF governance had responded to the mandate given in Pittsburgh in a way that exceeded expectations. "The 10 biggest shareholders in the IMF are those who deserve to be in the top 10 as they are the 10 most systemically important countries in the global economy," Strauss-Kahn stated. He also said the IMF’s Executive Board would be a "more democratic Board as will be an all-elected Board".

It's a welcome move, but shifting two seats out of 24 may better be portrayed as a gradual shift than an earth-moving, historic event. As always, I am keener on observing the follow-through. Should developing countries gain an even larger share of world economic activity, then there should be an even more pronounced shift in the membership of the Executive Board forthcoming. Moreover, it certainly would be nice if the IMF managing director were elected rather than appointed by a group of European countries as has been the convention at the IMF since its inception. With the Socialist Dominique Strauss-Kahn being ahead of Nicolas Sarkozy in the polls, DSK coming home to contest French elections in 2012 may be the first opportunity to see if this club has truly changed when matters come around to choosing the next IMF chief.

Welcome OECD's Latest Member, Israel (or Not)

I myself have taken my eye off the ball in not mentioning this turn of events amidst all the news emanating from Europe regarding the European Stabilization Fund. On Tuesday, Baroness Catherine Ashton of Upholland, High Representative of the European Union for Foreign Affairs and Security Policy, came to speak here at the LSE. Goodness, she has almost as many honorifics as her Labour contemporary Peter Mandelson during his recent glory days! During question time, a member of the audience then questioned why the EU has stood idly by while Israel has been accepted as a member of the Organization of Economic Cooperation and Development (OECD) despite perceptions of its continued human rights violations against the Palestinians. Since the EU claims to be an enlightened body when it comes to upholding human rights, shouldn't it at least attempt to block Israel's entry into this rich country's club?

Now, the issue of Israel has long been a cause celebre among British academics, with calls to boycott Israel's universities being a particularly contentious matter that surfaces periodically. As for our kids, remember that our student union recently decided to twin the LSE with the Islamic University of Gaza. At any rate, I was surprised by how deftly Baroness Ashton handled the questions posed to her, including this one. Basically, her response was that OECD membership is decided on strictly economic criteria--meeting this and that macroeconomic indicator. Indeed, she already indicated something to this effect earlier on the matter. Despite the surface unity, there has been much wrangling among existing OCED members about what Israel's membership signifies:

A Norwegian diplomat told EUobserver that 24 countries, including the EU group-of-19 as well as Mexico, Norway, Switzerland and Turkey in their individual statements at the conclave said the move should not be seen as a legitimisation of Israeli settlements in occupied Palestinian territories. "We don't want membership to influence the question of Israel's borders," the Norwegian source said. "There's been a huge debate on this. It's not an easy subject."

Some countries proposed attaching a footnote to Israel's official letter of invitation saying the OECD does not recognise any changes to Israel's pre-1967 boundary. But the move did not gain unanimous support, the Norwegian contact added. The OECD is to set up an expert group to ensure that Israel clearly separates economic activity on its territory proper from activity in settlements when reporting statistics, however.

Membership of the prestigious Paris-based institution is based primarily on economic criteria and will help Israel to attract foreign investors and to borrow money more cheaply on international markets. But the move also has a political dimension. The OECD's rulebook says members must be committed to "pluralist democracy based on the rule of law and the respect of human rights" and to look to the "attainment of the purposes of the United Nations..."

For her part, EU foreign relations chief Catherine Ashton on Monday welcomed progress between Israel, the Palestinian authorities and the US on so-called "proximity" talks designed to end the decades-old conflict. "I am delighted the proximity talks appear to be moving," she said.

Commenting on the EU's commitment to human rights in its foreign policy-making more broadly, she said: "They are the silver thread that runs through everything we do and will be the silver thread that runs through the EAS [the EU's nascent diplomatic corps] when it is up and running."

As such, there was practically no discussion of human rights issues or suchlike in the membership criteria. Think of the country as a Dr. Jekyll and Mr. Hyde situation; what the OECD authorities have done is to basically observe Dr. Jekyll and ignore Mr. Hyde. OTOH, Israel's Ministry of Foreign Affairs has this to say:

Today (10 May 2010), the Organization for Economic Co-operation and Development (OECD) invited Israel to become a member of the organization. The unanimous decision, taken by the 31 member-states, recognizes Israel's achievements, economic strength and ability to contribute to the organization and to the world's economy. The accession negotiations were led by the Foreign Ministry. An additional team for professional subjects was headed by the Ministry of Finance.

In order to maximalize [sic] Israel's connections with the organization, the Foreign Ministry is currently establishing Israel's Delegation to the OECD. The Delegation will operate out of the Embassy in Paris, and the Ambassador to UNESCO will be Israel’s Ambassador to the OECD, in addition to his other duties.

During the three year review process that checked compliance with OECD standards and benchmarks, OECD experts closely examined the policy and functioning of government offices, governmental authorities and the public sector and also met with representatives of economic and social organizations, universities and NGOs. Following this review process, recommendations on improvements and efficiencies were made.

Becoming a member state of the OECD will lead to economic advances and enhance Israel's image, as well as improving the functioning of various sectors in Israel's society and economy, including in the fields of environment, education and employment. The improvement and upgrading process will continue even after Israel joins the OECD as part of the government’s commitment to ongoing peer review by the organization and to adjust its regulation policy to the standards held by member-states.

And here is some mention, in passing at least, of those who tried to stop Israel from joining the OECD. Contrary to Baroness Ashton's argument about Israel's membership being on strictly economic criteria, Israel depicts the unanimous decision to allow Israel entry into the OECD as validation of its international standing. From Foreign Minister Avigdor Liberman comes this statement:

FM Liberman welcomes OECD decision
(Communicated by the Foreign Minister's Bureau)

Deputy Prime Minister and Minister of Foreign Affairs Avigdor Liberman welcomes the OECD decision inviting Israel to join the Organization for Economic Co-operation and Development. FM Liberman stated that the resolution is the result of a long-term diplomatic effort, and congratulated the MFA officials responsible. According to the Foreign Minister, the resolution is a stamp of approval for the country's economy and its achievements in technology.

FM Liberman added that the resolution was unanimous, despite attempts by anti-Israel entities to prevent the acceptance of Israel into the OECD. The fact that the attempts failed is proof of Israel's solid standing with the international community and shows that it is recognized for its achievements, despite the fierce incitement against it in every conceivable arena: political, security and economic.

You could of course turn matters around and argue that Israel has used "fierce incitement" against the Palestinians in the areas noted above. It has always struck me how Israel regards its foreign affairs with this same kind of siege mentality after all these years. On a lighter note, observe that largely unimpeachable states Estonia and Slovenia have also been extended an invitation to join the OECD after undergoing similar evaluation processes.

I do not parse questions of membership in largely symbolic rich country's clubs too much as it's not a matter of great concern to this child of the Global South. But I do it for you, dear readers, as it is indeed an IPE question that has not garnered enough attention. What others miss, I will write about.