Governance

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COVID-19 Victim: Kuwait is Broke

♠ Posted by Emmanuel in Energy,Governance,Middle East at 8/19/2020 05:52:00 PM

Kuwait's energy-dependent economy is not coping well with the pandemic like its neighbors.

How the mighty have fallen together with the collapsing demand for hydrocarbons as tourism and travel have been grounded around the world due to the ongoing coronavirus pandemic. Kuwait is a famously rich--albeit geographically tiny--country whose invasion sparked the first Gulf War. Nevertheless, its geopolitical clout was such that then-US President George HW Bush gathered together American allies to summarily eject Saddam Hussein's invading forces.

Thirty years later, we see it confront perhaps a more invidious threat in the form of the spread of a pandemic. Kuwait's current plight reflects that of its neighbors--albeit in a more extreme way. You see, Kuwait is burning up its liquid reserves at a prodigious rate, so much so that it projects being unable to pay its civil servants after October. While it has a sterling credit rating (like most other Middle Eastern energy exporters, it must be said), its legislature's delays in authorizing further borrowing are causing it to unsustainably deplete its liquid reserves in the meantime:

Kuwait has 2 billion dinars ($6.6 billion) worth of liquidity in its Treasury and not enough cash to cover state salaries beyond October, Finance Minister Barak Al-Sheetan warned parliament, as political wrangling again delayed efforts to return to international bond markets.

The government is withdrawing from its General Reserve Fund at a rate of 1.7 billion dinars a month, meaning liquidity will soon be depleted if oil prices don’t improve and if Kuwait can’t borrow from local and international markets, he said.

As energy-rich Gulf states see their finances hammered by the collapse in oil prices and the coronavirus pandemic, the remarks point to a dramatic reversal of fortunes for some of the world’s wealthiest nations. Managing the crisis has proven especially challenging for Kuwait, where all laws must be approved by lawmakers who accuse the government of mismanaging public money and are blocking legislation that would allow it to borrow abroad.

The General Reserve Fund is a separate pot of money from that which is invested by its sovereign wealth fund mostly in less liquid foreign assets. Overall, the Kuwait Investment Authority is the fourth-largest of its kind in the world. Yet, [GRF] funds can be used to pay for civil servants' salaries are dwindling. Note there is also a "good governance" complaint thrown in here as well as lawmakers point out that the country's leaders have not been [surprise!] exemplars of fiscal accountability and rectitude with regard to past petrodollar earnings. Imagine the Middle East being run by a jillion Jared Kushners and you wouldn't be far off.

The end result is that Kuwait, of all places, is facing a credit downgrade:

In March, Standard and Poors Global Ratings put Kuwait’s sovereign rating on negative watch, and Moody’s Investors Service followed. The IMF said that month that while Kuwait has large financial buffers and low debt, its “window of opportunity to tackle its challenges from the position of strength is narrowing.”

In June, Sheikh Sabah Al-Ahmed Al-Sabah, Kuwait’s ruler, issued a call to transform the economy to one less reliant on oil and urged rationalizing spending. More than 90% of the country’s revenue is generated from oil.

The reality is that Kuwait is an energy-reliant one-trick pony like its neighbors. Worse still, the bulk of its employment is in the public sector and predicated upon the fortunes of the aforementioned state-led energy exports. Even if it is able to cover its current fiscal shortfall by issuing debt, you have the feeling that the hydrocarbon age is nearing its end. What this future means for the fate of various authoritarian Middle Eastern regimes like Kuwait's is an interesting question.

Who knows? Perhaps Kuwait's fiscal reckoning--and its lawmakers' nascent questioning of the entire Middle Eastern petrostate model--foreshadow the region's political future

Today's PRC Pt II: Letting SOEs Fail

♠ Posted by Emmanuel in China,Governance at 4/30/2016 08:45:00 PM

No longer a novelty: a Chinese SOE that goes belly up.

Warren Buffett had a memorable turn of phrase when he said that we can identify who's naked when the tide rolls out. With the recent slowdown of China, we are seeing a similar phenomenon. Many--myself included--believed that the PRC would extend unconditional help to distressed state-owned enterprises (SOEs) when push came to shove. As any number of these SOEs are coming under distress, we are finding that there is no "blanket" coverage for these firms as quite a few have been left waiting for a state rescue that may never come:

China’s state-backed companies no longer have the ironclad support of the government -- and that’s bad news for the equity bull market in Hong Kong, says UBS Group AG.

Three of the seven Chinese companies that defaulted on debt repayments this year are partly owned by the state, including Baoding Tianwei Group Co. [also see here] The end of implicit government support will drive up funding costs and undermine foreign investor confidence in the 20 percent rebound by the Hang Seng China Enterprises Index, said Lu Wenjie, a Shanghai-based equity strategist at UBS.

"People are realizing national SOEs can default, local government-owned enterprises can default -- anything can default," Lu said. "H-share investors, especially foreign investors [Hong Kong-listed shares of stock of PRC-headquartered firms], haven’t paid much attention to this yet, so the risk isn’t priced in."

Is it the end of implicit guarantees? If so, the risk factor may not be adequately "priced in" as of yet:

Defaults are a relatively new phenomenon in China, which had its first such case only in 2014. The rising number of payment failures is reverberating across the nation’s $3 trillion credit market, with onshore junk debt heading for its biggest monthly selloff since 2014, issuers canceling bond sales and Standard & Poor’s cutting its assessment of Chinese firms at the fastest pace since 2003.

The widening of credit spreads from eight-year lows also threatens an incipient economic recovery, which has been mainly supported by a surge in cheap lending.

It's the [Western] notion of "moral hazard" being realized: Instead of the PRC bailing out nationally-owned firms in the event of trouble, it appear as though it's becoming more selective. What remains to be seen, though, is what happens if and when the really large Chinese firms run into trouble which have systemic importance like, say, its four big banks. I believe the "too big to fail" phenomenon will be observed since the recent bankruptcies were all of (relatively) smaller firms.

Volkswagen's State Capture of Germany

♠ Posted by Emmanuel in Europe,Governance at 4/24/2016 07:59:00 PM

Chancellor Merkel and ex-VW honcho Martin Winterkorn in happier times.

The Financial Times has a very interesting article on the extent of German automakers' influence on the German state. You would think that the Germans of all people are not as prone to the pitfalls of excessively close state-firm ties, but the Volkswagen emissions scandal raised all sorts of pointed questions about the matter. Just recently, the giant automaker set aside $18 billion to cover costs associated with its emissions-cheating violations. As it turns out, Chancellor Merkel has been lobbying on behalf of Germany's automakers all these years for less stringent emissions regulations throughout the world:

The ties between Ms Merkel’s government and big carmakers have come under increasing scrutiny since September, when US regulators revealed that Volkswagen’s diesel vehicles were fitted with special software enabling them to cheat in emissions tests. The scandal, the worst in VW’s history, has tarnished Germany’s reputation for quality in manufacturing and left many wondering whether the German authorities’ closeness to VW, Mercedes-Benz and BMW blinded them to the potential for wrongdoing in the industry.

“When you know that you have a very large part of the political class in your pocket — and that was clearly the case with VW — then you feel safe,” says Philippe Lamberts, the Belgian co-chair of the Green group in the European Parliament. “That inevitably leads to complacency; that whatever you do, you have the German government fully lined up behind you.”

It has happened too at the EU level:

The closeness between Germany’s car industry and its government has been reflected in a number of ways since Ms Merkel became chancellor in 2005.

Officials intervened in Brussels to water down curbs on pollutants, abandoned stringent independent tests of car emissions and ignored repeated warnings from research groups about suspicious readings from tests on diesel cars. Now Ms Merkel’s government stands accused of wrapping its own inquiry into the VW scandal in a shroud of secrecy, which even seasoned MPs are finding hard to penetrate.

To grasp her actions, consider the importance of the activity for Germany:

Yet Ms Merkel’s lobbying efforts are in many ways understandable. Carmaking is Germany’s largest industry, employing 792,500 people and recording turnover of €404bn in 2015 — a fifth of the country’s industrial revenue. The jobs of one in 20 Germans depend on the motor sector.

Ms Merkel has suggested that the carmakers are synonymous with Germany. Addressing VW employees in 2008, she called the company a “great piece of Germany”, and a “symbol of [our] development from the second world war until today”. VW’s history exemplified the reconstruction of the postwar years. “The German government stands by VW,” she said.

It's too bad that "state capture" is now part of Germany's industrial lexicon as well. You would never have expected it of the Germans, no?

China's 'Extraordinary Rendition' of Executives

♠ Posted by Emmanuel in China,Governance at 12/13/2015 01:32:00 PM

Detaining executives without due process or explanation: Does the PRC's actions constitute economic terror?

Leave it to the Communist Party to find a way to roil Asian markets one way or another. Having (sort of) learned their lesson not to suddenly and drastically devalue their currency as per the events of this past August, they are now devaluing slowly but surely. But, you do have to wonder about its continuing habit of locking up corporate executives without explanation...at an undisclosed location. In honor of the American's "extraordinary rendition" of anyone anywhere in the world without due process for detention and interrogation, well, China's powers-that-be are practicing exactly the same thing on corporate types.

With world markets unsettled by China's economic slowdown, falling commodity prices, and the impending rise in US rates, the timing could not have been worse for the PRC to make the the head of one of its largest non-state-owned conglomerates vanish. Imagine what would happen if the head of, say, General Electric was detained and held incommunicado indefinitely and you wouldn't be far off:

The baffling disappearance of Chinese executives in recent weeks has drawn attention to the ruling Communist Party’s practice of holding people incommunicado either as targets of investigations themselves or to help with probes of others.

The most recent example came last night, when Caixin magazine reported that Guo Guangchang, the billionaire chairman of Fosun International Ltd. couldn’t be contacted. Fosun suspended its shares today and its bonds plunged by a record before the company said Guo was assisting justice authorities with a probe. Other high profile cases in recent weeks included two members of Citic Securities’ executive committee who became unreachable earlier this month, along with Yim Fung, the chief executive officer of Guotai Junan Securities Co.

The Chinese word for unreachable -- shilian, which means “lost contact” -- has become a euphemism in China for the party holding executives and officials for questioning or arrest, often indefinitely and at an undisclosed location. That practice has long been criticized by human rights activists who say the lack of transparency and accountability opens the door to abuses such as torture.

Despite being extraordinarily curious to non-Chinese observers, these acts have become so ordinary as to even have terms as to whether the detainees are party or non-party members:

The detentions, known as “shuanggui” if the party detains one of its members and “shuangzhi” if a non-party member is held as part of a probe, has featured prominently in President Xi Jinping’s campaign to root out corruption that he says is now rife in the ranks of the party’s more than 87 million members. People can be detained even if they are not the target of a probe themselves.

Sohu.com reported today that Guo was helping with a corruption investigation into former Shanghai vice mayor Ai Baojun. Fosun didn’t specify the subject of the probe, other than to say Guo will be able to participate in the company’s decisions on “substantial issues.”

The Central Commission for Discipline Inspection, the agency leading the anti-corruption campaign, didn’t respond to a fax seeking comment. The main problem with the practice is that it isn’t transparent, said Zhu Lijia, a professor of public policy at the Chinese Academy of Governance. “Nobody really knows what happens inside the room, and that’s dangerous without regulations,” Zhu said.

The larger point is this: markets hate uncertainty, and detaining prominent industrialists is hardly the way to increase market confidence. For one thing, we don't even know if Guo Guangchang is being charged with corporate malfeasance. Stay tuned.

12/14 UPDATE: The elusive Guo Guanchang has made a public reappearance. Supposedly, Fosun in not under investigation. If so, it makes you wonder why the PRC would inflict so much harm on an unsuspecting company:

Fosun said on Sunday it was not the focus of the investigation. Liang Xinjun, chief executive, added that Mr Guo was “assisting the judicial authorities with an investigation, but it is not because the company has problems”. When Mr Guo entered the conference room in Shanghai on Monday, employees applauded for an extended period, according to a person present at the meeting.

A European executive whose company works closely with the Chinese conglomerate said that all of the group’s portfolio companies had sent representatives to the conference. “They weren’t expecting Guo to be there and there was relief when he showed up. Fosun suggested that he had been helping with an investigation but that neither he personally nor the company is under investigation,” the executive said. “They are not expecting any more public updates, either from Fosun or from the investigation. He has done his bit now and it is over.”

Malaysia, Middle-Income Trap, Failed SWF & Kickbacks

♠ Posted by Emmanuel in Governance,Southeast Asia at 7/06/2015 01:30:00 AM

The media's new poster boy for Asian corruption and mismanagement: 1MDB.

Despite being the next-most advanced nation in Southeast Asia after Singapore, Malaysia has never quite made it to "developed" status. It is usually cited as an example of a country stuck in a "middle-income trap": Its labor costs are no longer rock-bottom having achieved a certain level of development and thus cannot compete with lowest-cost labor locations. Yet, it is not sophisticated enough to compete with the sophisticated goods and services offered by the developed countries.

One of the initiatives to address this situation was the creation of the 1MDB government investment corporation which was intended to fund knowledge- or technology-intensive industries that would help the country escape the middle-income trap. As the years roll by, we have learned that its investments are not bearing fruit. In fact, 1MDB has accumulated substantial debts that may necessitate a government bailout. Hence the current controversies over 1MDB: how did it get so much money, and where did the money go?

The accusation that the money went into the pockets of Malaysian PM Najib Razak has been made, most notably in the international press by the Wall Street Journal:

Malaysian investigators scrutinizing a controversial government investment fund have traced nearly $700 million of deposits into what they believe are the personal bank accounts of Malaysia’s prime minister, Najib Razak, according to documents from a government probe. The investigation documents mark the first time Mr. Najib has been directly connected to the probes into state investment fund 1Malaysia Development Bhd., or 1MDB. Mr. Najib, who founded 1MDB and heads its board of advisors, has been under growing political pressure over the fund, which amassed $11 billion in debt it is struggling to repay.

1MDB is said to be a slush fund for Razak:

By far the largest transactions were two deposits of $620 million and $61 million in March 2013, during a heated election campaign in Malaysia, the documents show. The cash came from a company registered in the British Virgin Islands via a Swiss bank owned by an Abu Dhabi state fund. The fund, International Petroleum Investment Co., or IPIC, has guaranteed billions of dollars of 1MDB’s bonds and in May injected $1 billion in capital into the fund to help meet looming debt repayments. A spokeswoman for IPIC couldn’t be reached for comment. The British Virgin Islands company, Tanore Finance Corp., couldn’t be reached.

Feeling inspired by the Lees in Singapore, perhaps, Razak is planning to sue the WSJ:

Datuk Seri Najib Tun Razak is expected to file a suit against The Wall Street Journal on Tuesday over its report implicating him in an alleged RM2.6bil money trail. Sources close to the Prime Minister told The Star that he would make the announcement during an event in Semenyih on Sunday.

“He would file the suit through his lawyers in Kuala Lumpur,” the sources said. Najib was scheduled to have a press conference at Masjid Bandar Rinching in Semenyih at 6.15pm.

That said, investigators have more recently said that Razak has indeed done dirty deeds done dirt cheap, so he may not even have the opportunity to do so while in office:

Malaysia’s attorney general said an official investigation into a troubled state investment fund has uncovered documents related to allegations that money was transferred into the personal bank accounts of Prime Minister Najib Razak.

A task force comprising the central bank, the national police and the nation’s anticorruption agency uncovered the documents during a probe of 1Malaysia Development Bhd., or 1MDB, Abdul Gani Patail, the attorney general, said Saturday. Mr. Abdul Gani said that on Friday the task force had raided the offices of three Malaysian companies linked to 1MDB that allegedly were involved in the transfer of funds to Mr. Najib’s accounts.

It's fun to read through all the self-defenses on the 1MDB site--most penned by Razak himself. What does it say though about a corporation that spends more time fending off accusations of wrongdoing than highlighting profitable activities? I fear this will not end well at all.

American Imperialism & Blatter's Last Stand

♠ Posted by Emmanuel in CSR,Governance,Sports at 5/29/2015 01:30:00 AM

A match made in hell: Gazprom & FIFA.

One good post on battle over futbol mundial deserves another: I am constantly surprised by the amount of global attention the governance of FIFA has received these past few days. On the surface, the politics of an international sporting organization headquartered in Europe should be of limited interest to the rest of the world. For the most part, we watch the World Cup every four years and that's that. Dig below the surface, however, and there is much, much more at stake: the West versus the rest, the corrupting influence of big money, and the governance of global institutions. Let us examine each of these in turn.

(1) To no one's surprise, Russian President Vladimir Putin sees the United States' move to prosecute FIFA officials on corruption charges as an effort to scotch the 2018 World Cup in Sochi. As with most Putin narratives, there's a whiff of conspiracy theory, but read for yourselves:

Russian President Vladimir Putin accused the United States of meddling in FIFA's affairs and hinted that it was part of an attempt to take the 2018 World Cup away from his country. Putin said in televised comments Thursday that he found it "odd" that the probe was launched at the request of U.S. officials for crimes which do not involve its citizens and did not happen in the United States...

Putin said even if "someone has done something wrong," Russia "has nothing to do with it." He then tried to portray the probe as a U.S. attempt to go after dissenters, likening the case to the persecution of whistleblowers Julian Assange and Edward Snowden. "Our American counterparts, unfortunately, are using the same methods to reach their goals and illegally persecute people. I don't rule out that this is the case in relation to FIFA," Putin said. "I have no doubt that this is yet another evident attempt to derail Mr. Blatter's re-election as FIFA president. We are aware of the pressure that he was subjected to in relation to Russia holding the 2018 World Cup."

Just as I predicted in the earlier post, the losers will portray this action as American imperialism in cowing Swiss authorities to follow suit. The long arm of America is not yet gone, evidently.

(2) Actually, Blatter seems to have perceived American resentment at him before the arrests. Earlier this month, he wanted to hold the next few games outside of Europe (UEFA), making the US obviously the front-runner for another American event:

FIFA President Sepp Blatter wants to implement a rule that would prevent Europe from bidding for the 2026 World Cup, improving the chances of the United States to host the tournament. The FIFA executive committee could agree this month to block continental confederations from bidding for the following two World Cups after hosting. ''It should be this way,'' Blatter said Friday, adding that the proposal is ''more than an option.''

(3) On the CSR end, perhaps the United States will ultimately undermine Blatter's leadership most by hitting FIFA where hurts most--the millions in sponsorship money it rakes in each year from corporate sponsors. Some of these sponsors are real stinkers who couldn't care less like Putin's toadies at Gazprom. Obviously, American companies will be more sensitive to their home government's actions. What's most interesting are the neither here nor there firms in Europe like Adidas. At any rate, sponsors apper to be reassessing their options:

Visa Inc., a leading FIFA partner since 2007, said that the twin U.S. and Swiss investigations into alleged corruption that resulted in the arrest of seven soccer officials here Wednesday could prompt the company to end its agreement. Visa’s current deal runs until 2022.

Urging the organization to make sweeping change, Visa said overnight that FIFA needed to rebuild “a culture with strong ethical practices to restore the reputation of the games for fans everywhere.” “Should FIFA fail to do so, we have informed them that we will reassess our sponsorship,” it added.

Other top sponsors such as Adidas AG, Coca-Cola Co. and McDonald’s Corp. all said they were monitoring the situation, while Hyundai Motor Co. Ltd. said it was “deeply concerned” about the allegations. FIFA earns $177 million a year from its marketing partners, according to its 2014 financial results.

See here for other sponsors' thoughts on FIFA/Blatter. Being a firm believer in the notion that money talks, I ultimately believe that Blatter's fate lies in the hands of FIFA's sponsors. I am convinced that the US making a big stink about arresting FIFA officials in an international extradition was partly designed to draw attention to governance issues among the sponsors.

It's very interesting stuff, and let's see in a few moments whether Blatter's previously assumed rubber-stamping as president will actually happen.

5/30 UPDATE: Blatter wins a fifth term, to no one's real surprise. Having spread FIFA largesse to small member nations, it was inevitable since votes are weighted according to, say, revenues.

'Teflon' Sepp Blatter & FIFA 'Crime Syndicate'

♠ Posted by Emmanuel in Governance,Sports at 5/28/2015 01:30:00 AM

Can the US Justice Department take down Sepp Blatter, 'evil genius'?

Criminal organizations come in all sorts of shapes and sizes these days. Just last week, American financial giants Citigroup and JP Morgan did not contest criminal charges filed by the US Justice Department for rigging foreign exchange markets. Despite the trouble these banks found themselves in with all their multi-billion dollar fines, rest assured that there are even more nefarious organizations out there we're nevertheless familiar with...and I ain't talking about ISIS. Consider FIFA. In two days' time, it will vote on a new president, widely expected to be Sepp Blatter for a fifth consecutive term. Despite Europeans dominating world football--the last three World Cup winners are Italy, Spain and Germany--the truth of the matter is that the moneybags are more evenly stretched throughout the world. Given the global distribution of football associations voting on where to hold these events, Sepp Blatter knows better than most how the world works:

Sepp Blatter, from Switzerland’s touristic Valais canton, is a born Portier. That’s why on Friday he will be re-elected to his fifth term as president of Fifa, the corrupt global football authority. Western countries rightly decry Blatter. However, we ought to recognise his genius. This 79-year-old understood very early that there’s a new world order in which westerners don’t matter much...

It turned out that Fifa cared only about naked power and money. Vladimir Putin twisted voters’ arms. Long-legged Russian ladies stalked football conferences. Qatar funded football projects everywhere. In addition, more than a third of Exco’s 24 members were accused of corruption linked to the vote. Several resigned from football. Jérôme Valcke, Fifa’s secretary-general, wrote in a leaked memo that Qatar “bought” the World Cup. (He later said he’d been misinterpreted.) Last year The Sunday Times alleged that a Qatari, Mohamed bin Hammam, made payments totalling $5m to win support for Qatar’s bid...

Many non-western football officials admire the efficient Portier. Blatter is good at organising World Cups, admits Michael van Praag, a Dutchman who tried to run against him. And the Portier handles people well. “He is charming,” says Van Praag. “He knows the name of every national association’s chairman, even his wife’s name.” Better, Blatter dishes out perfectly legal gifts to national associations. True, he cannot charm western media. But, though their attacks wound his vanity, he knows that media scarcely matter in the new world order...

Western countries are powerless to change Fifa. They could boycott the World Cup but, characteristically, they won’t make sacrifices for their principles, says Roger Pielke Jr, political scientist at the University of Colorado.

Or maybe not: Simon Kuper wrote the above piece on May 22. Just today, however, the footballing world has been rocked as the US Justice Department and Swiss authorities seem to have cracked down on FIFA in retaliation for repeated slights of Westerners wishing to hold the World Cup only to be outdone by the likes of Russia and Qatar. The pipsqueaks. So a bunch of FIFA officials were arrested over the designation of the 2018 and 2022 World Cup venues--but surprise, surprise--Sepp Blatter wasn't among them:

Several hours after the soccer officials were apprehended at the hotel, Swiss authorities said they had opened criminal cases related to the bids for the 2018 and 2022 World Cups — incidents that, more than any others, encapsulated FIFA’s unusual power dynamic. “In the course of said proceedings,” the Swiss officials said, “electronic data and documents were seized today at FIFA’s head office in Zurich.”

The arrests were a startling blow to FIFA, a multibillion-dollar organization that governs the world’s most popular sport but has been plagued by accusations of bribery for decades. The inquiry is also a major threat to Sepp Blatter, FIFA’s longtime president who is generally recognized as the most powerful person in sports, though he was not charged. Blatter has for years acted as a de facto head of state. Politicians, star players, national soccer officials and global corporations that want their brands attached to the sport have long genuflected before him.

The mighty Sepp is still as cagey as ever:

An election, seemingly pre-ordained to give Mr. Blatter a fifth term as president, is scheduled for Friday. A FIFA spokesman insisted at the news conference that Mr. Blatter was not involved in any alleged wrongdoing and that the election would go ahead as planned.

The Department of Justice indictment names 14 people on charges including racketeering, wire fraud and money laundering conspiracy. In addition to senior soccer officials, the indictment also named sports-marketing executives from the United States and South America who are accused of paying more than $150 million in bribes and kickbacks in exchange for media deals associated with major soccer tournaments.

The soccer officials charged are Mr. Li, Jeffrey Webb, Eugenio Figueredo, Jack Warner, Julio Rocha, Costas Takkas, Rafael Esquivel, José Maria Marin and Nicolás Leoz.

I would love it if a clean, appealing candidate like soccer legend Luis Figo could have remained in the race to be FIFA president, but the truth of the matter is that international football is all about global power politics. Further, I do not doubt that FIFA's is a dirty, dirty game as a reflection of those aforementioned global power politics. That said, the United States' Justice Department's inability to make anything stick to the mastermind of the whole show, Sepp Blatter, makes you wonder if anyone can take him down at this stage in the game.

Soccer remains a famously minor sport in the US, and I doubt whether FIFA voters will be swayed by these outsider Yanks trying to persecute some of their own. Unless something major happens, another Blatter term is in the offing that's just as predictable as the Chinese Communist Party chooses its predetermined leaders. I further believe that the fight will increasingly take this sort of framing: developing countries fending off "American imperialism" over good governance practices.

It's game on, and smart money wouldn't bet against Sepp even now. Nothing personal, but it's all about the money.

UPDATE: See CNN for reasons why the US is taking on FIFA.

Corporate Governance: Of Korean 'Nut Rage' & BMW

♠ Posted by Emmanuel in Governance,South Korea at 12/15/2014 01:30:00 AM

Headlines here in Asia have been dominated by the story of the Korean Air executive who went ballistic on a flight attendant because he had served her nuts in a bag instead of on tableware. Hence the "nut rage" label applied to Cho Hyun-ah, the daughter of the Hanjin (chaebol conglomerate) chairman that owns Korean Air. Talk about nuts: She boarded the flight at JFK headed for Incheon and ordered it returned to the boarding gate over macadamia nuts to unload the poor fellow. The flight attendant Park Chang-jin was even coerced to cover up the incident to Korean government investigators. Does that make this incident "Nutgate"?

[Cho] ordered him off the plane and forced the flight to return to the gate at John F Kennedy airport in New York City. After being confronted about the nuts, senior flight attendant Park Chang-jin told South Korea's KBS television network he and his colleague kneeled down before Cho. According to Park, Cho yelled at the crew to "call right now and stop the plane. I will stop this plane from leaving."

Park said when he returned to South Korea on a separate flight, five to six officials from Korean Air came to visit his home every day and asked him to tell investigators that Cho did not use abusive language and that he voluntarily got off the plane. On Friday, in her first public appearance since the incident, a gloomy-faced Cho bowed and said "I sincerely apologise. I'm sorry," before droves of journalists in an almost inaudible, trembling voice.

At any rate, the Koreans have been fascinated with this incident. Just as the Sewol ferry accident caused much soul-searching, so has this "nut rage" reawakened questions about corporate governance in South Korea. In particular, chaebol reform has been on the to-do list of the government for quite some time now. Aside from dominating the business environment and discouraging dynamic small- and medium-sized businesses, cozy government-business ties have long generated accusations of favoritism. That is, chaebol may be too big to fail, block dynamic new entrants, and worst of all, abuse their dominance in the overall Korean economy.

Auntie points us to a thought-provoking article in the Korea Times that discusses corporate governance in their nation: are chaebol really so prone to these kinds of abuses? In particular, why are these conglomerates not meritocratic like their Western counterparts? Prior to this incident which has resulted in Cho Hyun-ah becoming an unlikely successor to her father at Hanjin, she was on track to do so. Here Hanjin is being compared to Germany's BMW here owned by the Quandt family who are largely uninvolved in day-to-day operations:

[Cho Hyun-ah] has shown behavior typical of someone born with a silver spoon in their mouth. In contrast, BMW recently named 49-year-old production executive Harald Krueger as the successor to CEO Norbert Reithofer, starting from May. The CEO in waiting joined the automaker in 1992 as a trainee, working his way to the top of the corporate ladder of the 98 year old company. His 11 predecessors have also been professionals without direct ties to the Quandt family, which owns a 46 percent stake of BMW.

Business experts say independent management was key to making BMW what it is now. "With no intervention coming from the owner family, BMW CEOs can concentrate on management issues, and maintaining the firm's growth," a BMW official said. "Had the company been directly controlled by an owner family, it is uncertain whether BMW would have reached the status it enjoys today because owners turned CEOs might have found themselves distracted at work by issues related to their ownership," an industry source said.

Contrast this trainee-to-CEO success story to what's supposedly happening in Korea:

Korean Air is owned by Hanjin Group led by Cho Yang-ho, the son of the firm's founder; he controls the company with a 15.49 percent stake. His three children ― Heather [Cho Hyun-ah], Won-tae and Hyun-min ― hold less than 2.5 percent each. One of those three will likely become the chairman's handpicked successor, a typical leadership transition seen at family-run conglomerates in Korea.

"Perhaps the recent nut rage incident was one of the dismal side effects of such a dynastic leadership succession," said Kim Sang-jo, a business professor at Hansung University and chief of the People's Solidarity for Economic Reform. "With chances of landing a top seat guaranteed, they may not feel any guilt looking down on employees of their father's company and treating them like their servants. "This is a feudal form of employer-employee relationship that should disappear as early as possible."

A bigger problem, he pointed out, is that the dynastic succession could lead Korean Air to fall into the hands of what he described as an "unqualified" leader. "Cho will choose his successor from a limited pool of candidates or out of his three children," the professor said. "Nothing wrong would happen if there is a qualified person among the three and the chairman makes the right choice. If it's not the case, however, his selection would usher in a tragedy. It's a very risky deal."

Make no mistake that there remains a pecking order of globalization envy. Us folks in developing Asia look up to Korea. In turn, Koreans look up to Germany which has a similar profile of being an export-oriented, manufacturing-based economy. Every so often we have one of these "why can't these !@#$%*+ Koreans be more like Westerners" despite the country being the most successful of Asians. IMHO folks are making too much of a high-profile incident, but suffice to say that "nut rage" has resurfaced concerns about Asian forms of governance that lay dormant for some time after the Asian financial crisis became yesterday's headline. Meanwhile, the incident has little direct bearing on the firm's performance.

UPDATE 1: The Korean transport ministry is said to be filing a case against her, too.

UPDATE 2: Singapore's Straits Times offers a more sympathetic story about how Cho Hyun-ah was able to make several improvements to Korean Air before the fateful incident.

UPDATE 3: Cho Hyun-Ah has now been arrested for endangering fight safety.

Stock Buybacks & the End of the Modern Corporation

♠ Posted by Emmanuel in Governance at 11/03/2014 01:30:00 AM

Should you even bother protesting corporations when they're dying anyway?

A most curious phenomena occurring in the new millennium as far as businesses are concerned is the number of publicly listed firms engaging in large stock buybacks. To be sure, there is a purely "window dressing" aspect to this: by reducing the number of outstanding shares, firms' earnings per share (EPS) figures are boosted to placate shareholders. But, these buybacks also raise questions about corporate governance. That is, if companies keep buying their own stock at their current pace, then pretty soon we won't have publicly listed companies anymore. If anti-globalization protesters have long demonized MNCs for being insular and unresponsive to public pressure, wait till they aren't floated on stock exchanges as the firm as we know it evolves to the next stage.

Simon Caulkin at the FT extrapolates these trends and invites us to think of a world where the public corporation is a thing of the past. Certainly, the trend described above is already in full swing in the most sophisticated of capitalist economies, the US and the UK. Are they firms dinosaurs in this day and age?

In the anglophone world at least, the publicly quoted company has been the central institution of modern capitalism, the marshalling yard for the economy’s resources – investors’ funds from one side, entrepreneurial animal spirits from the other – for 150 years. Yet all around the globe, listed companies are dying off, if not like flies then perhaps more like other things no longer suited to their environment – dinosaurs, say.

Nor is it likely to be a temporary trend:

Could this be temporary, with normal service resumed once business has finally recovered after the crash? It seems unlikely. First, the decline in quoted numbers started around the millennium, well before the financial crisis. Second, although the shrinkage is worldwide, it is greatest – nearly 50 per cent since the high point in 1998 – in the economies most attuned to the stock market: the US and the UK. Third, unlike their 20th-century predecessors, today’s new companies have little appetite for public capital. At Google, Facebook or Apple, intangible assets dwarf tangibles, which mostly consist of offices and computers, rather than capital-intensive production plants. These companies do not even need to own them.

In fact, companies are using the stock market less and less to raise capital for productive ends, instead employing it for the opposite reason: retiring equity capital via share buybacks running at a staggering 2-3 per cent of gross domestic product, according to City economist Andrew Smithers.

Like nearly everything else, the joint stock corporation probably does not have an infinite lifespan:

If this is right, we are witnessing not just a blip but the start of a historic shift. This is the view of the University of Michigan’s Professor Gerald Davis, who in a 2013 article, “After the Corporation”, described the public corporation, at least in the US, as a “distinctly 20th century phenomenon” that had been rendered “unnecessary for production, unsuited for stable employment and the provision of social welfare services, and incapable of providing a reliable long-term return on investment”. The consequences are already visible in declining employment prospects, rising insecurity and inequality, and endangered retirement and (in the US) health benefits, as well as indirectly in social pressures emanating from the likes of the Occupy movement.

Gerald Davis has an interesting article discussing this phenomenon at greater length. For left-leaning folks, he offers the more sanguine view that the coming end of the corporation should usher in more inclusive forms of social organization. Here is its abstract:

Shareholder-owned corporations were the central pillars of the US economy in the twentieth century. Due to the success of the shareholder value movement and the widespread “Nikefication” of production [firms being mere brands as opposed to having tangible manufacturing facilities], however, public corporations have become less concentrated, less integrated, less interconnected at the top, shorter-lived, and less prevalent since the turn of the twenty-first century, and there is reason to expect that their significance will continue to dwindle. We are left with both pathologies (heightened inequality, lower mobility, and a fragmented social safety net) and new technologies suitable for being repurposed in more democratic forms. Local solutions for producing, distributing, and sharing can provide functional alternatives to corporations for both production and employment; what is needed is the social organization to match the tools that we already have, or will have shortly. The time for democratic local economic forms prophesied by generations of activists may finally be at hand.

Should globophobes cheer on the death of the corporation as we know it? I think it's too early for them to rejoice since the alternative--the non-listed entity--will likely be more insulated from public pressure emanating from being a publicly listed company. Caveat emptor, then, for both lovers and haters of big businesses alike. Even if the shape of things to come is not yet definite, we at least know change is a-coming.

Singapore and the Demoncracy [sic] of Political Freedom

♠ Posted by Emmanuel in Entertainment,Governance,Southeast Asia at 8/04/2014 01:30:00 AM

Ah, independent Singapore: a Lee-controlled city-state with a brief Goh Chok Tong intermission. I call it the "Medvedevian Interlude." Harry Lee Kuan Yew is famous for his "Asian Values" argument that the natural mode of governance in Asian countries is authoritarianism due to cultural factors unique to the region. Confucianism and all that. This argument has been endlessly debated--see, for instance, Amartya Sen's criticism of the whole idea.

While visiting Singapore on a recent trip, a former student of mine with something of an authoritarian streak took a photo of an advertising hoarding (the British term for a billboard) that to me best sums up the Lee family line on democracy if they had a sense of humor: "DEMONCRACY NOW: The region's most TERRIFYING event is back." Adding to the hilarity, if you go to the website listed in the hoarding, it further advises us that this Universal Studios attraction features "The Ministry of Evil." Aaaigh...elections [!]...real opposition parties [!!]...that actually win elections in heavily gerrymandered Singapore [!!!] The sheer horror is too much to contemplate.

I guess in tightly-controlled Singapore where Lee the Elder and latterly Lee the Younger have sued any and all media outlets who have dared criticize them with defamation suits, your digs have to be subtle ;-) While I would appreciate the notoriety of being sued by the Lees, I'm afraid I've said nothing remotely defamatory here. Universal Studios may be hearing from the Lees, soon, however.

Olympics, World Cup & F1's Last Hope - Authoritarianism

♠ Posted by Emmanuel in Governance,Sports at 5/30/2014 02:00:00 AM

You'd be a fool to bet against Almaty hosting the 2022 Winter Games.

Talk about the relationship between sports and authoritarianism. Let me put it this way: the only countries now willing to host expensive marquee global sporting events--the Olympics, the World Cup and Formula One are authoritarian regimes. The proximate reason for this is that the cost of hosting these events keeps rising and rising. As they do, citizens in democracies are less and less willing to shoulder the costs. On this point, Yahoo! Fourth Place Medal has an interesting feature on how no democracies want to host the 2022 Winter Games:

Residents of Krakow, Poland overwhelmingly rejected the idea of hosting the 2022 Games, leading city officials to withdraw Krakow's bid on Monday. This follows Stockholm, Sweden's leaders' decision to withdraw; Munich, Germany's voters' rejection of an Olympic chase; and Davos/St. Moritz, Switzerland's defeat of a referendum on hosting the Games. For those keeping count, that's four of an original eight host cities which had considered hosting the Games.Two more cities' bids, while not technically dead, may as well be: Lviv, Ukraine [?!-ed.] is having real military issues and can't afford to waste time thinking about the Olympics, while Oslo, Norway's bid is floundering politically.

Who's left standing if all these democracies pull out of the running? At this rate, it's either going to be another Beijing Games (winter, not summer, edition) or Almaty, Kazakhstan where the people will just have to bear and grin it as tens of billions are poured into activities with presumably little public benefit:

It's no surprise, then, that the only two cities seriously still in the running for the 2022 Winter Games are Almaty, Kazakhstan and Beijing, China: two locales where the people don't get a choice in whether the Games come or not.

The most graphic example right now is Brazil. Just a few years ago, the rest of the world took it hosting the World Cup in 2014 and then the Summer Olympics in 2016 as a sign that it had arrived on the world stage. With Brazil's economy now stagnating as commodity prices have fallen, it looks to have had the winner's curse twice over as it won bids to host both these events and as violent protests are mounted nationwide. On one level, the question is whether these events will break even or make a profit. Past hosts are unpromising, Greece and Russia being particularly egregious examples. At another level, could these funds have been spent on more productive purposes? Their complaint is not an unreasonable one: in a poor country, why are vast public monies being wasted on stadiums that will go disused after these events are done instead of on health and education?

The explanation goes beyond sports. For many Brazilians, the Cup has become a symbol of the unfulfilled promise of an economic boom for this South American nation. But the boom has fizzled. And now the World Cup's $11.5 billion price tag—the most expensive ever—and a list of unfinished construction projects have become reminders of the shortcomings that many believe keep Brazil poor: overwhelming bureaucracy, corruption and shortsighted policy-making that prioritizes grand projects over needs like education and health care.

"It's an affront, in a country with so many deficiencies in basic needs, to organize a Cup in this way," said Alcyr Leme, a São Paulo investment manager and lifelong soccer fan. Mr. Leme has fond memories of going to see Brazilian legend Pelé play in the 1960s. But he plans to watch this Cup at home. Buying game tickets would only condone the waste, he said.

At this rate, the only ones who will be left to foot the tab are authoritarian regimes. China attempting to burnish its national standing through sporting performance needs little explanation. Russia spending an unfathomable $50 billion on the Sochi Winter Olympics (oligarchs' contributions are ultimately state-furnished) to show it has arrived then blowing it all away by inviting Western sanctions comes to mind. Speaking of which, the only genuinely "new" event on the Formula One calendar is the Sochi Grand Prix later this year since Russia hasn't hosted any races before.

What mainstream media pundits [1, 2, 3] miss is the role of sporting organizations in producing this fine mess. I believe that the International Olympic Committee (IOC), Fédération Internationale de Football Association (FIFA) and Fédération Internationale de l'Automobile (FIA) shoulder a significant part of the blame as well in setting their sights too high in terms of the requirements for hosting these events. They have become too used to dictators splurging vast sums on these boondoggles that democracies now balk at the expense. All three are rather mercurial and are definitely not transparent in the slightest.

Even in global sporting organizations, it appears good governance is very much the order of the day.

UPDATE: Having thought more about it, recall how the IOC managed Cold War tensions at its tail end by staging events behind the Iron Curtain: Moscow 1980 and Sarajevo 1984. By definition those were authoritarian hosts, so it may just be a return to Eighties form. Before you start breaking out the Flock of Seagulls, though, consider that spiraling costs are relatively new since the USSR and the former Yugoslavia were hardly rolling in the dough nearing their dissolution. And so they say: the more you love, the more you live.

Gadgets Make the World Go Round: 15 Yrs of ITA

♠ Posted by Emmanuel in Governance,Supply Chain,Trade at 12/03/2012 12:07:00 AM

During these dark days of Doha Round deadlock, good news from the WTO is hard to come by. But, even your ever-pessimistic correspondent has managed to fetch--wait for it--reasonably good news involving the WTO. Although many people do not know of it, the Information Technology Agreement (ITA) signed under the auspices of the WTO way back in 1996 was a seminal event in the formation of global value chains in the electronics industry. By gradually encompassing more and more countries in tariff-free arrangements in the production of electronic goods, disparate nations have benefited. To use commercial lingo, ITA enabled both Super Mario and Samsung to each have their own (export) Galaxy.

Just to show you how I am in such a generous mood, I will even let Mr. Doha Round Failure himself, WTO Director-General Pascal Lamy, fill you in on ITA's importance:

The 21st century is the era of information and communication technology, and the ITA has played a vital role in promoting affordable access to those technologies. This sector is crucial for the world economy – not only due to its considerable size, but also because it is an important driver of productivity, innovation and, ultimately, economic growth. Over the past 15 years, world exports of IT products have almost tripled in value since 1996, and reached an estimated US $1.4 trillion in 2010, accounting for 9.5 percent of world merchandise trade. Together, ITA participants account for 96 percent of world trade in IT products. And because they provide duty-free treatment to imports on a most-favoured-nation basis, they have created opportunities for exporters in all WTO members, including those in least-developed countries.

With the most recent participation of Colombia, the ITA has now grown to include 74 WTO members, and the majority of them are developing participants. Developing countries have consistently increased their participation in world trade of IT products since 1996, accounting for approximately 64 percent of exports and 51 percent of imports in 2010. While a growing share of the investment in both the production and use of these products is made by developed country IT industries, IT spending is increasing considerably in some emerging economies, such as China, India and countries of the Association of Southeast Asian Nations (ASEAN). These investments have been the catalyst that has allowed countries as diverse as China, Costa Rica, and some ASEAN countries to develop their capacity for manufacturing IT products and become important players in global production networks. In addition, other developing nations used these IT products and technologies as tools to become key players in other areas. For example, access to affordable IT equipment was instrumental in enabling India to become a powerhouse in consulting services, software development and other services.

Good stuff, and there's much more information on the ITA's history, mechanics and future in the publication I excerpted Lamy from. As ever there's far too much interesting stuff to read if you're interested at all in international political economy. Rest assured that, sometimes at least, the WTO works.

PRC Inc. Boycotts World Bank-IMF Meet in Tokyo

♠ Posted by Emmanuel in China,Governance at 10/05/2012 11:01:00 AM

In case you missed it, there's been very interesting news these past few days over the mass boycott of Chinese banks, presenters and other participants who were originally scheduled to be at the upcoming World Bank-IMF meetings to be held in Tokyo starting this coming Tuesday. Those expressing uncertainty over attendance include the "big four" state-owned banks the Agricultural Bank of China, the Bank of China, China Construction Bank and the Industrial and Commercial Bank of China. What's more, other banks have also pulled out of a big financial services shindig in Osaka scheduled for month's end. From the WSJ:

Japan's territorial dispute with China appears to be spilling onto the stage of global finance meetings. Several big Chinese banks say they've canceled participation in the high-profile annual meeting of the World Bank and International Monetary Fund to be held in Tokyo next week as well as in the constellation of events taking place alongside. Some of the banks say they've also pulled out of another big financial-industry conference scheduled to take place in the western Japanese city of Osaka at the end of the month.

You have to wonder how ready China is to assume more matters concerning global governance if it displays this kind of petulance. Sure the United States isn't perfect in this respect--its non-economic pet peeves spilling over into the economic realm usually deal with "human rights," and "weapons of mass destruction"--but China is on the outside looking in wishing to be among the big boys instead of being on the inside already alike the US. Moreover, it needs the support of other Asian nations if it wants to play a larger role in global governance, so its actions are rather childish:

China has long sought a more important role in such global forums, even as its dynamic economy has been playing an increasingly significant part in bolstering global growth. But some experts warn that letting bilateral spats spill into key economic and financial areas may be a sign China isn't quite ready to be at the international leaders' table.

"The point is really about China being a global player," said Fraser Howie, a Singapore-based co-author of "Red Capitalism," a book on China's financial system. "China may rightly demand a seat at the head table, but what signal does it send when they go off in a huff over these types of issues. Such boycotts are pointless." China has argued for more say for emerging markets in the matters of both the IMF and the World Bank.

Methinks China has much growing up to do. Even if Japan is equally culpable over the East China Sea dispute, it seldom links that issue to economic ones in the way the Chinese apparently do

Why the US Ain't in the Inter-Parliamentary Union

♠ Posted by Emmanuel in Americana,Governance at 3/22/2012 08:43:00 AM

Here's another factoid you can use to embarrass even the most vaunted international relations pooh-bahs alike my blogging colleagues (especially of the garden-variety American sort): Ask them whether the United States is a member of the Inter-Parliamentary Union composed of nations that have legislatures. The response you'll probably get involves something along the lines of (1) "I didn't even know there was such as thing" and (2) "as a global promoter of democracy, the US is probably a member of it."

Both responses are embarrassing in the sense that, (1) even if the Inter-Parliamenary Union is obscure--hence my fondness of it--the folks who blather endlessly about democracy promotion are mostly unaware of its existence. What's more, (2) there has been no clamour on the part of these ostensible champions of democracy to regain lost US membership in the institution.

In any event, here's a neat description from a Congressional Report Service document on democracy promotion that I found while researching something related that speaks to this discrepancy of non-membership. From footnote 83:

The IPU was established in 1889 as an association of individual parliamentarians and the world’s first permanent multilateral political forum. The United States was one of the original participants in IPU activities begun in 1889 and formally joined in 1935 when the House and Senate enacted statutory authority for U.S. participation in the IPU (49 Stat. 425). Congressional participation in the IPU gradually diminished. In July 1997, Congress (through the Clerk of the House and Secretary of the Senate) notified the IPU that, given the diminished congressional participation, the U.S. Congress could no longer justify the annual U.S. contribution of almost $1 million or 15% of the IPU annual budget and had decided to reduce its membership status and proposed to make an annual donation of $500,000 to support the aims of the organization. The IPU Executive Committee did not accept the offer so, in 1998, Congress passed legislation to end U.S. participation on October 1, 1999 (ultimately attached to P.L. 105-277, Sec. 2503). It would presumably require new legislation to restore U.S. membership.

It is odd how American lawmakers in 1999 could not justify spending a million dollars annually on an institution that it was a founding member of that spoke to its avowed ideals. Meanwhile, they soon had little trouble justifying spending tens of billions annually year in and year out prosecuting (highly unsuccessful) misadventures in promoting democracy in places like Afghanistan and Iraq. While largely symbolic, what does US non-membership in the Inter-Parliamentary Union symbolize for these folks who endlessly bloviate about the importance of freedom?

Thou Shalt Obey Thy Lord Mandy on Globalization

♠ Posted by Emmanuel in Europe,Governance,Neoliberalism at 2/28/2012 11:02:00 AM

On paper, I am not supposed to favourably regard Peter Mandelson, the third architect of the UK's third way along with Tony Blair and Gordon Brown. While I regard the latter two as rather odious at this point in time, I have yet to definitively suss why I remain a Lord Mandelson fan. Perhaps it's because his various machinations have ensured that he would never hold the UK's highest office--if he were such a brilliant schemer, then he would have become king instead of being exiled twice from British government.

And yet what a journey he's had! From being the EU trade commissioner to the de facto prime minister of the UK during the dying days of Brown's ill-fated time as PM, Mandelson can never be accused of being dull. I also find it remarkable that while Blair and Brown's underlings have subsequently bashed them to the high heavens, you don't see Mandy's acolytes doing the same. Perhaps the erstwhile Prince of Darkness commands loyalty through his actions.

Now, a few weeks ago Peter Mandelson came out swinging in his sort-of-retirement years against giving up on globalization in the pages of the FT. As you would expect, I was generally in agreement with what he had to say. Now, though, he's fleshed out more details in arguing that managing the social consequences via the third way has given way to the older question of defining the scope of globalization. In The Globalist, he begins by describing the age of high neoliberalism:

The two serious attempts to govern globalization in the first two-thirds of the 20th century — negatively through isolationistic, autarkic policies during the 1930s, and more positively through the Bretton Woods system between 1945 and the early 1970s — were both accounted to be failures. So we embarked on a third attempt — not to govern globalization as such, but to actively expand its reach.

The attempt at creating true governance structures was restricted chiefly to managing the social and economic consequences rather than trying to define and impose the desirable scope of globalization itself. To some extent this approach was intellectually underwritten by the IMF, World Bank and OECD, and in many — but not by any means all — of the economics departments and business schools of Western universities. In the Anglo-Saxon world, it simply became the conventional wisdom.

With the benefit of hindsight, Lord Mandy is backtracking and looks to salvage the more acceptable elements of contemporary globalization. All the while, better representation is necessary to improve the image of globalization:

Looking back, we can see that this approach did neither us, nor globalization itself, any favors. First, it was intellectually abstract and inflexible. In political terms, it often ignored the basic fact that preserving the conditions of open trade and open global markets is possible in a democracy only if we make those conditions sufficiently tolerable and beneficial that people do not vote to end them. Second, it oversold globalization, and ultimately made it harder to make a pragmatic case for openness.

It is not enough to pretend that globalization is simply irreversible and has to be tolerated. The reversals of the 1930s show that the direction of globalization can be changed by political and economic choices over which we have no shortage of control — if we choose to take them.

In the increasingly multipolar world in which we live, it is arguable that no single world view will emerge to define the way we manage globalization. But while the end of a world in which the West dictated the terms of globalization is not necessarily a tragedy, a world without a shared set of principles for managing globalization would be. I am not naïve about the prospects for global governance, but I would argue for new rules accepted by developing and developed countries alike, because "no rules" is not a sustainable option.

It's good stuff from Peter Mandelson, who is honest enough to admit where policy shortcomings lay. For more, see a recent Institute for Public Policy Research (IPPR) publication that Mandelson helped in preparing about globalization.

The Political Comeuppance of Rupert Murdoch

♠ Posted by Emmanuel in CSR,Europe,Governance at 7/07/2011 03:49:00 PM

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.