Monthly Archives: October 2009

The Battle for the EU Presidency

A battle is brewing for control of the European Union. At stake, according to some, is the very future direction of the organization.

Pending final approval by the Czech Republic, the last EU member still to ratify the Lisbon Treaty, the European Union will have a full-time president. The post will have some real powers, similar to those possessed by the head of government. But equally importantly, the new president will essentially operate as head of state, the symbolic figurehead of the European Union. The choice of who will occupy that position therefore is therefore important.

Until recently, former British Prime Minster Tony Blair appeared to be the undisputed frontrunner. Blair is a widely known figure who enjoys strong support by the British government, has close ties to the United States, and could operate effectively in an international context.

But the United Kingdom has traditionally been one of the more Euroskeptic members of the European Union. In addition, his friendship with former U.S. President George W. Bush, his support for the Iraq War, and his close ties to the United States undermine support for his candidacy among some EU members. Belgium and Luxembourg have already indicated that they would not support a Blair presidency; France and Germany have withheld their assessment for now.

In this context, Jean-Claude Juncker, Prime Minister of Luxembourg, has thrown his hat into the ring. Junker is seen to be much more pro-Europe. But this could also be his downfall, as some of the EU member states may not want a president who pushes too hard for further integration. The United Kingdom would likely veto his presidency. Indeed, this may be his very plan; to advance his own candidacy as a way of sinking Blair’s, allowing a third (compromise) candidate to come to the fore.

The politics of choosing a new EU president will be interesting to watch over the next several months. If nothing else, the battle over who will become the EU’s first full-time president exposes some key divisions within the EU.

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Towards New Economic Thinking

George Soros, the controversial hedge fund manager, announced on Monday that he would be donating $50 million to finance the establishment of the Institute for New Economic Thinking. According to Soros, the Institute would bring together some of the leading contemporary economists to challenge the dogma of free-market fundamentalism.

According to Soros,

There’s been a pretty widespread recognition by professionals that something is fundamentally wrong in the prevailing doctrine about financial markets, that you need a new understanding that this whole idea of efficient market hypothesis, rational expectations theory, is totally devoid of reality, and so there is need for new thinking.

The new Institute has already assembled an impressive advisory board, which includes Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay.

Although not necessarily a central focus of the new Institute, Soros is particularly interested in what he calls a “general theory of reflexivity,” the theory that markets tend to influence perceptions of reality, and that these perceptions in turn feed back into markets. This theory helps, according to Soros, make sense of bubbles in financial markets, where increasing rates of return outpace any realistic foundation in sound market analysis.

This could represent a welcomed change to the study of economics, which has increasingly been preoccupied with models and theories that lack any basis in the real world. As Joseph Stiglitz observed, “The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” Part of this failure certainly rests in the faulty assumptions on which many economic theories rest. Perhaps Soros’ initiative will add a new (and welcomed) layer of complexity to the field of economics.

McDonalds and De-Globalization

The only three McDonald’s restaurants in Iceland became the latest victims of the global economic crisis. According to an AP report, all three restaurants will close next week due to rising costs. The three franchise operations are required, according to their franchise agreement, to purchase and import all of their supplies from Germany. But the financial meltdown in Iceland—and the dramatic decline in the value of the krona, Iceland’s currency—combined with high tariffs on imports have led to a spike in operating costs for the restaurants. Indeed, according to the restaurants’ managing director, Magnus Odmudsson, operating costs have doubled over the past year, making it impossible for the restaurants to remain competitive.

According to the Big Mac index, Iceland already has the third most expensive Big Mac in the world, retailing for 650 krona ($5.29), falling behind Norway ($5.79) and Switzerland ($5.60). To meet the higher operating costs, Odmudsson said prices would have to increase to 780 krona ($6.36), a level which would make the restaurants uncompetitive.

The decision to close operations in Iceland represents a reversal of McDonald’s trend of increasing international operations. McDonalds currently operates in 119 countries on six continents. But the expansion has been controversial. In France, McDonald’s has been the target of protestors who claim that the chain restaurant undermines French cuisine, while in India, it faced lawsuits for allegedly using beef fat in the production of French fries. And earlier it was forced to trim operations in countries like Bolivia, where operations were not profitable.

The current global downturn presents new challenges for McDonald’s and other multinational corporations. Currency instability, a rise in protectionism, and an increasing preference for locally produced goods. This shift hardly represents a dramatic shift away from the process of globalization that has defined the global political economy since the end of World War II. But it does present, in a clear way, the challenges transnational operations face in an increasingly interconnected global economy.

Five Stories You Might Have Missed

Debates over Wall Street compensation reemerged on the national stage last week, as the government urged companies that received federal assistance under the Troubled Asset Recovery Program (TARP) limit executive compensation. On Thursday, the Federal Reserve issued draft rules governing compensation for companies that have not repaid TARP assistance. Under the new rules, the companies would be required to demonstrate that their compensation packages do not encourage excessive risk-taking. In an interview with the Financial Times, George Soros weighed in on the debate, calling Wall Street’s profits this quarter “hidden gifts” from the U.S. government. He commented that, “Those earning are not from the achievement of risk-takers. These are gifts, hidden gifts, so I don’t think that those monies should be used to pay bonuses. There’s a resentment which I think is justified.”

Meanwhile, concerns over the spread of the H1N1 (swine flu) virus continue to grow. On Saturday, President Barack Obama declared a declaration of “national emergency” to combat the flu. Under the declaration, hospitals eases some restrictions on hospital operations, giving them additional powers to treat the flu. 

In news from outside the United States last week:

1. German Chancellor Angela Merkel formally announced her new coalition agreement on Saturday. There were few surprises, as Merkel’s center right Christian Democrats allied with the liberal Free Democratic Party. The coalition contract included a promise to pass a €24 billion tax cut for poor and middle-income Germans and will reform inheritance laws. Under the new coalition agreement, Guido Westerwelle, the leader of the Free Democrats, will assume the post of foreign minister. The Christian Democrat’s Wolfgang Schäuble, a strong fiscal conservative, will become finance minister.

2. In two separate attacks, two car bombs exploded outside government buildings in Baghdad, Iraq, on Sunday, killed more than 130 people and injuring more than 500. The attacks were the deadliest in more than two months. Iraq had been enjoying a period of relative stability, as Western-backed tribal leaders had pushed al Qaeda militants into the margins. But U.S. officials contend that Iraq may be entering a period of increased violence, as militants attempt to reignite sectarian violence ahead of parliamentary elections scheduled for next year.

3. Negotiations intended to resolve the standoff over the Iranian nuclear program appear to have stalled. The talks, which were reopened early last week, were intended to develop an agreement which reduced Iran’s stockpile of low enriched uranium (LEU), building upon an agreement reached earlier this month under which Iran agreed, in principle, to send some of its estimated 1,200 kg of LEU to Russia and France, which would convert the fuel into medical isotopes before sending it back to Iran. But after Iran failed to meet a Friday deadline, the United States warned that it would be willing to wait for a few more days, but cautioned that its patience was limited. Iran’s current stockpile, if enriched, could provide enough uranium for a single nuclear weapon.

4. Figthing between Somali insurgents and African Union (AU) peacekeepers broke out in Mogadishu on Thursday, killing at least 30 people. According to witnesses, militants attacked using mortars as Somali President Sheikh Sharif Ahmed was leaving the country for a meeting in Uganda. AU forces responded with artillery fire. More than 19,000 civilians have been killed, and an estimated 1.5 million people have been displaced from their homes since 2007 as a result of ongoing fighting in Somalia, which has made the country a center for international piracy and terrorism.

5. The government of Brazil on Tuesday imposed a two percent tax on some capital inflows into the country. The decision, which as intended to slow the increase in the value of the real, Brazil’s currency, which had already increased more than 36 percent against the U.S. dollar this year. The new tax targets portfolio investment and financial speculation, not productive investment in the country. Nevertheless, the announcement was not well received by the market, and stocks fell sharply after the government made its announcement. But analysts offered a more positive pronouncement. In an editorial comment, the Financial Times described the new tax as “wise,” “sensible,” and “honest.”

Television, Equality, and Economic Development

The spread of television around the world is a positive force for socioeconomic development, according to an article published in Foreign Policy earlier this week. According to Charles Kenny, the article’s author, “It’s not Twitter or Facebook that’s reinventing the planet. Eighty years after the first commercial broadcast crackled to life, television still rules our world. And let’s hear it for the growing legions of couch potatoes: All those soap operas might be the ticket to a better future after all.”

The article cites a number of interesting studies to support their position. According to a study by the Inter-American Development Bank, the increased popularity of soap operas in Brazil in the 1970s and 1980s correlated to a decline in family size. Researchers hypothesize that female characters with small families provided an important social cue for rural women. The effect was equivalent to two additional years of education. A similar study conducted in India noted a similar outcome. Television can also play a role in promoting gender equity. The success of a female contestant in Afghan Star (Afghanistan’s version of American Idol), could, according to the program’s director, “do more for women’s right than all the millions of dollars we have spent on public service announcements for women’s rights on TV.”

But more radical changes might also be around the corner. Will people give up

What conclusions should we draw from this? FP suggests that,

In the not-too-distant future, it is quite possible that the world will be watching 24 billion hours of TV a day — an average of close to four hours for each person in the world. Some of those hours could surely be better spent — planting trees, helping old ladies cross the road, or playing cricket, perhaps. But watching TV exposes people to new ideas and different people. With that will come greater opportunity, growing equality, a better understanding of the world, and a new appreciation of the complexities of life for a wannabe Afghan woman pop star. Not bad for a siren Medusa supposedly giving so little.

Perhaps worries about television and the decline of social capital [glossary] were overrated? Was Robert Putnam wrong to suggest that we’d all be Bowling Alone? Perhaps we’re just bowling on Wii instead? The spread of television will not provide a cure to all the challenges of development. But it might not be a cause for worry either.

Five Stories You Might Have Missed

A suicide bomb attack in Iran killed several senior commanders of the country’s elite Revolutionary Guard and at least twenty tribal leaders in the southeastern province of Sistan-Baluchestan, which borders Pakistan and Afghanistan. The bombing was the first major terrorist attack in Iran in more than twenty years, and represents a major public relations blow for the Iranian government. A group known as Jundallah claimed responsibility for the attack, though the Iranian government has also attempted to place blame on the British government for the attack, claiming that Britain has an “overt and hidden hand in terrorist attack against Iran.” Juddallah is a Pakistan-based radical Sunni group campaigning for independence for ethnic Baluchis in Iran.

In an unrelated development, the Russian government indicated it would be willing to impose sanctions on Iran if the Iranian government fails to implement promises it made to the international community regarding its nuclear program. This represents a significant hardening of the Russian position on Iran, which it had previously dismissed as “unproductive.”

In news from outside Iran in the last week:

1. The United Nations-backed panel investigating elections in Afghanistan appears poised to overturn August election results. The panel is recommending that a number of suspicious ballots be thrown out, thus necessitating a runoff election between incumbent president Hamid Karzai and his rival, Abdullah Abdullah. The United States is attempting to resolve the growing political crisis, which threatens to complicate President Barack Obama’s decision on whether or not to expand the U.S. troop presence in the country.

2. Fights between rival drug gangs rocked Rio de Janeiro over the weekend, only one week after the city was named host of the 2016 summer Olympics. At least fourteen people were killed in the violence, and a police helicopter was shot down as members of the Comando Vermelho, Rio’s largest gang, and its rival, Amigos dos Amigos, fought in the favelas that surround the city. The state governor, Sergio Cabral, informed the International Olympic Committee of the events, noting, “We told the OIC this is not a simple matter, and they know this, and we want to arrive in 201 with Rio in peace before, during, and after the games.”

3. The Pakistani government launched a new offensive against Taliban strongholds in the South Waziristan region. The new offensive comes after two weeks in which the Taliban had engaged in a series of attacks against the Pakistani government and military. The Pakistani government believes that the Taliban may have as many as 10,000 militant fighters assembled in the region, which is also believed to be the hiding location for Osama bin Laden.

4. In a dramatic regional contrast, citizens in Botswana are expected to hand the government if Ian Khama a victory in Friday’s elections, while the government of neighboring Zimbabwe is struggling to address the continuing political instability there. Botswana is widely viewed as a success story in Southern Africa, due in part to its political stability and part to its vast diamond wealth.  But as global diamond prices fall, the economy of Botswana may begin to struggle. The government faces a severe budget shortfall, due primarily to a dramatic decline in diamond prices, necessitating a $1.5 billion loan from the African Development Bank.

Meanwhile, in Zimbabwe, Prime Minister Morgan Tsvangirai threatened to “disengage” from working with President Robert Mugabe. The two have been part of a power sharing arrangement since Febraury, but Tsvangarai’s party, the Movement for Democratic Change, has been marginalized from real political power.

5. The United States budget deficit has reached a record level of $1.4 trillion for the last fiscal year, as the government expanded spending significantly in order to address the global economic downturn. The deficit was approximately 10 percent of gross domestic product, but was $162 billion less than the administration forecast in August. Tax revenue fell by more than 16 percent as a result of the economic downturn, but spending increased by more than 18 percent.

Alternative Solutions to the Tragedy of the Commons

With all the debate that has surrounded the decision to award President Barack Obama with the Nobel Peace Prize, surprisingly little discussion has occurred around today’s announcement that Elinor Ostrom and Oliver Williamson would share the Nobel Prize in Economics. With the exception of Paul Krugman (who framed the Nobel Prize committee’s decision as a vindication of New Institutional Economics), the blogosphere has been surprisingly quiet about the award.

The award was given to Williamson for his work on transaction costs. According to the committee, “Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest.”

The decision to award Ostrom the prize is particularly interesting. Ostrom’s work challenges traditional assumptions around common pool resources. Indeed, her work is based fundamentally on a rejection of Garret Hardin’s famous parable of the tragedy of the commons, which argues that,

The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy. As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, “What is the utility to me of adding one more animal to my herd?” …The rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another…. But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit — in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.

The solution to the tragedy, according to Hardin, rests in one of two possibilities. Either we must enclose (privatize) the commons or we must allow government to regulate them. In the context of his argument, Hardin comes out in favor of the former rather than the latter. His argument around necessity of enclosing the commons to prevent over-exploitation of them has become accepted as a truism in resource management.

In her most well-known work, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge University Press, 1990), Ostrom demonstrates that communities can successfully manage commons even in the absence of private property rights and a strong regulatory authority. In analyzing common pool resources (CPRs) [glossary] from around the world, Ostrom concludes that informal institutions with certain characteristics (e.g., Clearly defined boundaries; Congruence between appropriation and provision rules and local conditions; Collective-choice arrangements allowing for the participation of most of the appropriators in the decision making process; Effective monitoring by monitors who are part of or accountable to the appropriators; Graduated sanctions for appropriators who do not respect community rules; Conflict-resolution mechanisms which are cheap and easy of access; Minimal recognition of rights to organize; and in case of larger CPRs: Organization in the form of multiple layers of nested enterprises, with small, local CPRs at their bases) can successfully manage common pool resources even in the absence of a formal system of private property rights. In doing so, Ostrom offers important insight into a wide range of contemporary issues, from deforestation to carbon emissions, and suggests that neither government regulation nor market-based solutions, necessarily represent the direction forward.