Weathering the financial crisis: good policy or good luck?

Weathering the financial crisis: good policy or good luck?, by Stephen Cecchetti, Michael R King and James Yetman - BIS Working Papers No 351 - August 2011

Abstract: The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.


Introduction

The global financial crisis of 2007–09 was the result of a cascade of financial shocks that threw many economies off course. The economic damage has been extensive, with few countries spared – even those far from the source of the turmoil. As with many economic events, the impact has varied from country to country, from sector to sector, from firm to firm, and from person to person. China’s growth, for example, never dipped below 6% and Australia’s worst quarter was one with no growth. The economies of Japan, Mexico and the United Kingdom, however, suffered GDP contractions of 5–10% at an annual rate for up to seven quarters in a row. For a spectator, this varying performance and differential impact surely looks arbitrary. Why were the hard-working, capable citizens of some countries thrown out of work, but others were not? What explains why some have suffered so much, while others barely felt the impact of the crisis?

Fiscal, monetary and regulatory policymakers around the world may be asking the same questions. Why was my country hit so hard by the recent events while others were spared? In this paper we examine whether national authorities in places that suffered severely during the global financial crisis are justified in believing they were innocent victims and that the variation in national outcomes was essentially random. Was the relatively good macroeconomic performance of some countries a consequence of good policy frameworks, institutions and decisions made prior to the crisis? Or was it just good luck?

We address this question in three steps. First, we develop a measure of macroeconomic performance during the crisis for 46 industrial and emerging economies. This measure captures each country’s performance relative to the global business cycle, which provides our benchmark. Next, we assemble a broad set of candidate variables that might explain the variation in cross-country experiences. These variables capture key dimensions of different economies, including their trade and financial openness, their monetary and fiscal policy frameworks, and the structure of their banking sectors. In order to avoid any impact of the crisis itself, we measure all these variables at the end of 2007, prior to the onset of the turmoil. Putting together the measured macroeconomic impact of the crisis with the initial conditions, we then look at the relationship between the two and seek to identify what characteristics were associated with a country’s positive macroeconomic performance relative to its peers.

Briefly, we construct a measure of relative macroeconomic performance by first identifying the global business cycle using a simple factor model. We calculate seasonally adjusted quarter-over-quarter real GDP growth rates and extract the first principal component across the 46 economies in our sample. This single factor explains around 40 per cent of the variation in the average economy’s output, but with wide variation across economies. We then use the residuals from the principal component analysis as the measure of an economy’s idiosyncratic performance. For each economy, we sum these residuals from the first quarter of 2008 to the fourth quarter of 2009. This cumulative sum, which captures both the length and depth of the response of output, is our estimate of how well or how poorly each economy weathered the crisis relative to its peers.

With this measure of relative macroeconomic performance as our key dependent variable, we examine factors that might explain its variation across economies. Given the small sample size, we rely on univariate tests of the difference in the median performance between different groups of economies, as well as linear regressions.

This simple analysis generates some surprisingly strong insights. We find that the better-performing economies featured a better capitalised banking sector, low loan-to-deposit ratios, a current account surplus and high levels of foreign exchange reserves. While the degree of trade openness does not distinguish the performance across economies, the level of financial openness appears very important. Economies featuring low levels and growth rates of private sector credit-to-GDP and little dependence on the US for short-term funding were much less vulnerable to the financial crisis. Neither the exchange rate regime nor the framework guiding monetary policy provides any guide to outcomes. Whether the government had a budget surplus or a low level of government debt are unimportant, but low levels of government revenues and expenditures before the crisis resulted in improved outcomes. This combination of variables suggests that sound policy decisions and institutions pre-crisis reduced an economy’s vulnerability to the international financial crisis. In other words, not everything was luck.


Results (excerpted)

(1) Economies where banking systems had higher levels of regulatory capital outperformed other economies in our sample, with a median CGAP of +1.5% versus ?0.7% for those that had not. These medians are statistically different from each other at the 1% level.

(2) Economies that experienced a banking crisis between 1990 and 2007 fared better, with a median CGAP of +2.6% versus ?0.7% for those that had not.

(3) Economies with a low loan-to-deposit ratio performed better than those with a high loan-to-deposit ratio. A one-standard deviation, or 51 percentage point, decrease in this ratio saw a 2.5% improvement in GDP performance over the crisis period.

(4) Economies with a current account surplus outperformed those with a deficit. A one-standard deviation increase in the current account as a percent of GDP, equivalent to 9 percentage points, resulted in a 2.4% outperformance in real GDP over the crisis period. Trade openness does not explain cross-country variation, and there was little difference between the median performance of commodity exporters and other economies.

(5) Economies with a low level of financial openness fared better than economies with higher levels of gross foreign assets and liabilities. When dividing the sample at the median level of financial openness, the half that were the most open had a median CGAP of –0.9% versus +3.0% for the half that were the least open.

(6) Economies dependent on the US for short-term debt financing fared worse. A one-standard deviation increase in US holdings of foreign short-term debt, equivalent to 2 percentage points of GDP, resulted in 2% less growth over the crisis.

(7) Economies with lower private sector credit did significantly better. When dividing the sample at the median level of private sector credit to GDP, economies in the top half, with higher private sector credit, had a median CGAP of –0.7% versus +2.9% for in the bottom half. The regression coefficient indicates that economies with credit-to-GDP one-standard deviation above the mean underperformed by 2% over the crisis period. Lower growth in private sector credit in the lead-up to the crisis also had a statistically significant effect of a similar magnitude.

(8) Countries that had a large stock of foreign exchange reserves outperformed. When dividing the sample at the median level of this variable, economies with more than the median foreign exchange reserves had a median CGAP of +2.9% versus –0.7% for economies in the bottom half. This result is not explained by whether an economy had an exchange rate peg or not. Similarly, the framework for monetary policy does not distinguish performance across countries.

(9) Countries having a small government, both in terms of low government revenues and expenditures to GDP, outperformed. When dividing the sample at the median level of either of these two variables, economies in the bottom half had a median CGAP of +3% versus –1% for economies in the top half. The regression coefficients imply that a year-end 2007 value for either government revenues or expenditures to GDP that was one-standard deviation above the sample mean was associated with lower output growth of 1.9% over the two-year period.

Taken together, these results confirm that economies with better fundamentals were less vulnerable to the crisis. Economies that experienced a banking crisis post-1990 and took steps to increase the capitalisation of their banks had superior macroeconomic performance, suggesting that prudential measures taken in response to crises improved the robustness of the financial system. A current account balance, low levels of financial openness and lower levels and growth rates of private sector credit-to-GDP helped insulate an economy from the crisis. Given that this crisis was triggered by events in the US, it also helped if an economy was not dependent on the US for short-term funding.


You can download the full paper at: http://www.bis.org/publ/work351.htm

Possible Unintended Consequences of Basel III and Solvency II

Some IMF staff published some ideas about the financial regulatory regime in a paper titled as this post:

In today’s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration.

Excerpts:

Efforts to strengthen the quality of capital for banks and insurers through Basel III and Solvency II are well advanced. On the one hand, the Basel Committee on Banking Supervision (BCBS), the organization responsible for developing international standards for banking supervision, adopted the Basel II framework in 2004 and, in response to the financial crisis, has taken steps to strengthen it in an incremental fashion to form what is now known the Basel III framework (BCBS 2009, 2011a, 2011b, and 2011c). On the other hand, the European Commission (EC) is leading the Solvency II project, in close cooperation with the European Insurance and Occupational Pensions Authority (EIOPA), to develop harmonized standards for insurance supervision within the European Union. A directive was adopted in 2009, and work—which included a series of quantitative impact studies—has been underway to develop supporting rules.

The regional scope of application of the two accords varies. Basel is an  “accord”/agreement with no legal force but potentially global applicability, whereas Solvency II is a legal instrument that will be binding in 30 European Economic Area (EEA) countries4 (27 European Union (EU) states plus Iceland, Liechtenstein, and Norway).  However, Solvency II has also implications beyond Europe through, for example, its influence on the international standards being developed by the International Association of Insurance Supervisors (IAIS), and because external insurance groups will be more easily able to operate in the EU if their home supervisory regimes are considered equivalent.

Although these standards have much in common, differences do exist. Both take a risk-based approach to minimum capital requirements and supervision and promote the integrated use of models by institutions in managing risks and assessing solvency. However, their objectives overlap only partially. In particular, Basel III attempts to increase the overall quantum of capital and its quality as a means of protecting against bank failures, including improved quantification of risks that were poorly catered for under Basel II. However, Solvency II attempts to strengthen the quality of capital and tailor the quantity of capital within the sector as a whole. Finally, the two accords have been tailored to the business characteristics of the respective sectors, often as a result of bilateral negotiations, and shaped by the views of those involved in their development in a piecemeal manner. Accordingly, they have generated long and complex documents which define the same concepts in different ways and often deal differently with the same or similar issues.

Paper objectives: (i) to present similarities and differences among Pillar 1 requirements of the two accords; and (ii) to discuss possible unintended consequences of their implementation. In order to ensure focus in the analysis, this paper is intentionally limited to aspects related to Pillar 1 (minimum capital requirement) in the two capital accords. The paper acknowledges that there can be significant overlap in the business activities of banks and insurers. For example, consumers save with banks through deposits and with life insurers through annuity with savings products. In addition, banks and insurers invest in many of the same types of assets and they compete with one another in raising capital, both in the capital markets and within the financial conglomerates of which many are members. Due to this overlap, differences in the two accords can generate unintended consequences in the area of cost of capital, funding patterns, and interconnectedness, and promote risk/product migration across or away from the two sectors. These unintended consequences are summarized in the conclusions together with policy considerations. Finally, the paper acknowledges that other sources of arbitrage not analyzed in this paper, like differences in Pillar 2 (supervisory approach) and Pillar 3 (market discipline), as well as differences in accounting (partially discussed here) and tax treatments, could reinforce or offset the impact of differences in the capital regulatory frameworks.  required more closely to the risks of each insurer, without necessarily increasing the quantity

Conclusions (edited):

124. The nature of capital needed by banks and insurers is naturally different. [...]

125. Basel III and Solvency II both attempt to increase the quality of capital in their respective sectors, but often have different provisions for similar issues. [...]

126. Provisions that cannot be related to the intrinsic differences between the two sectors can result in unintended consequences. For instance, it is unclear whether and, if so, to what extent the cost of capital for banks is going to increase compared to the cost of capital for insurers. On the one hand (i) the lack of an explicit objective to increase capital levels under Solvency II; (ii) the more restricted geographical application of Solvency II; (iii) the less persuasive need for capital systemic risk surcharges for insurers; and (iv) the yet to be defined standards for internal models for insurers suggest that cost of capital may increase more for banks than for insurers. On the other hand, arguments in support of higher cost of capital for insurers can also be made. But in general, Pillar 1 requirements across the two sectors are too different to argue conclusively in either direction. In addition, the new liquidity standards for banks and the new credit risk charges for insurers could affect the funding patterns of banks and increase the interconnectedness of the two sectors through the sovereign balance sheet. Finally, the two accords may result in an increased use of securitization for funding purposes by both banks and insurers. Hence, these unintended consequences could translate into risk migration between or away from the two sectors. 

127. Several policy considerations stem from the aforementioned analysis:

* Basel III and Solvency II suggest a need for insurance regulators to communicate with their banking counterparts to understand the combined implications of the behavioral incentives that the two regimes may provide. This could significantly reduce the risk of unintended consequences associated with seemingly inconsistent treatment of same risks under the respective accords. This would also avoid unintentional arbitrage between internal models and the standardized approach under Solvency II, as has happened under Basel II.

* In addition, while group supervision has been strengthened, concerns about leakages still remain. This is especially a concern under Solvency II, due to its restricted geographical application and the potential use of non-equivalent jurisdictions for reinsurance. A key challenge for all groups remains what will be the approach by the EC to equivalence.

* Also, the adequacy of safety nets may need to be reviewed in the future. The likely increased use of covered bonds by banks for funding purposes would ring-fence assets so that they are unavailable to depositors and unsecured creditors in case of resolution.

* Basel III and Solvency II could further increase the need to expand the perimeter of regulation. As both Basel III and Solvency II push banks and insurers toward shorter duration and less risky business, non-regulated entities and market-based risk transfer mechanisms might evolve to fill any gap in market capacity that emerges. In addition, the likely increased use of securitization by banks and insures alike requires a strengthening in transparency and oversight of these contagion channels including securities lending-related cash collateral reinvestment programs, implementing macro-prudential measures (such as counter-cyclical margin requirements) related to securitization, repos and securities lending where appropriate, and improving market infrastructure for secured funding markets.

* Basel III and Solvency II may lead to excessive risk transfer to consumers and therefore, may require strengthening consumer protection. To the extent that the new accords increase capital and funding costs, the product mix offered by banks and insurers may change and entail additional risks for consumers. For example, excessive risk transfers could be a concern in the area of pension benefits where consumers already bear significant investment and longevity risk. Additional risk transfers to consumers may not be socially desirable from the pension policy point of view.

* Finally, there appears to be a need for empirical investigation about the magnitude of the impact of unintended consequences. There is no universally agreed set of unintended consequences and this paper is the first attempt (that we know of) to generate a set and relate it to the specifics of the Basel III and Solvency II accords. In addition, there is a general absence of empirical studies on the extent of the impact of possible unintended consequences

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The Bright and the Dark Side of Cross-Border Banking Linkages

The Bright and the Dark Side of Cross-Border Banking Linkages
Author/Editor: Cihák, Martin; Muñoz, Sònia; Scuzzarella, Ryan
August 05, 2011

Summary: When a country’s banking system becomes more linked to the global banking network, does that system get more or less prone to a banking crisis? Using model simulations and econometric estimates based on a world-wide dataset, we find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness. In particular, for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis. Our findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.

Excerpts:

One of the hallmarks of financial globalization has been a growth in cross-border linkages (exposures) among banks. On the positive side, these linkages have been associated with new funding and investment opportunities, contributing to rapid economic growth in many countries (especially in the early part of the 2000s). But the growing financial linkages also have a “dark side”: the increased cross-border interconnectedness made it easier for disruptions in one country to be transmitted to other countries and mutate into systemic problems with global implications.

The potential harmful consequences of cross-border interconnectedness for domestic banking sector stability have been illustrated rather dramatically during the recent global financial crisis, when shocks to one country’s financial system were rapidly transmitted to many others. One of the upshots of the crisis was that considerable efforts have been devoted to better measuring “systemic importance” of jurisdictions around the world. There is a growing consensus that interconnectedness, together with size, should be a key variable in assessing the systemic importance of a jurisdiction from the viewpoint of financial stability (IMF, BIS, and FSB, 2009; IMF, 2010).

This paper aims to answer the following key question: when a country’s banking system gets more linked to the global banking network, does it become more stable, or less stable? The answer to this question is obviously relevant for policymakers and regulators in individual countries. To the extent that interlinkages help banking stability, should policies and regulations be designed to promote such cross-border interconnectedness? And to the extent that interlinkages are bad for stability, should policies and regulations aim to stop or, at least limit, the growth of such interlinkages?

We examine the above key question in two ways: First, we analyze it conceptually, using simulations. Second, we examine it empirically, based on a range of econometric approaches—parametric as well as non-parametric—that combine data on banking crises around the world with a comprehensive data set on cross-border banking linkages.  To preview the main results, our short answer to the above question is: it depends on the degree of interconnectedness. The relationship between the likelihood of a banking crisis in a country and the degree of integration of that country’s banking sector into the global banking network is far from trivial. We find that in a country whose banking sector has relatively few linkages to other banking sectors, increased cross-border linkages tend to improve that system’s stability, controlling for other factors. In other words, within a certain range, connections serve as a shock-absorber. The system acts as a mutual insurance device with disturbances dispersed and dissipated. Connectivity engenders robustness. Risk-sharing – diversification – prevails. But at some point—which we estimate to be at about the 95th percentile of the distribution of countries in terms of interconnectedness—increases in crossborder links begin to have detrimental effects on domestic banking sector stability. At a yet higher point, when a country’s network of interlinkages becomes almost complete, the probability of a crisis goes down again.

One of the novel insights of our paper is that it is important to distinguish whether the crossborder interlinkages are stemming primarily from banks’ asset side or from their liabilities side. We introduce measures that distinguish those two types of interconnectedness (which we call “downstream” and “upstream” interconnectedness), and we find that the impact of changes in interconnectedness on banking system fragility are more significant for liabilities-side (“upstream”) interconnectedness than for asset-side (“downstream”) interconnectedness. 

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CBO's 2011 Long-Term Projections for Social Security - Additional Information

You can request the PDF version of it and the full report of the same title as above.

Democratic Accountability, Deficit Bias, and Independent Fiscal Agencies

An IMF working paper by Xavier Debrun "illustrates key features of a model of independent fiscal agencies, and in particular the need (1) to incorporate the intrinsically political nature of fiscal policy - which precludes credible delegation of instruments to unelected decisionmakers - and (2) to focus on characterizing "commitment technologies" likely to credibly increase fiscal discipline."


Introduction:

The fiscal legacy of the economic and financial crisis of 2008-09 brought to the fore serious concerns about the capacity of governments to maintain sustainable public finances. Several vulnerable countries came under severe market pressure, while government bond yields in countries considered so far as safe havens also started rising. Of particular concern is the fact that the large fiscal deficits and ballooning government debts caused by the crisis came on top of already substantial inherited liabilities and ahead of intensifying demographic pressures on entitlement spending. These trends are on a collision course with the intertemporal budget constraint, making ambitious and sustained consolidations unavoidable.  The challenge is formidable and markets are on the watch, pushing governments to look for ways to firm up the credibility of their commitments to sound public finances.

While formal fiscal policy rules have long been used to contain tendencies toward fiscal profligacy (e.g. Fabrizio and Mody, 2006; and Debrun and others, 2008), it has been argued that many of the limitations and failures associated with numerical rules—most notably their inflexibility in the face of unusual circumstances—could be overcome by establishing nonpartisan agencies. Through independent analysis, assessments, and forecasts, such bodies could enhance policymakers’ incentives to deliver sustainable policies.

Despite a fairly active public debate, no full-fledged theory has either established the desirability of such institutions or derived first-order principles likely to secure their effectiveness. In a sense, this is hardly surprising, as one can only theorize about a welldefined object. In reality, the literature on independent fiscal agencies covers a wide array of specific (and sometimes outlandish) academic proposals as well as a number of existing institutions, including the Central Planning Bureau in the Netherlands, the High Council of Finance in Belgium, and the more recent Swedish Fiscal Policy Council and United Kingdom’s Office of Budget Responsibility. At best, existing papers propose a taxonomy (Debrun and others, 2009; Calmfors, 2010), but there currently is no consensus on the tasks these agencies should be assigned, what institutional form they should take, and on whether they should complement or instead substitute for a rules-based framework.

Expositions of the rationale for non-partisan agencies nevertheless share a common thread, the canonical illustration of which is Wyplosz (2005). First, there is a review of the many reasons why fiscal policy tends to systematically deviate from a socially optimal solution, with often an emphasis on common pool problems, short-termism, and time-inconsistency.  Second, the author(s) lament(s) the ineffectiveness of fiscal policy rules. It is argued that the main problem with the latter is that the simplicity required for their smooth operation limits their appropriateness outside normal circumstances, undermining their credibility as soon as uncommon conditions prevail. For example, deficit ceilings fail to trigger discipline in good times—when compliance is more likely to result from automatic stabilizers rather than conscious actions—but bind in bad times, forcing undesirable procyclical contractions. Third, the author(s) call(s) on our sense of déjà vu to draw a parallel with the case for central bank independence, which is also based on the idea of an expansive bias affecting unconstrained discretionary policies, and on the manifest failure of rigid rules (e.g. caps on the growth of certain monetary aggregates) to address that bias.

The aim of this paper is to assess the theoretical framework anchoring the policy debate on politically independent fiscal agencies. After setting-up a basic model of fiscal policy (Section II), I show that the parallel with independent central banks is theoretically flawed because most models of fiscal bias cannot demonstrate why elected officials would want to establish such institutions in the first place (Section III). In addition, the idea of fiscal delegation is misleading because the very fear of delegating may motivate principled, yet baseless opposition from politicians. I then suggest—still using simple formal illustrations— that any full-fledged theory of fiscal agencies should (1) incorporate the intrinsically political nature of fiscal policy and the infeasibility of delegating policy instruments to unelected officials and (2) focus on characterizing mechanisms that encourage ex-post compliance with ex-ante commitments (“commitment technologies”) to fiscal discipline (Section IV). Some practical conclusions are drawn in Section V.

Concluding remarks:

The paper discussed from a theoretical perspective the role of independent fiscal agencies in enhancing fiscal discipline. The key point is that the effectiveness of such institutions depends on their capacity to deal with the root cause of deficit bias, including informational asymmetries between voters—the only legitimate principal in the policy game—and politicians. A number of practical implications emerge:

1. The delegation of fiscal policy prerogatives to unelected officials is unworkable from a positive perspective, reinforcing the normative argument against fiscal delegation emanating from Alesina and Tabellini (2007). The model indeed illustrates that the very decision to delegate macro-relevant dimensions of fiscal policy—such as the level of the deficit, as suggested by Wyplosz (2005)—simply violates participation constraints of elected decisionmakers.

2. An independent fiscal agency is more likely to credibly enhance fiscal discipline if a broad mandate allows it to address the various manifestations of the deficit bias (from creative accounting to masking policy slippages or biasing revenue forecasts). This includes having the discretion to make normative assessments of the fiscal stance—albeit within the boundaries of elected politician’s own ex-ante commitments—in the light of cyclical conditions, public debt dynamics, and risks to public sector’s long-term solvency.

3. The agency’s effectiveness is likely to be greater if it receives specific instruments to trigger a public debate where elected officials would have to publicly explain slippages (with respect to ex-ante targets) deemed inappropriate by the agency. By becoming a reliable source on the overall quality of fiscal policy, the agency can help voters identify ex-post deviations related to “bad policies” (as opposed to “bad luck”) and hold policymakers accountable. This is a task that rules-based fiscal frameworks—bound to remain simple to be operational—cannot by themselves deliver. Indeed, mere deviations from preset benchmarks do not always signal policy mistakes.

4. As politicians may be reluctant to bear the short-term costs of deviations from ex-ante commitments, an effective fiscal agency ideally requires a degree of political independence enshrined in primary legislation (Constitutional or framework law) and guaranteed by ringfenced, multi-year budget appropriations or rules-based extra-budgetary financing (e.g.  through a fixed transfer from the central bank) commensurate with the agency’s tasks.

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Bill Gates: "We haven't chosen to get behind [vouchers] in a big way [...] because the negativity about them is very, very high"

Was the $5 Billion Worth It? By Jason Riley
A decade into his record-breaking education philanthropy, Bill Gates talks teachers, charters—and regrets.
WSJ, Jul 23, 2011
http://online.wsj.com/article/SB10001424053111903554904576461571362279948.html

Seattle

'It's hard to improve public education—that's clear. As Warren Buffett would say, if you're picking stocks, you wouldn't pick this one." Ten years into his record-breaking philanthropic push for school reform, Bill Gates is sober—and willing to admit some missteps.

"It's been about a decade of learning," says the Microsoft co-founder whose Bill and Melinda Gates Foundation is now the nation's richest charity. Its $34 billion in assets is more than the next three largest foundations (Ford, Getty and Robert Wood Johnson) combined, and in 2009 it handed out $3 billion, or $2 billion more than any other donor. Since 2000, the foundation has poured some $5 billion into education grants and scholarships.

Seated in his office at the new Gates Foundation headquarters located hard by the Emerald City's iconic Space Needle, Mr. Gates says that education isn't only a civil-rights issue but also "an equity issue and an economic issue. . . . It's so primary. In inner-city, low-income communities of color, there's such a high correlation in terms of educational quality and success."

One of the foundation's main initial interests was schools with fewer students. In 2004 it announced that it would spend $100 million to open 20 small high schools in San Diego, Denver, New York City and elsewhere. Such schools, says Mr. Gates, were designed to—and did—promote less acting up in the classroom, better attendance and closer interaction with adults.

"But the overall impact of the intervention, particularly the measure we care most about—whether you go to college—it didn't move the needle much," he says. "Maybe 10% more kids, but it wasn't dramatic. . . . We didn't see a path to having a big impact, so we did a mea culpa on that." Still, he adds, "we think small schools were a better deal for the kids who went to them."

The reality is that the Gates Foundation met the same resistance that other sizeable philanthropic efforts have encountered while trying to transform dysfunctional urban school systems run by powerful labor unions and a top-down government monopoly provider.

In the 1970s, the Ford, Carnegie and Rockefeller foundations, among others, pushed education "equity" lawsuits in California, New Jersey, Texas and elsewhere that led to enormous increases in state expenditures for low-income students. In 1993, the publishing mogul Walter Annenberg, hoping to "startle" educators and policy makers into action, gave a record $500 million to nine large city school systems. Such efforts made headlines but not much of a difference in closing the achievement gap.

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Martin Kozlowski
 .Asked to critique these endeavors, Mr. Gates demurs: "I applaud people for coming into this space, but unfortunately it hasn't led to significant improvements." He also warns against overestimating the potential power of philanthropy. "It's worth remembering that $600 billion a year is spent by various government entities on education, and all the philanthropy that's ever been spent on this space is not going to add up to $10 billion. So it's truly a rounding error."

This understanding of just how little influence seemingly large donations can have has led the foundation to rethink its focus in recent years. Instead of trying to buy systemic reform with school-level investments, a new goal is to leverage private money in a way that redirects how public education dollars are spent.

"I bring a bias to this," says Mr. Gates. "I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts." Compared with R&D spending in the pharmaceutical or information-technology sectors, he says, next to nothing is spent on education research. "That's partly because of the problem of who would do it. Who thinks of it as their business? The 50 states don't think of it that way, and schools of education are not about research. So we come into this thinking that we should fund the research."


Of late, the foundation has been working on a personnel system that can reliably measure teacher effectiveness. Teachers have long been shown to influence students' education more than any other school factor, including class size and per-pupil spending. So the objective is to determine scientifically what a good instructor does.

"We all know that there are these exemplars who can take the toughest students, and they'll teach them two-and-a-half years of math in a single year," he says. "Well, I'm enough of a scientist to want to say, 'What is it about a great teacher? Is it their ability to calm down the classroom or to make the subject interesting? Do they give good problems and understand confusion? Are they good with kids who are behind? Are they good with kids who are ahead?'

"I watched the movies. I saw 'To Sir, With Love,'" he chuckles, recounting the 1967 classic in which Sidney Poitier plays an idealistic teacher who wins over students at a roughhouse London school. "But they didn't really explain what he was doing right. I can't create a personnel system where I say, 'Go watch this movie and be like him.'"

Instead, the Gates Foundation's five-year, $335-million project examines whether aspects of effective teaching—classroom management, clear objectives, diagnosing and correcting common student errors—can be systematically measured. The effort involves collecting and studying videos of more than 13,000 lessons taught by 3,000 elementary school teachers in seven urban school districts.

"We're taking these tapes and we're looking at how quickly a class gets focused on the subject, how engaged the kids are, who's wiggling their feet, who's looking away," says Mr. Gates. The researchers are also asking students what works in the classroom and trying to determine the usefulness of their feedback.

Mr. Gates hopes that the project earns buy-in from teachers, which he describes as key to long-term reform. "Our dream is that in the sample districts, a high percentage of the teachers determine that this made them better at their jobs." He's aware, though, that he'll have a tough sell with teachers unions, which give lip service to more-stringent teacher evaluations but prefer existing pay and promotion schemes based on seniority—even though they often end up matching the least experienced teachers with the most challenging students.

Teachers unions can be counted on "to stick up for the status quo," he says, but he believes they can be nudged in the right direction. "It's kind of scary for them because what we're saying is that some of these people shouldn't be teachers. So, does the club stand for sticking up for its least capable member or does it stand for excellence in education? We'll, it kind of stands for both."

Asked if the National Education Association and the American Federation of Teachers have any incentive to back school reforms that help kids but also diminish union power, Mr. Gates responds by questioning the scope of that power. "We have heavy union states and heavy right-to-work states, and the educational achievement of K-12 students is not at all predicted by how strong the union rules are," he says. "If I saw that [right-to-work states like] Texas and Florida were running a great K-12 system, but [heavy union states like] New York and Massachusetts have really messed this up, then I could draw a correlation and say it's either got to be the union—or the weather."

Mr. Gates's foundation strongly supports a uniform core curriculum for schools. "It's ludicrous to think that multiplication in Alabama and multiplication in New York are really different," he says. He also sees common standards as a money-saver at a time when many states are facing budget shortfalls. "In terms of mathematics textbooks, why can't you have the scale of a national market? Right now, we have a Texas textbook that's different from a California textbook that's different from a Massachusetts textbook. That's very expensive."

A national core curriculum, detractors say, could force states with superior standards, like Massachusetts, to dumb down their systems. And even if good common standards could be established, how would they improve going forward if our 50-state laboratory is no longer in operation?

Mr. Gates responds to that by saying there's no need to sacrifice excellence for equity. "Behind this core curriculum are some very deep insights. American textbooks were twice as thick as Asian textbooks. In American math classes, we teach a lot of concepts poorly over many years. In the Asian systems they teach you very few concepts very well over a few years." Nor does he see the need for competition among state standards. "This is like having a common electrical system. It just makes sense to me."

On the fraught issue of school choice, his foundation has been a strong advocate of charter schools, and Mr. Gates is particularly fond of the KIPP charter network and its focus on serving inner-city neighborhoods. "Whenever you get depressed about giving money in this area," he volunteers, "you can spend a day in a KIPP school and know that they are spending less money than the dropout factory down the road."

Mr. Gates is less enamored of school vouchers. "Some in the Walton family"—of Wal-Mart fame—"have been very big on vouchers," he begins. "And honestly, if we thought there would be broad acceptance in some locales and long-term commitment to do them, they have some very positive characteristics."

He praises the private school model for its efficiency vis-à-vis traditional public schools, noting that the "parochial school system, per dollar spent, is an excellent school system." But the politics, he says, are just too tough right now. "We haven't chosen to get behind [vouchers] in a big way, as we have with personnel systems or charters, because the negativity about them is very, very high."


It's a response that in some ways encapsulates the Gates Foundation's approach to education reform—more evolution, less disruption. It attempts to do as much good as possible without upsetting too many players. You can quibble with Mr. Gates about that strategy. You can second-guess him. You can even offer free advice. Or you can shake his hand, thank him for his time and remember that it's his money.


Mr. Riley is a member of the Journal's editorial board.

Basel Committee: Assessment methodology and the additional loss absorbency requirement for global systemically important banks

Assessment methodology and the additional loss absorbency requirement for global systemically important banks - consultative document issued by the Basel Committee
July 19, 2011

http://www.bis.org/press/p110719.htm

The Basel Committee on Banking Supervision issued on July 19, 2011 a consultative document on Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

At its June 25, 2011 meeting, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee, agreed on the consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required loss absorbency and the arrangements by which they will be phased in.

Following the agreement, the GHOS submitted this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. The package including this consultative document was endorsed for publication at the FSB Plenary meeting on July 18, 2011.

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.

Based on the current results of applying the assessment methodology, 28 banks would be subject to the additional loss absorbency requirement due to their global systemic importance. It should be noted that this number will likely evolve over time as banks change their behaviour in response to the incentives of the G-SIB framework. Moreover, the Basel Committee will address any outstanding data issues and re-run the proposed assessment methodology using updated data well in advance of the implementation date.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% loss absorbency would be applied in such circumstances.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between Jan 1, 2016 and year end 2018 becoming fully effective on Jan 1, 2019.

Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the rationale for the policy measures proposed today is to deal with the cross-border negative externalities created by global systemically important banks which current regulatory policies do not fully address. The proposed measures will enhance the going-concern loss absorbency of global systemically important banks and reduce the probability of their failure. Along with the measures announced today by the Financial Stability Board, they will contribute to a safer and sounder banking and financial system".

Is Fiscal Policy Procyclical in Developing Oil-Producing Countries?

A new IMF working paper by Nese Erbil "examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures - government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group."

Excerpts (notes excluded):

Both the neoclassical and Keynesian theories support the idea that effective fiscal policy should smooth the volatility of output during the business cycle. Barro’s (1973) ―tax-smoothing‖ hypothesis of optimal fiscal policy suggests that, for a given path of government expenditure, tax rates should be held constant over the business cycle, and the budget surplus should move in a procyclical fashion. According to the Keynesian approach, however, if the economy is in recession, policy should increase government expenditure and lower taxes to help the economy out of the recession. During economic booms, the government should save the surpluses that emerge from the operation of automatic stabilizers and, if necessary, go further with discretionary tax increases or spending cuts. As a result, fiscal policies are expected to follow countercyclical patterns through automatic stabilizers and discretionary channels. In other words, one would expect a positive correlation between changes in output and changes in the fiscal balance or a negative correlation between changes in output and changes in government expenditure.

However, empirical studies show that fiscal policies are procyclical in developing countries and in OPCs.5 They increase spending with an increase in oil revenue during an oil price boom. They are forced to reduce spending because of a revenue decline as a result of a drop in oil prices. Since, in general, these countries are not able to accumulate savings in years with high oil revenues, they can only finance deficits by cutting expenditure during revenue shortfalls. Fouad and others (2007), Abdih and others (2010), and Villafuerte and Lopez-Murphy (2010) find that oil-producing countries followed procyclical fiscal policies during the recent oil price cycle. Baldini (2005) and De Cima (2003) also present evidence for the procyclicality of fiscal policies in two oil-producing countries, Venezuela and Mexico. More recent studies, e.g. Ilzetzki and Vegh (2008), find, using instrumental variable regression, strong evidence of procyclical fiscal policy in developing countries.

Two broad arguments that have been proposed as an explanation for procyclical policies in developing counties also apply to OPCs: constraints on financing (or limited access to credit markets) and factors related to the structure of the economy ( the budget, political, power, and social structure, and weak institutions). In general, these factors are presented separately but they go together and are likely to reinforce each other. For example, weak institutions, the budget structure, or a corrupt government may hinder prudent fiscal policies, which may, in turn, affect fiscal sustainability and creditworthiness by amplifying the financing constraints.

Liquidity and borrowing constraints emerge when a developing country needs financing the most--during a downturn--and that is when it is least likely to be able to obtain it. Many countries do not have significant foreign assets or developed domestic financial markets to raise funds. When these countries face large terms of trade shocks (i.e., a sharp fall in oil prices in the case of OPCs), investors may lose confidence and be less likely to lend, because they fear that the lack of policy credibility and discipline may force the government to run up large budget deficits and to default.6 Governments in this situation will also experience recurring credit constraints in world capital markets (―sudden stops,‖ as explained in Calvo and Reinhart (2000)), which hamper their ability to conduct countercyclical policies.

Oil stabilization funds have been increasingly used by OPCs as an instrument to cope with oil revenue volatility. These funds are aimed at stabilizing budgetary revenues: when oil revenues are high, some portion of the revenue would be channeled to the stabilization fund; when oil revenues are low, the stabilization fund would finance the shortfall. However, the creation of such funds is found to have no impact on the relationship between oil export earnings and government expenditure in countries where no sound and transparent fiscal and macroeconomic policies were implemented.7 Moreover, some oil funds have operated outside existing budget systems and are often accountable to only a few political appointees. This makes such funds especially susceptible to abuse and political interference. Therefore, stabilization funds should not be regarded as a substitute for sound fiscal management.

The other argument proposed to explain the difficulty in implementing countercyclical policy focuses on procyclical government spending due to three aspects of the economy and the government: the budget structure, the weak political structure and institutions, and corruption in government.

First, developing countries run procyclical fiscal policies because of their budget structure. These countries have a few automatic stabilizers built into their budgets. As a result, government spending in developing and emerging countries displays less of a countercyclical pattern than in industrial countries. For example, Gavin and Perotti (1997) note that Latin American countries spend much less on transfers and subsidies than do richer OECD economies (24 percent of total government spending, compared with 42 percent in the industrial countries). Furthermore, most developing countries and OPCs cannot raise revenue effectively through taxes since they usually suffer from inefficient tax collection systems, owing to the low level of compliance with tax laws, insufficient political commitment, and a lack of capacity, expertise, and resources.8 Additionally, non-oil tax bases in these countries are in general very low.9

Second, weak institutions and political structure encourage multiple powerful groups in a society to attempt to grab a greater share of national wealth by demanding higher public spending on their behalf. This behavior, called the ―voracity effect‖ by Tornell and Lane (1999), results in fiscal procyclicality arising from common pool problems, whereby a positive shock to income leads to a more than proportional increase in public spending, even if the shock is expected to be temporary. This is discussed extensively in ―resource curse‖ literature as a reason for low economic growth in resource-rich countries.10 Moreover, fiscal policies are more intense in countries with political systems having multiple fiscal veto points and higher output volatility (Stein, Talvi, and Grisanti, 1998;and Talvi and Végh, 2000). Similarly, Lane (2003) and Fatas and Mihov (2001) find that countries with power dispersion are likely to experience volatile output and procyclical fiscal behavior.

Lastly, Alesina and Tabellini (2005) argue that a more corrupt government displays more procyclical fiscal policies as voters, who do not trust the government, demand higher utility when they see aggregate output rising. This behavior would be more prevalent in democracies since a corrupt government is accountable to the voters, whereas, in a dictatorship, the government would not be accountable and, even if corruption were widespread, voters could not influence fiscal policy. Alesina and Tabellini conclude that corrupt governments in democracies, rather than credit market imperfections, are the underlying cause of procyclical fiscal policy.


[...]


The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

Despite their many differences, all the OPCs face volatile and unpredictable oil revenues, a situation that makes fiscal management challenging. For this reason, it is imperative for them to formulate effective countercyclical fiscal policies by which they can smooth government expenditure, decouple it from the volatile oil revenues, and prevent boom-and-bust cycles. Breaking away from a procyclical fiscal policy will enable them to sustain long-term growth and keep the safety net that the poor need. Sound fiscal policies and discipline require strong institutions, a higher-level bureaucracy, and more transparency. Strong institutions and transparency would also help reduce the ―voracity effect,‖ which, in turn, would facilitate the accumulation of financial assets and build up confidence among investors to raise funds when needed.

Order a printed copy here (broken link as of today): http://www.imfbookstore.org/IMFORG/WPIEA2011171

You can also request a PDF from us for free.

IMF working paper: Iran — The Chronicles of the Subsidy Reform

A recent IMF Working Paper by staff of the Middle East and Central Asia Department, "Iran — The Chronicles of the Subsidy Reform," [1] analyses the December 2010 changes in subsidies of domestic energy and agricultural prices, which increased about 20 times, making it the first major oil-exporting country to reduce substantially implicit energy subsidies.

Their paper reviews the economic and technical issues involved in the planning and early implementation of the reform, including the transfers to households and the public relations campaign that were critical to the success of the reform. It also looks at the reform from a chronological standpoint, in particular in the final phases of the preparation. The paper concludes by an overview of the main challenges for the second phase of the reform.

Buy a print copy at http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2011167 or request a PDF version from us for free.

Excerpts:

On Saturday, December 18, 2010, at 9:00 p.m. Tehran time, speaking in a televised “conversation with the nation”, President Ahmadinejad announced the start of what he termed the most sweeping economic “surgery” in Iran’s modern history. Just after midnight on December 19, Iranian media began releasing announcements detailing the new price structure for liquid fuels. Within twenty-four hours, new natural gas, electricity, and water tariffs were published, and allowable ceilings for the increase in taxi and public transport tariffs followed. At the time, close to 80 percent of Iran’s population was granted unrestricted access to compensatory payments that had been deposited in specially-created bank accounts starting in October 2010.

The reform, officially referred to as Targeted Subsidies Reform, made Iran the first major energy producing and exporting country to cut drastically massive indirect subsidies to energy products and replace them with across the board energy dividend transfers to the population. It is estimated that the price increases removed close to US$50–US$60 billion dollars in annual product subsidies. By December 2011, in the first 12 months following the price increase, Iranian households will have received at least US$30 billion in freely usable cash, and another $10–$15 billion will have been advanced to enterprises to finance investment in restructuring aimed at reducing energy intensity.

[...]

Although oil and gas production has accounted for an increasingly smaller share of real GDP, oil and gas revenues remain the main source of foreign exchange earnings and fiscal revenues. The share of oil in real GDP fell from an average of 40 percent of real GDP in the 1960s to about 10½ percent in the last decade, reflecting average annual non-oil GDP growth rate of 5.7 percent compared to only 4.4 percent for oil and gas GDP. Oil and gas receipts accounted for about 72 percent of export revenues in the last decade, despite rapid non-oil export growth.  Oil and gas revenues also account for 65 percent of fiscal revenues, and are likely to remain the main source of financing for development projects in the foreseeable future notwithstanding recent efforts to diversify fiscal revenues.

Iran’s high dependence on oil export revenues has had a profound impact on its business cycle. In the most recent business cycle during 2002-2008, fiscal spending and credit growth increased at the same time as export revenues and oil prices, resulting in an overheating of the economy and a surge in inflation. The subsequent tighter monetary and fiscal policies coincided with the sharp fall in oil exports caused by the international recession of 2008-2009. As a result, inflation and output declined sharply.

Domestic energy prices have historically been set administratively in Iran, as in the majority of oil exporting countries. They were set at a level high enough to cover production costs and have been changed only occasionally. This worked well when international oil prices were relatively stable and low, and close to production costs. However, when international prices began to rise after 2002, low domestic energy prices became increasingly out of line with the market value of oil. In addition, high domestic rates of inflation and subsequent exchange rate depreciations contributed to further erode domestic energy prices vis-à-vis their international benchmarks. The March 2002 unification of exchange rates and the resulting rial depreciation also accentuated a growing disparity between domestic and international energy prices.

Increasingly cheaper energy stimulated demand, making Iran the country with the highest level of energy subsidy. Not surprisingly, domestic energy use and energy intensity in Iran, as in many other energy producing countries, increased rapidly. Cheap domestic energy prices led to a rapid increase in domestic energy consumption. As a result, Iran became one of the most energy-intensive economies in the world. The high domestic absorption of crude oil distillates, natural gas, and electricity reduced the availability of these energy products for the export market. Iranian oil energy companies were also increasingly starved of funds needed for investment since domestic energy prices were set at barely cost recovery levels. Environmental pollution and its impact on human health, as well as the time lost due to traffic congestion on Iranian roads provided additional urgency for the reform. Not surprisingly, by 2007 some analysts started questioning not only Iran’s plans to increase its oil production capacity, but also its ability to stop a decline in oil production and exports.


[...]

The Iranian authorities were clear from the outset that the main reform objective was to reduce waste and rationalize consumption. By compensating households for the energy price increases, most consumers would be better off because the higher energy price would discourage some marginal gasoline consumption, while the cash compensation would allow consumers to buy more other goods and services.

[...]

The reform would also improve social equity in the distribution of Iran’s hydrocarbon wealth. For the poor who benefited little for cheap domestic energy price, the compensation would represent a large share of their income, lifting virtually every Iranian out of poverty.  This gave the government a powerful public relations and moral argument in support of the reform.

The likely large substitution effect triggered by large price increases could provide a significant stimulus to Iran’s domestic production and further diversification efforts, particularly given the slow growth in recent years, and relatively high, double-digit unemployment. The distribution of about $30 billion in annual compensatory payments directly to the population would support domestic demand and nonenergy sector growth.  The reform was not expected to contribute to fiscal consolidation. The reform legislation, and the political debate that preceded it, ruled out using the reduction of energy subsidies to improve the country’s fiscal balance. To the contrary, Iranian reforms, including the privatization program launched in 2006, aimed at reducing the size and the role of the public sector in the economy. However, potential large savings in domestic energy use could make significant quantities of crude oil and refined products available for exports (Box 2). The revenue from such exports could support a virtuous cycle of investment in the energy sector that would add production and refining capacity and further increase exports.


References

[1]  Dominique Guillaume, Roman Zytek, and Mohammad Reza Farzin: Iran — The Chronicles of the Subsidy Reform. July 2011.

Statements by the Parti communiste des ouvriers tunisiens/حزب العمال الشيوعي التونسي‎

Statements by the Parti communiste des ouvriers tunisiens/حزب العمال الشيوعي التونسي‎
http://themoornextdoor.wordpress.com/2011/07/13/studies-i-pcot-on-foreign-affairs-i/

1. Libya

PCOT: “Statement on the military intervention in Libya”
LINK: http://www.albadil.org/spip.php?article3741
DATE: 20 March, 2011
A number of imperialist countries (France, the United States, etc.) have launched air and missile attacks on sites said to belong to Mu’amar al-Qadhafi. These attacks came after the decision of the “Security Council,” which gave the green light to initiate military operations in Libya.
The Tunisian Communist Workers’ Party is concerned that the purpose of this intervention is not the protection of the Libyan people from the oppression of Qadhafi, but instead the occupation of the country, to subjugate its people, plunder its resources and use its territory to establish military bases for the control of North Africa in order to ensure the security of the Zionist Entity and safeguard the interests of the imperialist powers in the region. France, the United States and all western countries which have launched attacks on Libya today have no interest in the triumph of the popular revolts blowing down Arab regimes, corruption and unemployment, things which long found support and backing from the colonial powers, so today we see they are quick to take the necessary precautions so as not to let things get out of hand.
The brotherly Libyan people will be able to overthrow Qadhafi, depending on their capabilities and the support of other Arab peoples (and all the revolutionary forces of the world), and are not in need foreign intervention which will only bring them more killing and destruction, as well as violations of their sovereignty and the occupation of their land and the plunder of their resources.
The Tunisian Communist Workers’ Party expresses its rejection of the military intervention and calls for their immediate halt. It also calls on all anti-imperialist forces in the Arab and Islamic world at large to move and calls on all the peoples of the world to come out in marches and demonstrations and engage in all forms of struggle in order to stop this interference.
Long live the struggle of Arab peoples for freedom, dignity and the fall of the Arab regimes and corrupt puppets. Down with the imperialist enemies of the people and the protectors of the Zionist Entity.
– The Tunisian Communist Workers’ Party, 20 March, 2011.

2. Palestine

Tunisian Union of Communist Youth: “On the Anniversary of Land Day: Let the Revolution of the Arab Peoples be a step in the direction of the liberation of Palestine”
LINK: http://www.albadil.org/spip.php?article3754
DATE: 30 March, 2011
Let the Palestinian people be revived today, the thirty-fifth anniversary of Land Day under the obnoxious Zionist occupation and under political division, which has bedeviled Palestinian ranks and prevented success in stopping the gushing of settlements, which seek to obliterate the Arab identity of Palestinians towns and villages under the mantle of “more land and fewer Arabs”. The celebration of this anniversary in these particular circumstances mark national resistance and are a reminder of the persistence of resistance in the face of this racist [regime] which does not hesitate to use the dirtiest and most arrogant methods to swallow up the Palestinian territories. There is no doubt that the return of sovereignty to the Arab peoples, especially the Tunisians, will provide strong support for the Palestinian cause after the removal Ben Ali and Mubarak, who dedicated themselves in service of the occupation and forced their people to remain silent and easily suppressed demonstrations and campaigns [against Israel] in obedience to the racist entity to provide a good “neighborhood” and faith.
The Tunisian Union of Communist Youth salutes the steadfastness of the Palestinian people, reiterates its absolute support as it has since its establishment as an advanced and progressive site for the Palestinian national cause and:

• That the unity of the Palestinian ranks, nation, resistance, democracy best answers and expresses the demands of the Palestinian reality, especially with the failure of successive governments to put an end to the barbaric and racist policy back up by the United States of America and employed by the regimes of the Arab countries;
• That the Tunisian people, on the day after their glorious revolution bear more responsibility on the basis of national and humanitarian bonds to provide support for the brotherly Palestinian people in regaining their usurped land and their right to impose their sovereignty in the context of a progressive and democratic state.

Thus it emphasizes breaking all forms of normalization with the Zionist enemy and annulling all secret treaties which the previous regime spent its time on.
It calls for all the activities of the community of activists, parties, organizations, associations and personalities toward the activation of solidarity with and to publicize the Palestinian cause and to celebrate this anniversary in a manner fitting of its symbolism.
Long live the Palestinian people.
Downfall to Zionism, imperialism and reactionary Arabs.
Long live the Tunisian Revolution supporting the brotherly Palestinian people.
Immortality to the martyrs and victory to the resistance. 
– Tunisian Union of Communist Youth. Tunis, 30 March, 2011.

3. Syria

Article by Samir Hammouda: “Syria: The Pending Dictatorship…”
LINK: http://www.albadil.org/spip.php?article3755
DATE: 1 April, 2011
The Arab masses continue to make history. Current events in Syria today developed from ideological struggle and political fact. The most notorious dictatorships, including those hide by painting themselves as “nationalist” and “resisting Zionism” also downfall by means of mass vibrations.
From its start till now the popular uprising in Syria proceeds with more than 150 martyrs and hundreds of wounded after only a few days. The martyrs and the wounded are not the result of Zionist bombing or terrorism. Instead they come from the bloody repression of the “nationalist” Syrian regime.
In that country, as in Tunisia, Egypt, Yemen, Bahrain, Algeria, Morocco and Libya events are in essence repeating by similar ways, despite different specificities in this or that country, for be sure that the catastrophe is the Arab reality and true despotism for all Arab regimes.
The uprising of the masses in Syria is the result of the same underlying social, economic and political causes which shook the pillars of dictatorship in the rest of the Arab world. Syria is also a country of poverty, unemployment, regional disparities and is penetrated by liberal capitalism. In Syria, too, there is a total absence of freedoms, suppression of the opposition for the sake of maintaining sectarianism and smashing people’s most basic political, economic and cultural rights. In Syria corruption is rampant and the minority of the local bourgeoisie holds a monopoly on the country’s economy and wealth and the control of the political police has a hold on the judiciary and the throats of the citizens.
The policies and words of the Syrian regime in the face of popular protests and its suppression and distortions are of the same version know  to Arab peoples under the despotic regimes in Tunisia, Egypt, Yemen and other countries. If Bashar al-As’ad accused his opponents of being controlled by outsiders and the public of a tendency to drift along according to foreign schemes hostile to the country’s interests this is not the best political speech since Ben Ali and Mubarak or Qadhafi and Ali Saleh. All dictatorships, whatever their ideological dress — “nationalist” or “socialist” or “Islamic” — resort to the same outdated and false arguments to justify tyranny and the depravation of the people’s liberties as is necessary for political and social emancipation. While the Syrian regime boasts of thousands at the demonstrations of its supporters its security and military apparatus massacres and tortures its opponents. But history does not run out of lessons. Yushenko was boasting thousands at his crowds before his downfall, Ben Ali bragged of two million members in his own party a few days before fleeing.
But the popular uprising in Syria increases the taste for blood and for politics and other dimensions at the local level as in the rest of the Arab world. The Syrian regime is the last in a series of regimes that embraced the Ba’th project on the basis of Arab nationalist aspirations for unity, socialism and liberation from colonialism and Zionism. In recent decades, the Syrian regimes support has been an important component in Arab power, not only on the nationalist file, but also on the leftist and Islamist ones. This was done under the banner of “nationalism” and claiming that the Syrian regime is part of the nationalist forces that stand on the front lines of confrontation with the Zionist Entity.
We have stood on many occasions against political forces urging us to overlook the dictatorial approach of this regime on the pretext of standing against the Zionist Entity and we consider this approach opportunistic, harmful and against the development of the revolutionary movement and combativeness in the Arab world and national liberation. Patriotism and resistance to colonialism and to Zionist and imperialist plans facing us cannot be in contradiction with the people’s enjoyment of their full democratic and political freedoms, or their condition at the forefront. It is true that political freedoms alone are not sufficient to realization of national aims, but the sovereignty of the Arab peoples and the revival of the Arab world and unity in the face of imperialism will not be achieved without them. Why would democracy for the Arab peoples not antagonize the Zionist Entity if this were not a threat to its very existence?! And why has America supported and still support the tyranny of Arab regimes if these do not serve its interests and objectives?! And how can our peoples achieve unity and finally dispose of the poisons of religious conflict, sectarianism, tribalism and local infighting among their parties without citizenship and equality without democracy and the triumph of citizenship and equality without conquering discrimination based on classism, sectarianism, religion, gender or ideology?!
The failure of the Syrian regime once again confirms the failure of authoritarian regimes in achieving national goals: unity and socialism and liberation from colonialism and Zionism. If bourgeois democracy is the gateway to the dismantlement of Arab dictatorships and despotic regimes then the Arab people are not doomed to merely copy them and are instead able to overcome their shortcomings and negative aspects toward  broader and greater democracy, democracy responsive to the grassroots, national political ambitions and economic and cultural rights.
No one today can predict how events in Syria will evolve, nor the depth or extent of the preparedness of the Syrian people to topple Bashar al-As’ad yet it is certain the Syrian regime will not respond to calls for political reform for it is not in its character or interest of a single Arab dictatorship to respond to the people’s demands for freedom. The regime that represses its people and harasses its opponents does have a future or a way out of crisis and collapses by its own internal rot, the laws of its own design and by the advancement of the masses, sooner or later.
– Samir Hammouda, 1 April, 2011

Cultural Analysis: Concepts and Questions / From Cultural Topography: A New Research Tool for Intelligence Analysis

Cultural Analysis: Concepts and Questions 
From Jeannie L. Johnson and Matthew T. Berrett: Cultural Topography: A New Research Tool for Intelligence Analysis. Studies in Intelligence Vol. 55, No. 2, extracts, June 2011. https://cia.gov


Identity
•Is individual identity seen as comprising one’s distinct, unique self, or is it bound up in a larger group (family, clan, tribe)?
•Does this group see itself as responsible for and capable of solving social problems? Are problems responded to with energy or left to fate?
•Which myths and national narratives compose the stories everyone knows? How do these speak about group identity?
•What is this group’s origin story? Does it inform group members of their destiny?
•What would this group list as defining traits of its national, tribal, ethnic character?
•Is one aspect of identity being overplayed, not because it is foundational for most decisions but because it is being threatened or diminished?


Values
•For the linguist, which concepts/things are described in nuanced ways (meaning that many words have been assigned to them)? Which concepts are missing from the language? (For example, the concept of “fair play” is hard to find outside of English.)
•What generates hope in this population?
•Which is viewed more highly as a communicative tool—emotion or logic? Are conversational styles which emphasize logic viewed as trustworthy?
•Is conspicuous consumption valued as a status marker? If not, what incentives exist to work hard?
•To what extent do security concerns trump liberty concerns in this society? Which parts of liberty are deemed attractive?
•Is social mobility considered a good thing, or is it deemed disruptive to a highly organized system?  Would this group fight to keep a hierarchical arrangement even if offered opportunities for egalitarianism?
•To what extent does loyalty trump economic advantage?
•Which is more value-laden for this group—“progress” or “tradition”?
•Is optimism rewarded as a character trait or is it considered naive, juvenile, and possibly dangerous?
•Which character qualities are consistently praised?
•What composes the “good life”?
•What sorts of myths, hero figures, segments of history, or identity markers does the material culture celebrate? What is revealed by the decorations in homes, modes of dress, food eaten (or not eaten), monuments respected (as opposed to those covered with graffiti), gifts given, etc.?
•In describing a proposed project, what will “impress” this audience? The project’s size? Its historical relevance? The technology used to produce it? How might new projects best be framed in order to win popular support?


NORMS

Political
•What is considered a legitimate pathway to power? How do “heroes” in film and other popular media obtain their power? Do they act as isolated individualists or in concert with others?
•“What gives a public the comfortable feeling that the way that decisions are reached and leaders are chosen is ‘right’?”
•How does the group view compromise?
•Where does “genuine” law come from? (Nature? God? A constitution? Current political institutions? Imagined, future institutions? Moral conscience? A personality from the past?)
•Is adherence to state-manufactured law admired or disdained? To what extent is state law equated with “right” and “wrong”?

Social
•Is social status in this society primarily ascribed (i.e., one is born into it) or achieved? If achieved, how so?
•What are the primary markers of a person of high rank in this society? How would you recognize him/her? Does political power or intellectual prestige rank higher than economic surplus?
•What is the process for establishing trust? How does one know when it has been achieved?
•Do people perceive their own place and the dominant hierarchy as natural?
•To what extent are subordinates responsible for their own actions?
•What do proverbs say about social expectations and the perceived pathway to success?


Economic
•What are the group’s views on work? Which types are admired? Which are disdained? What are the economic implications?
•Which economic activities are considered immoral?
•Is it considered appropriate to “master” the natural environment and bend it to one’s will?
•To what extent is the economy intertwined with kin obligations?
•What are obstacles to private property ownership?
•How does this culture group stack up when evaluated against the traits some claim are necessary for successful market economies? These can include:

• •Is there trust in the individual?
• •Are wealth and resources perceived as finite or infinite? Is the focus on “what exists” or “what does not yet exist”?
• •Is competition seen as healthy or unacceptably aggressive?
• •Is this society comfortable with a questioning mind?
• •Does the education system encourage investigative learning?
• •Are the “lesser virtues”—punctuality, job performance, tidiness, courtesy, efficiency – admired?
• •Which are emphasized—small achievements accomplished by the end of the day (preferable for market economies) or grandiose projects (the unfinished megaworks of progressresistant economies)?

•What is the “radius of trust” in this community? Is trust extended to family only? How far does it extend to strangers?
•What are prestige commodities within this community? Why? Might these serve as stronger incentives for cooperation than direct funding?
•Is risk taking admired or negatively sanctioned? How widely spread is the “harm” of individual failure (damages family honor, potentially ignites retribution cycle, etc.)?

Security
•What defines “victory” for this group in a kinetic conflict?
•What types of battlefield behavior would result in shame?
•What level of internal destruction is acceptable?
•How do accepted myths describe this group’s military history? What is its projected destiny?
•Are allies viewed as reliable, or historically treacherous? What is the resultant ethic regarding alliance loyalties?


Time/Change Orientation
•Does this group behave according to linear time? Is there a marked contrast between rural and urban regions? Do deadlines matter?
•What is the future orientation of this group? Does it see itself as capable of changing the near future? Is it deemed appropriate or laudable to make aggressive efforts to do so?
•Which time frames are referenced with strong positive emotion—past or future scenarios?
•Is there a significant gap between socioeconomic expectations and reality? (This often is a precursor of social shifts.)


Problem-Solving Devices
•What is the order of activities for solving a social problem (often called an action chain)? Does face-to-face confrontation happen first or last? Is violence used as a signal or is it an endgame?
•How do those outside of official channels of activity (i.e. women in seclusion, youth in elder-oriented cultures) play a part in problem-solving processes?
•Which is preferred—action or deep deliberation? Is this group comfortable with trial and error as a discovery method?
•Are individuals comfortable with making a wide range of personal choices? Are individual choice and accountability practiced social norms? Would the choices present in democratic and market systems be overwhelming?
•To what extent must community consensus be reached in order for a decision to go forward?


PERCEPTIVE LENS

Cognitive processes
•What sources of information yield ‘truth’? Scientific/factual processes? Dreams? Inspired authority figures?
•Are most situations set into dichotomous frames? Are they made to be black and white? How comfortable are group members with situational complexity? How patient are they in working to understand it?

Of Self
•What are the basic expectations about the future? (“Poverty becomes a greater problem the moment wealth is perceived as a definite possibility.”) How might typical aspirations within this society be charted?
•How does this group characterize/perceive its own history? Which events are highlighted? Which are omitted?
•What does this group’s history tell it about “dangerous” behaviors/circumstances for a society? (For example, Chinese—chaos, Americans—tyranny).


Of Others Generally
•How do members of this group assign intentions? What motives make the most sense to them? (If the best US intentions do not “make sense” to the host population, they will assign intentions that do. It is to our advantage to understand and then emphasize areas of cognitive congruence when embarking on joint ventures.)
•What is this group’s view on human nature? Are people generally trustworthy? Are they prone to excess and beset by vices, or are they able to regulate themselves? How are these views used for legitimating less or more government?
•How does this group obtain its information about the outside world? Which sources are considered most reliable? How are those sources biased or deficient?
•Are outsiders perceived as fundamentally different or fairly similar to group members?


Of the US Specifically 
•What are regarded by this group as US vulnerabilities?
•What does this group believe drives Americans? What do they value?
•Does this group see common ground with its American counterparts? In which areas?
•To what extent does this group believe American rhetoric matches intentions?


Cosmology (The way the world works...origin and structure of the universe)
•When explanations for events are not easily accessible, how does this group fill in the blanks?

PwC Chairman Aims to Keep Millennials Happy

PwC Chairman Aims to Keep Millennials Happy
By JAVIER ESPINOZA
WSJ, July 11, 2011
http://online.wsj.com/article/SB10001424052702303365804576434223787503598.html

When Dennis Nally started at PricewaterhouseCoopers LLP 37 years ago, the business was simpler, says the chairman of the accounting and management-consultancy. Back then nearly 80% of firm revenue stemmed from PWC audit work in the U.S.

Today, the company has 175,000 employees operating in 154 countries. And about half of PwC's global revenues derive from tax and advisory work, which includes consulting on operations, human resources and M&A, among other things.

About 18% of the firm's revenue comes from work for clients in developing markets in Asia, the Middle East, South America and Africa. Over the next five years, the company expects this to grow to 40%, as its clients become increasingly focused on emerging markets.

Recruiting and hiring, particularly in those markets, is the biggest challenge the firm and its clients are facing, says Mr. Nally. As evidence, he quotes from PwC's annual global CEO survey, released in April, in which more than 90% of the business leaders surveyed said that they are focused on making significant changes to their human-resource policies in the next 12 to 18 months.

The Wall Street Journal spoke with Mr. Nally in London where he talked about hiring and the importance of keeping the so-called millennial generation happy. Edited excerpts:

WSJ:How do you define talent?

Mr. Nally:Having the technical skills is important but that's almost a given these days. [Talent is also] having the right softer skills in terms of being [able] to work in a collaborative environment, teaming with people, good communication skills, good sensitivities to cultural diversity.

WSJ:What's the biggest challenge for companies when trying to recruit talented staff?

Mr. Nally:The competition for talent in the emerging markets has never been greater and that's placing a lot of pressure on salaries. Having a competitive compensation base is really important. It's [also] about how to create an environment where people want to be. This millennial generation is not just looking for a job, they're not just looking for salary and financial benefits, they're looking for skill development, they're looking for mobility, they're looking for opportunities to acquire different skills and to move quickly from one part of an organization to another. How you manage that sort of talent and how you deal with their expectations is very different from what's been done in the past.

So, clearly articulating your people strategy, what you can deliver and importantly what you expect in return is key. Connecting with your employees so they understand you can deliver the career they want is key.

WSJ:How do you go about creating that connectivity?

Mr. Nally:The human capital agenda has to be driven by the CEO. It's so strategic today that you want to have great support coming from the HR organization, but if this isn't viewed as just as strategic as new products and services or research and development, [it] won't be successful.

WSJ: Why is this thirst for talent more evident now than before?

Mr. Nally: The opportunities are so significant, coming from all different directions in all parts of the world that the demand for talent is at an all-time high. In today's global competitive workplace, you can't think just in the context of your own territory.

WSJ: What sort of policies will companies need to put in place?

Mr. Nally: The millennium generation is probably the most technological group of people ever joining the workforce. How they want to work, use social media and team within a company is very different than the prior generation. If your human policies aren't responsive to what they are looking for, they are going to go to a company that is. They want less-hierarchical structures, they want more flexibility, they want to work as hard but they want to define how they do their work. If you can't figure out a way to accommodate that kind of flexibility, you're not going to be able to retain that talent.

WSJ: What [is PwC] doing to attract and retain talent?

Mr. Nally:We have adapted both how we recruit and how we work with people once they join us to suit the millennial generation. For example, in the U.S. we have set up a LinkedIn application that allows students to track the career paths of existing graduate trainees already in the firm so a student can see how a career with PwC develops. In the U.K., we use a Facebook application to connect recruits together before they join so they can begin to build their own PwC community.

We also provide mentors for our people from day one both formally and informally and encourage people to actively use their mentors to build skills and experience. We understand that flexibility and the ability to gather useful experience are key, as a result we actively encourage our people to move both between different business areas and around the world to gain experience. We also provide career breaks, flexible working, cycles of experience outside PwC and we actively encourage volunteering.

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Correction: Dennis Nally is the chairman of PricewaterhouseCoopers. In an earlier version of this article, the caption and headline incorrectly said Mr. Nally was the CEO.

Richard Clarke's China's Cyberassault on America

China's Cyberassault on America. By RICHARD CLARKE
If we discovered Chinese explosives laid throughout our national electrical system, we'd consider it an act of war. China's digital bombs pose as grave a threat.
The Wall Street Journal, Wednesday, June 15, 2011
http://online.wsj.com/article/SB10001424052702304259304576373391101828876.html

In justifying U.S. involvement in Libya, the Obama administration cited the "responsibility to protect" citizens of other countries when their governments engage in widespread violence against them. But in the realm of cyberspace, the administration is ignoring its primary responsibility to protect its own citizens when they are targeted for harm by a foreign government.

Senior U.S. officials know well that the government of China is systematically attacking the computer networks of the U.S. government and American corporations. Beijing is successfully stealing research and development, software source code, manufacturing know-how and government plans. In a global competition among knowledge-based economies, Chinese cyberoperations are eroding America's advantage.

The Chinese government indignantly denies these charges, claiming that the attackers are nongovernmental Chinese hackers, or other governments pretending to be China, or that the attacks are fictions generated by anti-Chinese elements in the United States. Experts in the U.S. and allied governments find these denials hard to believe.

Three years ago, the head of the British Security Service wrote to hundreds of corporate chief executive officers in the U.K. to advise them that their companies had in all probability been hacked by the government of China. Neither the FBI nor the Department of Homeland Security has issued such a notice to U.S. executives, but most corporate leaders already know it.

Some, like Google, have the courage to admit that they have been the victims of Chinese hacking. We now know that the "Aurora" attack (so named by the U.S. government because the English word appears in the attack software) against Google in 2009 also hit dozens of other information technology companies—allegedly including Adobe, Juniper and Cisco—seeking their source code. Aurora wasn't an isolated event. This month Google renewed its charge against China, noting that the Gmail accounts of senior U.S. officials had been compromised from a server in China. The targeting of specific U.S. officials is not something that a mere hacker gang could do.

The Aurora attacks were followed by systematic penetrations of one industry after another. In the so-called Night Dragon series, attackers apparently in China went after major oil and gas companies, not only in the U.S. but throughout the world. The German government claims that the personal computer of Chancellor Angela Merkel was hacked by the Chinese government. Australia has also claimed that its prime minister was targeted by Chinese hackers.

Recently the computer-security company RSA (a division of EMC) was penetrated by an intrusion which appears to have stolen the secret sauce behind the company's SecureID. That system is widely used to protect critical computer networks. And this month, the largest U.S. defense contractor, Lockheed, was subject to cyberespionage, apparently by someone using the stolen RSA data. Cyber criminals don't hack defense contractors—they go after banks and credit cards. Despite Beijing's public denials, this attack and many others have all the hallmarks of Chinese government operations.

In 2009, this newspaper reported that the control systems for the U.S. electric power grid had been hacked and secret openings created so that the attacker could get back in with ease. Far from denying the story, President Obama publicly stated that "cyber intruders have probed our electrical grid."

There is no money to steal on the electrical grid, nor is there any intelligence value that would justify cyber espionage: The only point to penetrating the grid's controls is to counter American military superiority by threatening to damage the underpinning of the U.S. economy. Chinese military strategists have written about how in this way a nation like China could gain an equal footing with the militarily superior United States.

What would we do if we discovered that Chinese explosives had been laid throughout our national electrical system? The public would demand a government response. If, however, the explosive is a digital bomb that could do even more damage, our response is apparently muted—especially from our government.

Congress hasn't passed a single piece of significant cybersecurity legislation. When the Chinese deny senior U.S. officials' claims (made in private) that Beijing is stealing terabytes of data in the U.S., Congress should not leave the American people in doubt. It should demand answers to basic questions:

What does the administration know about the role of the Chinese government in cyberattacks on public and private computer networks in the United States?

If there is widespread Chinese hacking of sensitive U.S. networks and critical infrastructure, what has the administration said about it to the Chinese government? Specifically, did President Obama raise concerns about these attacks with Chinese President Hu Jintao at the White House this spring?

Since defensive measures such as antivirus software and firewalls appear unable to stop the Chinese penetrations, does the administration have any plan to address these cyberattacks?

In private, U.S. officials admit that the government has no strategy to stop the Chinese cyberassault. Rather than defending American companies, the Pentagon seems focused on "active defense," by which it means offense. That cyberoffense might be employed if China were ever to launch a massive cyberwar on the U.S. But in the daily guerrilla cyberwar with China, our government is engaged in defending only its own networks. It is failing in its responsibility to protect the rest of America from Chinese cyberattack.

Mr. Clarke was a national security official in the White House for three presidents. He is chairman of Good Harbor Consulting, a security risk management consultancy for governments and corporations.