World Bank on MENA: Opportunities To Reshape Economic Playing Field
There are historic opportunities for greater openness and citizen participation in economies across the Middle East and North Africa (MENA) that, if strongly managed over the transitions ahead, could see a significant boost to economic growth and living standards in the medium term.
This is the analysis presented on My 24, 2011 in the World Bank’s Regional Economic Outlook: MENA Facing Challenges and Opportunities. The report notes that current economic disruption in many MENA countries is translating into lower growth in the short term (now forecast at 3.6 percent for 2011 down from 5 percent) but that opportunities in the medium term offer new hope for an inclusive and sustainable development that has not before been seen in the region.
"The rich experience from countries that have undergone political changes suggest that short-term disruptions to economic growth and social tensions are inevitable,” said Shamshad Akhtar, World Bank Vice President for the MENA region. “However, transition offers an opportunity for countries to break with the past and set course in a newer direction. A first order of priority is to offer the right signals to restore public and private investor confidence which, in MENA, calls for ensuring respect and citizen dignity through inclusive social policies, a fundamental change in governance frameworks and swiftly restoring macroeconomic stability."
The report finds that by the end of 2010, MENA countries had largely recovered from the global financial crisis, and growth rates had been expected to reach pre-crisis levels in 2011. Events in early 2011 which led to swift regime change in Tunisia and Egypt, and ongoing challenges in Bahrain, Libya, Syria and Yemen, have affected the short-term macroeconomic outlook and the status and speed of economic reforms in the region.
“The effects of reform tend to follow a J-curve, where things get worse before they get better. Experience from other countries which have made successful transitions has shown an initial decline of 3 to 4 percent in the first year but quickly recovering,” said Caroline Freund, Chief Economist for the MENA region.
“Also encouraging is that successful countries saw significant and fast improvements in voice and accountability, some of the very things that underpin the MENA uprisings. We need to learn from history’s successful transitions and carefully manage the short-term downturn which is where we are focusing our best efforts now. While the challenges are many, the opportunities are more."
Freund said better rule of law will promote competition and political stability will attract investment, facilitating more rapid growth in a sustainable way. By the same token, more voice for civil society will prevent the unequal application of regulations, and can lead to more inclusive growth.
Examples of transitions to democracy in other parts of the world confirm that economic gains can be sizable. Typically, successful transitions are associated with higher levels of income growth in the decade after change than in the prior one. But, the short-run is challenging; investors typically wait for uncertainty to be resolved and it is inevitable that investment will be delayed. Signs of stability and reform are quick to be rewarded though and evidence from other countries shows that this dip in economic activity typically lasts a year, with growth quickly gaining momentum if the transition is strongly managed.
The report’s regional forecast of 3.6 percent growth for 2011, down from 5 percent expected a few months ago, is largely due to the sharp drop in Egypt’s and Tunisia’s economic activity, but also because of weaker growth in developing oil exporters in MNA. Gulf Cooperation Council (GCC) countries will maintain strong growth rates, expected to exceed 5 percent. Growth effects are sharply differentiated by country in MENA, depending largely on whether the country is an oil exporter or an oil importer and the degree to which unrest and political change has disrupted economic activity.
The report also notes that government spending is expected to rise in 2011 as governments move to expanding supportive policy measures and social transfers to reduce the burden of unemployment and counter high commodity prices. Partly because of these actions, but also because of rising fuel and food prices, inflation rates are expected to increase in many MENA countries in 2011.
“Expanding social measures during an uncertain period is understandable to protect the most vulnerable and to help maintain support for reform,” said Elena Ianchovichina, World Bank Lead Economist and author of the report. “But it is important that these measures be used to complement needed reforms and be targeted efficiently to the poorest and the most needy.”
The report considers prolonged instability resulting from unmet political and social aspirations and lack of clarity about political transitions to be the most serious risk to short-term economic growth in MENA.
The report also investigates the effect of high commodity prices on MENA countries. Impacts are country-specific and determined by dependence on food and oil imports, and the extent of the pass-through from international to domestic prices. While MENA includes some major oil exporters that are benefiting from oil price increases, it is also home to a number of countries that rely on imported oil. Importantly, because most MENA countries are highly dependent on imported food, particularly cereals, oils, and sugar, in the event of further food price increases, they face the risk of more malnutrition, increased import bills, higher domestic inflation, and worsened fiscal balances in cases when governments subsidize food. And new estimates of pass through from international food prices to domestic prices are presented for MENA countries.
“Food security is and will continue to be an important issue for Arab countries,” said Julian Lampietti, Lead Food Security Expert for MENA region at the World Bank. “Now is not the time to be complacent in addressing this with global wheat stocks low and with the Arab world importing one third of the world’s traded wheat.” There is considerable scope for reducing food price volatility in the MENA region through investments in infrastructure and logistics, he said, pointing to examples in the region where ongoing analysis is showing that there are ways to manage exposure to food price spikes and ensure a timely supply of dietary essentials.
This press release is downloadable here: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22922472~pagePK:64257043~piPK:437376~theSitePK:4607,00.html
Full report on http://siteresources.worldbank.org/MENAEXT/Resources/EDP_MNA_2011.pdf
Saturday, May 28, 2011
Wednesday, May 25, 2011
“The Day of Rejection” in Mauritania
Kal posts this:
"For pictures, flyers, video and a summary of the 24 May youth demonstrations in Mauritania (The Day of Rejection), see here and here. The youth staged a mock funeral for democracy in Mauritania, marching on the Blokate square in Nouakchott. As in previous demonstrations, there was an emphasis on reducing the military’s role in politics, corruption and commodity prices. The demonstrators were met by plain cloths police and security men, who allegedly distributed knives to thugs. The demonstrations on 24 May were smaller than in April and saw less head on violence from the authorities. But the government does appear somewhat spooked by the youth movement: aside from the use of plain clothes police and agents provocateurs, it has used misinformation campaigns to confuse and hamper the protests with false flyers (and by setting up false Facebook accounts and pages, according to activists). Here is a link to an al-Akhbar article on the demonstration [Ar.]. For background on the youth protest movement see the previous posts on this blog and this writer’s recent article in the Arab Reform Bulletin."
Here is one flyer, "posted by organizers on Facebook and by this writer on Twitter last week (they are also in a gallery in the links above)":
There is a second flyer in Arabic at the original post.
"For pictures, flyers, video and a summary of the 24 May youth demonstrations in Mauritania (The Day of Rejection), see here and here. The youth staged a mock funeral for democracy in Mauritania, marching on the Blokate square in Nouakchott. As in previous demonstrations, there was an emphasis on reducing the military’s role in politics, corruption and commodity prices. The demonstrators were met by plain cloths police and security men, who allegedly distributed knives to thugs. The demonstrations on 24 May were smaller than in April and saw less head on violence from the authorities. But the government does appear somewhat spooked by the youth movement: aside from the use of plain clothes police and agents provocateurs, it has used misinformation campaigns to confuse and hamper the protests with false flyers (and by setting up false Facebook accounts and pages, according to activists). Here is a link to an al-Akhbar article on the demonstration [Ar.]. For background on the youth protest movement see the previous posts on this blog and this writer’s recent article in the Arab Reform Bulletin."
Here is one flyer, "posted by organizers on Facebook and by this writer on Twitter last week (they are also in a gallery in the links above)":
There is a second flyer in Arabic at the original post.
Saturday, May 14, 2011
Analysts say GCC inclusion of Jordan, Morocco will strengthen Arab integration
Analysts say GCC inclusion of Jordan, Morocco will strengthen Arab integration
May 14, 2011
BBC Monitoring Middle East
["Today's Harvest" news programme on GCC's invitation to Morocco to join the GCC, and Jordan's request to join the GCC; Saudi Consultative Council member, Jordanian government spokesman, and Moroccan Socialist Unified Party member interviewed - live.]
Doha Al-Jazeera Satellite Channel Television in Arabic at 2001 GMT on 10 May carries within its "Today's Harvest" news programme a 200-second report on the GCC consultative summit held in Riyadh on 10 May, an approximately six-minute interview with Zuhayr al-Harithi, member of the Saudi Arabia's Consultative (Shura) Council, in the Doha studio; followed by a four-minute interview with Tahir al-Adwan, Jordan's minister of state for media affairs and communication and official spokesman of the Jordanian government, via telephone from Amman; and a four-minute interview with Hassan Tarik, member of the Political Bureau of Morocco's Socialist Unified Party, SUP, via telephone from Rabat. The interviews are conducted from Doha by anchors Khadijah Bin-Qinnah and Muhammad al-Kurayshan.
Al-Jazeera reports on the consultative summit held by the heads of the six Gulf Cooperation Council [GCC] states - or their representatives - in Riyadh on 10 May during which they discussed the situation in Yemen and Bahrain and the tense relations with Iran.
Al-Jazeera reports that GCC Secretary General Abd-al-Latif al-Zayani said the GCC Supreme Council delegated its foreign ministers to initiate talks with Rabat on Morocco joining the GCC, while the GCC leaders "welcomed Jordan's request to join the GCC, and promised to study the request."
Al-Jazeera then carries a video report by an unidentified correspondent on the summit. Video shows scenes from the summit, beginning with the Saudi monarch walking with the help of a stick, surrounded by Saudi and other GCC dignitaries. The correspondent notes that the summit coincides with "a big deterioration in the GCC states' relations with Iran, in the wake of recent protests in Bahrain," adding that Iran was unhappy with Bahrain's request for the assistance of the Peninsula Shield Force to end the disturbances.
The correspondent adds that the GCC states are becoming increasingly worried by the continuing crisis in Yemen where huge demonstrations are held daily to demand President Salih's departure. Al-Jazeera's correspondent adds that the GCC summit sent a delegation to meet with Syrian President Al-Asad, and the director of the Gulf Research Centre in Dubai has revealed that the GCC will not mediate in the Syrian situation, but it may have proffered advice to Al-Asad and stressed to him that the "security solution is not the only solution, and reforms are essential."
Bin-Qinnah then asks Al-Harithi about the GCC's "surprise move" in welcoming Jordan's request to join the GCC and inviting Morocco to join, Al-Harithi says "the picture is not quite clear yet." He explains that the move stems from "the GCC's desire to establish a bloc that represents a political stand, and an economic bloc that gives momentum to the GCC. The political systems in all those countries are similar: they are monarchies, and their political stands are also similar." Asked if he is referring to stands towards Iran, Al-Harithi says Iran and other issues. He says it is a "good move, because we are talking about the globalization age, which requires the creation of blocs that achieve economic integration."
Asked whether his assertion about the political systems of the GCC, Jordan, and Morocco being similar explains why the GCC had rejected past requests to join the GCC, Al-Harithi disagrees and says Yemen has begun preparations to qualify, adding: "I think it will join soon."
Al-Harithi says the GCC states are facing regional and domestic challenges, and they have certain demands, and the GCC states are wise to take such a far-sighted stand that could be helpful in the future. He says some states "are trying to exploit the present weakness of the Arab states, for we have seen some interference and some changes in the Arab political map."
Al-Harithi says he believes that since four months ago "the GCC embarked on a new stage" with regard to joint action and security and defence policies. He says the GCC's achievements continue to fall short of the aspirations of the peoples of the GCC states, and the GCC has sensed the dangers of the present stage and wisely looked for ways out.
Told it is called a Gulf council, while Morocco is a long distance from the Gulf, Al-Harithi says if Morocco and Jordan join the GCC geographic location will no longer be so important, for the states' joint action, political stand, and economic integration will be more important. He says if the outcome of those two states joining the GCC is that Arab joint action will gain momentum that ultimately serves the Arab states.
Asked about Yemen's application to join the GCC, Al-Harithi says: "The problem is in the Yemeni court, where there is some stalling and procrastination on the part of the regime, while the opposition is being intransigent and is taking a hard-line operation." He urges the Yemenis to seize this opportunity for it is "a road map to find a solution.
Al-Harithi says the GCC initiative because it will spare the Yemeni people's blood, achieve their demands, and lead to respect for the options of the Yemeni people. He adds: "The GCC states are neither backing the Yemeni president, nor siding with the Yemeni opposition, but seek to consolidate Yemen's stability and security." Al-Harithi adds: Yemen's security is a strategic matter. It is linked to the security system of the GCC as a whole."
Al-Kurayshan then interviews Jordan's Tahir al-Adwan. Al-Kurayshan begins by asking him how Jordan received the decisions of the GCC consultative summit. Al-Adwan says: "The Jordanian government issued a statement lauding the GCC summit's statement that welcomed Jordan's request to join the GCC. It is a big and important step for joint Arab action, and achieves the interests of the Arab peoples in this region. Amy step towards strengthening Jordanian-GCC relations is welcomed in Jordan, not only at the official level but at various popular levels as well." He notes Jordan's strong and longstanding relations with the GCC states where, he says, many Jordanians are employed.
Asked what does Jordan hope to achieve by joining the GCC, Al-Adwan says: "Such a step serves the interests of Jordan and also serves joint Arab action. It strengthens Arab integration and cooperation in economic fields, and bolsters the ties and contacts between the peoples of the region."
Seeking a more specific answer, Al-Kurayshan says why does Jordan apply to join the GCC which had so far been a club exclusively for Gulf states, Al-Adwan says: "It has been a longstanding ambition of Jordan to join the GCC. You may recall that in recent weeks when the king went on a tour, and the prime minister also went on a tour of the Gulf states, there were reports on the possibility of Jordan joining the GCC. The report was well received by Jordanian public opinion. I believe Jordan has constantly aspired to join the GCC, which is a very big step for Jordan. It is a welcome move. Certainly, Jordanians will feel that new horizons have been opened to cooperation between Jordan and the peoples and states of the GCC. It is in Jordan's interest. As you know, Jordan faces difficult economic circumstances. The entire region is suffering from unrest and instability."
Al-Adwan adds: "Now any step towards bolstering joint Arab action on various levels represents a ray of hope for the peoples of the region."
Bin-Qinnah then interviews Hasan Tarik, of Morocco's SUP. Asked how did Morocco receive the GCC's invitation to join the GCC, Tarik says Moroccan public opinion was surprised by the invitation, both because Morocco is more oriented towards the Arab Maghreb and the West, and because the GCC is a closed club. Tariq notes that not all the facts are known, and the reports are conflicting, for there are those who say Morocco has officially applied to join the GCC, while there are those who say that Mo rocco was invited by the GCC to join it. He adds that there had been no previous public discussions on the issue. He says there will be questions regarding the effect of such a move on Morocco's relations with other Maghreb and Mediterranean states. [Video shows King Hamad of Bahrain sitting and listening to other GCC leaders]
Asked how would Morocco's relations with other Arab Maghreb states conflict with its relations with GCC states, Tarik says the political stands of Morocco and the GCC states have always been close, and there was clear economic support for Morocco. He adds: "However, for those relations to go as far as Morocco joining the GCC represents a shift in Morocco's foreign policy. The fear is that, in the light of the political transformations that have been occurring in the Arab region, the bid to join the GCC will be construed as a return to the policy of axes. There is also a fear that it will be viewed as the last nail in the coffin of the Arab Regional Order. There are numerous questions that are being asked by Moroccan public opinion, but there are not enough appropriate answers to those questions."
Tarik says decisions on foreign policy are the prerogative of the state and the royal establishment, and adds: "However, it is hoped there will be a public debate on the issue and the options. Are we getting involved in a pragmatic and economic process? Does it have political significance and consequences? What is the cost? Why now? Those are all matters that require clarification?"
Source: Al-Jazeera TV, Doha, in Arabic 2001 gmt May 10, 2011
May 14, 2011
BBC Monitoring Middle East
["Today's Harvest" news programme on GCC's invitation to Morocco to join the GCC, and Jordan's request to join the GCC; Saudi Consultative Council member, Jordanian government spokesman, and Moroccan Socialist Unified Party member interviewed - live.]
Doha Al-Jazeera Satellite Channel Television in Arabic at 2001 GMT on 10 May carries within its "Today's Harvest" news programme a 200-second report on the GCC consultative summit held in Riyadh on 10 May, an approximately six-minute interview with Zuhayr al-Harithi, member of the Saudi Arabia's Consultative (Shura) Council, in the Doha studio; followed by a four-minute interview with Tahir al-Adwan, Jordan's minister of state for media affairs and communication and official spokesman of the Jordanian government, via telephone from Amman; and a four-minute interview with Hassan Tarik, member of the Political Bureau of Morocco's Socialist Unified Party, SUP, via telephone from Rabat. The interviews are conducted from Doha by anchors Khadijah Bin-Qinnah and Muhammad al-Kurayshan.
Al-Jazeera reports on the consultative summit held by the heads of the six Gulf Cooperation Council [GCC] states - or their representatives - in Riyadh on 10 May during which they discussed the situation in Yemen and Bahrain and the tense relations with Iran.
Al-Jazeera reports that GCC Secretary General Abd-al-Latif al-Zayani said the GCC Supreme Council delegated its foreign ministers to initiate talks with Rabat on Morocco joining the GCC, while the GCC leaders "welcomed Jordan's request to join the GCC, and promised to study the request."
Al-Jazeera then carries a video report by an unidentified correspondent on the summit. Video shows scenes from the summit, beginning with the Saudi monarch walking with the help of a stick, surrounded by Saudi and other GCC dignitaries. The correspondent notes that the summit coincides with "a big deterioration in the GCC states' relations with Iran, in the wake of recent protests in Bahrain," adding that Iran was unhappy with Bahrain's request for the assistance of the Peninsula Shield Force to end the disturbances.
The correspondent adds that the GCC states are becoming increasingly worried by the continuing crisis in Yemen where huge demonstrations are held daily to demand President Salih's departure. Al-Jazeera's correspondent adds that the GCC summit sent a delegation to meet with Syrian President Al-Asad, and the director of the Gulf Research Centre in Dubai has revealed that the GCC will not mediate in the Syrian situation, but it may have proffered advice to Al-Asad and stressed to him that the "security solution is not the only solution, and reforms are essential."
Bin-Qinnah then asks Al-Harithi about the GCC's "surprise move" in welcoming Jordan's request to join the GCC and inviting Morocco to join, Al-Harithi says "the picture is not quite clear yet." He explains that the move stems from "the GCC's desire to establish a bloc that represents a political stand, and an economic bloc that gives momentum to the GCC. The political systems in all those countries are similar: they are monarchies, and their political stands are also similar." Asked if he is referring to stands towards Iran, Al-Harithi says Iran and other issues. He says it is a "good move, because we are talking about the globalization age, which requires the creation of blocs that achieve economic integration."
Asked whether his assertion about the political systems of the GCC, Jordan, and Morocco being similar explains why the GCC had rejected past requests to join the GCC, Al-Harithi disagrees and says Yemen has begun preparations to qualify, adding: "I think it will join soon."
Al-Harithi says the GCC states are facing regional and domestic challenges, and they have certain demands, and the GCC states are wise to take such a far-sighted stand that could be helpful in the future. He says some states "are trying to exploit the present weakness of the Arab states, for we have seen some interference and some changes in the Arab political map."
Al-Harithi says he believes that since four months ago "the GCC embarked on a new stage" with regard to joint action and security and defence policies. He says the GCC's achievements continue to fall short of the aspirations of the peoples of the GCC states, and the GCC has sensed the dangers of the present stage and wisely looked for ways out.
Told it is called a Gulf council, while Morocco is a long distance from the Gulf, Al-Harithi says if Morocco and Jordan join the GCC geographic location will no longer be so important, for the states' joint action, political stand, and economic integration will be more important. He says if the outcome of those two states joining the GCC is that Arab joint action will gain momentum that ultimately serves the Arab states.
Asked about Yemen's application to join the GCC, Al-Harithi says: "The problem is in the Yemeni court, where there is some stalling and procrastination on the part of the regime, while the opposition is being intransigent and is taking a hard-line operation." He urges the Yemenis to seize this opportunity for it is "a road map to find a solution.
Al-Harithi says the GCC initiative because it will spare the Yemeni people's blood, achieve their demands, and lead to respect for the options of the Yemeni people. He adds: "The GCC states are neither backing the Yemeni president, nor siding with the Yemeni opposition, but seek to consolidate Yemen's stability and security." Al-Harithi adds: Yemen's security is a strategic matter. It is linked to the security system of the GCC as a whole."
Al-Kurayshan then interviews Jordan's Tahir al-Adwan. Al-Kurayshan begins by asking him how Jordan received the decisions of the GCC consultative summit. Al-Adwan says: "The Jordanian government issued a statement lauding the GCC summit's statement that welcomed Jordan's request to join the GCC. It is a big and important step for joint Arab action, and achieves the interests of the Arab peoples in this region. Amy step towards strengthening Jordanian-GCC relations is welcomed in Jordan, not only at the official level but at various popular levels as well." He notes Jordan's strong and longstanding relations with the GCC states where, he says, many Jordanians are employed.
Asked what does Jordan hope to achieve by joining the GCC, Al-Adwan says: "Such a step serves the interests of Jordan and also serves joint Arab action. It strengthens Arab integration and cooperation in economic fields, and bolsters the ties and contacts between the peoples of the region."
Seeking a more specific answer, Al-Kurayshan says why does Jordan apply to join the GCC which had so far been a club exclusively for Gulf states, Al-Adwan says: "It has been a longstanding ambition of Jordan to join the GCC. You may recall that in recent weeks when the king went on a tour, and the prime minister also went on a tour of the Gulf states, there were reports on the possibility of Jordan joining the GCC. The report was well received by Jordanian public opinion. I believe Jordan has constantly aspired to join the GCC, which is a very big step for Jordan. It is a welcome move. Certainly, Jordanians will feel that new horizons have been opened to cooperation between Jordan and the peoples and states of the GCC. It is in Jordan's interest. As you know, Jordan faces difficult economic circumstances. The entire region is suffering from unrest and instability."
Al-Adwan adds: "Now any step towards bolstering joint Arab action on various levels represents a ray of hope for the peoples of the region."
Bin-Qinnah then interviews Hasan Tarik, of Morocco's SUP. Asked how did Morocco receive the GCC's invitation to join the GCC, Tarik says Moroccan public opinion was surprised by the invitation, both because Morocco is more oriented towards the Arab Maghreb and the West, and because the GCC is a closed club. Tariq notes that not all the facts are known, and the reports are conflicting, for there are those who say Morocco has officially applied to join the GCC, while there are those who say that Mo rocco was invited by the GCC to join it. He adds that there had been no previous public discussions on the issue. He says there will be questions regarding the effect of such a move on Morocco's relations with other Maghreb and Mediterranean states. [Video shows King Hamad of Bahrain sitting and listening to other GCC leaders]
Asked how would Morocco's relations with other Arab Maghreb states conflict with its relations with GCC states, Tarik says the political stands of Morocco and the GCC states have always been close, and there was clear economic support for Morocco. He adds: "However, for those relations to go as far as Morocco joining the GCC represents a shift in Morocco's foreign policy. The fear is that, in the light of the political transformations that have been occurring in the Arab region, the bid to join the GCC will be construed as a return to the policy of axes. There is also a fear that it will be viewed as the last nail in the coffin of the Arab Regional Order. There are numerous questions that are being asked by Moroccan public opinion, but there are not enough appropriate answers to those questions."
Tarik says decisions on foreign policy are the prerogative of the state and the royal establishment, and adds: "However, it is hoped there will be a public debate on the issue and the options. Are we getting involved in a pragmatic and economic process? Does it have political significance and consequences? What is the cost? Why now? Those are all matters that require clarification?"
Source: Al-Jazeera TV, Doha, in Arabic 2001 gmt May 10, 2011
Sunday, March 20, 2011
Leadership substitutes and personality impact on time and quality in some projects
Leadership substitutes and personality impact on time and quality in virtual new product development projects / Kenneth David Strang
Article first published online: Sep 29, 2010 - DOI: 10.1002/pmj.20208
Keywords:
- virtual product development;
- transformational transactional leadership;
- leadership substitutes;
- personality;
- competencies;
- time performance;
- scope quality
Abstract
Leadership, personality, and organizational factors were analyzed to measure their combined effect on virtual-based product development time and scope-quality performance. Over 1,000 team members were surveyed. MANCOVA was used to test if leadership, personality project, and/or organizational factors impacted performance. All realistic factors were included to detect leadership substitutes moderation, mediation, and prediction. Bias was reduced by not surveying leaders, by using reverse item coding, and by checking social desirability. Experimental control and common method variance were managed by including multilevel and multisource data. Performance was objectively computed from organizational data. The findings were that transactional leadership (not transformational) and some personality attri-butes (leader substitutes) were significant factors, increasing project scope quality and time performance. This article was published online on September 29, 2010. An error was subsequently identified. This notice is included in the online and print versions to indicate that both have been corrected. See the correction noted on the seventh page of the print version of the article.
Friday, February 4, 2011
More than 90% of Egyptians hold their property without legal title. No wonder they can't build wealth.
Egypt's Economic Apartheid. By Hernando de Soto
More than 90% of Egyptians hold their property without legal title. No wonder they can't build wealth and have lost hope.
WSJ, Feb 03, 2011
http://online.wsj.com/article/SB10001424052748704358704576118683913032882.html
The headline that appeared on Al Jazeera on Jan. 14, a week before Egyptians took to the streets, affirmed that "[t]he real terror eating away at the Arab world is socio-economic marginalization."
The Egyptian government has long been concerned about the consequences of this marginalization. In 1997, with the financial support of the U.S. Agency for International Development, the government hired my organization, the Institute for Liberty and Democracy. It wanted to get the numbers on how many Egyptians were marginalized and how much of the economy operated "extralegally"—that is, without the protections of property rights or access to normal business tools, such as credit, that allow businesses to expand and prosper. The objective was to remove the legal impediments holding back people and their businesses.
After years of fieldwork and analysis—involving over 120 Egyptian and Peruvian technicians with the participation of 300 local leaders and interviews with thousands of ordinary people—we presented a 1,000-page report and a 20-point action plan to the 11-member economic cabinet in 2004. The report was championed by Minister of Finance Muhammad Medhat Hassanein, and the cabinet approved its policy recommendations.
Egypt's major newspaper, Al Ahram, declared that the reforms "would open the doors of history for Egypt." Then, as a result of a cabinet shakeup, Mr. Hassanein was ousted. Hidden forces of the status quo blocked crucial elements of the reforms.
Today, when the streets are filled with so many Egyptians calling for change, it is worth noting some of the key facts uncovered by our investigation and reported in 2004:
• Egypt's underground economy was the nation's biggest employer. The legal private sector employed 6.8 million people and the public sector employed 5.9 million, while 9.6 million people worked in the extralegal sector.
• As far as real estate is concerned, 92% of Egyptians hold their property without normal legal title.
• We estimated the value of all these extralegal businesses and property, rural as well as urban, to be $248 billion—30 times greater than the market value of the companies registered on the Cairo Stock Exchange and 55 times greater than the value of foreign direct investment in Egypt since Napoleon invaded—including the financing of the Suez Canal and the Aswan Dam. (Those same extralegal assets would be worth more than $400 billion in today's dollars.)
The entrepreneurs who operate outside the legal system are held back. They do not have access to the business organizational forms (partnerships, joint stock companies, corporations, etc.) that would enable them to grow the way legal enterprises do. Because such enterprises are not tied to standard contractual and enforcement rules, outsiders cannot trust that their owners can be held to their promises or contracts. This makes it difficult or impossible to employ the best technicians and professional managers—and the owners of these businesses cannot issue bonds or IOUs to obtain credit.
Nor can such enterprises benefit from the economies of scale available to those who can operate in the entire Egyptian market. The owners of extralegal enterprises are limited to employing their kin to produce for confined circles of customers.
Without clear legal title to their assets and real estate, in short, these entrepreneurs own what I have called "dead capital"—property that cannot be leveraged as collateral for loans, to obtain investment capital, or as security for long-term contractual deals. And so the majority of these Egyptian enterprises remain small and relatively poor. The only thing that can emancipate them is legal reform. And only the political leadership of Egypt can pull this off. Too many technocrats have been trained not to expand the rule of law, but to defend it as they find it. Emancipating people from bad law and devising strategies to overcome the inertia of the status quo is a political job.
The key question to be asked is why most Egyptians choose to remain outside the legal economy? The answer is that, as in most developing countries, Egypt's legal institutions fail the majority of the people. Due to burdensome, discriminatory and just plain bad laws, it is impossible for most people to legalize their property and businesses, no matter how well intentioned they might be.
The examples are legion. To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.
All this helps explain who so many ordinary Egyptians have been "smoldering" for decades. Despite hard work and savings, they can do little to improve their lives.
Bringing the majority of Egypt's people into an open legal system is what will break Egypt's economic apartheid. Empowering the poor begins with the legal system awarding clear property rights to the $400 billion-plus of assets that we found they had created. This would unlock an amount of capital hundreds of times greater than foreign direct investment and what Egypt receives in foreign aid.
Leaders and governments may change and more democracy might come to Egypt. But unless its existing legal institutions are reformed to allow economic growth from the bottom up, the aspirations for a better life that are motivating so many demonstrating in the streets will remain unfulfilled.
Mr. de Soto, author of "The Mystery of Capital" (Basic Books, 2000) and "The Other Path" (Harper and Row, 1989), is president of the Institute for Liberty and Democracy based in Lima, Peru.
More than 90% of Egyptians hold their property without legal title. No wonder they can't build wealth and have lost hope.
WSJ, Feb 03, 2011
http://online.wsj.com/article/SB10001424052748704358704576118683913032882.html
The headline that appeared on Al Jazeera on Jan. 14, a week before Egyptians took to the streets, affirmed that "[t]he real terror eating away at the Arab world is socio-economic marginalization."
The Egyptian government has long been concerned about the consequences of this marginalization. In 1997, with the financial support of the U.S. Agency for International Development, the government hired my organization, the Institute for Liberty and Democracy. It wanted to get the numbers on how many Egyptians were marginalized and how much of the economy operated "extralegally"—that is, without the protections of property rights or access to normal business tools, such as credit, that allow businesses to expand and prosper. The objective was to remove the legal impediments holding back people and their businesses.
After years of fieldwork and analysis—involving over 120 Egyptian and Peruvian technicians with the participation of 300 local leaders and interviews with thousands of ordinary people—we presented a 1,000-page report and a 20-point action plan to the 11-member economic cabinet in 2004. The report was championed by Minister of Finance Muhammad Medhat Hassanein, and the cabinet approved its policy recommendations.
Egypt's major newspaper, Al Ahram, declared that the reforms "would open the doors of history for Egypt." Then, as a result of a cabinet shakeup, Mr. Hassanein was ousted. Hidden forces of the status quo blocked crucial elements of the reforms.
Today, when the streets are filled with so many Egyptians calling for change, it is worth noting some of the key facts uncovered by our investigation and reported in 2004:
• Egypt's underground economy was the nation's biggest employer. The legal private sector employed 6.8 million people and the public sector employed 5.9 million, while 9.6 million people worked in the extralegal sector.
• As far as real estate is concerned, 92% of Egyptians hold their property without normal legal title.
• We estimated the value of all these extralegal businesses and property, rural as well as urban, to be $248 billion—30 times greater than the market value of the companies registered on the Cairo Stock Exchange and 55 times greater than the value of foreign direct investment in Egypt since Napoleon invaded—including the financing of the Suez Canal and the Aswan Dam. (Those same extralegal assets would be worth more than $400 billion in today's dollars.)
The entrepreneurs who operate outside the legal system are held back. They do not have access to the business organizational forms (partnerships, joint stock companies, corporations, etc.) that would enable them to grow the way legal enterprises do. Because such enterprises are not tied to standard contractual and enforcement rules, outsiders cannot trust that their owners can be held to their promises or contracts. This makes it difficult or impossible to employ the best technicians and professional managers—and the owners of these businesses cannot issue bonds or IOUs to obtain credit.
Nor can such enterprises benefit from the economies of scale available to those who can operate in the entire Egyptian market. The owners of extralegal enterprises are limited to employing their kin to produce for confined circles of customers.
Without clear legal title to their assets and real estate, in short, these entrepreneurs own what I have called "dead capital"—property that cannot be leveraged as collateral for loans, to obtain investment capital, or as security for long-term contractual deals. And so the majority of these Egyptian enterprises remain small and relatively poor. The only thing that can emancipate them is legal reform. And only the political leadership of Egypt can pull this off. Too many technocrats have been trained not to expand the rule of law, but to defend it as they find it. Emancipating people from bad law and devising strategies to overcome the inertia of the status quo is a political job.
The key question to be asked is why most Egyptians choose to remain outside the legal economy? The answer is that, as in most developing countries, Egypt's legal institutions fail the majority of the people. Due to burdensome, discriminatory and just plain bad laws, it is impossible for most people to legalize their property and businesses, no matter how well intentioned they might be.
The examples are legion. To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.
All this helps explain who so many ordinary Egyptians have been "smoldering" for decades. Despite hard work and savings, they can do little to improve their lives.
Bringing the majority of Egypt's people into an open legal system is what will break Egypt's economic apartheid. Empowering the poor begins with the legal system awarding clear property rights to the $400 billion-plus of assets that we found they had created. This would unlock an amount of capital hundreds of times greater than foreign direct investment and what Egypt receives in foreign aid.
Leaders and governments may change and more democracy might come to Egypt. But unless its existing legal institutions are reformed to allow economic growth from the bottom up, the aspirations for a better life that are motivating so many demonstrating in the streets will remain unfulfilled.
Mr. de Soto, author of "The Mystery of Capital" (Basic Books, 2000) and "The Other Path" (Harper and Row, 1989), is president of the Institute for Liberty and Democracy based in Lima, Peru.
Thursday, February 3, 2011
Angola country report
Angola country report
1 US State Dept: Angola Briefing: http://www.state.gov/p/af/ci/ao/index.htm.
Economy:
Despite a fast-growing economy largely due to a major oil boom, Angola ranks in the bottom 10% of most socioeconomic indicators. The International Monetary Fund (IMF) estimates that Angola's real GDP increased by 16% in 2008. However, GDP growth in 2009 was flat due to significantly lower oil prices owing to the global financial crisis. According to IMF the GDP growth in 2010 is projected at around 2.5 percent, but a solid pick-up in the pace of growth is expected for 2011. Angola is still recovering from 27 years of nearly continuous warfare, and it remains beset by corruption and economic mismanagement. Despite abundant natural resources and rising per capita GDP, it was ranked 157 out of 179 countries on the 2008 UN Development Program's (UNDP) Human Development Index. Subsistence agriculture sustains one-third of the population.
The rapidly expanding petroleum industry reached its Organization of Petroleum Exporting Countries (OPEC) cap of 2 million barrels per day (bpd) in 2008. However, Angola’s production was cut to 1.51 million bpd in January 2009 by an OPEC mandate in response to plummeting oil prices. Throughout 2009, Angola never got down to its OPEC quota and produced an average of 1.8 million bpd. Angola is currently Africa’s largest oil producer, a position that Angola has traded places back and forth with Nigeria over the last year. Crude oil accounted for roughly 85% of GDP, 95% of exports, and 85% of government revenues in 2009. Angola also produces 40,000 bpd of locally refined oil. Oil production remains largely offshore and has few linkages with other sectors of the economy, though a local content initiative promulgated by the Angolan Government is pressuring oil companies to source from local businesses. The government is also pressuring oil companies to increase the number of Angolan staff.
Block 15, located offshore of Soyo, currently provides 30% of Angola's crude oil production. ExxonMobil, through its subsidiary Esso, is the operator, with a 40% share. In 2005, Block 15's second major sub-field, Kizomba B, came on line, producing about 250,000 bpd. BP, ENI-Agip, and Statoil are partners in the concession. Chevron operates Block 0, offshore of Cabinda, which provides about 20% of Angola's crude oil production. Its partners in Block 0 are Sonangol (the Angolan state oil company), TotalFinaElf, and ENI-Agip. In 2007, Block 0 had a total production of 370,000 bpd, and drilling activity continues at a high level. Chevron also operates Angola's first deepwater section to go into production, Block 14, which started pumping in January 2000 and produced 105,000 bpd in 2006.
TotalFinaElf brought the first Kwanza Basin deepwater blocks on line with production from its Block 17 concession that began in February 2002. Inauguration of the Dalia oilfield in December 2006 combined with the Girassol field already in operation brought Block 17's total production to approximately 500,000 bpd as of July 2007. Total expected to begin drilling in new oilfield Pazflor in 2009, bringing production to a peak of 700,000 bpd by 2011. Exploration is ongoing in ultra-deep water concessions and in deepwater and shallow concessions in the Namibe Basin. BP made the first significant ultra-deepwater find in its Block 31 concession in 2002 and had reached nine significant discoveries by the end of 2005. BP shipped its first crude from the Plutonio oilfield in Block 18 in 2007 and ultimately expects Plutonio to average 200,000 bpd in full production. Marathon also drilled a successful well in its Block 32 ultra-deep water concession. TotalFinaElf operates Angola's one refinery (in Luanda) for sole owner Sonangol; plans for a second refinery in Lobito with projected production of 200,000 bpd are moving forward, with KBR selected to do the front-end engineering and design work. There are plans to increase capacity of the Luanda refinery from 40,000 bpd to 100,000 bpd. Chevron, Sonangol, BP, Total, and Eni are developing a $4 billion to $5 billion liquefied natural gas plant at Soyo, now under construction by Bechtel, expected to start production in 2012.
Exports to Asian countries have grown rapidly in recent years, particularly to China. In late 2004, China's state oil company Sinopec entered the market, offering two separate $1 billion signing bonus offers on two offshore blocks. Sinopec has also formed a partnership with Sonangol to operate Block 3/05 (formerly Block 3/80), whose operation was transferred from Total to Sonangol. Sonangol will seek to expand its operation of onshore and shallow water blocks. This includes the northern block of Cabinda's onshore concessions, which since the reduction in hostilities with separatist forces is now open to exploration. Sonangol and Sinopec will also be eyeing future concession rounds, particularly for 23 blocks in the Kwanza Basin onshore area and the relinquished parts of Blocks 15, 17, and 18, currently operated by Exxon, Total, and BP. In 2008, Angola was China’s second-leading source country for crude oil by volume, importing 599 million barrels valued at U.S. $59.900 billion, up 19.3% year on year.
Diamonds make up most of Angola's remaining exports, with yearly production at 6 million carats. However, the financial crisis severely depressed diamond prices in 2009, sharply curtailing Angola’s diamond exports, and at one point forcing the state diamond authority, Endiama, to buy up production at cost for stockpiling to keep operators going. Diamond sales reached approximately $1.1 billion in 2006. Despite increased corporate ownership of diamond fields, much production is currently in the hands of small-scale prospectors, often operating illegally. Eight large-scale mines operate out of a total of 145 concessions. In June 2005, De Beers signed a $10 million prospecting contract with the government's diamond parastatal, ending a 4-year investment dispute between De Beers and the government. The government is making an increased effort to register and license prospectors. Legal sales of rough diamonds may occur only through the government's diamond-buying parastatal, although many producers continue to bypass the system to obtain higher prices. The government has established an export certification scheme consistent with the "Kimberley Process" to identify legitimate production and sales. Other mineral resources, including gold, remain largely undeveloped, though granite and marble quarrying has begun.
In the last decade of the colonial period, Angola was a major African agricultural exporter. Because of severe wartime conditions, including the massive dislocation of rural people and the extensive laying of landmines throughout the countryside, agricultural activities came to a near standstill, and the country now imports over half of its food. Small-scale agricultural production has increased several-fold over the last 5 years due to demining efforts, infrastructure improvements, and the ability of returnees and internally displaced persons (IDPs) to return safely to agricultural areas, yet production of most crops remains below 1974 levels. Some efforts at commercial agricultural recovery have gone forward, notably in fisheries and tropical fruits, but most of the country's vast potential remains untapped. Recently proposed land reform laws attempt to reconcile overlapping traditional land use rights, colonial-era land claims, and recent land grants to facilitate significant commercial agricultural development. However, the lack of clear title to land tracts and burdensome registration process in Angola continues to be a significant impediment to foreign investment in the agriculture sector.
An economic reform effort launched in 1998 was only marginally successful in addressing persistent fiscal mismanagement and corruption. In April 2000, Angola started an IMF staff-monitored program (SMP). The program lapsed in June 2001 over IMF concerns about lack of progress by Angola. Under the program, the Government of Angola did succeed in unifying exchange rates and moving fuel, electricity, and water prices closer to market rates. In March 2007, the government announced it was not interested in a formally structured IMF program, but would continue to participate in Article IV consultations and other technical assistance on an ad hoc basis. In November 2009, following increased Angolan efforts to make oil revenues more transparent, the IMF approved a 27-month Standby Arrangement (SBA) with Angola in the amount of approximately $1.4 billion to help the country cope with the effects of the global economic crisis. According to a statement released by the IMF, “While the immediate goal is to mitigate the repercussions of the adverse terms of trade shocks linked to the global crisis, the program also includes a reform agenda aimed at medium-term structural issues to foster non-oil sector growth.” The loan is the largest IMF financing package to date for a sub-Saharan African country during the current global crisis.
In December 2002, President dos Santos named a new economic team to oversee homegrown reform efforts. The new team succeeded in decreasing overall government spending, rationalizing the Kwanza exchange rate, closing regulatory loopholes that allowed off-budget expenditures, and capturing all revenues in the state budget. New procedures were implemented to track the flow of funds among the Treasury, Banco Nacional de Angola (the central bank), and the state-owned Banco de Poupança e Credito, which operates the budget. The Angolan Government adopted a new investment code. Concerns remain about quasi-fiscal operations by the state oil company Sonangol, opaque oil-backed concessionary lines of credit that operate outside the budget process, inadequate transparency, oversight in the management of public accounts, and the lack of supervision of the commercial banking sector. A recent Financial Action Task Force on Money Laundering (FATF) report cited Angola for a significant lack of laws and regulations regarding anti-money laundering and counterterrorist financing (AML/CFT). The Angolan commercial code, financial sector law, and telecommunications law all require substantial revision.
Angola is the second-largest trading partner of the United States in sub-Saharan Africa, mainly because of its petroleum exports. U.S. exports to Angola primarily consist of industrial goods and services--such as oilfield equipment, mining equipment, chemicals, aircraft, and food. On December 30, 2003, President George W. Bush approved the designation of Angola as eligible for tariff preferences under the African Growth and Opportunity Act (AGOA).
2 CIA summary: https://www.cia.gov/library/publications/the-world-factbook/geos/ao.html
3 World Bank: Angola at a glance, http://devdata.worldbank.org/AAG/ago_aag.pdf
4 World Bank: costs of doing business in Angola, http://www.doingbusiness.org/data/exploreeconomies/angola. Here you can see costs for all of these (downloadable as Excel sheet):
Starting a Business
Dealing with Construction Permits
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Closing a Business
---
Employees:
Difficulty of hiring
Rigidity of hours
Difficulty of redundancy
Redundancy costs (weeks of salary)
1 US State Dept: Angola Briefing: http://www.state.gov/p/af/ci/ao/index.htm.
Economy:
Despite a fast-growing economy largely due to a major oil boom, Angola ranks in the bottom 10% of most socioeconomic indicators. The International Monetary Fund (IMF) estimates that Angola's real GDP increased by 16% in 2008. However, GDP growth in 2009 was flat due to significantly lower oil prices owing to the global financial crisis. According to IMF the GDP growth in 2010 is projected at around 2.5 percent, but a solid pick-up in the pace of growth is expected for 2011. Angola is still recovering from 27 years of nearly continuous warfare, and it remains beset by corruption and economic mismanagement. Despite abundant natural resources and rising per capita GDP, it was ranked 157 out of 179 countries on the 2008 UN Development Program's (UNDP) Human Development Index. Subsistence agriculture sustains one-third of the population.
The rapidly expanding petroleum industry reached its Organization of Petroleum Exporting Countries (OPEC) cap of 2 million barrels per day (bpd) in 2008. However, Angola’s production was cut to 1.51 million bpd in January 2009 by an OPEC mandate in response to plummeting oil prices. Throughout 2009, Angola never got down to its OPEC quota and produced an average of 1.8 million bpd. Angola is currently Africa’s largest oil producer, a position that Angola has traded places back and forth with Nigeria over the last year. Crude oil accounted for roughly 85% of GDP, 95% of exports, and 85% of government revenues in 2009. Angola also produces 40,000 bpd of locally refined oil. Oil production remains largely offshore and has few linkages with other sectors of the economy, though a local content initiative promulgated by the Angolan Government is pressuring oil companies to source from local businesses. The government is also pressuring oil companies to increase the number of Angolan staff.
Block 15, located offshore of Soyo, currently provides 30% of Angola's crude oil production. ExxonMobil, through its subsidiary Esso, is the operator, with a 40% share. In 2005, Block 15's second major sub-field, Kizomba B, came on line, producing about 250,000 bpd. BP, ENI-Agip, and Statoil are partners in the concession. Chevron operates Block 0, offshore of Cabinda, which provides about 20% of Angola's crude oil production. Its partners in Block 0 are Sonangol (the Angolan state oil company), TotalFinaElf, and ENI-Agip. In 2007, Block 0 had a total production of 370,000 bpd, and drilling activity continues at a high level. Chevron also operates Angola's first deepwater section to go into production, Block 14, which started pumping in January 2000 and produced 105,000 bpd in 2006.
TotalFinaElf brought the first Kwanza Basin deepwater blocks on line with production from its Block 17 concession that began in February 2002. Inauguration of the Dalia oilfield in December 2006 combined with the Girassol field already in operation brought Block 17's total production to approximately 500,000 bpd as of July 2007. Total expected to begin drilling in new oilfield Pazflor in 2009, bringing production to a peak of 700,000 bpd by 2011. Exploration is ongoing in ultra-deep water concessions and in deepwater and shallow concessions in the Namibe Basin. BP made the first significant ultra-deepwater find in its Block 31 concession in 2002 and had reached nine significant discoveries by the end of 2005. BP shipped its first crude from the Plutonio oilfield in Block 18 in 2007 and ultimately expects Plutonio to average 200,000 bpd in full production. Marathon also drilled a successful well in its Block 32 ultra-deep water concession. TotalFinaElf operates Angola's one refinery (in Luanda) for sole owner Sonangol; plans for a second refinery in Lobito with projected production of 200,000 bpd are moving forward, with KBR selected to do the front-end engineering and design work. There are plans to increase capacity of the Luanda refinery from 40,000 bpd to 100,000 bpd. Chevron, Sonangol, BP, Total, and Eni are developing a $4 billion to $5 billion liquefied natural gas plant at Soyo, now under construction by Bechtel, expected to start production in 2012.
Exports to Asian countries have grown rapidly in recent years, particularly to China. In late 2004, China's state oil company Sinopec entered the market, offering two separate $1 billion signing bonus offers on two offshore blocks. Sinopec has also formed a partnership with Sonangol to operate Block 3/05 (formerly Block 3/80), whose operation was transferred from Total to Sonangol. Sonangol will seek to expand its operation of onshore and shallow water blocks. This includes the northern block of Cabinda's onshore concessions, which since the reduction in hostilities with separatist forces is now open to exploration. Sonangol and Sinopec will also be eyeing future concession rounds, particularly for 23 blocks in the Kwanza Basin onshore area and the relinquished parts of Blocks 15, 17, and 18, currently operated by Exxon, Total, and BP. In 2008, Angola was China’s second-leading source country for crude oil by volume, importing 599 million barrels valued at U.S. $59.900 billion, up 19.3% year on year.
Diamonds make up most of Angola's remaining exports, with yearly production at 6 million carats. However, the financial crisis severely depressed diamond prices in 2009, sharply curtailing Angola’s diamond exports, and at one point forcing the state diamond authority, Endiama, to buy up production at cost for stockpiling to keep operators going. Diamond sales reached approximately $1.1 billion in 2006. Despite increased corporate ownership of diamond fields, much production is currently in the hands of small-scale prospectors, often operating illegally. Eight large-scale mines operate out of a total of 145 concessions. In June 2005, De Beers signed a $10 million prospecting contract with the government's diamond parastatal, ending a 4-year investment dispute between De Beers and the government. The government is making an increased effort to register and license prospectors. Legal sales of rough diamonds may occur only through the government's diamond-buying parastatal, although many producers continue to bypass the system to obtain higher prices. The government has established an export certification scheme consistent with the "Kimberley Process" to identify legitimate production and sales. Other mineral resources, including gold, remain largely undeveloped, though granite and marble quarrying has begun.
In the last decade of the colonial period, Angola was a major African agricultural exporter. Because of severe wartime conditions, including the massive dislocation of rural people and the extensive laying of landmines throughout the countryside, agricultural activities came to a near standstill, and the country now imports over half of its food. Small-scale agricultural production has increased several-fold over the last 5 years due to demining efforts, infrastructure improvements, and the ability of returnees and internally displaced persons (IDPs) to return safely to agricultural areas, yet production of most crops remains below 1974 levels. Some efforts at commercial agricultural recovery have gone forward, notably in fisheries and tropical fruits, but most of the country's vast potential remains untapped. Recently proposed land reform laws attempt to reconcile overlapping traditional land use rights, colonial-era land claims, and recent land grants to facilitate significant commercial agricultural development. However, the lack of clear title to land tracts and burdensome registration process in Angola continues to be a significant impediment to foreign investment in the agriculture sector.
An economic reform effort launched in 1998 was only marginally successful in addressing persistent fiscal mismanagement and corruption. In April 2000, Angola started an IMF staff-monitored program (SMP). The program lapsed in June 2001 over IMF concerns about lack of progress by Angola. Under the program, the Government of Angola did succeed in unifying exchange rates and moving fuel, electricity, and water prices closer to market rates. In March 2007, the government announced it was not interested in a formally structured IMF program, but would continue to participate in Article IV consultations and other technical assistance on an ad hoc basis. In November 2009, following increased Angolan efforts to make oil revenues more transparent, the IMF approved a 27-month Standby Arrangement (SBA) with Angola in the amount of approximately $1.4 billion to help the country cope with the effects of the global economic crisis. According to a statement released by the IMF, “While the immediate goal is to mitigate the repercussions of the adverse terms of trade shocks linked to the global crisis, the program also includes a reform agenda aimed at medium-term structural issues to foster non-oil sector growth.” The loan is the largest IMF financing package to date for a sub-Saharan African country during the current global crisis.
In December 2002, President dos Santos named a new economic team to oversee homegrown reform efforts. The new team succeeded in decreasing overall government spending, rationalizing the Kwanza exchange rate, closing regulatory loopholes that allowed off-budget expenditures, and capturing all revenues in the state budget. New procedures were implemented to track the flow of funds among the Treasury, Banco Nacional de Angola (the central bank), and the state-owned Banco de Poupança e Credito, which operates the budget. The Angolan Government adopted a new investment code. Concerns remain about quasi-fiscal operations by the state oil company Sonangol, opaque oil-backed concessionary lines of credit that operate outside the budget process, inadequate transparency, oversight in the management of public accounts, and the lack of supervision of the commercial banking sector. A recent Financial Action Task Force on Money Laundering (FATF) report cited Angola for a significant lack of laws and regulations regarding anti-money laundering and counterterrorist financing (AML/CFT). The Angolan commercial code, financial sector law, and telecommunications law all require substantial revision.
Angola is the second-largest trading partner of the United States in sub-Saharan Africa, mainly because of its petroleum exports. U.S. exports to Angola primarily consist of industrial goods and services--such as oilfield equipment, mining equipment, chemicals, aircraft, and food. On December 30, 2003, President George W. Bush approved the designation of Angola as eligible for tariff preferences under the African Growth and Opportunity Act (AGOA).
2 CIA summary: https://www.cia.gov/library/publications/the-world-factbook/geos/ao.html
3 World Bank: Angola at a glance, http://devdata.worldbank.org/AAG/ago_aag.pdf
4 World Bank: costs of doing business in Angola, http://www.doingbusiness.org/data/exploreeconomies/angola. Here you can see costs for all of these (downloadable as Excel sheet):
Starting a Business
Dealing with Construction Permits
Registering Property
Getting Credit
Protecting Investors
Paying Taxes
Trading Across Borders
Enforcing Contracts
Closing a Business
---
Employees:
Difficulty of hiring
Rigidity of hours
Difficulty of redundancy
Redundancy costs (weeks of salary)
Monday, January 31, 2011
The Two Likeliest Political Outcomes for Mubarak
The Two Likeliest Political Outcomes for Mubarak. By Stephen J. Hadley
Egyptian society needs time to prepare for free elections and to remediate years of government oppression.
WSJ, Jan 31, 2011
http://online.wsj.com/article/SB10001424052748703833204576114252976824050.html
All eyes are now on Egypt and an Obama administration struggling to find its footing. The truth is that once revolutionary fervor emerges and a situation descends into crisis, any administration is largely hostage to events and the dilemmas are acute. Do we desert a longstanding ally, only to raise doubts about our staying power in the minds of other longstanding allies? Do we remain loyal to a longstanding ally even after he has clearly lost public support, only to alienate a people struggling to win their freedom? In the midst of a crisis like this, the options are few.
Before the current crisis, there were good options. They were urged on the Egyptian government by a series of American administrations—including especially the administration of George W. Bush, in which I served. The United States pressed President Hosni Mubarak publicly and privately to encourage the emergence of non-Islamist political parties. Our calls for action were generally ignored and non- Islamist parties were persecuted and suppressed.
The result was a political landscape that offered the Egyptian people just two choices: the government party (the National Democratic Party or NDP) and the underground Islamist Muslim Brotherhood. This sad outcome was President Mubarak's own creation. He did it in part so that he could argue to successive U.S. administrations and his own people that the only alternative to his rule was an Islamist state. But it didn't have to be this way.
Some critics argue that no U.S. administration went far enough in pressing President Mubarak—including the administrations in which I served. As important as the "freedom agenda" was to President Bush, there were other issues—terrorism, proliferation, the Israeli-Palestinian conflict, to name a few—that required us to deal with the Egyptian government. Perhaps as important, the Egyptians are a proud people. No nation wants to be seen to be giving in to public pressure from another state—even a close ally. In the end, the decision was President Mubarak's. He made it, and he is now facing the consequences.
At present, the two most probable outcomes of the current crisis are a lame-duck Mubarak administration or a Mubarak departure from power in favor of a transitional government backed by the Egyptian military.
Under the first outcome, President Mubarak rides out the current crisis. Presidential elections are expected in September of this year. It seems unlikely that either President Mubarak or his son Gamal will conclude that under current circumstances they can run and win. That will leave President Mubarak presiding over a lame-duck administration. The issue will be whether he seeks to transfer power to another authoritarian strongman backed by the army or dramatically changes course and uses the upcoming presidential election to create a democratic transition for his country.
The precedents for this latter outcome are few but not nonexistent. It is essentially the role that the Bush administration urged on Pakistani President Pervez Musharraf, which he played successfully in 2008. The resulting government is admittedly a weak one that continues to cause the U.S. real problems in Afghanistan. But it is a democratic government, and by its coming to power we avoided the kind of Islamist regime that followed the fall of the Shah of Iran and that has provoked three decades of serious confrontation with the U.S. and totalitarian oppression of the Iranian people.
Under the second outcome, President Mubarak surrenders power and is replaced by a transitional government supported by the Egyptian military. The presidential elections then become the vehicle for transferring power to a government whose legitimacy comes from the people.
Either way, Egyptian society needs time to prepare for these elections and to begin to remediate the effects of years of government oppression. The Egyptian people should not have to choose only between the government-backed NDP and the Islamist Muslim Brotherhood. Non-Islamist parties need an opportunity to emerge to fill in the intervening political space. Time is short even if the presidential elections go forward as expected in September. The U.S. should resist the temptation to press for an accelerated election schedule. Hopefully wise heads in Egypt will do the same.
Time and a full array of political alternatives are critical in the upcoming presidential election and the parliamentary elections that undoubtedly will follow. If given an array of choices, I believe that the Egyptian people will choose a democratic future of freedom and not an Islamist future of imposed extremism. While the Muslim Brotherhood, if legalized, would certainly win seats in a new parliament, there is every likelihood that the next Egyptian government will not be a Muslim Brotherhood government but a non-Islamist one committed to building a free and democratic Egypt.
Such a government would still pose real challenges to U.S. policy in many areas. But with all eyes in the region on Egypt, it would be a good outcome nonetheless. With a large population and rich cultural heritage, Egypt has always been a leader in the Middle East. Now it has the opportunity to become what it always should have been—the leader of a movement toward freedom and democracy in the Arab world.
Mr. Hadley was national security adviser to President George W. Bush.
Egyptian society needs time to prepare for free elections and to remediate years of government oppression.
WSJ, Jan 31, 2011
http://online.wsj.com/article/SB10001424052748703833204576114252976824050.html
All eyes are now on Egypt and an Obama administration struggling to find its footing. The truth is that once revolutionary fervor emerges and a situation descends into crisis, any administration is largely hostage to events and the dilemmas are acute. Do we desert a longstanding ally, only to raise doubts about our staying power in the minds of other longstanding allies? Do we remain loyal to a longstanding ally even after he has clearly lost public support, only to alienate a people struggling to win their freedom? In the midst of a crisis like this, the options are few.
Before the current crisis, there were good options. They were urged on the Egyptian government by a series of American administrations—including especially the administration of George W. Bush, in which I served. The United States pressed President Hosni Mubarak publicly and privately to encourage the emergence of non-Islamist political parties. Our calls for action were generally ignored and non- Islamist parties were persecuted and suppressed.
The result was a political landscape that offered the Egyptian people just two choices: the government party (the National Democratic Party or NDP) and the underground Islamist Muslim Brotherhood. This sad outcome was President Mubarak's own creation. He did it in part so that he could argue to successive U.S. administrations and his own people that the only alternative to his rule was an Islamist state. But it didn't have to be this way.
Some critics argue that no U.S. administration went far enough in pressing President Mubarak—including the administrations in which I served. As important as the "freedom agenda" was to President Bush, there were other issues—terrorism, proliferation, the Israeli-Palestinian conflict, to name a few—that required us to deal with the Egyptian government. Perhaps as important, the Egyptians are a proud people. No nation wants to be seen to be giving in to public pressure from another state—even a close ally. In the end, the decision was President Mubarak's. He made it, and he is now facing the consequences.
At present, the two most probable outcomes of the current crisis are a lame-duck Mubarak administration or a Mubarak departure from power in favor of a transitional government backed by the Egyptian military.
Under the first outcome, President Mubarak rides out the current crisis. Presidential elections are expected in September of this year. It seems unlikely that either President Mubarak or his son Gamal will conclude that under current circumstances they can run and win. That will leave President Mubarak presiding over a lame-duck administration. The issue will be whether he seeks to transfer power to another authoritarian strongman backed by the army or dramatically changes course and uses the upcoming presidential election to create a democratic transition for his country.
The precedents for this latter outcome are few but not nonexistent. It is essentially the role that the Bush administration urged on Pakistani President Pervez Musharraf, which he played successfully in 2008. The resulting government is admittedly a weak one that continues to cause the U.S. real problems in Afghanistan. But it is a democratic government, and by its coming to power we avoided the kind of Islamist regime that followed the fall of the Shah of Iran and that has provoked three decades of serious confrontation with the U.S. and totalitarian oppression of the Iranian people.
Under the second outcome, President Mubarak surrenders power and is replaced by a transitional government supported by the Egyptian military. The presidential elections then become the vehicle for transferring power to a government whose legitimacy comes from the people.
Either way, Egyptian society needs time to prepare for these elections and to begin to remediate the effects of years of government oppression. The Egyptian people should not have to choose only between the government-backed NDP and the Islamist Muslim Brotherhood. Non-Islamist parties need an opportunity to emerge to fill in the intervening political space. Time is short even if the presidential elections go forward as expected in September. The U.S. should resist the temptation to press for an accelerated election schedule. Hopefully wise heads in Egypt will do the same.
Time and a full array of political alternatives are critical in the upcoming presidential election and the parliamentary elections that undoubtedly will follow. If given an array of choices, I believe that the Egyptian people will choose a democratic future of freedom and not an Islamist future of imposed extremism. While the Muslim Brotherhood, if legalized, would certainly win seats in a new parliament, there is every likelihood that the next Egyptian government will not be a Muslim Brotherhood government but a non-Islamist one committed to building a free and democratic Egypt.
Such a government would still pose real challenges to U.S. policy in many areas. But with all eyes in the region on Egypt, it would be a good outcome nonetheless. With a large population and rich cultural heritage, Egypt has always been a leader in the Middle East. Now it has the opportunity to become what it always should have been—the leader of a movement toward freedom and democracy in the Arab world.
Mr. Hadley was national security adviser to President George W. Bush.
Saturday, January 29, 2011
Databases
* ABI/Inform
ABI/INFORM is a database covering business, management, economics and a wide range of related fields. It provides abstracts of material from 1971 onwards and over 2,000 titles in full text, from 1987 onwards.
* Academic Search Complete
Updated daily, Academic Search Complete is a multi-disciplinary database with full text coverage of almost 4,700 scholarly publications, including full text coverage of over 3,600 peer-reviewed journals dating as far back as 1975.
* Business Source Premier
Full text coverage of nearly 7,600 business publications, including full text coverage of over 1,100 peer-reviewed, scholarly journals. Coverage back to 1922 in some cases.
* Cambridge Journals Online
Cambridge University Press publishes a prestigious list of scholarly journals, ranging across the humanities, social sciences and STM displines, made available electronically through the Cambridge Journals online service.
* Dawsons E-Book Collection
The Online Library has purchased several core text books in electronic format, and the collection is constantly growing. Please note that not all your required textbooks can be provided but we consider all your suggestions.
* Economic and Social Data Service (ESDS)
Brings together a broad range of social and economic data, both qualitative and quantitative.
* EndNote Bibliographic Software
EndNote and Reference Manager Bibliographic software enables you to record and store references to books or journal articles - with additional options such as the facility to generate bibliographies.
* HeinOnline
Hein Online has four major full text collections: the Law Journal Library, covering over 650 titles (including older issues of journals), the Federal Register Library (1936-1998), the Treaties and Agreements Library, and the U.S. Supreme Court Library.
* IngentaConnect |IngentaConnect offers one of the most comprehensive collections of academic and professional research articles online - some 4 million articles from 11,000 publications.
* Journal of Regional Analysis and Policy Full text available from 1971 to present
* JSTOR
A digital archive collection of core scholarly journals. It is unique in that complete archives of these journals have been digitised, starting with the very first issues, many of which were published as far back as the nineteenth century.
* Lexis®Library
Full-text case-law and legislation for the UK, US (Federal and State), EU and other jurisdictions. It also provides access to a large number of full-text legal journals, local and national newspapers and business information, again both from the UK and the rest of the world.
* PsycARTICLES
PsycARTICLES provides full-text scholarly and scientific articles in psychology. The database contains more than 40,000 articles from 56 journals - 45 published by the American Psychological Association (APA) and 11 from allied organizations. It includes all journal articles, letters to the editor and errata from each journal. Coverage spans 1985 to present.
* PsycEXTRA
PsycEXTRA, produced by the American Psychological Association (APA), is a bibliographic and full-text companion to the scholarly PsycINFO database. The document types included are technical, annual and government reports, conference papers, newsletters, magazines, newspapers, consumer brochures and more.
* SAGE Journals Online
SAGE Journals Online is the delivery platform that provides online access to the full text of individual SAGE journals.
* Science Direct
FulL text access to over 70 peer reviewed journals in a wide range of subject areas, including education health, business & management and the social sciences. Abstracts for over 1800 journals can be searched, but full text access is limited to those titles we have selected and paid for.
* Web of Knowledge
ISI Web of Knowledge delivers easy access to high quality, scholarly information in the sciences, social sciences, and arts and humanities.
* Westlaw
Full text UK case law and journals. Also includes UK Civil Procedures, EU cases, treaties and directives, daily alerting service and some material for other jurisdictions such as the USA
* Wiley Online Library
Access an extensive range of quality journals, reference works and Current Protocols online, covering a range of scientific, medical, technical and professional disciplines.
Monday, January 24, 2011
Press Briefing
Press Briefing
World Economic Forum: Global Risks 2011
http://bit.ly/gDhGcO
Kaplan on Tunisia, or, defending autocratic stability
http://themoornextdoor.wordpress.com/2011/01/23/kaplan-on-tunisia-or-autocratic-stability/
MLK Day Refelctions http://goo.gl/fb/b6vkv
The Vice President & First Lady Honor Sargent Shriver http://goo.gl/fb/QH2HL
Video: A State of the Union Preview http://goo.gl/fb/3D39k
Find a State of the Union Watch Party Near You http://goo.gl/fb/x9QrM
Weekly Address: "We Can Out-Compete Any Other Nation" http://goo.gl/fb/wdLhQ
Seniors and the Affordable Care Act http://goo.gl/fb/gkh5g
Rush Limbaugh on President Obama's state dinner for Hu Jintao
Radio show, Jan. 20, 2011
http://online.wsj.com/article/SB10001424052748704754304576095892416479506.html
The moral code, the moral compass of the state-controlled media is something to behold. Now, some of you may not know the 2009 Nobel Peace Prize winner hosted a state dinner last night for Hu Jintao of China. Hu Jintao is holding the 2010 Nobel Peace Prize winner in prison in China. Not making it up. The 2009 Nobel Peace Prize winner hosted a dinner for the guy holding the 2010 Nobel Peace Prize winner in prison, and the media does not get the irony of this at all. They're too busy running around chasing Sarah Palin and radio talk show hosts over "civility."
World Economic Forum: Global Risks 2011
http://bit.ly/gDhGcO
Kaplan on Tunisia, or, defending autocratic stability
http://themoornextdoor.wordpress.com/2011/01/23/kaplan-on-tunisia-or-autocratic-stability/
MLK Day Refelctions http://goo.gl/fb/b6vkv
The Vice President & First Lady Honor Sargent Shriver http://goo.gl/fb/QH2HL
Video: A State of the Union Preview http://goo.gl/fb/3D39k
Find a State of the Union Watch Party Near You http://goo.gl/fb/x9QrM
Weekly Address: "We Can Out-Compete Any Other Nation" http://goo.gl/fb/wdLhQ
Seniors and the Affordable Care Act http://goo.gl/fb/gkh5g
Rush Limbaugh on President Obama's state dinner for Hu Jintao
Radio show, Jan. 20, 2011
http://online.wsj.com/article/SB10001424052748704754304576095892416479506.html
The moral code, the moral compass of the state-controlled media is something to behold. Now, some of you may not know the 2009 Nobel Peace Prize winner hosted a state dinner last night for Hu Jintao of China. Hu Jintao is holding the 2010 Nobel Peace Prize winner in prison in China. Not making it up. The 2009 Nobel Peace Prize winner hosted a dinner for the guy holding the 2010 Nobel Peace Prize winner in prison, and the media does not get the irony of this at all. They're too busy running around chasing Sarah Palin and radio talk show hosts over "civility."
Sunday, January 23, 2011
Four of every 10 rows of U.S. corn now go for fuel, not food
Amber Waves of Ethanol. WSJ Editorial
Four of every 10 rows of U.S. corn now go for fuel, not food.
WSJ, Jan 22, 2011
http://online.wsj.com/article/SB10001424052748703396604576088010481315914.html
The global economy is getting back on its feet, but so too is an old enemy: food inflation. The United Nations benchmark index hit a record high last month, raising fears of shortages and higher prices that will hit poor countries hardest. So why is the United States, one of the world's biggest agricultural exporters, devoting more and more of its corn crop to . . . ethanol?
The nearby chart, based on data from the Department of Agriculture, shows the remarkable trend over a decade. In 2001, only 7% of U.S. corn went for ethanol, or about 707 million bushels. By 2010, the ethanol share was 39.4%, or nearly five billion bushels out of total U.S. production of 12.45 billion bushels. Four of every 10 rows of corn now go to produce fuel for American cars or trucks, not food or feed.
This trend is the deliberate result of policies designed to subsidize ethanol. Note the surge in the middle of the last decade when Congress began to legislate renewable fuel mandates and many states banned MTBE, which had competed with ethanol but ran afoul of the green and corn lobbies.
This carve out of nearly half of the U.S. corn corp to fuel is increasing even as global food supply is struggling to meet rising demand. U.S. farmers account for about 39% of global corn production and about 16% of that crop is exported, so U.S. corn stocks can influence the world price. Chicago Board of Trade corn March futures recently hit 30-month highs of $6.67 a bushel, up from $4 a bushel a year ago.
Demand from developing nations like China is also playing a role in rising prices, and in our view so is the loose monetary policy of the U.S. Federal Reserve that has increased the price of nearly all commodities traded in dollars.
But reduced corn food supply undoubtedly matters. About 40% of U.S. corn production is used to produce feed for animals. As corn prices rise, beef, poultry and other prices rise, too. The price squeeze has already contributed to the bankruptcy of companies like Texas-based Pilgrim's Pride Corp. and Delaware-based poultry maker Townsends Inc. over the past few years.
This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals. Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. But Cornell University scientist David Pimentel calculates that if the entire U.S. corn crop were devoted to ethanol production, it would satisfy only 4% of U.S. oil consumption.
The Environmental Protection Agency has found that ethanol production has a minimal to negative impact on the environment. Even Al Gore, once an ethanol evangelist, now says his support had more to do with Presidential politics in Iowa and admits the fuel provides little or no environmental gain.
Not that this has changed the politics of ethanol. When consumers didn't buy enough gas last year to meet previous ethanol mandates, the Obama Administration lifted the cap on how much ethanol may be mixed into gasoline to 15% from 10%. Presto! More ethanol "demand." On Friday the EPA greatly expanded the number of cars approved to use the 15% blend. Last month, Congressmen whose constituents benefit from this largesse tucked into the tax bill an extension of the $5 billion tax credit for blending ethanol into gasoline.
At a time when the world will need more corn and grains, it makes no sense to devote scarce farmland to make a fuel that exists only because of taxpayer subsidies and mandates. If food supplies tighten and prices keep rising, such a policy will soon become immoral.
Saturday, January 22, 2011
Iranians adjust to increases in fuel – diesel costs 837% more than a month ago
Iranians adjust to increases in fuel – diesel costs 837% more than a month ago
You can request the full WSJ report in the link above.
Friday, January 21, 2011
Press Briefing
Press Briefing
Video: President Obama on the 50th Anniversary of JFK's Inauguration http://goo.gl/fb/AOdS1
Top Tips for Hosting a State of the Union Watch Party http://goo.gl/fb/lNZWi
Promises Kept: Civil Rights http://goo.gl/fb/ivYl9
Promises Kept: Education http://goo.gl/fb/2F1wK
Promises Kept: National Security http://goo.gl/fb/GcS3c
Press Briefing by Press Secretary Robert Gibbs, 1/20/2011 http://goo.gl/fb/k7OcI
First Lady Michelle Obama to Surprise Visitors on White House Tour at 10:45 AM ET… http://goo.gl/fb/Eifi5
Remarks by President Obama and President Hu of the People's Republic of China in an… http://goo.gl/fb/qdNrA
U.S. & China: Building a Positive, Cooperative, and Comprehensive Relationship http://goo.gl/fb/EjIZ8
The Ruling Ad-Hocracy
So much for Dodd-Frank's promise of no more bailouts.
The Wall Street Journal, Friday, January 21, 2011
http://online.wsj.com/article/SB10001424052748704590704576092422321704498.html
Federal regulators have made it official: The 2010 Dodd-Frank law to reform Wall Street has already failed on its most fundamental promise. That was quick.
Over the last week, the new overseers of American finance have confirmed that there could be more "exceptional" market interventions and that regulators will continue to exercise their own discretion to identify "systemic risks." Regulators will also be able to discriminate among creditors and bail out short-term lenders to too-big-to-fail firms, which will be protected from bankruptcy.
A new report from Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), underlines the fact-free analysis behind the bailout judgments of 2008. Focusing on one of the biggest of the too-big-to-fail firms, Mr. Barofsky reports that the process by which federal officials decided that Citigroup had to be saved in late 2008 "was strikingly ad hoc. While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria."
One could make a case that Citigroup was too big to fail, but nobody seems to have made it. Before voting on November 23, 2008 to recommend that Treasury invoke the systemic-risk exception, which allows the Federal Deposit Insurance Corporation to assist an open bank, the FDIC board seems to have relied largely on the judgment of others.
Mr. Barofsky quotes FDIC Chairman Sheila Bair: "We were told by the [Federal Reserve Bank of New York] that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."
Office of Thrift Supervision Director John Reich voted along with the rest of the FDIC board to help Citi and agreed that it was "obviously a systemic risk situation," but he expressed concern that there had been "some selective creativity exercised in the determination of what is systemic and what's not."
As a result of the FDIC vote and similar judgments at the Fed and Treasury, Citigroup received its second round of federal aid in the space of two months. Having received $25 billion via TARP in October, the company in November received a federal guarantee on some $300 billion of its toxic assets plus another $20 billion from TARP.
Why $20 billion? The company had only asked for the asset guarantee, not the new TARP funds. Henry Paulson, then Secretary of the Treasury, told Mr. Barofsky that he made the decision but "stated that he did not perform any analysis specific to Citigroup in arriving at the $20 billion figure. Rather, he took into consideration the limited amount of TARP funds still available, as well as the prospect that another bank could soon need assistance."
But that was 2008, when according to the Beltway narrative, seat-of-the-pants judgments were needed because regulators had insufficient powers to manage crises. Surely Dodd-Frank fixed all that, right?
Well, not necessarily, according to current Treasury Secretary Tim Geithner, who told Mr. Barofsky that, "In the future we may have to do exceptional things again if we face a shock that large. You just don't know what's systemic and what's not until you know the nature of the shock. It depends on the state of the world—how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock."
Taxpayers may notice that this message has evolved since last July, when President Obama signed Dodd-Frank and proclaimed, "There will be no more tax-funded bailouts—period."
It's not merely a shift in rhetoric. The new old ad-hocracy was also on display this week in two regulatory decisions. The new Financial Stability Oversight Council chaired by Mr. Geithner once again refused to define exactly what it means to be a systemically significant firm.
In a draft rule, the council said it will take into account things like the size, leverage and "interconnectedness" of firms, but didn't say how big or how leveraged, or what a high degree of interconnectedness means. Oh, and "In addition, the Council would consider any other risk-related factors that the Council deems appropriate, either by regulation or on a case-by-case basis . . ."
So systemically risky will be whatever unelected officials say it is. A financial market in need of bright lines will get only more shades of regulator gray.
Over at the FDIC, meanwhile, the regulators enacted an "interim final" rule on how to manage the failure of systemically significant firms. "Interim" means the FDIC will still accept comments about it from the public, but "final" means the rule is now binding. And the final decision is that when too-big-to-fail firms are handed over to the FDIC instead of to a bankruptcy court, the FDIC can discriminate among creditors and can keep payments flowing to short-term creditors that the agency believes are essential to the operation of the firm.
We think Mr. Barofsky is performing a public service by excavating these 2008 bailout ruins because the time to tighten the rules on too-big-to-fail firms is when the market is calm, not amid a panic. Dodd-Frank was supposed to reduce the odds of back-pocket rescue decisions, but now even its main promoters are admitting that the law gives them enormous discretion to do it all over again, based on little more than their own ad-hoc judgments.
Any Republicans tempted to accept Dodd-Frank as settled law should dig into the details and work to restore the freedom to fail in American finance.
Video: President Obama on the 50th Anniversary of JFK's Inauguration http://goo.gl/fb/AOdS1
Top Tips for Hosting a State of the Union Watch Party http://goo.gl/fb/lNZWi
Promises Kept: Civil Rights http://goo.gl/fb/ivYl9
Promises Kept: Education http://goo.gl/fb/2F1wK
Promises Kept: National Security http://goo.gl/fb/GcS3c
Press Briefing by Press Secretary Robert Gibbs, 1/20/2011 http://goo.gl/fb/k7OcI
First Lady Michelle Obama to Surprise Visitors on White House Tour at 10:45 AM ET… http://goo.gl/fb/Eifi5
Remarks by President Obama and President Hu of the People's Republic of China in an… http://goo.gl/fb/qdNrA
U.S. & China: Building a Positive, Cooperative, and Comprehensive Relationship http://goo.gl/fb/EjIZ8
The Ruling Ad-Hocracy
So much for Dodd-Frank's promise of no more bailouts.
The Wall Street Journal, Friday, January 21, 2011
http://online.wsj.com/article/SB10001424052748704590704576092422321704498.html
Federal regulators have made it official: The 2010 Dodd-Frank law to reform Wall Street has already failed on its most fundamental promise. That was quick.
Over the last week, the new overseers of American finance have confirmed that there could be more "exceptional" market interventions and that regulators will continue to exercise their own discretion to identify "systemic risks." Regulators will also be able to discriminate among creditors and bail out short-term lenders to too-big-to-fail firms, which will be protected from bankruptcy.
A new report from Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program (TARP), underlines the fact-free analysis behind the bailout judgments of 2008. Focusing on one of the biggest of the too-big-to-fail firms, Mr. Barofsky reports that the process by which federal officials decided that Citigroup had to be saved in late 2008 "was strikingly ad hoc. While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria."
One could make a case that Citigroup was too big to fail, but nobody seems to have made it. Before voting on November 23, 2008 to recommend that Treasury invoke the systemic-risk exception, which allows the Federal Deposit Insurance Corporation to assist an open bank, the FDIC board seems to have relied largely on the judgment of others.
Mr. Barofsky quotes FDIC Chairman Sheila Bair: "We were told by the [Federal Reserve Bank of New York] that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."
Office of Thrift Supervision Director John Reich voted along with the rest of the FDIC board to help Citi and agreed that it was "obviously a systemic risk situation," but he expressed concern that there had been "some selective creativity exercised in the determination of what is systemic and what's not."
As a result of the FDIC vote and similar judgments at the Fed and Treasury, Citigroup received its second round of federal aid in the space of two months. Having received $25 billion via TARP in October, the company in November received a federal guarantee on some $300 billion of its toxic assets plus another $20 billion from TARP.
Why $20 billion? The company had only asked for the asset guarantee, not the new TARP funds. Henry Paulson, then Secretary of the Treasury, told Mr. Barofsky that he made the decision but "stated that he did not perform any analysis specific to Citigroup in arriving at the $20 billion figure. Rather, he took into consideration the limited amount of TARP funds still available, as well as the prospect that another bank could soon need assistance."
But that was 2008, when according to the Beltway narrative, seat-of-the-pants judgments were needed because regulators had insufficient powers to manage crises. Surely Dodd-Frank fixed all that, right?
Well, not necessarily, according to current Treasury Secretary Tim Geithner, who told Mr. Barofsky that, "In the future we may have to do exceptional things again if we face a shock that large. You just don't know what's systemic and what's not until you know the nature of the shock. It depends on the state of the world—how deep the recession is. We have better tools now, thanks to Dodd-Frank. But you have to know the nature of the shock."
Taxpayers may notice that this message has evolved since last July, when President Obama signed Dodd-Frank and proclaimed, "There will be no more tax-funded bailouts—period."
It's not merely a shift in rhetoric. The new old ad-hocracy was also on display this week in two regulatory decisions. The new Financial Stability Oversight Council chaired by Mr. Geithner once again refused to define exactly what it means to be a systemically significant firm.
In a draft rule, the council said it will take into account things like the size, leverage and "interconnectedness" of firms, but didn't say how big or how leveraged, or what a high degree of interconnectedness means. Oh, and "In addition, the Council would consider any other risk-related factors that the Council deems appropriate, either by regulation or on a case-by-case basis . . ."
So systemically risky will be whatever unelected officials say it is. A financial market in need of bright lines will get only more shades of regulator gray.
Over at the FDIC, meanwhile, the regulators enacted an "interim final" rule on how to manage the failure of systemically significant firms. "Interim" means the FDIC will still accept comments about it from the public, but "final" means the rule is now binding. And the final decision is that when too-big-to-fail firms are handed over to the FDIC instead of to a bankruptcy court, the FDIC can discriminate among creditors and can keep payments flowing to short-term creditors that the agency believes are essential to the operation of the firm.
We think Mr. Barofsky is performing a public service by excavating these 2008 bailout ruins because the time to tighten the rules on too-big-to-fail firms is when the market is calm, not amid a panic. Dodd-Frank was supposed to reduce the odds of back-pocket rescue decisions, but now even its main promoters are admitting that the law gives them enormous discretion to do it all over again, based on little more than their own ad-hoc judgments.
Any Republicans tempted to accept Dodd-Frank as settled law should dig into the details and work to restore the freedom to fail in American finance.
Tuesday, January 18, 2011
Beijing's leaders have concluded that the U.S. is in decline and that now is the time to seek more global influence
The New Era of U.S.-China Rivalry. By Aaron Friedberg
Beijing's leaders have concluded that the U.S. is in decline and that now is the time to seek more global influence.
WSJ, Jan 17, 2011
http://online.wsj.com/article/SB10001424052748704323204576085013620618774.html
When he meets with President Barack Obama this week, China's paramount leader Hu Jintao will probably be looking to soothe concerns over his country's recent behavior. The last two years have seen a marked increase in tensions between the two Pacific powers, as well as between China and many of its Asian neighbors. In the past 12 months alone Beijing has:
• Shielded North Korea from tough international sanctions, despite Pyongyang's unprovoked sinking of a South Korean naval vessel and deadly shelling of a small island;
• Intensified its long-standing claim to virtually all of the resource-rich South China Sea by suggesting that the region was a "core national interest," a term previously used to refer only to areas (like Tibet and Taiwan) over which China is willing to go to war.
• Declared publicly that, when it comes to resolving competing claims over this region "China is a big country and other countries are small countries, and that's just a fact."
• Threatened for the first time to impose sanctions on U.S. companies that participate in arms sales to Taiwan.
• Conducted unprecedentedly large and complex naval exercises in the waters of the Western Pacific.
• Revealed the existence of a new stealth fighter aircraft.
• Begun initial deployments of a new antiship ballistic missile targeting U.S. aircraft carriers in the Western Pacific.
Not surprisingly, all of this activity has stirred anxiety across Asia, and it has begun to provoke responses from the United States as well. President Obama's recent swing through Asia included stops in India, Indonesia, South Korea and Japan, but it pointedly excluded Beijing. American and Japanese defense officials have since announced their intention to devote more resources to counter China's rising power, and the U.S. and South Korea have enhanced their military cooperation. Despite a history of animosity, Seoul and Tokyo have taken steps in the same direction.
Beijing's behavior has thus triggered reactions that could make it harder to achieve its long-term goal of re-establishing China as the dominant power in East Asia. A well-timed campaign of "smile diplomacy" could help.
But how meaningful will any of this week's theater be? The answer depends in large part on what lies behind China's recent assertiveness. Some Western analysts have sought to explain it away as an incidental by-product of political infighting in the run-up to the planned 2012 leadership succession, or a passing outburst of belligerence by some elements of the People's Liberation Army. Cooler heads have now prevailed, we are told, and they are now trying to put the country back on the less confrontational path it has followed for the past three decades.
Unfortunately, the problem is more deeply rooted than these reassuring assertions suggest. While Chinese leaders may disagree on questions of tactics and timing, there is no reason to believe they differ over fundamental questions of strategy. Beijing may be willing to dial back its rhetoric, but it is not going to abandon its goal of regional preponderance.
Since the start of the 2008-09 financial crisis, many Chinese strategists have concluded that the U.S. is declining, while China is rising much faster than expected. Belief that this is the case has fed an already powerful nationalism that appears to be increasingly widespread, especially among the young.
In this view it is time for China to "stand up," to right some of the wrongs suffered when the country was relatively weak, and to reclaim its rightful role in Asia and the world. Such sentiments are not the exclusive preserve of the military, although it may seek to tap them for its own ends. The rising generation of Chinese leaders cannot afford to ignore these views, and they may well share them.
If this assessment is correct, then the last two years are not a temporary deviation but a portent. Rather than signaling the start of a new interval of cooperation and stability, Hu Jintao's visit may mark the end of an era of relatively smooth relations between the U.S. and China.
Mr. Friedberg is a professor at Princeton University. His new book, "A Contest for Supremacy: China, America and the Struggle for Mastery in Asia" is forthcoming from W.W. Norton.
Beijing's leaders have concluded that the U.S. is in decline and that now is the time to seek more global influence.
WSJ, Jan 17, 2011
http://online.wsj.com/article/SB10001424052748704323204576085013620618774.html
When he meets with President Barack Obama this week, China's paramount leader Hu Jintao will probably be looking to soothe concerns over his country's recent behavior. The last two years have seen a marked increase in tensions between the two Pacific powers, as well as between China and many of its Asian neighbors. In the past 12 months alone Beijing has:
• Shielded North Korea from tough international sanctions, despite Pyongyang's unprovoked sinking of a South Korean naval vessel and deadly shelling of a small island;
• Intensified its long-standing claim to virtually all of the resource-rich South China Sea by suggesting that the region was a "core national interest," a term previously used to refer only to areas (like Tibet and Taiwan) over which China is willing to go to war.
• Declared publicly that, when it comes to resolving competing claims over this region "China is a big country and other countries are small countries, and that's just a fact."
• Threatened for the first time to impose sanctions on U.S. companies that participate in arms sales to Taiwan.
• Conducted unprecedentedly large and complex naval exercises in the waters of the Western Pacific.
• Revealed the existence of a new stealth fighter aircraft.
• Begun initial deployments of a new antiship ballistic missile targeting U.S. aircraft carriers in the Western Pacific.
Not surprisingly, all of this activity has stirred anxiety across Asia, and it has begun to provoke responses from the United States as well. President Obama's recent swing through Asia included stops in India, Indonesia, South Korea and Japan, but it pointedly excluded Beijing. American and Japanese defense officials have since announced their intention to devote more resources to counter China's rising power, and the U.S. and South Korea have enhanced their military cooperation. Despite a history of animosity, Seoul and Tokyo have taken steps in the same direction.
Beijing's behavior has thus triggered reactions that could make it harder to achieve its long-term goal of re-establishing China as the dominant power in East Asia. A well-timed campaign of "smile diplomacy" could help.
But how meaningful will any of this week's theater be? The answer depends in large part on what lies behind China's recent assertiveness. Some Western analysts have sought to explain it away as an incidental by-product of political infighting in the run-up to the planned 2012 leadership succession, or a passing outburst of belligerence by some elements of the People's Liberation Army. Cooler heads have now prevailed, we are told, and they are now trying to put the country back on the less confrontational path it has followed for the past three decades.
Unfortunately, the problem is more deeply rooted than these reassuring assertions suggest. While Chinese leaders may disagree on questions of tactics and timing, there is no reason to believe they differ over fundamental questions of strategy. Beijing may be willing to dial back its rhetoric, but it is not going to abandon its goal of regional preponderance.
Since the start of the 2008-09 financial crisis, many Chinese strategists have concluded that the U.S. is declining, while China is rising much faster than expected. Belief that this is the case has fed an already powerful nationalism that appears to be increasingly widespread, especially among the young.
In this view it is time for China to "stand up," to right some of the wrongs suffered when the country was relatively weak, and to reclaim its rightful role in Asia and the world. Such sentiments are not the exclusive preserve of the military, although it may seek to tap them for its own ends. The rising generation of Chinese leaders cannot afford to ignore these views, and they may well share them.
If this assessment is correct, then the last two years are not a temporary deviation but a portent. Rather than signaling the start of a new interval of cooperation and stability, Hu Jintao's visit may mark the end of an era of relatively smooth relations between the U.S. and China.
Mr. Friedberg is a professor at Princeton University. His new book, "A Contest for Supremacy: China, America and the Struggle for Mastery in Asia" is forthcoming from W.W. Norton.
Sunday, January 16, 2011
Can We Boost Demand for Rainfall Insurance in Developing Countries?
Can We Boost Demand for Rainfall Insurance in Developing Countries?
Wold Bank, Jan 05, 2011
http://blogs.worldbank.org/allaboutfinance/node/634
Ask small farmers in semiarid areas of Africa or India about the most important risk they face and they will tell you that it is drought. In 2003 an Indian insurance company and World Bank experts designed a potential hedging instrument for this type of risk—an insurance contract that pays off on the basis of the rainfall recorded at a local weather station.
The idea of using an index (in this case rainfall) to proxy for losses is not new. In the 1940s Harold Halcrow, then a PhD student at the University of Chicago, wrote his thesis on the use of area yield to insure against crop yield losses. In the past two decades the market to hedge against weather risk has grown, especially in developed economies: citrus farmers can insure against frost, gas companies against warm winters, ski resorts against lack of snow, and couples against rain on their wedding day.
Rainfall insurance in developing countries is typically sold commercially before the start of the growing season in unit sizes as small as $1. To qualify for a payout, there is no need to file a claim: policyholders automatically qualify if the accumulated rainfall by a certain date is below a certain threshold. Figure 1 shows an example of a payout schedule for an insurance policy against drought, with accumulated rainfall on the x-axis and payouts on the y-axis. If rainfall is above the first trigger, the crop has received enough rain; if it is between the first and second triggers, the policyholder receives a payout, the size of which increases with the deficit in rainfall; and if it is below the second trigger, which corresponds to crop failure, the policyholder gets the maximum payout. This product has inspired development agencies around the world, and today at least 36 pilot projects are introducing index insurance in developing countries.
Figure 1. Example of a Payout Schedule for an Insurance Policy against Drought
Despite the potentially large welfare benefits, take-up of the product has been disappointingly low. Explanations for this low demand abound. The first and obvious reason is that the product is too expensive relative to the risk coping strategies now used by the farmers. After all, when it is not heavily subsidized (as it is in several states in India), average payouts, which are based on historical rainfall data, amount to about 30–40 percent of the premiums. In a recent paper several coauthors and I estimate that if insurance could be offered with payout ratios similar to those of U.S. insurance contracts, demand would increase by 25–50 percent. But even if prices were close to actuarially fair, demand would not come close to universal participation. So the price cannot be the whole story.
Another explanation is based on liquidity constraints: farmers purchase insurance at the start of the growing season, when there are many competing uses for the limited cash available. In the same paper we randomly assign certain households enough cash to buy one policy and find that this increases take-up by 150 percent of the baseline take-up rate. This effect is several times as large as the effect of cutting the price of the product by half and is concentrated among poor households, which are likely to have less access to the financial system.
In addition, potential buyers may not fully trust the product. Unlike credit, which requires that the lender trust the borrower to repay the loan, insurance requires that the client trust the provider to honor its promise in case of a payout. We measure the importance of trust by varying whether or not the insurance educator visiting households is endorsed by a trusted local agent during the visit. Demand is 36 percent higher when the insurance is offered by a source the household trusts. Trust may be particularly important because many households have only limited numeracy and financial literacy, which is likely to reduce their ability to independently evaluate the insurance.
These results point to several possible improvements in contract design. For example, the trust issue might be overcome by designing a product that pays often initially, since it is easier to sell insurance where a past payout has occurred. Liquidity constraints might be eased by ensuring that payouts are disbursed quickly or by offering loans to pay the premium. Finally, agricultural loans could be bundled with insurance, creating what is in effect a contingent loan, with the amount to be repaid depending on the amount of rainfall. This product was tested in a pilot in Malawi, and to our surprise demand for the bundled loan (17.6 percent uptake) was lower than that for a regular loan (33 percent). The reason may have been that the lender’s inability to penalize defaulting borrowers (in part, because of lack of collateral) was already providing implicit insurance and so farmers did not value the insurance policy.
What is remarkable about the Malawi experience is that after the pilot the lenders decided to bundle all agricultural loans with insurance. In their view, rainfall insurance had proved to be an attractive way to reduce the risk of credit default and had the potential to increase access to agricultural credit at lower prices.
The insurance covers only the loans. But informal discussions with borrowers suggest that they remain largely unaware that the loans are insured. Banks may not be telling borrowers about the insurance, however—because if they did, borrowers would need to know the exact amount of the payout (if any) to compute what they need to repay to the bank. In other words, uncertainty about the payout can undermine the culture of repayment. This happened in the Malawi pilot. One region of the pilot experienced a mild drought that triggered only a small payout. But because farmers were told that there had been a payout, they assumed that it covered the entire repayment amount and thus defaulted on their loans.
This example suggests that where financial literacy and understanding of the product are limited, insurance policies could instead be targeted to a group—such as an entire village, a producer group, or a cooperative—rather than to individuals. The decision to purchase insurance would be made by the group’s managers, who are likely to be more educated and more familiar with financial products than other group members and may also be less financially constrained. The group could then decide ahead of time how best to allocate funds among its members in case of a payout.
Wold Bank, Jan 05, 2011
http://blogs.worldbank.org/allaboutfinance/node/634
Ask small farmers in semiarid areas of Africa or India about the most important risk they face and they will tell you that it is drought. In 2003 an Indian insurance company and World Bank experts designed a potential hedging instrument for this type of risk—an insurance contract that pays off on the basis of the rainfall recorded at a local weather station.
The idea of using an index (in this case rainfall) to proxy for losses is not new. In the 1940s Harold Halcrow, then a PhD student at the University of Chicago, wrote his thesis on the use of area yield to insure against crop yield losses. In the past two decades the market to hedge against weather risk has grown, especially in developed economies: citrus farmers can insure against frost, gas companies against warm winters, ski resorts against lack of snow, and couples against rain on their wedding day.
Rainfall insurance in developing countries is typically sold commercially before the start of the growing season in unit sizes as small as $1. To qualify for a payout, there is no need to file a claim: policyholders automatically qualify if the accumulated rainfall by a certain date is below a certain threshold. Figure 1 shows an example of a payout schedule for an insurance policy against drought, with accumulated rainfall on the x-axis and payouts on the y-axis. If rainfall is above the first trigger, the crop has received enough rain; if it is between the first and second triggers, the policyholder receives a payout, the size of which increases with the deficit in rainfall; and if it is below the second trigger, which corresponds to crop failure, the policyholder gets the maximum payout. This product has inspired development agencies around the world, and today at least 36 pilot projects are introducing index insurance in developing countries.
Figure 1. Example of a Payout Schedule for an Insurance Policy against Drought
Despite the potentially large welfare benefits, take-up of the product has been disappointingly low. Explanations for this low demand abound. The first and obvious reason is that the product is too expensive relative to the risk coping strategies now used by the farmers. After all, when it is not heavily subsidized (as it is in several states in India), average payouts, which are based on historical rainfall data, amount to about 30–40 percent of the premiums. In a recent paper several coauthors and I estimate that if insurance could be offered with payout ratios similar to those of U.S. insurance contracts, demand would increase by 25–50 percent. But even if prices were close to actuarially fair, demand would not come close to universal participation. So the price cannot be the whole story.
Another explanation is based on liquidity constraints: farmers purchase insurance at the start of the growing season, when there are many competing uses for the limited cash available. In the same paper we randomly assign certain households enough cash to buy one policy and find that this increases take-up by 150 percent of the baseline take-up rate. This effect is several times as large as the effect of cutting the price of the product by half and is concentrated among poor households, which are likely to have less access to the financial system.
In addition, potential buyers may not fully trust the product. Unlike credit, which requires that the lender trust the borrower to repay the loan, insurance requires that the client trust the provider to honor its promise in case of a payout. We measure the importance of trust by varying whether or not the insurance educator visiting households is endorsed by a trusted local agent during the visit. Demand is 36 percent higher when the insurance is offered by a source the household trusts. Trust may be particularly important because many households have only limited numeracy and financial literacy, which is likely to reduce their ability to independently evaluate the insurance.
These results point to several possible improvements in contract design. For example, the trust issue might be overcome by designing a product that pays often initially, since it is easier to sell insurance where a past payout has occurred. Liquidity constraints might be eased by ensuring that payouts are disbursed quickly or by offering loans to pay the premium. Finally, agricultural loans could be bundled with insurance, creating what is in effect a contingent loan, with the amount to be repaid depending on the amount of rainfall. This product was tested in a pilot in Malawi, and to our surprise demand for the bundled loan (17.6 percent uptake) was lower than that for a regular loan (33 percent). The reason may have been that the lender’s inability to penalize defaulting borrowers (in part, because of lack of collateral) was already providing implicit insurance and so farmers did not value the insurance policy.
What is remarkable about the Malawi experience is that after the pilot the lenders decided to bundle all agricultural loans with insurance. In their view, rainfall insurance had proved to be an attractive way to reduce the risk of credit default and had the potential to increase access to agricultural credit at lower prices.
The insurance covers only the loans. But informal discussions with borrowers suggest that they remain largely unaware that the loans are insured. Banks may not be telling borrowers about the insurance, however—because if they did, borrowers would need to know the exact amount of the payout (if any) to compute what they need to repay to the bank. In other words, uncertainty about the payout can undermine the culture of repayment. This happened in the Malawi pilot. One region of the pilot experienced a mild drought that triggered only a small payout. But because farmers were told that there had been a payout, they assumed that it covered the entire repayment amount and thus defaulted on their loans.
This example suggests that where financial literacy and understanding of the product are limited, insurance policies could instead be targeted to a group—such as an entire village, a producer group, or a cooperative—rather than to individuals. The decision to purchase insurance would be made by the group’s managers, who are likely to be more educated and more familiar with financial products than other group members and may also be less financially constrained. The group could then decide ahead of time how best to allocate funds among its members in case of a payout.
Further reading
Giné, X., R. M. Townsend, and J. Vickery. 2007. “Statistical Analysis of Rainfall Insurance Payouts in Southern India.” American Journal of Agricultural Economics 89 (5): 1248–54.
Giné, X., R. Townsend, and J. Vickery. 2008. “Patterns of Rainfall Insurance Participation in Rural India.” World Bank Economic Review 22 (3): 539–66.
Giné, X., and D. Yang. 2009. “Insurance, Credit, and Technology Adoption: Field Experimental Evidence from Malawi.” Journal of Development Economics 89 (1): 1–11.
Cole, S., X. Giné, J. Tobacman, P. Topalova, R. Townsend, and J. Vickery. 2010. “Barriers to Household Risk Management: Evidence from India.” Policy Research Working Paper 5504, World Bank, Washington, DC.
Thursday, January 13, 2011
A New Model for Corporate Boards - Companies have too many directors, and not enough of them have experience in the firm's main line of business
A New Model for Corporate Boards. By ROBERT C. POZEN
Companies have too many directors, and not enough of them have experience in the firm's main line of business.
The Wall Street Journal, Thursday, December 30, 2010
http://online.wsj.com/article/SB10001424052748703581204576033430665661032.html
In 2002, Congress passed the Sarbanes-Oxley Act to prevent corporate governance debacles like Enron and WorldCom from happening again. But six years later, many of the largest U.S. institutions had to be rescued by massive federal assistance. All of these institutions were Sarbox-compliant: Most members of their boards were independent, and their auditors' reports showed no material weaknesses in internal controls. So why were the reforms so ineffective?
I believe that the problem is the current structure of corporate boards. In short, they are too big, members often don't have enough relevant experience, and they put too much emphasis on procedure. Complex global companies need a new model. Boards should be comprised of a small group of people with enough pertinent experience and sufficient time to hold management accountable.
The average board size for companies in the S&P 500 was almost 11 in 2009. In groups this large, individual members engage in what psychologists call "social loafing." Instead of taking personal responsibility for the group's actions, they rely on others to take the lead.
Psychologists such as Harvard's Richard Hackman suggest that groups of six or seven are the most effective at decision-making. Groups of this size are small enough for all members to take personal responsibility for the group's actions. They also can take decisive action more quickly than a large board.
Although the Citigroup board in 2007 was filled with many luminaries, only one of the independent directors had ever worked for a financial-services firm. Of course, every board needs a generalist to provide a broad perspective and an accounting expert to head the audit committee. But the rest should have experience in the company's main line of business.
Most boards meet in person every other month for one day, plus conference calls between meetings. That simply isn't enough time to keep abreast of the global operations of a large company. An effective outside director should spend at least two days per month on company business between board meetings. Accordingly, independent directors should be restricted to serving on just two boards of public companies.
In all three respects, this model represents a significant departure from current board practice. Here are some pre-emptive answers to questions that will likely arise from my proposal:
When it comes to finding people with relevant experience, those most qualified to be professional directors often are working for the company's competitors. They obviously couldn't serve on a competitor's board due to conflicts of interest and antitrust concerns. As a result, most independent directors will have to be retired company executives (but not of the company in question). Many executives retire around age 60 in good health and want to continue to work, preferably on a part-time basis. They should serve as directors as long as they are capable, without a requirement for mandatory retirement at 70.
The average compensation of directors in S&P 500 companies is currently $213,000 per year. In this new model, professional directors would be putting in roughly twice the hours, so their total compensation should be approximately $400,000 per year.
To align the interests of professional directors with those of long-term shareholders, these directors should receive 75% of their total compensation in shares, subject to two conditions. First, these shares would vest in equal parts over four years. Second, at least half of the shares would have to be held until retirement.
Since professional independent directors will be more active in supervising the business of the company, will they become subject to increased legal liabilities? For example, if the head of a particular company's audit committee learns a lot about that company's finances, will he or she be personally liable if its financial statements contain material misrepresentations? No. Under federal securities laws, unless the audit head knew of these misrepresentations or recklessly disregarded them, he or she would not be liable.
Under state laws, state courts will override the business judgment of independent directors only if they do not act "in good faith." Because professional directors will be more diligent than today's norm, they will be in a particularly strong position to show that they acted "in good faith."
The most serious objection to my proposed model will probably be the concern that it could blur the distinction between the roles of the board and management. A board of directors has specific duties such as selecting the CEO, plus more general duties such as setting strategic goals. But the board is not supposed to get involved in day-to-day company management.
Although the new model will give greater power to professional directors, it would not empower them to cross the line into the day-to-day operations. Between board meetings, for example, professional directors would talk with managers to better understand the key decisions underlying the company's financial statements and the actual impact of its compensation policies. These sessions wouldn't amount to micromanagement. Instead, they would ensure that critical issues were fully addressed by the relevant board committees.
This new model could get adopted in several ways. First, bank regulators could use their "safety and soundness" authority to force troubled banks to elect professional directors. Second, activist shareholders might join together to pressure a poorly performing company into adopting this model. Finally, a few boards of large companies might be willing to try it out and see how it works.
Regulators, investors and directors should recognize that we do not need more procedures for corporate boards. Instead, we need more expert directors who view their board services as their primary profession—not an avocation.
Mr. Pozen is chairman emeritus of MFS Investment Management and a senior lecturer at Harvard Business School. This op-ed was adapted from an article appearing in the December 2010 issue of the Harvard Business Review.
Companies have too many directors, and not enough of them have experience in the firm's main line of business.
The Wall Street Journal, Thursday, December 30, 2010
http://online.wsj.com/article/SB10001424052748703581204576033430665661032.html
In 2002, Congress passed the Sarbanes-Oxley Act to prevent corporate governance debacles like Enron and WorldCom from happening again. But six years later, many of the largest U.S. institutions had to be rescued by massive federal assistance. All of these institutions were Sarbox-compliant: Most members of their boards were independent, and their auditors' reports showed no material weaknesses in internal controls. So why were the reforms so ineffective?
I believe that the problem is the current structure of corporate boards. In short, they are too big, members often don't have enough relevant experience, and they put too much emphasis on procedure. Complex global companies need a new model. Boards should be comprised of a small group of people with enough pertinent experience and sufficient time to hold management accountable.
The average board size for companies in the S&P 500 was almost 11 in 2009. In groups this large, individual members engage in what psychologists call "social loafing." Instead of taking personal responsibility for the group's actions, they rely on others to take the lead.
Psychologists such as Harvard's Richard Hackman suggest that groups of six or seven are the most effective at decision-making. Groups of this size are small enough for all members to take personal responsibility for the group's actions. They also can take decisive action more quickly than a large board.
Although the Citigroup board in 2007 was filled with many luminaries, only one of the independent directors had ever worked for a financial-services firm. Of course, every board needs a generalist to provide a broad perspective and an accounting expert to head the audit committee. But the rest should have experience in the company's main line of business.
Most boards meet in person every other month for one day, plus conference calls between meetings. That simply isn't enough time to keep abreast of the global operations of a large company. An effective outside director should spend at least two days per month on company business between board meetings. Accordingly, independent directors should be restricted to serving on just two boards of public companies.
In all three respects, this model represents a significant departure from current board practice. Here are some pre-emptive answers to questions that will likely arise from my proposal:
When it comes to finding people with relevant experience, those most qualified to be professional directors often are working for the company's competitors. They obviously couldn't serve on a competitor's board due to conflicts of interest and antitrust concerns. As a result, most independent directors will have to be retired company executives (but not of the company in question). Many executives retire around age 60 in good health and want to continue to work, preferably on a part-time basis. They should serve as directors as long as they are capable, without a requirement for mandatory retirement at 70.
The average compensation of directors in S&P 500 companies is currently $213,000 per year. In this new model, professional directors would be putting in roughly twice the hours, so their total compensation should be approximately $400,000 per year.
To align the interests of professional directors with those of long-term shareholders, these directors should receive 75% of their total compensation in shares, subject to two conditions. First, these shares would vest in equal parts over four years. Second, at least half of the shares would have to be held until retirement.
Since professional independent directors will be more active in supervising the business of the company, will they become subject to increased legal liabilities? For example, if the head of a particular company's audit committee learns a lot about that company's finances, will he or she be personally liable if its financial statements contain material misrepresentations? No. Under federal securities laws, unless the audit head knew of these misrepresentations or recklessly disregarded them, he or she would not be liable.
Under state laws, state courts will override the business judgment of independent directors only if they do not act "in good faith." Because professional directors will be more diligent than today's norm, they will be in a particularly strong position to show that they acted "in good faith."
The most serious objection to my proposed model will probably be the concern that it could blur the distinction between the roles of the board and management. A board of directors has specific duties such as selecting the CEO, plus more general duties such as setting strategic goals. But the board is not supposed to get involved in day-to-day company management.
Although the new model will give greater power to professional directors, it would not empower them to cross the line into the day-to-day operations. Between board meetings, for example, professional directors would talk with managers to better understand the key decisions underlying the company's financial statements and the actual impact of its compensation policies. These sessions wouldn't amount to micromanagement. Instead, they would ensure that critical issues were fully addressed by the relevant board committees.
This new model could get adopted in several ways. First, bank regulators could use their "safety and soundness" authority to force troubled banks to elect professional directors. Second, activist shareholders might join together to pressure a poorly performing company into adopting this model. Finally, a few boards of large companies might be willing to try it out and see how it works.
Regulators, investors and directors should recognize that we do not need more procedures for corporate boards. Instead, we need more expert directors who view their board services as their primary profession—not an avocation.
Mr. Pozen is chairman emeritus of MFS Investment Management and a senior lecturer at Harvard Business School. This op-ed was adapted from an article appearing in the December 2010 issue of the Harvard Business Review.
Press Briefing
Jan 13, 2011
Video: President Obama: Memorial in Arizona http://goo.gl/fb/VcCCk
Remarks by Vice President Biden and Prime Minister Gilani of Pakistan http://goo.gl/fb/f57o3
Readout of the President's Meeting with Prime Minister Hariri of Lebanon http://goo.gl/fb/jGBNc
Readout of the President’s call to King Abdullah of Saudi Arabia http://goo.gl/fb/n215n
Letter from the President regarding the Cuban Liberty and Democratic Solidarity http://goo.gl/fb/f4usj
Statement by President Barack Obama on the One Year Anniversary of the Earthquake in Haiti http://goo.gl/fb/ykrE0
Remarks by Vice President Biden and President Karzai of Afghanistan After Meeting http://goo.gl/fb/EnTsi
Special Inspector General for Afghanistan Reconstruction Submits Resignation http://goo.gl/fb/oxwyx
President Obama on Tucson, Grief & Courage http://goo.gl/fb/unDA1
Remarks by President Obama and President Sarkozy of France after Bilateral Meeting http://goo.gl/fb/tIAOX
Gulf Political Spill. WSJ Editorial
Obama's commission indicts an industry, without evidence.
WSJ, Jan 13, 2011
http://online.wsj.com/article/SB10001424052748703791904576076012106308644.html
President Obama's drilling commission released its 398-page report on the causes of the Gulf oil spill this week, and talk about a lost opportunity. After six months of hearings and interviews, the commission still doesn't know what caused the accident but does think it knows enough to condemn all and sundry.
The disaster, we are told, was primarily the result of "overarching failure of management" by BP, Transocean and Halliburton—which is hardly news to anyone who's been paying attention. Yet the commission didn't stop with the companies that managed the Macondo well, going on to blame the highly unusual blowout on a "system-wide problem" of failed regulation and a complacent industry that requires "significant reform."
These sweeping conclusions are remarkable from a commission that admits to knowing so little. The report cites several questionable decisions made by Macondo drillers as the "immediate causes" of the blowout, only to acknowledge it can't say which, if any, were the cause:
• "It is not clear whether the decision to use a long string well design contributed directly to the blowout."
• "The evidence to date does not unequivocally establish whether the failure to use 15 additional centralizers was a direct cause of the blowout."
•"Whether . . . 'unconverted' float valves contributed to the eventual blowout, has not yet been, and may never be, established with certainty."
Unable to name what definitely caused the well failure, the commission resorts to a hodgepodge of speculations. Adding to the confusion, it acknowledges it could find no evidence that BP or its contractors "consciously chose a riskier alternative because it would cost the company less money." The commission didn't even wait to get an autopsy of the failed blowout preventer, which is rusting on a Louisiana dock.
The report's one firm conclusion boils down to this: In the hours preceding the explosion, crew members missed "critical signs" that something was wrong. "The crew could have prevented the blowout—or at least significantly reduced its impact—if they had reacted in a timely and appropriate manner." This is called human error, in this case with tragic consequences to those who erred.
Yet it's hardly evidence that the entire drilling industry is an accident waiting to happen, as the commission insists. Its section "The Root Causes: Failures in Industry and Government" uses questionable decisions made by the Macondo players to suggest, with no evidence, that such behavior is the industry norm.
The report fails to reconcile this indictment with the industry's prior safety record, or with the fact that many countries have modeled their drilling technology and practices on those of the Gulf. For a better account of how unusual the Macondo practices were, we recommend the June 11, 2010 letter to the editor in this newspaper from Terry Barr, the president of Samson Oil and Gas.
The commission nonetheless offers an array of recommendations, most of which would severely restrict oil and gas drilling. Despite President Obama's promises that the new Bureau of Ocean Management (formerly the Minerals and Management Service) is now a shipshape regulator, the commission recommends that Congress create another agency to supervise drilling. Now, there's a new idea—another layer of bureaucracy to supervise the bureaucracy that failed.
The report also advocates toughening the National Environmental Policy Act to make it harder for companies to obtain drilling leases. Another section doubts it is possible ever to drill safely in Alaska or the Arctic—a hardy perennial of the anti-oil lobby.
This was all too predictable given the political history of commission members. Former Democratic Senator Bob Graham fought drilling off Florida, William Reilly is the former head of the antidrilling World Wildlife Fund, and Frances Beinecke ran the Natural Resources Defense Council, which is opposed to carbon fuels. Not a single member was a drilling engineer or expert in oil exploration technology or practices.
Compare this to the Rogers Commission, which investigated the Challenger space shuttle disaster of 1986. Led by former Secretary of State William P. Rogers, that group included theoretical and solar physicists, engineers and aeronautics specialists. The commission located the exact cause of the disaster (failed O-rings) and prescribed precise safety changes. The preface of the Rogers report states that the only way to deal with such a failure is to investigate, correct and "continue the program with renewed confidence and determination."
***
The unbalanced, tendentious nature of the commission report vindicates those who suspected from the start that this was all a political exercise. The White House has been pounded on the left for agreeing to ease drilling restrictions before the spill, and now it is looking for support to walk that back. Though the Administration officially lifted its Gulf drilling moratorium and issued new safety rules two months ago, it has refused to permit a single new well.
U.S. gasoline prices are now above $3 a gallon, and the decline in Gulf drilling will not help supply. Forecasters predict domestic production will fall at least 13% this year due in part to the Gulf lockdown. Meanwhile, last week the British Parliament rejected a drilling moratorium in U.K. waters on grounds it would cause "expertise to migrate," decrease "security of supply" and harm the British economy.
The BP spill was a tragedy that should be diagnosed with a goal of preventing a repeat, not in order to all but shut down an industry that is vital to U.S. energy supplies and the livelihood of millions on the Gulf Coast.
Video: President Obama: Memorial in Arizona http://goo.gl/fb/VcCCk
Remarks by Vice President Biden and Prime Minister Gilani of Pakistan http://goo.gl/fb/f57o3
Readout of the President's Meeting with Prime Minister Hariri of Lebanon http://goo.gl/fb/jGBNc
Readout of the President’s call to King Abdullah of Saudi Arabia http://goo.gl/fb/n215n
Letter from the President regarding the Cuban Liberty and Democratic Solidarity http://goo.gl/fb/f4usj
Statement by President Barack Obama on the One Year Anniversary of the Earthquake in Haiti http://goo.gl/fb/ykrE0
Remarks by Vice President Biden and President Karzai of Afghanistan After Meeting http://goo.gl/fb/EnTsi
Special Inspector General for Afghanistan Reconstruction Submits Resignation http://goo.gl/fb/oxwyx
President Obama on Tucson, Grief & Courage http://goo.gl/fb/unDA1
Remarks by President Obama and President Sarkozy of France after Bilateral Meeting http://goo.gl/fb/tIAOX
Gulf Political Spill. WSJ Editorial
Obama's commission indicts an industry, without evidence.
WSJ, Jan 13, 2011
http://online.wsj.com/article/SB10001424052748703791904576076012106308644.html
President Obama's drilling commission released its 398-page report on the causes of the Gulf oil spill this week, and talk about a lost opportunity. After six months of hearings and interviews, the commission still doesn't know what caused the accident but does think it knows enough to condemn all and sundry.
The disaster, we are told, was primarily the result of "overarching failure of management" by BP, Transocean and Halliburton—which is hardly news to anyone who's been paying attention. Yet the commission didn't stop with the companies that managed the Macondo well, going on to blame the highly unusual blowout on a "system-wide problem" of failed regulation and a complacent industry that requires "significant reform."
These sweeping conclusions are remarkable from a commission that admits to knowing so little. The report cites several questionable decisions made by Macondo drillers as the "immediate causes" of the blowout, only to acknowledge it can't say which, if any, were the cause:
• "It is not clear whether the decision to use a long string well design contributed directly to the blowout."
• "The evidence to date does not unequivocally establish whether the failure to use 15 additional centralizers was a direct cause of the blowout."
•"Whether . . . 'unconverted' float valves contributed to the eventual blowout, has not yet been, and may never be, established with certainty."
Unable to name what definitely caused the well failure, the commission resorts to a hodgepodge of speculations. Adding to the confusion, it acknowledges it could find no evidence that BP or its contractors "consciously chose a riskier alternative because it would cost the company less money." The commission didn't even wait to get an autopsy of the failed blowout preventer, which is rusting on a Louisiana dock.
The report's one firm conclusion boils down to this: In the hours preceding the explosion, crew members missed "critical signs" that something was wrong. "The crew could have prevented the blowout—or at least significantly reduced its impact—if they had reacted in a timely and appropriate manner." This is called human error, in this case with tragic consequences to those who erred.
Yet it's hardly evidence that the entire drilling industry is an accident waiting to happen, as the commission insists. Its section "The Root Causes: Failures in Industry and Government" uses questionable decisions made by the Macondo players to suggest, with no evidence, that such behavior is the industry norm.
The report fails to reconcile this indictment with the industry's prior safety record, or with the fact that many countries have modeled their drilling technology and practices on those of the Gulf. For a better account of how unusual the Macondo practices were, we recommend the June 11, 2010 letter to the editor in this newspaper from Terry Barr, the president of Samson Oil and Gas.
The commission nonetheless offers an array of recommendations, most of which would severely restrict oil and gas drilling. Despite President Obama's promises that the new Bureau of Ocean Management (formerly the Minerals and Management Service) is now a shipshape regulator, the commission recommends that Congress create another agency to supervise drilling. Now, there's a new idea—another layer of bureaucracy to supervise the bureaucracy that failed.
The report also advocates toughening the National Environmental Policy Act to make it harder for companies to obtain drilling leases. Another section doubts it is possible ever to drill safely in Alaska or the Arctic—a hardy perennial of the anti-oil lobby.
This was all too predictable given the political history of commission members. Former Democratic Senator Bob Graham fought drilling off Florida, William Reilly is the former head of the antidrilling World Wildlife Fund, and Frances Beinecke ran the Natural Resources Defense Council, which is opposed to carbon fuels. Not a single member was a drilling engineer or expert in oil exploration technology or practices.
Compare this to the Rogers Commission, which investigated the Challenger space shuttle disaster of 1986. Led by former Secretary of State William P. Rogers, that group included theoretical and solar physicists, engineers and aeronautics specialists. The commission located the exact cause of the disaster (failed O-rings) and prescribed precise safety changes. The preface of the Rogers report states that the only way to deal with such a failure is to investigate, correct and "continue the program with renewed confidence and determination."
***
The unbalanced, tendentious nature of the commission report vindicates those who suspected from the start that this was all a political exercise. The White House has been pounded on the left for agreeing to ease drilling restrictions before the spill, and now it is looking for support to walk that back. Though the Administration officially lifted its Gulf drilling moratorium and issued new safety rules two months ago, it has refused to permit a single new well.
U.S. gasoline prices are now above $3 a gallon, and the decline in Gulf drilling will not help supply. Forecasters predict domestic production will fall at least 13% this year due in part to the Gulf lockdown. Meanwhile, last week the British Parliament rejected a drilling moratorium in U.K. waters on grounds it would cause "expertise to migrate," decrease "security of supply" and harm the British economy.
The BP spill was a tragedy that should be diagnosed with a goal of preventing a repeat, not in order to all but shut down an industry that is vital to U.S. energy supplies and the livelihood of millions on the Gulf Coast.
Saturday, January 8, 2011
Amy Chua: Why Chinese Mothers Are Superior
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Please check commentary at TradeFlow21.com
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Why Chinese Mothers Are Superior. BY AMY CHUA
Can a regimen of no playdates, no TV, no computer games and hours of music practice create happy kids? And what happens when they fight back?The Wall Street Journal Life & Culture, Saturday, January 8, 2011
http://online.wsj.com/article/SB10001424052748704111504576059713528698754.html
A lot of people wonder how Chinese parents raise such stereotypically successful kids. They wonder what these parents do to produce so many math whizzes and music prodigies, what it's like inside the family, and whether they could do it too. Well, I can tell them, because I've done it. Here are some things my daughters, Sophia and Louisa, were never allowed to do:
• attend a sleepover
• have a playdate
• be in a school play
• complain about not being in a school play
• watch TV or play computer games
• choose their own extracurricular activities
• get any grade less than an A
• not be the No. 1 student in every subject except gym and drama
• play any instrument other than the piano or violin
• not play the piano or violin.
I'm using the term "Chinese mother" loosely. I know some Korean, Indian, Jamaican, Irish and Ghanaian parents who qualify too. Conversely, I know some mothers of Chinese heritage, almost always born in the West, who are not Chinese mothers, by choice or otherwise. I'm also using the term "Western parents" loosely. Western parents come in all varieties.
All the same, even when Western parents think they're being strict, they usually don't come close to being Chinese mothers. For example, my Western friends who consider themselves strict make their children practice their instruments 30 minutes every day. An hour at most. For a Chinese mother, the first hour is the easy part. It's hours two and three that get tough.
Despite our squeamishness about cultural stereotypes, there are tons of studies out there showing marked and quantifiable differences between Chinese and Westerners when it comes to parenting. In one study of 50 Western American mothers and 48 Chinese immigrant mothers, almost 70% of the Western mothers said either that "stressing academic success is not good for children" or that "parents need to foster the idea that learning is fun." By contrast, roughly 0% of the Chinese mothers felt the same way. Instead, the vast majority of the Chinese mothers said that they believe their children can be "the best" students, that "academic achievement reflects successful parenting," and that if children did not excel at school then there was "a problem" and parents "were not doing their job." Other studies indicate that compared to Western parents, Chinese parents spend approximately 10 times as long every day drilling academic activities with their children. By contrast, Western kids are more likely to participate in sports teams.
What Chinese parents understand is that nothing is fun until you're good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences. This often requires fortitude on the part of the parents because the child will resist; things are always hardest at the beginning, which is where Western parents tend to give up. But if done properly, the Chinese strategy produces a virtuous circle. Tenacious practice, practice, practice is crucial for excellence; rote repetition is underrated in America. Once a child starts to excel at something—whether it's math, piano, pitching or ballet—he or she gets praise, admiration and satisfaction. This builds confidence and makes the once not-fun activity fun. This in turn makes it easier for the parent to get the child to work even more.
Chinese parents can get away with things that Western parents can't. Once when I was young—maybe more than once—when I was extremely disrespectful to my mother, my father angrily called me "garbage" in our native Hokkien dialect. It worked really well. I felt terrible and deeply ashamed of what I had done. But it didn't damage my self-esteem or anything like that. I knew exactly how highly he thought of me. I didn't actually think I was worthless or feel like a piece of garbage.
As an adult, I once did the same thing to Sophia, calling her garbage in English when she acted extremely disrespectfully toward me. When I mentioned that I had done this at a dinner party, I was immediately ostracized. One guest named Marcy got so upset she broke down in tears and had to leave early. My friend Susan, the host, tried to rehabilitate me with the remaining guests.
The fact is that Chinese parents can do things that would seem unimaginable—even legally actionable—to Westerners. Chinese mothers can say to their daughters, "Hey fatty—lose some weight." By contrast, Western parents have to tiptoe around the issue, talking in terms of "health" and never ever mentioning the f-word, and their kids still end up in therapy for eating disorders and negative self-image. (I also once heard a Western father toast his adult daughter by calling her "beautiful and incredibly competent." She later told me that made her feel like garbage.)
Chinese parents can order their kids to get straight As. Western parents can only ask their kids to try their best. Chinese parents can say, "You're lazy. All your classmates are getting ahead of you." By contrast, Western parents have to struggle with their own conflicted feelings about achievement, and try to persuade themselves that they're not disappointed about how their kids turned out.
I've thought long and hard about how Chinese parents can get away with what they do. I think there are three big differences between the Chinese and Western parental mind-sets.
First, I've noticed that Western parents are extremely anxious about their children's self-esteem. They worry about how their children will feel if they fail at something, and they constantly try to reassure their children about how good they are notwithstanding a mediocre performance on a test or at a recital. In other words, Western parents are concerned about their children's psyches. Chinese parents aren't. They assume strength, not fragility, and as a result they behave very differently.
For example, if a child comes home with an A-minus on a test, a Western parent will most likely praise the child. The Chinese mother will gasp in horror and ask what went wrong. If the child comes home with a B on the test, some Western parents will still praise the child. Other Western parents will sit their child down and express disapproval, but they will be careful not to make their child feel inadequate or insecure, and they will not call their child "stupid," "worthless" or "a disgrace." Privately, the Western parents may worry that their child does not test well or have aptitude in the subject or that there is something wrong with the curriculum and possibly the whole school. If the child's grades do not improve, they may eventually schedule a meeting with the school principal to challenge the way the subject is being taught or to call into question the teacher's credentials.
If a Chinese child gets a B—which would never happen—there would first be a screaming, hair-tearing explosion. The devastated Chinese mother would then get dozens, maybe hundreds of practice tests and work through them with her child for as long as it takes to get the grade up to an A.
Chinese parents demand perfect grades because they believe that their child can get them. If their child doesn't get them, the Chinese parent assumes it's because the child didn't work hard enough. That's why the solution to substandard performance is always to excoriate, punish and shame the child. The Chinese parent believes that their child will be strong enough to take the shaming and to improve from it. (And when Chinese kids do excel, there is plenty of ego-inflating parental praise lavished in the privacy of the home.)
Second, Chinese parents believe that their kids owe them everything. The reason for this is a little unclear, but it's probably a combination of Confucian filial piety and the fact that the parents have sacrificed and done so much for their children. (And it's true that Chinese mothers get in the trenches, putting in long grueling hours personally tutoring, training, interrogating and spying on their kids.) Anyway, the understanding is that Chinese children must spend their lives repaying their parents by obeying them and making them proud.
By contrast, I don't think most Westerners have the same view of children being permanently indebted to their parents. My husband, Jed, actually has the opposite view. "Children don't choose their parents," he once said to me. "They don't even choose to be born. It's parents who foist life on their kids, so it's the parents' responsibility to provide for them. Kids don't owe their parents anything. Their duty will be to their own kids." This strikes me as a terrible deal for the Western parent.
Third, Chinese parents believe that they know what is best for their children and therefore override all of their children's own desires and preferences. That's why Chinese daughters can't have boyfriends in high school and why Chinese kids can't go to sleepaway camp. It's also why no Chinese kid would ever dare say to their mother, "I got a part in the school play! I'm Villager Number Six. I'll have to stay after school for rehearsal every day from 3:00 to 7:00, and I'll also need a ride on weekends." God help any Chinese kid who tried that one.
Don't get me wrong: It's not that Chinese parents don't care about their children. Just the opposite. They would give up anything for their children. It's just an entirely different parenting model.
Here's a story in favor of coercion, Chinese-style. Lulu was about 7, still playing two instruments, and working on a piano piece called "The Little White Donkey" by the French composer Jacques Ibert. The piece is really cute—you can just imagine a little donkey ambling along a country road with its master—but it's also incredibly difficult for young players because the two hands have to keep schizophrenically different rhythms.
Lulu couldn't do it. We worked on it nonstop for a week, drilling each of her hands separately, over and over. But whenever we tried putting the hands together, one always morphed into the other, and everything fell apart. Finally, the day before her lesson, Lulu announced in exasperation that she was giving up and stomped off.
"Get back to the piano now," I ordered.
"You can't make me."
"Oh yes, I can."
Back at the piano, Lulu made me pay. She punched, thrashed and kicked. She grabbed the music score and tore it to shreds. I taped the score back together and encased it in a plastic shield so that it could never be destroyed again. Then I hauled Lulu's dollhouse to the car and told her I'd donate it to the Salvation Army piece by piece if she didn't have "The Little White Donkey" perfect by the next day. When Lulu said, "I thought you were going to the Salvation Army, why are you still here?" I threatened her with no lunch, no dinner, no Christmas or Hanukkah presents, no birthday parties for two, three, four years. When she still kept playing it wrong, I told her she was purposely working herself into a frenzy because she was secretly afraid she couldn't do it. I told her to stop being lazy, cowardly, self-indulgent and pathetic.
Jed took me aside. He told me to stop insulting Lulu—which I wasn't even doing, I was just motivating her—and that he didn't think threatening Lulu was helpful. Also, he said, maybe Lulu really just couldn't do the technique—perhaps she didn't have the coordination yet—had I considered that possibility?
"You just don't believe in her," I accused.
"That's ridiculous," Jed said scornfully. "Of course I do."
"Sophia could play the piece when she was this age."
"But Lulu and Sophia are different people," Jed pointed out.
"Oh no, not this," I said, rolling my eyes. "Everyone is special in their special own way," I mimicked sarcastically. "Even losers are special in their own special way. Well don't worry, you don't have to lift a finger. I'm willing to put in as long as it takes, and I'm happy to be the one hated. And you can be the one they adore because you make them pancakes and take them to Yankees games."
I rolled up my sleeves and went back to Lulu. I used every weapon and tactic I could think of. We worked right through dinner into the night, and I wouldn't let Lulu get up, not for water, not even to go to the bathroom. The house became a war zone, and I lost my voice yelling, but still there seemed to be only negative progress, and even I began to have doubts.
Then, out of the blue, Lulu did it. Her hands suddenly came together—her right and left hands each doing their own imperturbable thing—just like that.
Lulu realized it the same time I did. I held my breath. She tried it tentatively again. Then she played it more confidently and faster, and still the rhythm held. A moment later, she was beaming.
"Mommy, look—it's easy!" After that, she wanted to play the piece over and over and wouldn't leave the piano. That night, she came to sleep in my bed, and we snuggled and hugged, cracking each other up. When she performed "The Little White Donkey" at a recital a few weeks later, parents came up to me and said, "What a perfect piece for Lulu—it's so spunky and so her."
Even Jed gave me credit for that one. Western parents worry a lot about their children's self-esteem. But as a parent, one of the worst things you can do for your child's self-esteem is to let them give up. On the flip side, there's nothing better for building confidence than learning you can do something you thought you couldn't.
There are all these new books out there portraying Asian mothers as scheming, callous, overdriven people indifferent to their kids' true interests. For their part, many Chinese secretly believe that they care more about their children and are willing to sacrifice much more for them than Westerners, who seem perfectly content to let their children turn out badly. I think it's a misunderstanding on both sides. All decent parents want to do what's best for their children. The Chinese just have a totally different idea of how to do that.
Western parents try to respect their children's individuality, encouraging them to pursue their true passions, supporting their choices, and providing positive reinforcement and a nurturing environment. By contrast, the Chinese believe that the best way to protect their children is by preparing them for the future, letting them see what they're capable of, and arming them with skills, work habits and inner confidence that no one can ever take away.
—Amy Chua is a professor at Yale Law School and author of "Day of Empire" and "World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability." This essay is excerpted from "Battle Hymn of the Tiger Mother" by Amy Chua, to be published Tuesday by the Penguin Press, a member of Penguin Group (USA) Inc. Copyright © 2011 by Amy Chua.
Please check commentary at TradeFlow21.com
_ ---advertisement---
Why Chinese Mothers Are Superior. BY AMY CHUA
Can a regimen of no playdates, no TV, no computer games and hours of music practice create happy kids? And what happens when they fight back?The Wall Street Journal Life & Culture, Saturday, January 8, 2011
http://online.wsj.com/article/SB10001424052748704111504576059713528698754.html
A lot of people wonder how Chinese parents raise such stereotypically successful kids. They wonder what these parents do to produce so many math whizzes and music prodigies, what it's like inside the family, and whether they could do it too. Well, I can tell them, because I've done it. Here are some things my daughters, Sophia and Louisa, were never allowed to do:
• attend a sleepover
• have a playdate
• be in a school play
• complain about not being in a school play
• watch TV or play computer games
• choose their own extracurricular activities
• get any grade less than an A
• not be the No. 1 student in every subject except gym and drama
• play any instrument other than the piano or violin
• not play the piano or violin.
I'm using the term "Chinese mother" loosely. I know some Korean, Indian, Jamaican, Irish and Ghanaian parents who qualify too. Conversely, I know some mothers of Chinese heritage, almost always born in the West, who are not Chinese mothers, by choice or otherwise. I'm also using the term "Western parents" loosely. Western parents come in all varieties.
All the same, even when Western parents think they're being strict, they usually don't come close to being Chinese mothers. For example, my Western friends who consider themselves strict make their children practice their instruments 30 minutes every day. An hour at most. For a Chinese mother, the first hour is the easy part. It's hours two and three that get tough.
Despite our squeamishness about cultural stereotypes, there are tons of studies out there showing marked and quantifiable differences between Chinese and Westerners when it comes to parenting. In one study of 50 Western American mothers and 48 Chinese immigrant mothers, almost 70% of the Western mothers said either that "stressing academic success is not good for children" or that "parents need to foster the idea that learning is fun." By contrast, roughly 0% of the Chinese mothers felt the same way. Instead, the vast majority of the Chinese mothers said that they believe their children can be "the best" students, that "academic achievement reflects successful parenting," and that if children did not excel at school then there was "a problem" and parents "were not doing their job." Other studies indicate that compared to Western parents, Chinese parents spend approximately 10 times as long every day drilling academic activities with their children. By contrast, Western kids are more likely to participate in sports teams.
What Chinese parents understand is that nothing is fun until you're good at it. To get good at anything you have to work, and children on their own never want to work, which is why it is crucial to override their preferences. This often requires fortitude on the part of the parents because the child will resist; things are always hardest at the beginning, which is where Western parents tend to give up. But if done properly, the Chinese strategy produces a virtuous circle. Tenacious practice, practice, practice is crucial for excellence; rote repetition is underrated in America. Once a child starts to excel at something—whether it's math, piano, pitching or ballet—he or she gets praise, admiration and satisfaction. This builds confidence and makes the once not-fun activity fun. This in turn makes it easier for the parent to get the child to work even more.
Chinese parents can get away with things that Western parents can't. Once when I was young—maybe more than once—when I was extremely disrespectful to my mother, my father angrily called me "garbage" in our native Hokkien dialect. It worked really well. I felt terrible and deeply ashamed of what I had done. But it didn't damage my self-esteem or anything like that. I knew exactly how highly he thought of me. I didn't actually think I was worthless or feel like a piece of garbage.
As an adult, I once did the same thing to Sophia, calling her garbage in English when she acted extremely disrespectfully toward me. When I mentioned that I had done this at a dinner party, I was immediately ostracized. One guest named Marcy got so upset she broke down in tears and had to leave early. My friend Susan, the host, tried to rehabilitate me with the remaining guests.
The fact is that Chinese parents can do things that would seem unimaginable—even legally actionable—to Westerners. Chinese mothers can say to their daughters, "Hey fatty—lose some weight." By contrast, Western parents have to tiptoe around the issue, talking in terms of "health" and never ever mentioning the f-word, and their kids still end up in therapy for eating disorders and negative self-image. (I also once heard a Western father toast his adult daughter by calling her "beautiful and incredibly competent." She later told me that made her feel like garbage.)
Chinese parents can order their kids to get straight As. Western parents can only ask their kids to try their best. Chinese parents can say, "You're lazy. All your classmates are getting ahead of you." By contrast, Western parents have to struggle with their own conflicted feelings about achievement, and try to persuade themselves that they're not disappointed about how their kids turned out.
I've thought long and hard about how Chinese parents can get away with what they do. I think there are three big differences between the Chinese and Western parental mind-sets.
First, I've noticed that Western parents are extremely anxious about their children's self-esteem. They worry about how their children will feel if they fail at something, and they constantly try to reassure their children about how good they are notwithstanding a mediocre performance on a test or at a recital. In other words, Western parents are concerned about their children's psyches. Chinese parents aren't. They assume strength, not fragility, and as a result they behave very differently.
For example, if a child comes home with an A-minus on a test, a Western parent will most likely praise the child. The Chinese mother will gasp in horror and ask what went wrong. If the child comes home with a B on the test, some Western parents will still praise the child. Other Western parents will sit their child down and express disapproval, but they will be careful not to make their child feel inadequate or insecure, and they will not call their child "stupid," "worthless" or "a disgrace." Privately, the Western parents may worry that their child does not test well or have aptitude in the subject or that there is something wrong with the curriculum and possibly the whole school. If the child's grades do not improve, they may eventually schedule a meeting with the school principal to challenge the way the subject is being taught or to call into question the teacher's credentials.
If a Chinese child gets a B—which would never happen—there would first be a screaming, hair-tearing explosion. The devastated Chinese mother would then get dozens, maybe hundreds of practice tests and work through them with her child for as long as it takes to get the grade up to an A.
Chinese parents demand perfect grades because they believe that their child can get them. If their child doesn't get them, the Chinese parent assumes it's because the child didn't work hard enough. That's why the solution to substandard performance is always to excoriate, punish and shame the child. The Chinese parent believes that their child will be strong enough to take the shaming and to improve from it. (And when Chinese kids do excel, there is plenty of ego-inflating parental praise lavished in the privacy of the home.)
Second, Chinese parents believe that their kids owe them everything. The reason for this is a little unclear, but it's probably a combination of Confucian filial piety and the fact that the parents have sacrificed and done so much for their children. (And it's true that Chinese mothers get in the trenches, putting in long grueling hours personally tutoring, training, interrogating and spying on their kids.) Anyway, the understanding is that Chinese children must spend their lives repaying their parents by obeying them and making them proud.
By contrast, I don't think most Westerners have the same view of children being permanently indebted to their parents. My husband, Jed, actually has the opposite view. "Children don't choose their parents," he once said to me. "They don't even choose to be born. It's parents who foist life on their kids, so it's the parents' responsibility to provide for them. Kids don't owe their parents anything. Their duty will be to their own kids." This strikes me as a terrible deal for the Western parent.
Third, Chinese parents believe that they know what is best for their children and therefore override all of their children's own desires and preferences. That's why Chinese daughters can't have boyfriends in high school and why Chinese kids can't go to sleepaway camp. It's also why no Chinese kid would ever dare say to their mother, "I got a part in the school play! I'm Villager Number Six. I'll have to stay after school for rehearsal every day from 3:00 to 7:00, and I'll also need a ride on weekends." God help any Chinese kid who tried that one.
Don't get me wrong: It's not that Chinese parents don't care about their children. Just the opposite. They would give up anything for their children. It's just an entirely different parenting model.
Here's a story in favor of coercion, Chinese-style. Lulu was about 7, still playing two instruments, and working on a piano piece called "The Little White Donkey" by the French composer Jacques Ibert. The piece is really cute—you can just imagine a little donkey ambling along a country road with its master—but it's also incredibly difficult for young players because the two hands have to keep schizophrenically different rhythms.
Lulu couldn't do it. We worked on it nonstop for a week, drilling each of her hands separately, over and over. But whenever we tried putting the hands together, one always morphed into the other, and everything fell apart. Finally, the day before her lesson, Lulu announced in exasperation that she was giving up and stomped off.
"Get back to the piano now," I ordered.
"You can't make me."
"Oh yes, I can."
Back at the piano, Lulu made me pay. She punched, thrashed and kicked. She grabbed the music score and tore it to shreds. I taped the score back together and encased it in a plastic shield so that it could never be destroyed again. Then I hauled Lulu's dollhouse to the car and told her I'd donate it to the Salvation Army piece by piece if she didn't have "The Little White Donkey" perfect by the next day. When Lulu said, "I thought you were going to the Salvation Army, why are you still here?" I threatened her with no lunch, no dinner, no Christmas or Hanukkah presents, no birthday parties for two, three, four years. When she still kept playing it wrong, I told her she was purposely working herself into a frenzy because she was secretly afraid she couldn't do it. I told her to stop being lazy, cowardly, self-indulgent and pathetic.
Jed took me aside. He told me to stop insulting Lulu—which I wasn't even doing, I was just motivating her—and that he didn't think threatening Lulu was helpful. Also, he said, maybe Lulu really just couldn't do the technique—perhaps she didn't have the coordination yet—had I considered that possibility?
"You just don't believe in her," I accused.
"That's ridiculous," Jed said scornfully. "Of course I do."
"Sophia could play the piece when she was this age."
"But Lulu and Sophia are different people," Jed pointed out.
"Oh no, not this," I said, rolling my eyes. "Everyone is special in their special own way," I mimicked sarcastically. "Even losers are special in their own special way. Well don't worry, you don't have to lift a finger. I'm willing to put in as long as it takes, and I'm happy to be the one hated. And you can be the one they adore because you make them pancakes and take them to Yankees games."
I rolled up my sleeves and went back to Lulu. I used every weapon and tactic I could think of. We worked right through dinner into the night, and I wouldn't let Lulu get up, not for water, not even to go to the bathroom. The house became a war zone, and I lost my voice yelling, but still there seemed to be only negative progress, and even I began to have doubts.
Then, out of the blue, Lulu did it. Her hands suddenly came together—her right and left hands each doing their own imperturbable thing—just like that.
Lulu realized it the same time I did. I held my breath. She tried it tentatively again. Then she played it more confidently and faster, and still the rhythm held. A moment later, she was beaming.
"Mommy, look—it's easy!" After that, she wanted to play the piece over and over and wouldn't leave the piano. That night, she came to sleep in my bed, and we snuggled and hugged, cracking each other up. When she performed "The Little White Donkey" at a recital a few weeks later, parents came up to me and said, "What a perfect piece for Lulu—it's so spunky and so her."
Even Jed gave me credit for that one. Western parents worry a lot about their children's self-esteem. But as a parent, one of the worst things you can do for your child's self-esteem is to let them give up. On the flip side, there's nothing better for building confidence than learning you can do something you thought you couldn't.
There are all these new books out there portraying Asian mothers as scheming, callous, overdriven people indifferent to their kids' true interests. For their part, many Chinese secretly believe that they care more about their children and are willing to sacrifice much more for them than Westerners, who seem perfectly content to let their children turn out badly. I think it's a misunderstanding on both sides. All decent parents want to do what's best for their children. The Chinese just have a totally different idea of how to do that.
Western parents try to respect their children's individuality, encouraging them to pursue their true passions, supporting their choices, and providing positive reinforcement and a nurturing environment. By contrast, the Chinese believe that the best way to protect their children is by preparing them for the future, letting them see what they're capable of, and arming them with skills, work habits and inner confidence that no one can ever take away.
—Amy Chua is a professor at Yale Law School and author of "Day of Empire" and "World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability." This essay is excerpted from "Battle Hymn of the Tiger Mother" by Amy Chua, to be published Tuesday by the Penguin Press, a member of Penguin Group (USA) Inc. Copyright © 2011 by Amy Chua.
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