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On Global Business and Economics in Volatile Times

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Walter Eucken and economic liability ("Haftung")

January 20, 2010

 

German economic policy since 1945 has been strongly influenced by an economist that is hardly known outside Germany: Walter Eucken. Anyone who trained in economics in Germany will however have been exposed to his ideas. Essentially, Eucken believed in the market mechanism as basic coordination mechanism, but was acutely aware that markets need regulation to function effectively. Hence, the state had to set rules that create the preconditions for businesses to pursue their self-interest - and generate an outcome that is in the general interest. His ideas are not unlike those developed in institutional economics by Douglas North and others, but it is quite consistent with the market philosophy of Adam Smith.

 

One of those rules is that economic actors are responsible for the consequences of their actions.  Joseph Stiglitz recently pointed to the asymmetry of rewards and costs that caused the banking crisis: Banks were taking risks, and if they win they collect their bonuses, if they loose the tax payer picks up the bill (at least if the bank is 'too big too fail', or if failure causes systemic failure). This flawed incentive system is at the core of the bubble & crash of 2008. Hence, resolving this incentive problem should be core of regulatory reform. Stiglitz thus advocates to either break up banks that are 'too big too fail', or to subject them to tighter regulation - both options having their pros and cons.

 

The notion that economic actors (such as banks) have to be liable for the what they are doing takes quite a central role in Walter Eucken's economy. He uses the word "Haftung" which translates as "liability" but really has a more specific meaning as liability for the consequences (intended or unintended) of one's action on others. This notion of course exists also in mainstream economics, but it is not addressed as explicitly.

 

A difference between the US-American and the continental European approach is embedded in the legal systems. In the US, such liabilities are regulated through the legal system of the common law - anyone harmed could take a company to court as sue for damages. This notion is quite strong in the class action lawsuits. However, this system involves considerable transaction costs, and it doesn't help much if the company (or individual) is bankrupt. In Europe, a predominant approach has been to create rules that prevent businesses from doing things that may potentially harm others, or tax such kind of activities to discourage them - which can become a straightjacket that also prevents good innovations. Neither system is perfect - but inaction would probably be worse. The global policy discourse seems to get stuck in these cultural differences grounded in legal traditions. However, we much make sure that businesses are liable for what they do. 

  • J. Stiglitz, 2009, Too Big to Live, project-syndicate (a web discussion forum), December.

  • J. Starbatty, 2010, Marktwirtschaft gibt es nicht ohne Haftung, Frankfurter Allgemeine Zeitung, January

 

France Stops Outward FDI

January 14

 

There is a lot of debate about the pros and cons of foreign direct investment (FDI) for host countries, and hence about the appropriate government policies. In contrast, policies of governments back home are rarely a big issue. Some countries have actively encouraged outward FDI as a means to upgrade the economy, or to access resources - notably Japan in the 1970s and China currently. Trade unions tend to make a lot of noise when outward FDI is thought to affect jobs back home - but it is rare for a government to intervene to prevent a company to invest abroad.

 

Yet, that apparently happened in France this week. Renault announced its intention to relocate production of the Clio, a small car, from France to Turkey. Several French government ministers issued strong statements condemning the action, and – with reference to the state's 15% equity stake in Renault – put pressure on Renault to cancel its plans. The CEO of Renault, Carlos Ghosn, was 'ordered' to report to the President of the Republic, Nicolas Sarkózy, to explain his actions. Renault, it seems, quickly retracted and announced the withdrawal of those plans.

 

Whether that was a wise action is a different question. The Clio is competing in a very price-sensitive market segment. Most of its competitors are, as far as I am aware, produced in Slovakia or Hungary, even if they carry German or Japanese brand names. I can't quite see how a Clio 'made in France' could be competitive in the long run....

 

From Housing Policy to Subprime Mortgages

January 11

I am currently reading a new book on the financial crisis by a German business leader, Hans-Olaf Henkel. His main line of argument is a critique of various government policies in both the US and Germany over the past three decades that contributed to the bubble, and the crash – mainly inappropriate regulatory interventions and excessively low interest rates.

In the first chapter, he outlines some features of the US mortgage finance system that I was not aware of before. Since Jimmy Carter in 1977, US administrations have pushed banks to extend more loans to ethnic minorities and to impoverished areas. The regulation that came with these policies inhibited proper risk assessment: Criteria such as documented income, track record of finance, and savings were considered as old-fashioned, and apparently courts even considered them as discriminatory (as in racial discrimination). At the same time, low interest rates during the Greenspan years created the expectation that interest rates would always stay low – which of course they don’t. This led to a boom of mortgages, including so-called ninja loans (loans to people with no income, no job no assets), which turned to ‘subprime loans’ (what a euphemism!).

Being trained as a banker in the 1980s, for me a mortgage is a loan – and a loan is only granted if the bank can be confident that the money will be paid back. This confidence has to be grounded on an assessment of two issues a) the person, in particular his/her income but also his/her track record of managing their finances, and b) the assessment of the assets – which we used to value at either historical costs or at purchasing price with various discounts for features that might affect the resale value – taking into consideration that housing prices ALWAYS are volatile and may down as well as up. After leaving banking twenty years ago, I haven’t really followed banking practice before coming involved in discussions on the global crisis (as you can see in this blog). My views about banking are – still – called 'old fashioned' and 'very conservative' whenever I talk with finance people. Sadly, if banks had used a bit more conservative and rigorous assessment criteria financial markets wouldn’t be in the mess they are in now.

There seem to be two policy implications here (1) Banking regulation has to ensure that those taking decisions over risk (i.e granting a loan) also bear the costs of the risk (i.e. profit if it goes well, and lose if things go wrong) - as I argued before. (2) Banks have to have access to the information, and the right to use it, to make proper risk assessments - I had so far taken that for granted, possibly naively. 

  • Henkel, H.O., 2009, Die Abzocker: Wie Zocker und Politiker unsere Zukunft verspielen, Munich: Heyne.

 

Offshoring Energy Generation

January 9

 

Generating sufficient electricity is a major change for economies around the world - independent of the added challenge to do so in a carbon-neutral way. In this context, a most ambitious project has been launched by the British government this week by granting contracts for developing huge wind farms off the British coast. Britain is at the moment lagging countries such as Denmark, Spain and Germany in the use of wind energy - if this project succeeds it would put Britain in the lead. However, the project is economically still risky as technologies for these sort of large scale wind energy farms in the deep sea (as opposed to flat waters like the Baltic Sea) are still untested, and probably dependent on subsidies for a while.

 

Interestingly, I found more information on these ambitious plans in the German news than in the British news. Why is that? Because the biggest contracts do to consortia involving big German energy and construction firms, along with their competitors from Spain and other countries leading in wind energy technology. Few British companies have developed competences in this area, and British partners in the consortia seem to be mainly network operators. This points to the broader issue of the (comparative) weakness of British industry in new technologies. It also seem to justify subsidies for new technologies that may allow firms to attain first mover advantages - a controversial 'green' policy from Denmark to California.

 

These wind parks also need to be seen in the context of the broader debate about the UK's future energy supplies. The UK appears to run out of electricity generation capacity with the expiry of old nuclear power station and the dwindling of North Sea gas supplies. The British government also plans to build nuclear power stations to cover this energy gap. Here too, the technological competences seems to be with foreign companies, in that case French, though Royce-Rolls in particular is investing in this area. Securing the world future energy supplies requires heavy investment - not only in generation capacity but also in building capabilities, and thus education and training!

 

Why are Iceland's Taxpayers liable for their banks?

January 7

 

Iceland is in the news again, this time because a petition signed by a quarter of voters led the president to veto an agreement for Iceland to "repay" debt of its bankrupt banks to governments in the UK and the Netherlands. The British media are outraged (including Jeremy Paxman in yesterday's BBC Newsnight), but rather unhelpful in explaining why Icelandic taxpayers owe the British government that much money (about €3.9 billion, about 250% of Iceland's GDP, or more than €100,000 for each of Iceland 320,000 citizens).

 

The question that is troubling me is this: When a Bernie Madoff went bust, the US government did not reimburse any of the investors who placed their money with him - eager to earn his promised higher rates of return. Why then should the Icelandic state reimburse investors that put their money with private Icelandic banks? Here are some of the facts that I managed to extract from the German and Danish media as well as the Financial Times.

  • The has arisen from the bankruptcy Landisbanki and its subsidiary Icesave, an online bank in October 2008, which led to nationalization.

  • Icesave offered considerably higher interest rates for saving accounts than other banks, which made it an attractive-looking investment. However, anyone with even a basic understanding of financial markets knows that higher rates are associated with higher risk. Hence, an investment with Ice-save had a slightly speculative character. 

  • Landisbanki/Icesave were not registered in London but were operating under Icelandic law, which under European Economic Area (EEA) agreements allowed them to attract investors in the EU.

  • Iceland has a state-backed banking guarantee fond that covers savings up to a limit of about €20,000 - which is somewhat less than in other European countries, but still enough to protect ordinary investors like you and me. This guarantee would apply to claimants of any nationality, and, as I understand it, this claim is not disputed. The conflict really is about bigger investments placed with Landisbanki/Icesave.

  • When Landisbanki was nationalized in October 2008, the British and Dutch government felt compelled to reimburse investors in their countries. Their promise to do so preempted moves by the Icelandic insurance, which would under EU/EEA law would have had 9 months to clear the matter.

  • They then pressurized the Icelandic government to accept liability for these claims, using what looks like bullying tactics: using anti-terror legislation to freeze Icelandic assets in the UK, and intervening directly with the IMF with the aim to block an IMF bridging loan that Iceland desperately needed.

  • Normally, I would expect such international conflicts over money to go through some sort of arbitration, which Iceland asked for but which Britain and the Netherlands refused.

So far the facts, as I could reconstruct them. This still leaves the question where does the British government derive its claim to expect reimbursement beyond those €20,000 per investor? The main arguments seem to be the following:

  • The real culprit is the Icelandic banking regulation, which is a responsibility of the Icelandic state - if they screw up, the Icelandic state (and thus tax payers) is liable. === While there certainly were failures, such a liability is not assumed elsewhere where banks failed. It is always the investors who carries the investment risk (that's why they get higher returns), and the bank where invested if and only if the bank acted illegally (anything from providing misleading information to outright fraud). I don't understand why a regulato liability is assumed in this particular case.

  • Another argument in an otherwise very useful commentary by Uffe Elleman-Jensen, a former Danish foreign minister, is that Icelandic have a collective responsibility what businesses in their country are doing, and thus society as a whole has to stand up for damages caused that cannot be covered by the businesses themselves. === This might apply within a Nordic society, but hardly in international business; I have never heard of states compensation foreign business partners when a multinational company goes bankrupt.

  • According to some sources, the administrators of the bank have released funds to Icelandic investors but not to foreign investors. If this is so, they may have treated different customers differently by nationality, which would presumably be illegal under EEA/EU agreements.

  • I am moreover wondering if there are any specific obligations that Iceland assumed in the contracts on the European Economic Area (EEA) that give Iceland responsibilities with respect to bank guarantee funds or banking regulation that are now being used as a basis for the claims. I couldn't find any information on this point.

Who were those investors who put amounts of over €20,000 into Icesave? Obviously, these were large entities, businesses or public sector organizations. Given the size of the investment, you would expect them to have professionals managing their funds, people who understand basic such as risk-return trade-offs, and portfolio diversification. Apparently not. Reportedly the biggest investors were actually local governments in the UK, and some of them had quite large chunks of their liquid funds with Ice-save. It seems they were investing in speculative assets being blissfully unaware of 'investment risk'. Now, this explains the viciousness of the reaction of the British governments: In the short run, the freezing of the accounts made the local governments illiquid and thus lead to service disruptions, in the long terms it the British governments that would have to pay for losses from financial investments of the local governments.

 

Thus, the whole questions burns down to who should pay for the losses from high risk investment: British tax payers or Icelandic tax payers? The British government has certainly succeeded in using the full strength of its bargaining power to push through its views at a time when Iceland was (and is) very weak. In Iceland the contract is being compared to the Versailles treaty...

 

So, what can we conclude from this discussion? A lot is still unclear to me, notably regarding the legal basis for the British (and Dutch) claim. There seems to be a good case to claim funds from the Icelandic bank guarantee fund, possibly more than €20,000 per customer. However, why this should cover the entire amount in the case of large investments is still unclear to me.

 

Postscript: The debate about Iceland's EU membership is a red herring. Icelandic citizens (like Norwegians) are opposed to the EU anyway because it would imply handing over their fishing grounds, one of their main assets, to fishermen from across the EU (a pain that the British and testify to). It is only the promise of a financial bailout that made them reconsider in the first place. Latest polls suggest 3 out of 4 voters are opposed to the EU, unsurprisingly.

 

 

Electoral Systems: UK

January 5

 

The Economist opens the year with an article on the de facto opening of the electoral campaign in the UK. The illustrations are revealing in what they say about the electoral system. A cartoon shows David Cameron (big) and Gordon Brown (small) at the starting line, with an audience asleep. What I found most interesting about the cartoon is what is not there: the about 30% of voters who vote for others than the two establishment parties, and the 40% of the electorate who didn't vote last time, and who are likely not to vote this time either. This is typical of the discussions in the British media, which give rather little voice to those 30% other parties, and those 40% non-voters (though noone can really speak for them).

 

The second illustration shows polling of voting intentions: most recently, roughly 40% Conservative, 30% Labour and 20% Liberal Democrats. In the British winner-takes-all constituency based system, this would translate into a solid Conservative majority in parliament. Thus, we can expect a Conservative government even though the majority of voters voted for policies of the centre left - the Liberal Democrats are nowadays on many issues to the left of Labour (as positioned by Tony Blair). For a non-British observer it is hard to see such a result reflecting the idea of democracy, even if it was reached by democratic rules.

 

In 2005 the result was Labour 35.3%, Conservative 32.3% and Liberal Democrats 22.1% and Others 10.3%. Most observers not familiar with the electoral system would probably expect either a coalition government, or run-off election as for example in France. Yet, Tony Blair was hailed as the big winner, as his party obtained 356 seats in parliament, compared to 198 for the Conservatives and 62 for the Liberal Democrats and 30 Others. A lead of three percentage points gave five year of almost unrestricted power to Labour. Not really satisfactory.

 

The first-past-the-post system of course influences how people vote. For example, everyone knows that the Labour party won't get a feet on the ground in the constituency where I live, and hence they would vote for one of the bigger parties (locally, that's the Conservatives and the Liberal Democrats). How would the results look like if there was no such tactical voting? The only indication we have comes from the European election (though many voters stayed at home). The result was: Conservatives 27.7%, UKIP 16.5%, Labour 15.7%, Liberal Democrats 13.7%, Green Party 8.6%, BNP 6.2%, Scottish Nationalists 2.1%, English Democrats 1.8%, Christian Party 1.6%, Socialist Labour Party 1.1%, No2EU 1.0%, Plaid Cymru (Welsh Nationalist) 0.8%, Others 2.7%.

 

What kind of government should Britain be getting based on that sort of results? For purpose of analysis let's assume that a) somewhat fewer voters desert the mainstream parties in favor of fringe parties and b) Labour gets not quite as big a drumming. With a French system we would see a run-off election between the Conservatives and probably Labour (or, possibly, UKIP or Lib-Dem). With an Australian single-transferable-vote system, the result would be similar as in the French system. With a German-style system with proportional representation and a 5% hurdle we would see four to five parties in parliament (Conservatives, Labour, Lib-Dem, UKIP and Greens), which means either Conservative-UKIP coalition, or a Labour-Lib-Dem coalition (with or without Greens). [under the specific rules of Germany the nationalists would get a few seats]. Under pure proportional representation without hurdle, as in Italy, we would have loads of parties in parliament - and very lively debates.

 

Of course all this is not going to happen. It is fair prediction that sometime between now and May, about 60% of the British electorate are going to vote, of which 40% vote Conservative (that's 24% of those eligible), and for the next five years we get a Conservative government. Thus, The Economist's cartoon get's right to the essence.

 

The question that the media really ought to discuss is whether 24% gives a government the democratic legitimacy to make huge budget cuts, or decide on war and peace in the land. For ordinary citizens, the best advice is to advice is to participate in the process - even if the result in your constituency, like in mine, appears a foregone conclusion with the reelection of the same bloke who did the job the last 30 years. At least, you may be able to set a signal for the next election.

Exporting Pub Culture

December 30

 

Tourists like authentic English or Irish pubs, so why not take the pubs where the tourists come from? How about opening an English pub in France? Ship all the interior decoration from England, put English beers on the tap, and serve English pub food - how difficult can that be?

 

The challenge is that the authentic atmosphere comes with the people - not with the 'hardware'. So, to create an authentic atmosphere you have to make the customers behave as if they are English, which is more of a challenge. Ordering at the bar? Standing up while drinking? Ordering a round for your mates? Eating jacket potatoes? Drinking beer rather than wine - and using pint glasses rather than smaller one? The average French customer would expect to sit down, wait to be served, and have a considerable choice of foods? The FT reports today the story of an English chain of pubs that succeeded in creating that authentic atmosphere, in part by becoming the local watering hole for expats, but also actively 'educating' the customer.

 

This little anecdote illustrates an interesting international business challenge for many businesses in culture-related industries: How to create an authentic experience where the participation of the customer contributes to the experience? And, how authentic should it really be? How American should Disneyland Paris be - and how American can it be if the audience doesn't behave like Americans?

 

Many say they would like authentic Indian or Chinese food in British restaurants - but do you really? Most of my Indian or Chinese friends don't like to go the local Indian or Chinese restaurant because it isn't the real thing, but the English like the adapted version. To be truly authentic, you would need to educate your customers - which some may like, and other don't. London China town shows a variety of degrees of adaptation, and flexibility. What restaurants experience on small scale, is equally a big challenge for culture industries like movies, shows, tour operators, hotels, etc.

 

The tourism research literature has explored the issue of communicating culture to foreign visitors (a few references are below), but to my knowledge that research has not been connected to the international business and strategy literature.

 

 

Philosophy for Christmas?

December 25

 

Shouldn't Christmas be a good time to think a bit deeper, philosophically about our times? Here is a nice challenge to think about - or to debate: Imagine Socrates would come to America today, what would he be saying and doing? 

 

The Economist debates the question in its Christmas issue, opining that "Socrates would witness a vibrant and proud democracy, and disdain it as indulgence of the benighted, unphilosophical "herd". He would interrogate America's politicians, talk-radio and cable-television pundits in search of honest discussion, and thereby exposing their confusion, contradictions and ignorance...". It is an interesting piece, but to complex to summarize here. Thus, I recommend that you read for yourself - or even better, debate!

 

Picture of the Year

December 23

 

© Klaus Meyer, 2009

 

 

My favorite picture of the year, I have taken outside a car dealership in Reading. Unsuspecting passers by might think they could now get rid of their government - and that option would certainly have appealed to many at the time. However, what was on offer was a subsidy from the government if you scrap your car, a scheme meant to kick-start the economy (and a rare case of the UK government copying a German policy that it previously criticized as ineffective).

 

 

Merry Christmas from The Economist

December 22

 

In its Christmas issue, The Economist summarizes the Great Depression that never was in the leader "The Great Stabilization". It is easy to forget how worried we were a year ago about the state of the global economy. The Economist's leader makes  few points worth remembering for the policy debates of the coming year(s), which are likely to be lively:

 

Most importantly, "2009 was extraordinary not just for how output fell, but for how a catastrophe was averted" ... " That outcome was not inevitable. It was the result of the biggest, broadest and fastest government response in history." It is important to remember that, because we are seeing opposition parties the world over lambasting those who were carrying responsibility in the dark winter 2008/9 for spending to much government money, piling up national debt. Certainly, mistakes were made, and some of the money could have been spend wiser. But, it could have been a lot worse.

 

However, there are many challenges ahead, as the the world economy is far from recovery, and the fall-out of this recession and the government bail-outs have to be paid for. Challenges are many:

  • The imbalance of international trade with a huge deficit of the US and a corresponding surplus in China.

  • The big debt accumulated by some government, most infamously Greece.

  • The bubble that may be in many stock markets due to the expansionary monetary policy.

  • The inflationary potential arising from the recent monetary policy, unless excess liquidity is withdrawn by Central Banks without delays.

  • The uncertainty in the housing market, notably in places like Ireland, Spain, the UK and the US - and with it depressed consumer spending. 

  • The uncertainty regarding the liquidity of some banks, and the need for better regulation - yet where few agree what would be "better regulation".

  • Distribution conflicts between companies and their workers, such as those at British Airways.

  • The budget cuts expected in many countries, and the associated pressures on public services, and indirectly consumer spending and quality of life.

2010 promises to be a lively time in the global economy!

 

Infrastructure Under Stress

December 21

 

Every year this time of the year, I get cynic messages from around the world about the British inability to handle a little bit of snow. It seems, the rest of Europe is giggling in front their televisions watching, yet again, England seemingly braking down after a slight bit of snow. Sometimes, it is the airports, sometimes it is the roads, and usually it includes the trains. This year, it is the Eurostar trains connecting London to Paris that seem to be hardest hit - they are closed down for the third day now, leaving tens of thousands of passengers stranded, with no alternative modes of transport available. What is going on?

 

In my view, there are three fundamental problems facing British infrastructure, whether privately owned or state owned:

  • An underinvestment in infrastructure maintenance and modernization. Coming back from travels abroad, it is always sad to see how backward and expensive any form of travel is in the UK - with very few exceptions (Heathrow T5 is modern, and easyJet is cheap (but unreliable)). The origins of this problems, in my view, go back to the Thatcher years of the 1980s when the government slashed expenses on anything in the state sector, and this investment gap has never been recovered; privatization made little difference on this score. 

  • A lack of contingency planning. The relentless drive for efficiency of operations reduces the slack in organizations - no more resources and people sitting idle. Of course, if you have a bit of slack, you can easier accommodate 'unexpected' adverse events - you pull all your people together and solve the problem. This also requires thinking ahead and be prepared for various forms of adverse events - from signaling failure to snow storms - and train your people on what to do if something happens.

  • A demotivated workforce. The relentless drive for efficiency (in part driven by the focus on shareholder value) often goes at the expense of the workforce, who feel stretched and (in less skilled jobs) underpaid. If you support your people when times are good, they are also more willing to pull in extra effort in times of crises. If, however, they feel (subjectively!) treated badly, they are less willing to put in extra hours when crisis hits. This probably explains why the staff of British Airways is even considering to go on strike during the Christmas period. 

What to do about it? As an investor, I would stay away from companies with dissatisfied customers - sooner or later these customers are going to desert (as will the best employees). As a politician, I would advocate better compensation for passengers who do not get the service that they bought a ticket for. If companies have to pay compensation (as train companies now have to in Germany), they have incentives to put proper contingency planning in place! And it would end the excuses that the snow was unexpected ...

 

In fairness, I should add that the train that I am on right now is 'only' 10 minutes late... but two weeks ago, a journey on the same route took me 3½ hours instead of 1 hour, without snow, only "signaling failure". 

 

 

Big Green Business in Copenhagen

December 13

 

Climate change, and the current political processes aiming to introduce new regulations is often see as a threat to businesses. However, El País, which I was reading for breakfast (yes, I am in Spain today), takes a different twist: "Green" is a big opportunity for business!

 

Many businesses have been thinking about the implications of climate change for a long time, and they have been developing new technologies - and gradually these technologies have reached the stage where they can be introduced to the market at prices that are not outrageously expensive. New technologies help climate change in multiple ways: improving the efficiency of energy use (for example, more fuel efficient cars), efficiency improvements in energy generation (i.e. changes in existing power plants), power generation from renewable sources (e.g. and solar energy), bio-combustibles, nuclear, and carbon capture (i.e. putting carbon created in power station underground).

 

El País shows a figure suggesting that consumer demand based on more efficient energy usage would stabilize carbon emissions by 2015; to get carbon emissions down, new technologies of power generation are needed. Business people are thus present in Copenhagen, demonstrating their technologies, and the opportunities they see - from Vestas' windmills to Renault's fuel-efficient car. And, presumably, they are lobbying for new regulation to favour their particular technologies. 

 

Another interesting statistic from this article: Denmark is already earning over 3% of its GDP from 'clean energy' - followed by Brazil, Germany and Spain. I presume, export of windmills, solar power and associated technologies account for a major part of this. This puts Denmark in a strong position to 'square the circle' of cutting emissions while keeping the economy buzzing.

 

Comparative Newspapers

December 13

 

The hotel offers a neat service for its international customers: 1-page news from their respective countries. It is interesting to read them across and compare what is top news in different countries. Americans seems most preoccupied with Tiger Woods, British are still arguing whether they were right to invade Iraq alongside George W., and Germans are arguing about their military operations in Afghanistan. I was also curious to note that the item on Copenhagen had the same headline across editions. However, the (identical) US/UK version talks almost only about the violent protestors, the German version emphasizes more the large numbers of peaceful demonstrators and some creative ideas they used to get their point across.

 

Needless to add that the sports news are mutually incomprehensible: "Cleveland 104, Portland 99" and "Stoke 2-2 Wigan" or "Bremen 0:2 Schalke" may excite the fans in either country, but have little meaning for others.

 

 

About Blogging

December 7

 

A good blog takes quite a bit of time. I guess that is obvious, if you think about it. Since my main job is not blogging - or journalism - that time often just isn't there. I have recently been working on a new book on 'Global Business', and that is taking most of my time - using up those time slots that I might otherwise use to think about global business practice. So, I promise to continue but perhaps not twice a week.

 

I also realized that a lot of material we read in the newspapers about business is a mix of wild speculation and the companies' own public relations statements. What is really going on behind closed doors remains confidential, and so it actually should be. But that makes it difficult to evaluate what is going on. For example, I have been asked many times what I think about GE and Opel (see June 6). Well, the story took a very different turn than everyone expected. The only thing I can say is that politicians are not good at negotiating with businesses...

 

I want to focus the blog on business matters rather than being drawn into political matters - though there would be plenty to say about British politics (and the supposedly independent media reporting about it). Yet, that's really beyond what I can do here. However, there is one issue that I feel strongly about and that I shall explore on the blog in the next weeks, and that is "election systems". Even though we have democracies all over the world, the actual process by which public votes are translated into actual politics varies widely. In my view, the supposed differences between 'nations' are in fact not caused by, e.g., the French being different than the English, but by the way voters can or cannot influence national politics. My favorite example is the second Iraq war where public opinion across Western Europe was fairly similar (small majority against), yet we saw a big rift between the governments of Britain and Spain versus the governments of Germany, France and various others. Watch this spot...

 

Unemployment trends across countries

November 6

 

The recession appears to be over the worst (keep your fingers crossed), yet most people feel it in their every day life more now than a year ago. The recession started with crashes in financial markets, yet they seem to be on their way to recovery, and bonuses in 'the city' are on the rise again.

 

In contrast, unemployment is still rising. That is typical for a recession - the impact in the financial markets is felt earlier than the impact on labour markets. Financial markets anticipate the developments of the near future, so share prices start rising when expected profits rise - even if in the short-term things are getting worse. This means that we really ought to turn our attention to labour markets now.

 

The Economist ran a good article explaining why the recession had hugely varying effects on unemployment in different countries. The essence is that in countries with highly flexible labour markets, such as the US, companies are prone to quickly lay-off people when they face declining demand. This then suppresses consumer spending, which makes the recession worse (even the fear to loose a job can have that effect).

 

These effects are felt less in countries that make it more difficult to lay-off staff, that provide support for companies keeping temporarily not needed staff, or that pay generous unemployment benefits. In consequence, Germany, Italy and the Netherlands have seen much less increase in unemployment that Spain, the US and Britain. Moreover, companies keep there often highly specialized people together rather than loosing human capital for good. It is rare for The Economist to point out the advantages of a less free market! However, as The Economist is quick to add, when the good times return, countries with more rigid labour markets will also find it more difficult to reduce their unemployment again.

 

 

Scientists, Politicians and Ethics

November 5

 

The U.K. has experienced a peculiar debate on the relationship between scientists and politicians in recent days. The trigger has been the dismissal  of the of an eminent scholar, Prof David Nutt of Bristol University, by the home secretary Alan Johnson (no university education), from a supposedly independent advisory council on drugs policy. His misdeed? He repeated his assessments regarding appropriate classification of drugs, notably cannabis, in various scholarly outlets: according to scientific evidence it is much less dangerous than the government suggests, a view supported by many other experts. Yet, the government is determined to class it as a dangerous drug, and to send the police after all those growing or distributing it.

 

Naturally, the government is free to form its own opinion. For instance, they would want to take into account wider consideration such as social implications rather than just medical impact. However, where this case becomes unacceptable is when the minister denies or discredits the scientific evidence presented. When he moreover dismisses an advisor for not 'towing the party line', he makes a mockery of the word 'independent'. Consequently, scientists across the UK, usually not a very vocal group, spoke out against their treatment by politicians in government and opposition alike.

 

Scientific ethics requires to be truthful in reporting research results! It is not acceptable to only report results that please the authors' favorite theory, or the sponsors' preferred outcomes (a common concern in medical research). Neither, is it acceptable to depress findings that don't please the political elites of the day.

 

On the other hand, if scientist become involved in politics, or otherwise participate in an argument without this being grounded in scientific evidence, they should be free to do so - but need to clarify the difference. (this blog presents personal opinions that is not necessarily grounded in my own research, though I try to provide evidence where appropriate.)

 

This story raises serious questions whether it is acceptable for scientists to work with a government on independent advisory panels if their membership is de facto conditional on towing the party line. It also raises serious concerns regarding the independence of research that is funded by government bodies on a project by project basis, and creates de facto dependencies on political decision making. The implications of this story

 

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