The government-private interface for India's rich and poor

A strong perception has been gaining ground in the mainstream debates that private sector in India has acquired enough strength to replace the government in many areas. However, this impression may not quite match up with the reality of life for the overwhelming majority of Indians.

The graphic below tries to summarize the respective roles of the government and the private sector in the lives of the three categories of Indians - those in the bottom half of the income ladder, the elites, and the remaining population.



As can be seen, the government interface for the corporate elites is limited to facilitating the regulatory and other clearances required to run their businesses. And even this role is receding as the economy becomes increasingly deregulated. In contrast, the government continues to play the overarching role in the lives of the poorer half of Indians (and even the others excluding the elites).

The simplification of public debates

At the outset, let me clarify that this post is not a defence of any government. Nor is it an attempt to blame anybody. It is only a reflection of the environment in which public debates are taking place in modern societies.

Why is the government unable to lower inflation? Why is the government failing to provide employment to the massive numbers of people joining the workforce? Why is the government raising the prices of petrol and cooking gas periodically? Why is the government unwilling to tackle corruption? Why are governments failing to provide good quality utility services? Why are governments increasing the utility tariffs?

These are the dominant themes in our public debates today. The agenda of the debate is framed in a manner that puts governments at the center of the issue. The audience, mostly passive recipients, have come to believe that governments are either "failing", "unable", or "unwilling" to resolve these important and universal issues. Even when there is a rare attempt to search for the causes, it ends up in a circular manner reverting back to the government.

This framing of the agenda and questions suits all sides to the debate. The villain of the piece, government, is easily identifiable. This narrative fits nicely into the widely accepted stereotype of governments being the source of all evils. In this simplified world-view, citizens find easily identifiable villains. Most often, these debates end up as opportunities for collective middle-class catharsis. It is perfect staple for tweets and Facebook comments. They also make for good media events - soundbites, short op-ed columns, blog posts and half-hour television debates involving 4-6 people. The opposition and intelligentsia love it. The former's job is after all to oppose the government, while the later are known to just criticize, without offering solutions.

Ironically, governments too may not be unhappy. It helps them to avoid confronting the difficult issues that need to be addressed to meaningfully settle the issue being debated. In fact, it makes governments try out populist band-aid solutions which merely kick the can down the road. In many respects, we have a classic collective action problem.

The fundamental issues are complex, not amenable to quick-fixes, requires hard-thinking, and painstaking and long-drawn out action on multiple fronts. It involves all stakeholders facing up to bitter truths that unsettles and often discards the settled conventional wisdom. Most importantly, it requires communicating to all of us certain fundamental realities and the need to accommodate our opinions and ideologies based on them.

These issues are important for developing economy democracies like India, which are in the middle of far-reaching social and cultural transformations. These countries have a strong and deeply entrenched legacy of dominant government role in all walks of life. All the surviving generations are used to relying on governments to resolve all their problems. Accordingly, the dominant discourse invokes the language of regulations, enforcement, punishments, subsidies, and so on.

When governments are making pretences of controlling inflation by coming down on hoarders, or helping farmers by raising the minimum support price, or protecting consumers by keeping tariffs and oil prices unchanged, or controlling corruption by sending the corrupt to jail, it is this discourse that is being played out. This discourse has limited space to explain the complex dynamics of modern markets and the limitations of governments.

The theatrics associated with these debates means that we lose the opportunity for informed debates about critical issues of concern to all of us. In all these cases, since the government is the perceived villain, we stop or refrain from examining these issues in greater detail in search of "real" answers. Take the case of the debate surrounding inflation. What are its causes? What can be done to mitigate, in the short-term, and resolve, in the medium and long term, the causes of inflation? What should be the responsibility of governments, academicians, media, citizens and the society in this endeavour?

Or take the case of corruption. What are the major sources of corruption? What are the different categories of corruption and what are its dynamics? How can we systemically prevent rent-seeking for each category of corruption? What should be the role of different stakeholders in collectively addressing this problem?

This is not to be fatalistic - the resolution of all these problems require collective effort, and since such efforts are difficult to mobilize, we are left with no choice! But a more nuanced perspective of these issues and their challenges helps all participants in the debate to atleast appreciate the complex nature of the problem. I am sure all of us realize that we stand a better chance of success with addressing a complex issue when we have a well rounded understanding of the forces contributing to the problem.

If we are able to elevate public debates to this level, all of us will quickly realize that controlling inflation, job creation, keeping tariffs and user charges constant, and so on are issues that are increasingly beyond the competence of mere governments. They require long-term structural changes and societal adjustments, where all of us have an important role to play, either directly or by co-operating with and assisting in the process. The governments have to take the lead (sadly, even this is missing!).

However, as mentioned at the beginning, none of this is to underplay or overlook the central role of governments. They can, and should, play an important role (though their degree of control varies from situation to situation), in both mitigating the adverse consequences of these problems and putting in place the mechanisms to enable their effective resolution. Addressing market failures are the basic responsibility of governments. Public debates and policy making will be much the richer for this realization.

Why governments are important in a market economy?

Wish I had written this! Dani Rodrik has a superb explanation of the role of governments in the successful functioning of modern markets.

"Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments. They need systems of contract enforcement and property-rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalized, and market power is not abused. They need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimize distributional outcomes.

Well-functioning markets are always embedded within broader mechanisms of collective governance. That is why the world’s wealthier economies, those with the most productive market systems, also have large public sectors."

Once we recognize this, a few things naturally follow

1. Markets require basic physical infrastructure and rule of law to be effective. Regulation is necessary to correct market failures. In other words, Governments underpin markets.

2. This, as Prof Rodrik writes, also raises the issue of who makes the rules that govern this system and then administer them. Democracy and politics inevitably follow.

3. Development of good quality infrastructure and establishment of effective administrative and governance systems do not come cheap. People need to pay taxes in return for enjoying these services. And given the low tax base, especially in countries like India, those at the top of the income ladder need to pay more.

4. Ironically, and contrary to conventional wisdom, the rich and well-off benefit disproportionately from government and its activities than the poor. They use the physical infrastructure directly and derive much greater benefits from its use than the poor. Similarly, contractual regulations and rule of law undepin much of the transactions made by the rich. In fact, in countries like India, the transactions carried out by the poor are mostly done outside the formal government institutional channels.

Education IPE: Gadhafi Brings Down LSE Director

Well, I hope they're happy now. They've succeeded in ousting a person of great managerial skill--a rare feat in academia. Go ask Larry Summers. The irony of it all, of course, is in academia you are often punished for sparing the tried and true of "tradition" (i.e., not doing anything much). Especially now that public support of academia is going to be much less than it was in recent years--especially for the social sciences--you need folks like these. Having actually gone out into the world and promoted the LSE name for many, many years, this is what Sir Howard Davies gets.

It's odd that I received this message by mass e-mail when the director's office is just one floor below mine, but the breaking news is that LSE Director Howard Davies has resigned over the school's relationship with the Gadhafi government. I won't recycle my thoughts on what occurred which I generally don't think were sufficient to force the ouster of someone who's done a lot for the LSE--from furthering its international reach (admittedly to mixed effect in this instance) to improving the school's premises [1, 2, 3]. All these of course while maintaining the LSE's status as perhaps the globe's premier social science institution. Certainly, it has no peer in hosting prominent speakers from all over the world.

At any rate, the press release which contains his letter of resignation cites the following matters which will be subject to independent investigation:
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An independent inquiry to establish the full facts of the School’s links with Libya, whether there have been errors made, and to establish clear guidelines for international donations to and links with the School. Lord Woolf is to make recommendations to the LSE Council as soon as possible. He is to have total discretion as to how he conducts the inquiry, and as to the matters on which he is to report.

The issues the Council will suggest he investigates include, but are not limited to, the following:

• The agreement to accept a £1.5 million donation from the Gaddafi International Charity and Development Foundation (GICDF) in 2009 to LSE Global Governance, £300,000 of which has been received to date
• The acceptance of $50,000 paid to the university in return for Sir Howard’s advice to Libya’s sovereign wealth fund in 2007
• The academic authenticity of Saif Gaddafi’s PhD thesis, awarded in 2008
• The agreement of a £2.2 million contract between LSE Enterprise and Libya’s Economic Development Board to train Libyan civil servants and professionals, £1.5 million of which has been received to date and payment of £20,000 for tuition of the head of the Libyan Investment Authority
• The acceptance of an award from GICDF of £22,857 to support travel costs, mainly airfares, for academic speakers to travel to Libya. Furthermore, the Council notes that LSE staff have co-operated with an investigation of an allegation of an assault during a protest at the LSE on 25th May 2010 when Saif Gaddafi visited the School to make a speech. This alleged assault, involving one of Gaddafi’s associates and a protestor, is currently sub judice and no further comment can be made.
• Finally, the Council will carry out its own investigation of the administration of LSE Global Governance.

Anarchy--or what passes for it in academia--has descended on us denizens of Houghton Street. If you're (somewhat oddly) further interested in the goings-on around here, our school paper has more on the LSE student protests which perhaps helped force Davies' hand and the accusations of plagiarism against Saif al-Islam Gadhafi.
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Godspeed to Sir Howard Davies. The abovementioned issues aside, he's done much for our school since coming on board in 2003. Why is Sir Howard Davies a casualty ahead of a guy who fires on religious buildings? In a fair world, I wouldn't have to ask such a question.

UPDATE: The FT expounds on the magnitude of the LSE's loss.

When Basel III Met the Yankee Bubblemeisters

In German, weltmeister is the world champion in English. But, when it comes to inflating asset price bubbles, perhaps we can relax the rules of grammar and syntax and declare our American friends the global bubblemeisters. Not being content with one housing bubble and its demise, let's just say the US in its own inimitable way is trying to inflate another one via shenanigans such as the $600 billion Fed bond purchase programme.

Now we come to another conundrum of international organization in the form of the upcoming Basel III macroprudential banking regulations. Interestingly enough, some of its framers propose including a mechanism for various countries to report that asset bubbles are afoot at home. In theory, the others would then be able to raise financial firms' capital requirements to guard against troubles in the said country spilling across borders via this early warning device.

It sounds great in theory, but what if the world's largest economy is so magnificently distorted already by, say, still-historically elevated housing prices as to preclude rational analysis in neat and tidy Basel III frameworks? Beats me, and nobody should be surprised to see the bubblemeisters push back at the global negotiating table for Basel III:

Banking regulators have quietly taken a major step towards harmonised global regulation by agreeing to raise worldwide capital requirements whenever an individual country declares a credit bubble. Part of the larger “Basel III” banking reform package, the “countercyclical capital buffer” heralds a step change in the way national banking regulators interact and is the first concrete example of “macroprudential” regulation that seeks to moderate the economic cycle.

In a nutshell, it works this way:

The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses. Regulators in every other country would have to follow suit and impose a proportional surcharge on their own banks, based on the size of those institutions’ exposure to the bubble country.

However, there are operational problems in verifying that the concerned developed countries apply these measures equally. There's a particularly large one that may feel it's being unfairly targeted based on its recent economic history. Its excuse is that their geographical spread is so large that so-called bubbles may be localized as to render such measures impracticable (as if Michigan compensated for Nevada circa 2007, but I digress):

Banking groups said they were concerned some nations would impose buffers more readily than others, creating an uneven playing field. They are also sceptical that once buffers are imposed, they will become permanent, either because regulators never cut them or investors react badly to a reduction.

“A country would have significant disincentives to impose the countercyclical capital buffer [because] ... the impact would likely be greater on its economy than on the banks,” said Greg Lyons, a US partner at law firm Debevoise. The US is said to be particularly reluctant because it would have to declare a country-wide bubble, even though there might be large variations between regions.

In essence, what if certain countries deliberately encourage such bubbles for short-term gain alike certain folks whose, ahem, "forward-looking perspectives" incorporate nearly infinite discount rates?

Khodorkovsky, Rule of Law & Russia Joining WTO

This is yet another entry in the long-running saga of Russian WTO accession [1, 2, 3, 4, 5, 6, 7]. I think you know how this story goes: the seemingly arbitrary (re-)incarceration of Vladimir Putin's political foe and onetime oligarch Mikhail Khodorkovsky bodes ill for Russia's attempts to join the WTO for obvious reasons. To Western eyes, the lack of stability and transparency in Russia are definite no-nos whose implications spill over into the trade realm. That is, how can the whims of a handful be the basis for its membership in a rule-based organization?

First we have a US trade official commenting on how this has set back Russia's chances (as if it were making significant strides, but I digress):

The sentencing handed down to former Russian tycoon Mikhail Khodorkovsky will complicate Russia's bid to join the World Trade Organization, a senior Obama administration official said on Thursday.

"It is not going to help their cause, it is only going to complicate their cause," the official said. "The WTO is a rules based, rule of law organization. Most countries around the world do not look at this verdict as a demonstration of the deepening of the rule of law in Russia. It will definitely have an effect on Russia's reputation," the official added.

Ah, but don't worry, says Vladimir Putin. He sees 2011 as the year it finally happens. In fact, he's rather less worried about governance than he is about keeping automobile tariffs intact:

Prime Minister Vladimir Putin said Wednesday that Russia can be expected to enter the World Trade Organization in 2011, but "questions still remain," Interfax reported.

Putin also said Moscow could use "the so-called technical regulations," used by the members of WTO, to protect its auto industry after entering the organization. "If we see that the auto industry gets into unequal conditions of competition, we will find the methods of protection," Putin said.

Putin makes it sound as if Russia would be doing the WTO a favour instead of the other way around IMHO.

'Indonesian & Filipino Corruption Compared'

With Christmas a few hours away, here's more lighthearted fare for you all. A few weeks ago, I attended an LSE event held by our colleagues here at the Asia Research Centre intriguingly titled "Where Have all the Bad Guys Gone? Governance in Indonesia Today." Since Southeast Asia is my area of interest for obvious reasons, governance matters are a matter near and dear to me. Needless to say, it was a very interesting discussion. After the event, Roger Montgomery told me the following joke about the difference between Indonesia and Filipino corruption, with the latter coming out worse and being the punch line.

So the Philippines ranks rather lower than Indonesia in corruption perceptions via the likes of Transparency International .The latter has made some strides towards combating corruption that the Philippines should investigate. Ah well, I just hope my retelling is reasonably accurate for now. Here it goes...

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A decade and a half ago, Dian and Renato were roommates at Harvard Business School studying for their MBAs. Reminiscing about their B-school days, Dian rung up his Filipino friend Renato from his office in Jakarta. When Renato had free time, Dian said, he should come visit Indonesia.

And so it came to pass that Renato found some time off work to accept the invitation of his old roommate. Upon arriving at Soekarno-Hatta International Airport, Renato was suitably impressed when Dian sent a Mercedes-Benz limousine to pick him up. Arriving at Dian's sprawling mansion in Jakarta's exclusive Kebayoran Beru residential district, Renato greeted his old friend warmly:

"I've got to hand it to you, Dian. You've really made it. Once we were just grad students struggling to get by. But look at you now, you're a wealthy industrialist--one of Indonesia's elite! What's the secret of your success?"

Dian just grinned, told Renato to get back in the car, and instructed his chauffeur to drive to the outskirts of Jakarta. While approaching a power plant, Dian asked Renato, "Do you see that geothermal plant?"

Renato nodded.

Dian smiled broadly at his friend and said, "ten percent!"

Renato gave Dian a big pat on the back and replied, "That's brilliant, Dian!" For the rest of his stay, Renato was treated to the finest entertainment money can buy in Jakarta. But, in the back of his mind, he was already plotting how to top his old schoolmate.

Four years later, Dian was at work when Renato rang him up and invited him to visit the Philippines. Renato assured him of a good time, and Dian found himself in Manila two months afterward.

Arriving at Ninoy Aquino International Airport, Dian was suitably impressed when Renato sent a stretched Mercedes-Benz limousine to pick him up, complete with a chauffeur wearing immaculate white gloves. Arriving at Renato's mansion in Manila's exclusive Forbes Park residential district, Dian greeted his old friend warmly:

"I've got to hand it to you, Renato. You've really made it. Not so long ago we were just MBA students scrounging for our meals. But wow, you're now the toast of the town --one of the Philippine elite! What's the secret of your success?"

Renato just grinned, told Dian to get back in the car, and instructed his chauffeur to drive to the outskirts of Manila. For two hours they talked about the good old days until they came upon an empty stretch of road. Renato pointed at nothing in particular and asked Dian, "Do you see that geothermal plant?"

Dian looked at the empty expanse, scratched his head and said, "I don't see anything."

Renato smiled broadly and said, "one-hundred percent!"
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This joke is probably based on the infamous Bataan Nuclear Power Plant that the US-based firm Westinghouse built under the rule of Ferdinand Marcos but was never used. (History buffs will also remember Bataan as the site of the infamous 1942 Bataan Death March.)

India, the IMF's Poster Child for Capital Flows

It's always one step forward, two steps back with the IMF moving into a post-Washington Consensus age, it seems. We've talked about it becoming kinder and gentler with regard to conditionalities--or maybe not. Today, let's revisit the tolerance of states implementing capital controls in contravention of the Washington Consensus--or maybe not. IMF Managing Director Dominique Strauss-Kahn seemed to raise more questions than answers in his recent speech in Delhi lauding India's approach to the subject matter. Unlike a certain even more populous neighbour, India does not actively clamp down on capital inflows (or at least so far). Unlike a certain nominally socialist regime, nor does it try to manage the level of its currency.

So, for what it's worth, this latest iteration of DSK is broadly in the Washington Consensus mould. (Hear that, China?)

Today, India is once again receiving strong capital inflows—more than $50 billion over the last year, or 4 percent of GDP. And while other countries facing surging capital inflows cry foul, India has neither undertaken massive intervention, nor further tightened its existing system of capital controls—in fact the limits on foreign investment in long-term debt were recently increased.

In my view, this approach is the right one. As noted by Prime Minister Singh at the Seoul Summit, “even as we try to avoid a destabilizing surge in volatile capital inflows, there is a strong case for supporting long-term flows to stimulate investment, especially in infrastructure.” He also pointed out that recycling surplus savings into investment helps address developmental imbalances. I am confident that with India’s strong track record of vigilance, capital flows can be put to good use without sacrificing financial stability.

Shifting focus to the medium term, how best to achieve strong global growth?

Rebalancing global demand holds the key. In economies with excess external deficits, public and private saving must increase. And in economies with excess current account surpluses—including many in Asia—domestic demand needs to increase. Stronger financial safety nets and financial market development can promote this shift from external to internal demand. In many emerging economies—including China—currency appreciation is also an important part of the solution. Finally, structural reforms remain essential in all countries to raise productivity and boost growth.

It could've come straight out of Bernanke's mouth if you ask me. And for those looking at more ammunition for the argument that the IMF remains an America-friendly institution first and foremost, DSK lauds the imminent $600 billion helicopter drop care of B-B-B-Bennie and the Feds:

Because public debt in the advanced economies is so high, the burden of this support falls on monetary policy. And because interest rates are already very low, less conventional measures may also be needed. In the U.S, for example, the Fed recently announced a $600 billion program of quantitative easing. It aims to prevent damaging deflation and support the recovery. Of course, the Fed’s actions carry implications for the global economy—and I will address the issue of capital flows shortly. This is why it is so important to have a collaborative approach to rebalancing the global economy.

I guess some things never change.

Stiglitz: US Patent System Fouls Global Innovation

If you think that this blog is overwhelmingly negative about America (I surely don't; call it "unvarnished reality"), you'd do wise to consider that Americans themselves are often those who are most negative with America. Today, let's have a look at innovation and innovation policy. While there have been any number of innovations to emanate from the US which have undoubtedly improved the global lot, they're becoming more dubious as of late. Moreover, the patent system that America has in its own way tried to globalize is itself in need of a rethink. In essence, disseminating and preserving rents from knowledge work should not be confined to parochial boundaries in an increasingly interconnected world.

In a new article in the LSE house journal Global Policy, Claude Henry and Joseph Stiglitz explain how a dyfunctional US patent system spells a dysfunctional global system for innovation. Here is the abstract:

We live in a knowledge economy. The production and dissemination of knowledge will be central to solving the problems of climate change and environmental sustainability, reducing global poverty and addressing other global problems. This article asks: do intellectual property rights – with their increasingly global reach –further or hinder the production and dissemination of knowledge? Experience with genetically modified organisms shows that a model markedly different from the current one is more likely to bring wider social benefits, both in the short and the long run. Indeed, the current system may impede both innovation and dissemination. There are reforms in the intellectual property regime, and more broadly in the way we finance, organize and incentivize innovation, that would increase the pace of innovation and its utilization. The spread of the current dysfunctional system owes much to the evolution of intellectual property rights in the US – and the influence of particular special interests there.

And here are the policy implications:

• A well-functioning patent system requires careful attention to a number of details, including: (1) what can be patented; (2) the breadth of a patent; and (3) the standards of novelty that determine whether an innovation is eligible for a patent. Corporate interests have resulted in a patent system which answers each of these questions in a way that may impede not only the utilization of knowledge, but even innovation.
• Among the details that matter is the process by which patents are granted. The current system grants too many ‘bad’ patents. Opening the process of examination of patent candidates to all parties that reveal themselves as having private information relevant to a thorough examination (in a process called opposition) should reduce the number of ‘bad’ patents.
• The patent system is only one part of a society’s innovation system, through which the production of knowledge is financed, incentivized and organized. Too much attention has been focused on IPR (intellectual property rights), and too little on alternatives, e.g. open source systems, publicly financed innovation and prizes.
• Providing more scope for compulsory licenses – making it easier for countries to issue them – would reduce some of the inefficiencies associated with the current patent system.

America, who loves ya, baby? As with many other things, getting things right in America as far as patents go means getting things right in the rest of the world, too. And therein lies the rub with "fixing what's wrong with America": dynamics in a country of a little over 300 million people affect so many stakeholders abroad.

Are IMF Reforms Favouring LDCs Truly 'Historic'?

So it has finally been agreed upon: In addition to the much-ballyhooed ceasefire of sorts on the international currency war front [1, 2], G-20 participants at the recently concluded finance ministers meeting in Gyeongju, South Korea also finalized plans to reallocate Executive Board seats and thus contributions to the International Monetary Fund. In effect, European countries that were prominent in the postwar world will vacate two seats at the IMF's Executive Board that developing countries will now occupy. The IMF write-up summarizes these changes and how it believes its legitimacy will be enhanced by virtue of representing more voices from the developing world that are undeniably gaining clout in the world economy:

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

Meeting in Gyeongju, Korea, G-20 finance ministers and central bank governors agreed on a doubling of IMF members’ quotas—financial stakes that determine voting power in the institution—that will shift voting shares toward dynamic emerging market and developing countries. As a result of the quota rebalancing, the large, dynamic emerging market countries Brazil, China, India, and Russia move up to be among the top 10 shareholders of the IMF.

The ministers also agreed on a reshuffle of the IMF’s 24-member Executive Board that will raise the representation of dynamic emerging market and developing countries on the institution’s day-to-day decision-making body. There will be two fewer Board members from advanced European countries, and all Executive Directors will be elected rather than appointed as they are now. The size of the Board will remain at 24.

IMF Managing Director Dominique Strauss-Kahn, speaking to reporters after attending the Gyeongju meeting, said the move was “historic” and the most important decision on the governance of the IMF since its creation in 1944. “There will be other reforms, but what we did today puts an end to a discussion on legitimacy that had lasted for years, almost decades."

The Gyeongju ministerial meeting was held to prepare the agenda for the full summit of G-20 heads of state and government in Seoul, Korea, on November 11. The agreement reached at Gyeongju still has to be approved by the IMF’s Board. The target date for completion of the changes to IMF governance is the IMF-World Bank Annual Meetings in October 2012.

At their summit in Pittsburgh, United States in September 2009, G-20 leaders provided political support for a shift in country representation at the IMF. Leaders backed “a shift in quota share to dynamic emerging market and developing countries of at least 5 percent from over-represented to under-represented countries using the current quota formula as the basis to work from.” The leaders also stressed their commitment to protect the voting share of the poorest in the IMF. Currently, there is roughly a 60/40 percent split in the shares at the IMF between advanced countries and emerging market and developing countries.

While the Pittsburgh summit targeted a quota shifts of 5 percent from advanced countries to dynamic emerging market and developing countries and from over- to underrepresented countries, the Gyeongju deal achieves a shift of more than 6 percent in both cases.

The IMF head honcho is saying that his expectations were thus surpassed by what was achieved over the weekend:

Strauss-Kahn said the decision on IMF governance had responded to the mandate given in Pittsburgh in a way that exceeded expectations. "The 10 biggest shareholders in the IMF are those who deserve to be in the top 10 as they are the 10 most systemically important countries in the global economy," Strauss-Kahn stated. He also said the IMF’s Executive Board would be a "more democratic Board as will be an all-elected Board".

It's a welcome move, but shifting two seats out of 24 may better be portrayed as a gradual shift than an earth-moving, historic event. As always, I am keener on observing the follow-through. Should developing countries gain an even larger share of world economic activity, then there should be an even more pronounced shift in the membership of the Executive Board forthcoming. Moreover, it certainly would be nice if the IMF managing director were elected rather than appointed by a group of European countries as has been the convention at the IMF since its inception. With the Socialist Dominique Strauss-Kahn being ahead of Nicolas Sarkozy in the polls, DSK coming home to contest French elections in 2012 may be the first opportunity to see if this club has truly changed when matters come around to choosing the next IMF chief.

Welcome OECD's Latest Member, Israel (or Not)

I myself have taken my eye off the ball in not mentioning this turn of events amidst all the news emanating from Europe regarding the European Stabilization Fund. On Tuesday, Baroness Catherine Ashton of Upholland, High Representative of the European Union for Foreign Affairs and Security Policy, came to speak here at the LSE. Goodness, she has almost as many honorifics as her Labour contemporary Peter Mandelson during his recent glory days! During question time, a member of the audience then questioned why the EU has stood idly by while Israel has been accepted as a member of the Organization of Economic Cooperation and Development (OECD) despite perceptions of its continued human rights violations against the Palestinians. Since the EU claims to be an enlightened body when it comes to upholding human rights, shouldn't it at least attempt to block Israel's entry into this rich country's club?

Now, the issue of Israel has long been a cause celebre among British academics, with calls to boycott Israel's universities being a particularly contentious matter that surfaces periodically. As for our kids, remember that our student union recently decided to twin the LSE with the Islamic University of Gaza. At any rate, I was surprised by how deftly Baroness Ashton handled the questions posed to her, including this one. Basically, her response was that OECD membership is decided on strictly economic criteria--meeting this and that macroeconomic indicator. Indeed, she already indicated something to this effect earlier on the matter. Despite the surface unity, there has been much wrangling among existing OCED members about what Israel's membership signifies:

A Norwegian diplomat told EUobserver that 24 countries, including the EU group-of-19 as well as Mexico, Norway, Switzerland and Turkey in their individual statements at the conclave said the move should not be seen as a legitimisation of Israeli settlements in occupied Palestinian territories. "We don't want membership to influence the question of Israel's borders," the Norwegian source said. "There's been a huge debate on this. It's not an easy subject."

Some countries proposed attaching a footnote to Israel's official letter of invitation saying the OECD does not recognise any changes to Israel's pre-1967 boundary. But the move did not gain unanimous support, the Norwegian contact added. The OECD is to set up an expert group to ensure that Israel clearly separates economic activity on its territory proper from activity in settlements when reporting statistics, however.

Membership of the prestigious Paris-based institution is based primarily on economic criteria and will help Israel to attract foreign investors and to borrow money more cheaply on international markets. But the move also has a political dimension. The OECD's rulebook says members must be committed to "pluralist democracy based on the rule of law and the respect of human rights" and to look to the "attainment of the purposes of the United Nations..."

For her part, EU foreign relations chief Catherine Ashton on Monday welcomed progress between Israel, the Palestinian authorities and the US on so-called "proximity" talks designed to end the decades-old conflict. "I am delighted the proximity talks appear to be moving," she said.

Commenting on the EU's commitment to human rights in its foreign policy-making more broadly, she said: "They are the silver thread that runs through everything we do and will be the silver thread that runs through the EAS [the EU's nascent diplomatic corps] when it is up and running."

As such, there was practically no discussion of human rights issues or suchlike in the membership criteria. Think of the country as a Dr. Jekyll and Mr. Hyde situation; what the OECD authorities have done is to basically observe Dr. Jekyll and ignore Mr. Hyde. OTOH, Israel's Ministry of Foreign Affairs has this to say:

Today (10 May 2010), the Organization for Economic Co-operation and Development (OECD) invited Israel to become a member of the organization. The unanimous decision, taken by the 31 member-states, recognizes Israel's achievements, economic strength and ability to contribute to the organization and to the world's economy. The accession negotiations were led by the Foreign Ministry. An additional team for professional subjects was headed by the Ministry of Finance.

In order to maximalize [sic] Israel's connections with the organization, the Foreign Ministry is currently establishing Israel's Delegation to the OECD. The Delegation will operate out of the Embassy in Paris, and the Ambassador to UNESCO will be Israel’s Ambassador to the OECD, in addition to his other duties.

During the three year review process that checked compliance with OECD standards and benchmarks, OECD experts closely examined the policy and functioning of government offices, governmental authorities and the public sector and also met with representatives of economic and social organizations, universities and NGOs. Following this review process, recommendations on improvements and efficiencies were made.

Becoming a member state of the OECD will lead to economic advances and enhance Israel's image, as well as improving the functioning of various sectors in Israel's society and economy, including in the fields of environment, education and employment. The improvement and upgrading process will continue even after Israel joins the OECD as part of the government’s commitment to ongoing peer review by the organization and to adjust its regulation policy to the standards held by member-states.

And here is some mention, in passing at least, of those who tried to stop Israel from joining the OECD. Contrary to Baroness Ashton's argument about Israel's membership being on strictly economic criteria, Israel depicts the unanimous decision to allow Israel entry into the OECD as validation of its international standing. From Foreign Minister Avigdor Liberman comes this statement:

FM Liberman welcomes OECD decision
(Communicated by the Foreign Minister's Bureau)

Deputy Prime Minister and Minister of Foreign Affairs Avigdor Liberman welcomes the OECD decision inviting Israel to join the Organization for Economic Co-operation and Development. FM Liberman stated that the resolution is the result of a long-term diplomatic effort, and congratulated the MFA officials responsible. According to the Foreign Minister, the resolution is a stamp of approval for the country's economy and its achievements in technology.

FM Liberman added that the resolution was unanimous, despite attempts by anti-Israel entities to prevent the acceptance of Israel into the OECD. The fact that the attempts failed is proof of Israel's solid standing with the international community and shows that it is recognized for its achievements, despite the fierce incitement against it in every conceivable arena: political, security and economic.

You could of course turn matters around and argue that Israel has used "fierce incitement" against the Palestinians in the areas noted above. It has always struck me how Israel regards its foreign affairs with this same kind of siege mentality after all these years. On a lighter note, observe that largely unimpeachable states Estonia and Slovenia have also been extended an invitation to join the OECD after undergoing similar evaluation processes.

I do not parse questions of membership in largely symbolic rich country's clubs too much as it's not a matter of great concern to this child of the Global South. But I do it for you, dear readers, as it is indeed an IPE question that has not garnered enough attention. What others miss, I will write about.

To Cow a Dictator: Zimbabwe and Blood Diamonds

It is heartening to know that corporate social responsibility (CSR) efforts can work on even some of the most despotic regimes with the worst financial management. For those of you who have yet to come across it, the Kimberley Process Certification Scheme (KPCS) grew out of a United Nations effort to staunch the flow of so-called "blood diamonds" in international trade. That is, its intention was to certify diamonds as not being sold by militants to finance wars--especially those from Africa. While third world governments are not usually fans of measures largely devised in the West, KPCS has largely succeeded because even despotic regimes generally welcome efforts to quell armed movements and blockage of trade in diamonds. Just look at its globe-spanning participant list.

As a child of the Global South, I have long held a keen interest in third world solidarity. While he is regarded nowadays as a tyrant and even a laughingstock by the West, I have always viewed Robert Mugabe in less Bushian black-or-white terms common to Anglo-Saxon commentators. Hard as it is to believe now, Comrade Bob was widely lauded as a pan-African hero in his heyday in the independence movement. That the intervening years have proven him no better at improving conditions in Zimbabwe is a real shame, but still. To paraphrase current PRC doctrine on Chairman Mao, Mugabe is 70% bad, 30% good. And, the more he clings on tenaciously to power, it seems the balance gets worse.

Now, there has been much blowback from the Zimbabwean government lately over the Kimberley Process trying to force Mugabe's hand in appointing a monitor over the Marange diamond fields. It's a long story but it basically goes like this: when De Beers' mining concession expired in 2006, another was given to British firm African Consolidated Resources (ACR). However, Mugabe's government has since declined granting ACR its rights to mine the area and has even set up rival interests. In the interim, opportunists began scouring the area. As a response, sponsored "security" forces have been implicated in human rights violations to solidify their grip on the region and make sure the cut flows in their direction. So, witnesses report beatings, torture, and worse.

A few weeks ago, Mines Minister Obert Mpofu mirrored Robert Mugabe's hardline stance on the Kimberley Process of, we'll go elsewhere if they won't accommodate us in light of a June 2010 deadline to shape up set by the Kimberley Process after finding much amiss in Marange, including the appointment of someone to monitor the situation:

Mines minister Obert Mpofu has reiterated government threats to pull out of the Kimberly Process (KP) if the body refuses to endorse the country’s bid to freely trade diamonds extracted from the disputed Marange fields. Allegations of human rights abuses and the claimed involvement of security services in the exploitation of the Marange diamonds in eastern Zimbabwe resulted in the country being brought before the KP, a joint government, industry and civil society initiative aimed at stemming trade in so-called “blood diamonds”.

Trade in diamonds produced from Marange has since been stopped and the country was given a June 2010 deadline to comply with a number of stringent requirements which include the appointment of a KP country monitor. However Mpofu told journalists at the Bulawayo Press Club that Zimbabwe would pull out of the Kimberly Process if government efforts to comply with its requirements are not endorsed.

"If the KP is unsatisfied with our efforts and says we have failed to comply with their requirements (and) bar us from diamond trade, we will not lose sleep. We are ready to just pull through and not lose anything. The KP does not own the diamond trade markets. Zimbabwe will pull out of the KP and sell its diamonds to those markets,” Mpofu said adding that membership of the organisation was in fact voluntary.

President Robert Mugabe also said recently that Zimbabwe would find other ways of trading its diamonds if the country continued to encounter problems with the Kimberly Process. Human rights organisations and sections of the global diamond industry have been pushing for the country’s suspension from the KP claiming that the Marange stones are being used to enrich government officials and fund rights abuses in the country.

But, more recently, the Mugabe-led government caved in, most likely fearing a ban of the sale of diamonds from the Marange diamond fields:

The guidelines include the demilitarisation of the diamond fields, which has not happened, with rights groups reporting that there is still strict military control of Chiadzwa and the villagers there. According to the guidelines there is also supposed to be an independent monitor in place to oversee the sale of all stones from Chiadzwa. Abbey Chikane, the head of the South African Diamond Board and a former Chairman of the Kimberley Process Certification Scheme, was finally appointed as a monitor for the diamond fields after four months of fighting over a suitable candidate.

Chikane arrived on Monday, and was expected to visit the Marange fields in the east of the country on Tuesday, the state-run Herald newspaper reported. Chikane has reportedly already met with mining ministry officials, as well as representatives of Mbada Diamonds and Canadile Miners, the firms given state authorisation to mine the diamond fields.

Meanwhile, the now-nefarious Mr. Mpofu has just been hauled before the Zimbabwean parliament to face suspicions of profiteering by Mugabe cronies in the governance vacuum:

Mpofu had for weeks refused to appear before the committee, insisting the issues they wanted to take up were the subject of litigation. But he finally relented after the Attorney General’s office confirmed that a refusal to testify to Parliament could result in legal charges. Economic Planning Minister Elton Mangoma confirmed the cabinet approved the controversial Marange deals though he said certain issues need a closer look.

Committee sources said Mpofu was quizzed over issues including an aborted January auction of 300,000 carats of diamonds, which was halted after the office of Prime Minister Morgan Tsvangirai got wind of it. The sale had not been approved by Harare or by the Kimberly Process Certification Scheme, which was scrutinizing diamonds from Marange due to alleged human rights abuses...

The state entity has said that since it began to exploit the Marange field in 2006 it has produced only 3,000 carats worth US$12 million. But the committee has determined that Mbada and Canadile have extracted 7.1 million carats of diamonds. The panel says evidence indicates Zimbabwe has lost millions to top officials.

CSR researchers should take note of features that make the Kimberley process successful where other efforts have not. Nearly universal buy-in from both diamond buying and selling countries due in no small part to self-interest has helped ensure even the most recalcitrant characters eventually walk the line. While there are some loopholes, KPCS is noticeably effective on the balance. Wouldn't it be nice if more UN initiatives were like this one?

"Rise of the Rest III" (2010)

Earlier this month, we held at the Carnegie Council the third iteration of our ongoing series on the "rise of the rest" or the emergence of non-Western powers in international affairs. Our March 9, 2010 panel titled "Rise of the Rest III" was a follow up to a similarly themed event we held at Carnegie Council in 2008 and one that I participated in at the Nixon Center in Washington DC in 2007. Here is a summary from the original 2007 panel called "The World Without the West." Here is my summary and my speech from 2007.

Nicholas Gvosdev kicked off the panel this month by reviewing some of the points made at the last two panels.



A point I made in 2007 was that the BRICs (Brazil, Russia, India, and China) countries are not similar, nor are they a coherent alliance. But why the BRICs has been working as a group is that these countries are coordinating their actions and using theirs relationships as force multipliers, Gvosdev said. It allows the members to credibly speak for half the planet. Gvosdev pointed to embryonic groupings that can go around the United States if U.S. leadership is unsatisfactory.



The southern democracies, like Brazil and India, act as "independents" in international affairs. They will work with the United States when they see it in their interest and will work with other southern democracies, for example through the IBSA (India, Brazil, South Africa) Dialogue Forum when they don't. IBSA is coordinating on trade issues but is also making forays into military joint activities as well, Gvosdev said.



Craig Charney started by making the point that there is an international consensus among peoples that they want some sort of elected and accountable political leadership. "Democracy" broadly means "free expression" worldwide, and people want to choose their own leaders, according to Charney's extensive polling. It is "minimalist" support for democracy and not very deep. It is not a demand for "free and fair elections," but the desire to choose own's leader is a "very powerful trend at present," Charney said.



Charney also identified "connectedness," along with collective responsibility and national power, as another powerful trend and reality in international affairs today. "We are seeing the emergence of imagined communities," which is reinforcing national sentiment through electronic media, Charney said. He noted that 70 percent of humanity now lives in a family with a telephone, creating billions of communications possibilities and accelerating collective consciousness, collective action, and social movements.

As for China, Charney made a fascinating point that seems to resonate with my own research in Asia: Worldwide people admire China for its economic growth, but the admiration for the United States goes much deeper to include America's legal system, its movies, its popular culture, its educational system, its openness, etc. Recently, I have tried to make a somewhat playful point to some of my friends that until China creates modern equivalents to rock 'n' roll and Hollywood, I will be unconcerned about Chinese influence. Give me a Chinese Michael Jackson and "Avatar," I will be worried about a decline in U.S. influence.



Parag Khanna identified a widespread crisis of global governance--in power, norms, and institutions. The emerging powers or "the rest" do not yet have the appropriate voice in global goverance commensurate with their political and economic weight. In power relations, for example, there is no credible proposal on the table to expand the UN Security Council or reform the board of the IMF. For norms, the rules, for example over democracy or intellectual property or humanitarian intervention, are in question. As for institutions, the proposals have been unimaginative. "Meta global governance" has been uninspired, Khanna said.



"What is global governance?" Khanna asked. It is the sum of: multilateral bodies (like the UN), regional mechanisms (like the African Union), inter-regional functional activities (like bilateral climate change cooperation), and the huge array of public-private partnerships (like the activities of the Gates Foundation), Khanna answered. Global governance therefore has no center, Khanna said. So to capture the totality of globalization, "you have to think of global governance as radically decentralized," he said.



Stephen Young asserted that the epistemology of modern civilization is fundamentally nihilistic, and therefore there are no norms or values, only power. But power fragments unless you have a dominant power. So the world is guided by Hobbesian dynamics--"kill or be killed, eat or be eaten," Young said. You therefore need to find norms and values common to many traditions. He rejected the idea that America actually ever had hegemony in the international system but underscored the importance of the "rise of the rest" in a world that is fundamentally about power.

Nevertheless, the central and continuing importance of "the West" in international affairs actually makes "the rise of the rest" the "second rise of the West," Young said. He also asked whether what we might see if a "convergence of societies," as I have argued elsewhere, for example in relation to Google's exit from China. Young concluded that greed has been a perennial problem in the global economy and we have not much evolved since the Dutch tulip bubble of the 1600s. Young's group, the Caux Round Table, sees the need to promote corporate responsibility, use core (universal) values in corporate governance, and to find the right pricing in the economy even if it takes state intervention.



I asked the panel what I asked Harry Harding in 2008: In this new world of emerging powers is cooperation possible? (Harding's response is above.) This time, each panelist had slightly differing views. Young said cooperation is possible but it will be case specific and we therefore need to engage by acknowledging the identities of potential partners. Gvosdev said cooperation will require a real give-and-take, especially between the United States and China. We have to honestly ask ourselves, what kind of world do we want, said Gvosdev. The United States asks for more burden sharing from China but when China becomes more assertive Americans get suspicious. Like Young and many in the Obama administration, Charney said cooperation will depend on establishing a dialogue on shared interests. Khanna finished by saying we will see a world that is "to each his own. You will see more and more of what Charles Kupchan of Georgetown calls the autonomy rule—engaging with other countries in such a way that one can't push too far beyond the extent to which one is really respecting their own autonomy and self-directed evolution. I think we'll see more of that."

To view the transcript and the video in its entirety of the event, click here. A special thanks to our corporate sponsors Booz, HP, and Merck for making this event possible. We look forward to the next iteration of this ongoing series. Like any successful Hollywood movie, another sequel is expected--"Rise of the Rest IV," perhaps next time in 3D.