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Why Can’t the West Govern Itself?
From US News Blog
|Posted on March 18, 2013 at 2:50 PM||comments (0)|
From US News Blog
Cyprus is Coming for Your Savings
There seem to be times when commonsense eludes us even after years of experience. While we know this to be true in our personal lives, it is surprising when it is done at a national level, let alone a supranational level. What I’m referring to are the financial crisis management and bank bailouts happening in Europe. In particular, the eurozone which has muddled through for three long years trying to rescue itself.
It seemed that the Europeans finally got their act together last November when new European Central Bank Governor (ECB) Mario Draghi took the helm and began real crisis management. The world began to exhale finally as the Europeans began to look like they were getting their financial house under control and a real handle on their economic crisis.
But here we go again. Cyprus has asked for a bailout. This by itself is not a big event. Nor is it surprising and it should have been a non-event with only €10 billion (approx. US$13 billion) at stake. Remember the U.S. American Insurance Group (AIG) was bailed out with $175 billion, Spanish bailout $100 billion plus, Greek bailout $200 billion plus, and so on and so on.
The Cyprus bailout, however, has a condition attached to it that would irk any average citizen no matter where they reside. All bank customers in Cyprus (which essentially means everyone) are being asked to pay a one-off levy (tax) in return for the €10 billion country (bank) bailout. To date, the details are that all bank customers in Cyprus will pay a one-time tax of 6.75 percent or 9.9 percent on their bank deposits. Anyone with less than €100,000 euros would have to pay the lesser off the two tax rates while those who have more money would pay the higher tax. In an attempt to ease the sting of this tax, the depositors will receive the equivalent amount in shares in their banks. This is not much solace to many savers and is, in fact, a gross "moral hazard."
So basically, if you don’t pay that bank tax to save your bank, your savings may be lost. No one likes to have his or her hard earned savings be held hostage, especially by their own bank. All this was announced over the weekend and ATM machines were emptied out over the weekend. Today, luckily for the government, happens to be a public holiday in Cyprus and the government has mandated that all banks will be closed until Thursday to prevent a full blown bank run.
The parliament and government in Cyprus are trying to renegotiate a better deal with the European Union (EU) and International Monetary Fund (IMF) for smaller savers after the understandable public outcry. Parliament is due to vote in the next 24 hours on a renegotiated deal to ease the blow to small savers. There are many options being put on the table. For example, to levy the fine only on large savers or to reduce the levy to 3 percent for savers with €25,000 or less.
What exactly was the EU or IMF for that matter thinking when demanding (at worse) or agreeing (at best) on a tax upon common small savers in exchange for a €10 billion bank bailout for Cyprus? A good rebuttal to this question would be as follows: "would you [Cypriots] rather pay this one-time tax or see a full blown banking and financial system collapse in Cyprus, soon to be followed by a severe recession and 25 percent of all of you losing your jobs?"
I have two thoughts on the above dilemma: My first is that the EU has still not found an effective way to manage periodic banking crisis without causing systemic anxiety. Moreover, I cannot fathom that the EU and IMF collective brainpower could not have conjured up a demand that could have been less of a lightning rod and slightly more camouflaged and bureaucratic in nature. The last thing we need now is a spark that reignites the European crisis.
Remember there is no workable government in Italy, Greece is struggling with its bailout terms, and Spain is in a middle of a financial crisis mingled with a political scandal at the highest government level. Moreover, we know from the Greek experience that it is not a good idea to take it lightly (and drag out a bailout plan with rioters on the streets) when small countries in Europe finds themselves in severe financial crisis, as it could easily vibrate into larger global financial markets. On a side note, Cyprus is the smallest EU country accounting for 0.2 percent of total EU output. Nonetheless!
My second thought: there is of course, more to the story. The EU (i.e. Germany) has long suspected that they are very large sums of Russian money in Cypriot banks -- a long-time massive money-laundering scheme occurring in the Cypriot banking system. This is not a well kept secret. It is estimated that these Russian international deposits are approximately US$31 billion (US$19 billion corporate deposits and US$12 billion bank deposits). As part of the bailout deal Cyprus must agree to an international anti-money laundering audit. Needless to say the Russians are not very happy about this upcoming audit or the new proposed tax on their money, as they stand to lose approximately US$2 billion. But is using small Cypriot savers really a good venue for the EU to address Russian money laundering issues? Needless to say foreign investors will think twice before choosing a Cypriot bank or any bank from a small southern European country.
Putting the intrigue of international high finance aside, levying a tax on small savers does not exactly breed confidence in banking systems. Now all eurozone small savers know that their savings are fair game to be used in bank bailouts. But the upside is that this might fast-track the introduction of an FDIC type insurance (deposit guarantee for accounts up to, for example, €100,000 euros) for small depositors in Europe.
|Posted on March 4, 2013 at 3:40 PM||comments (0)|
From US New Blog
Why Can’t the West Govern Itself?
The current global risk landscape is full of challenges that we never anticipated even a few years ago. The surprise key risk of 2013 is the abject inability for many countries to govern themselves effectively, also known as global governance failure. Most surprising is that this is particularly pervasive in the West. We are seeing this in Europe (in Italy, for example) and we are most certainty seeing this in the United States. Who would have imagined that the most developed and advanced nations off the world, with the most sophisticated political, economic, financial, social, educational, environmental, institutional, judicial and legal systems, would find themselves suddenly ungovernable ... and unforgivably at the expense of the common man otherwise classified as the middle-class?
There are, of course, other global risks facing 2013 that we have accurately predicted for many decades. There are, for example, an increasingly challenging competitive business environment with the pace of innovation going at breakneck speeds in developed and emerging markets alike, increasing global income disparity, labor markets shifts, extreme weather, mismanaged urbanization and water management, threats to cybersecurity, and natural resource limitations ...a to mention just a few.
The unexpected global risk of governance failure in the post-crisis era, however, seems the most puzzling. Almost all notable risk experts are now citing government's failure to act, to make policy, to govern, in many developed countries, as the most serious risk these nations and the world face in 2013. This is true for the United States, Italy, France, Spain, and the United Kingdom, not to mention all the smaller countries like Greece and Portugal.
It has gotten so bad that the United States is experiencing a government sequester—$1.2 trillion of automatic, across-the-board cuts to government agencies over the next 10 years to be evenly split between domestic and defense discretionary spending. The sequester occurred because a divided Congress could not reconcile its differences to enact either a policy to reduce government debt or other laws necessary to move this country into a post-crisis recovery phase after experiencing the worse recession in 60 years. While we all agree democracy is messy (and there is no substitute for it) surely this is not the model to govern the richest and most advanced nation in the world.
In Europe things are equally as bad. For example, in Italy the government's inability to govern was so persistent that Italians give up the right to have a democratically elected government for a few years. Italy's previously elected government of Silvio Berlusconi was thrown out and replaced by the technocratic unelected government of Mario Monti to save Italy from a looming full-blown Greek-style financial crisis. When the harsh medicinal remedies of the unelected, technocratic Monti government proved too bitter to swallow it was forced to resign, soon to be followed by democratic elections (last month) in which 25 percent of the votes went to a comedian who claims to stand for no government and wants a referendum on the euro (as if reverting back to the Italian lira is going to solve anything) and over 30 percent of the votes went back to Berlusconi's dysfunctional camp. The votes are so split in Italy that they cannot form a government. As a result new elections will in all probability be called for in the next few months and until then nothing will move and Italy will continues its long slide into economic decay and social malaise. Currently, there is a governmental void in Rome much like the one in the Vatican. This is stunning in the heart of modern, developed Europe.
Unfortunately this trend seems only to be getting worse in the West. This is, in part, because the common man—the middle class—is still not infuriated enough or perhaps not attentive enough or not empowered enough to demand that elected politicians and public officials simply do their jobs well. In the aftermath of the financial crisis, burdened by debt, with declining real incomes, and a shrunken wealth profile, the Western middle class simply seems to become more and more mired in hopelessness, accepting failure to govern as the new normal. I, for one, cannot fathom how things are going to get better in 2013 unless governments are forced to act by American-style sequesters or European-type public riots.
|Posted on February 26, 2013 at 12:10 AM||comments (0)|
From US News Blog
Today, in part, Europe's future will be decided. The Western world is waiting for the outcome of the Italian elections. This is the modern moment of truth for the Italians. If they miss this golden opportunity to fully jump on board the European Union integration project goals of development, competitiveness, and sustainability, the Italians will be left behind in a southern state of slow decline as they face the worst recession in two decades. They are sliding backwards on development with declining competitiveness, deteriorating fiscal health, one third of their youth unemployed, and being slowly locked out of the global capital markets i.e. access to cheap money. This moment of truth is very similar to the decision the Greeks faced when they were joining the euro i.e. "business as usual" or "time to grow up" as a country. The Greeks choose "business as usual" and we know what happened with that. Only this time it is Italy. Italy is much more significant and the third largest economy in the European Union. Italians can either get "real" this time or slide back into self-delusion. The Italian desire to return to the past is a pipedream; the world has radically shifted, and staying still and daydreaming will swiftly put any country (developed or developing) into an uncompetitive state. Essentially if the new Italian government is not credible and cannot forge through very difficult institutional and systemic reforms, the aging Italian voters have kicked the proverbial can down the road for their children to carry.
As I've mentioned in previous blogs, the Europeans fully deserve the Nobel Peace Prize for maintaining peace after centuries of warmongering that damaged not only themselves but also the globe. Moreover, Europe has to a large extent successfully delivered the world's highest living standards for their citizens in the aftermath World War II. While the Europeans have now muddled through and passed the apex of their financial crisis in which they were in a precarious state of economic chaos, political dysfunction, and social turmoil, they still facing looming hurdles to overcome. For example, zero or negative growth in the near future, unemployment at levels not acceptable in the West, impact of fiscal austerity for decades to come, difficult and no longer guaranteed easy access to the global capital markets, and perhaps, most damaging to the world, the loss of confidence in Western economic models and perhaps democracy itself.
This is a critical juncture for Europe, as they desperately need solidarity and leadership to move forward as they begin to shift from a monetary to an economic (fiscal) to a political union. The recent crisis fast-forwarded their path towards building a closer union. The Europeans have no choice: They either integrate or wither. The world has changed and is evolving faster than some European countries can transform—Italy being one of them. The question the Italians need to ask as they finish voting today is not what their new government can "give back to them", but what "new future" their new government can build for them. Going backwards in time and sitting on the sidelines is no longer an option for any country today (including the United States).
The key to Europe's future, and especially Italy's future, is regaining global competitiveness. The Global Competiveness Index states that there are 12 pillars needed to build and sustain a country's competitiveness. The 12 pillars are: "institutions, infrastructure, macro economic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation." Europe as a whole has a long road ahead on all 12 issues, and the Italians are no exception. To make matters worse the Italians have to accomplish the Herculean task of regaining global competitiveness amidst a global landscape of increasing challenges and competition with the pace of innovation moving towards breakneck speeds coupled by increasing global income disparity, labor markets shifts, extreme weather, mismanaged urbanization and water management, global governance failure, and natural resource limitations, to mention just a few.
As the most highly evolved developed region of the world, the Europeans are trying to manage all of the above mentioned challenges, and more, while trying to maintain their value system in that they are adamant, no matter what, they must maintain a certain lifestyle and civilized standard of living for all their citizens. This is a tall order and will take at least a decade—longer if the third largest economy in Europe (Italy) doesn't decide that it's time now to be a more responsible member of the European Union.
Most Americans are watching skeptically but in awe as the Europeans struggle to recover from a devastating financial crisis, regain global competitiveness, and stubbornly hold steadfast to the belief that every citizen in Europe must not be allowed to fall below a certain threshold of human dignity. Everyone is paying the price for this belief, albeit reluctantly, from the German taxpayers to the Spanish unemployed youth. We wish them luck.
|Posted on February 5, 2013 at 2:15 PM||comments (0)|
From US New Blog
What has happened in Africa? Africa was on the brink of being reborn. Africa was on its way to becoming the roadmap for humanity's future. Especially what is happening in North Africa? In Mali? The African continent has incubated and suffered some of mankind's most dreaded plagues. There is a new one…this time it's in the north of the continent—Islamic extremist groups, specifically al Qaeda.
The U.S. intelligence experts have been worried about North Africa for sometime now. It turns out they were right to worry. We know economic deprivation and lack of rule of law is a breeding ground for extremist movements. Not only is extreme poverty and lawlessness the hallmarks for many countries in North Africa but this new breeding ground for extremists also features strife, famines, pestilence, corruption, and lack of education. Now throw in cachets of weapons streaming across chaotic borders. If you were an ousted Islamic extremist group from Pakistan, Afghanistan, Yemen, or Somalia where would you go? Some place where borders are porous, weapons are easy to find, political systems are fragile, large deserts that are difficult to navigate, and where the U.S. military and their drones are absent—presenting Mali, Algeria, Libya, and Niger. (It should be noted that the Syrian and Iraqi border area is also experiencing a boom of extremists).
While the United States has been busy trying to root out Islamic extremism in Afghanistan, Somalia, Yemen, and Pakistan others extremist groups have had a resurgence in North Africa. What was unanticipated to some extent and perhaps poses the biggest threat according to U.S. national security experts is the “cross-pollination” amongst the various fractions. North Africa's extremist groups tend to be a bit different than the groups that are found in, for example, Pakistan and Afghanistan. These North African groups are organized around a more loose networking system than their cousins in Afghanistan and Pakistan (where the original al Qaeda was much more of a rigid hierarchical organization). They also have are more miscellaneous membership of not only local North Africans but also foreign extremist fighters. The North African extremists are readily seeking alliances with foreign extremist groups in their eagerness to expand their reach and have an impact beyond their borders while their Pakistani and Afghani cousins tended to be far more insular.
The unexpected mutation of North African extremist movements attracting more and more foreign membership was perhaps foreseeable. Displaced extremists from Pakistan, Afghanistan, Yemen, and Sudan needed a home. Moreover, while it is difficult not to participate in the celebration of freedom that Arab Spring brought, the dark side of that equation was that it pushed newly freed extremist groups out into the open. These groups where previously suppressed by their Middle East (i.e. Egypt's Mubarak) and North African (Libya's Gaddafi) autocratic regimes. These newly freed extremists are now mostly free to move about and as a result there has been an increase of foreign extremists from Sudan, Libya, Egypt and Mauritania—flowing into Mali, the current hub for North African extremists.
The North Africa network of extremist groups is often referred to as al Qaeda in the Islamic Maghreb or AQIM. The base off this North African militant nexus is in Mali. Initially many of its members were either from Mali or Algeria next door. This branch of extremists were originally Algerian antigovernment rebels who spilled over into Mali and then about five years ago saw an opportunity and decided to pursue a much wider agenda off “global jihad” and open their arms to displaced jihads fighters from the east. They have virtually free access to weapons streaming from a chaotic Libyan border and their leadership is made up of experienced war veterans from Afghanistan. AQIM is also very well-funded with cash from a long history of smuggling, crime, and kidnapping. AQIM feels poised to be the next force to take on a global jihad against the West.
AQIM has spillover across many boarders in North Africa and is steadily becoming larger. While the United States has been trying to diplomatically encourage the North African's to form a coalition and a joint African nation antiterrorist armed force to address the AQIM threat, the Algerian natural gas station attack where 37 foreign workers died a few weeks ago fast forwarded the timeline and threat level.
Due to the recent escalation of Islamists in Mali, the French have acted fast to stem this new ruin in North Africa. While the public face of France has given the appearance of the resurrection an old Western powerbroker back in charge of North Africa, there are skeptics on the ground. Frist, while the Islamist extremist threat in North Africa, and in Mali in particular, is real, President Hollande of France is facing his lowest domestic popularity since he came into office last year. France is also an embattled Eurozone member whose near-term economic future promises zero percent growth, double-digit unemployment, severe austerity measures with a controversial wealth tax agenda, a budgetary crisis, and deep social unrest. Nothing like a nice quick little war to boost popularity and show strength for the embattled left of central French president. Skeptics believe that President Hollande is too optimistic that the Mali invasion and liberation will be a short quick victory. Many critics believe intervention in Mali is going to haunt the French government back on the home front with possible retaliatory attacks and unrest amongst the large French North Africans and Muslim populations all set within a long historic background of the French government's harsh crackdowns of people of North African descent.
One has to begin to wonder if the French are underestimating the enemy. For an economic battered eurozone member, France is currently monetarily and emotionally ill suited to have a protracted armed engagement in North Africa. This will not be pretty for President Hollande if Mali becomes France's Afghanistan. The question, more importantly, is what happens when the French leave Mali…we only have to look 4,527 miles to the east of Paris to see what is happening with the American withdrawn from Afghanistan.
|Posted on January 28, 2013 at 2:10 PM||comments (0)|
From US News Blog
One of the greatest dangers for U.S. national security emanating from the financial crisis is that it has cast doubt on the notion that Western style democracy, capitalism, and market economies are the best long-term path to economic prosperity, development, and sustained wealth. This is without question one of the most striking, distinct, and impending threats to U.S. national security. The current financial crisis has exposed real weaknesses in Western economic and political models and has cast misgivings about their long-term results, for example, unsustainable debt, overleveraging, common systems (i.e. banking and healthcare) systemic failure, rising youth unemployment, increasing dysfunction of government governance, growing disparity in income, etc.
Moreover, the financial crisis has showcased to the world that mixed economies and non-democratic political systems are seemingly weathering the storm better than western developed countries. In some cases, such as China, these emerging economies are actually thriving. Emerging market economies (such as, Brazil, Indonesia, India) are looking at the China model with some envy as they are trying to determine how to grow wealthier, increase infrastructure, rely less on inward investment, move towards domestic demand, and manage income disparity amongst their large populations. In the United States we may worry about ideology, but others whose economies are not developed yet worry first and foremost about economic success and second about ideology (ironically with the exception of China).
The previously glowing perception of modern capitalism is shifting, indeed even in the West and unfortunately the messy and sometimes inefficient side of democracy is being showcased.
Over the last 60 years the West has focused on strategies to use democracy as a mechanism to transform fragile countries into functioning ones. Our hand is severely weakened in convincing others that we have the roadmap to economic and political systemic success. There's no doubt that the severity and destruction of the still ongoing financial crisis in the West has eroded real wealth and confidence in the system. The erosion has fundamentally tarnished the ideology that Weston style institutions and governments are the key to development in emerging markets. Thus, the long-term impact on U.S. national security could be far more damaging than previously anticipated.
Additionally, there has been more than subtle pressure being put on Washington, D.C. lawmakers and the White House to shift away from the focus on promotion of democracy and threats overseas and instead rebuild the U.S. economy and its future i.e. to focus on the middle-class recovery, upgrade education, slow down income disparity, and essentially keep society functioning. It should be noted that the single greatest threat to these goals is government dysfunction and failure to deliver needed policy to move us in that direction.
From a security standpoint perhaps the most dangerous outcome of the current financial crisis is the disenchantment with the messy side of democracy, a loss of confidence in free market capitalism, and an inward looking United States and Europe.
|Posted on January 14, 2013 at 1:05 PM||comments (1)|
From US News Blog
What is a weapon of mass destruction? According to the Encyclopedia Britannica a weapon of mass destruction, known as WMD, is a
weapon with the capacity to inflict death and destruction on such a massive scale and so indiscriminately that its very presence in the hands of a hostile power can be considered a grievous threat. Modern weapons of mass destruction are either nuclear, biological, or chemical weapons—frequently referred to collectively as NBC weapons.
In fact, if you look up most definitions of WMD, nowhere is the mention of a cybersecurity threat being part of the equation. While the conventional WMD are truly frightening to most of us, imagine the impact of a real cyberattack in the Western world. Power grids down, banking transactions failures, deliberate scrambling of healthcare or customer credit information, and deliberate mass transportation, commercial airspace, and shipping lines confusion, etc. There is, however, always the issue of how to identify whether a cyberattack is a weapon of "mass destruction or simply a weapon of mass distraction and inconvenience." Even if a cyberattack is a mass distraction, besides from the inconvenience, the business costs could be astronomical.
Cyberattacks were elevated to warfare status in early 2007 when the tiny country of Estonia decided they were going to let the world know that their country was "under a cyberattack" by the Russians (the government), i.e. state sponsored cyberwarfare. What was claimed and later proven by the Estonians was that the Russians had launched a series of massive coordinated cyberattacks on the Estonian public and private sector in April 2007. Estonian banks, parliament, ministries, newspapers, and TV were bombard. This was all over an argument with the Russians over the reallocation of the "Bronze Soldier of Tallinn" and war graves in Tallinn (the capital of Estonia). This was the second largest state-sponsored cyberattack, second only to "Titan Rain," a series of coordinated attacks on U.S. computer systems between 2003-2006, thought to be of Chinese origin.
Estonia shouted loudly from the roof tops that they were being attacked, that an act of war had being committed by the Russians, and called upon its allies to assist, but they had a hard time getting anyone to believe that this was a "real war" and not a cybernuisance. In the end no one came to help the Estonians but what that alarm did do was to put global cyberattacks on the warfare discussion table for North Atlantic Treaty Organization, known as NATO. Why is it important? Well for starters Estonia happens to belong to NATO, which has something called Article 5 which goes something like this: "attack one of us, and it’s the same as attacking all of us"…along the lines of Alexander Dumas Musketeer slogan "Unus pro omnibus, omnes pro uno" which is Latin for "one for all, all for one." Article 5 is at
the basis of a fundamental principle of the North Atlantic Treaty Organization (NATO). It provides that if a NATO Ally is the victim of an armed attack, each and every other member of the Alliance will consider this act of violence as an armed attack against all members and will take the actions it deems necessary to assist the Ally attacked.
Ironically it was the United States that evoked Article 5 for the first time, in the aftermath of 9/11.
The Estonians were trying to evoke Article 5 when they were being attacked by the Russians in 2007, but thought better of it and did not evoke the article because of the lack of support from their NATO allies; NATO could not agree on the definition of "under attack" in this case and identifying and proving that this was a Kremlin-sponsored attack was difficult. The Estonians were left to fend for themselves.
The Estonians raised global awareness of state-sponsored cyberattacks. We will never know if Estonia was the first real "cyberwar" but it was the first time a country claimed publicly it was under attack. There are still many questions about cyberwarfare and cybersecurity that need to be addressed. For example, what is the threshold of cyberattacks so that a cybernuisance is reclassified as a cyberwar? Is it cyberwar if the perpetrator is a "geeky" kid next door launching an attack from his bedroom versus a state-sponsored group? Moreover, do we declare we are under attack only when the cyber targets are military/government installations or national power grids or even if private institutions are hit? Who do you go after, because usually cyberattacks "ping" themselves through a third party (country) computer server? And so on and so on.
Estonia spent the last six years becoming one of the best defended countries against a potential cyberattack (but with limited offensive capabilities). Today, almost six years later, the Estonian model is studied by many countries on how to build national defensive cybersecurity capability systems. This is of particular importance since the Estonians have a public-private business cybersecurity partnership model which is the envy of many countries.
Like most things, the issue is really now a legal one—about the rules of engagement in cyberwarfare (defensive and offensive), not only including the legal partnerships between a government and its pubic but with other nations. We know one thing for sure, if there is no public-private business partnership, real national cyberdefense is an illusion, and if there is no international convention allowing defensive and offensive actions, all countries are vulnerable regardless of their domestic cyber capabilities.
On a side note, I just got back from Tallinn, Estonia, where I was part of The George Washington University School of Business Executive MBA in Cyber Security Program in partnership with the GW Homeland Security Policy Institute under Frank Cilluffo, former White House special assistant to the president for Homeland Security. GW launched the first ever U.S. university-sponsored residency in Estonia on this issue of public-private business cybersecurity partnership. The GW executives in residence are still there on the ground in Estonia learning first-hand about the complexities of cyber security as this article is going to press. This is a "shout-out" to them for pioneering the future of cyber security. I expect Tallinn will soon be inundated with a proliferation of U.S. universities students interested in learning how to build public-private business cybersecurity programs.
|Posted on December 31, 2012 at 12:35 AM||comments (0)|
Most of us (non-Italians) believed, or at least prayed, that the outgoing Prime Minister Mario Monti would lead Italy in 2013 in some capacity. Most of us hope that it will be in the capacity of prime minister again. Although this seemed difficult on the surface as Mario Monti is a "senator for life" and cannot technically stand for election, he is allowed to participate in the campaign. If the centrist parties form a coalition large enough to win the election they can invite Mario Monti to be the leader of that coalition, i.e. prime minister. This past Sunday, Monti finally indicated his willingness to be "named leader of a future Italian centrist coalition." But he has made it clear that he is not affiliated with either the left or the right, and not even the center parties. Monti offered his advice to all during the elections and agreed to lead a coalition that will continue to follow his reform/austerity agenda. This enables him to keep his distance from dirty political battles and keep his economist/technocrat/professorial nonpolitical status and image. It also allows him to focus on the reform agenda if he is brought back into office. Professor Monti is playing it very smart, almost like a shrewd politician. Thus the race for Italy's future is on.
Mario Monti resigned on December 21 from the post of Italian technocrat prime minister after serving 13 months beginning November 2011. The resignation was provoked by Silvio Berlusconi (previous Italian prime minister from the center-right party) when Berlusconi withdrew his party's (People of Freedom, known as PDL) support for the Monti technocrat government. It is important to note that Monti had to resign in any case by April 2013 so that Italian general elections could have been held in their normal timeline. Elections are now scheduled for February 24-25 in the new year.
Monti states that his 13 months in office where "…difficult but fascinating…the work we did has made the country what trustworthy…more competitive and attractive to foreign investors…". As neutral as Monti would like to appear, Berlusconi's antics are clearly fraying his patience. He indicated in Sunday's news conference that he had "…no sympathy for political parties based on personalities." A bit ironic for us non-Italians since we are rooting for Monti, the technocrat personality, who can keep Italy safe from a Spanish-style financial calamity. Silvio Berlusconi, of course, made his own headlines this past weekend in his distinctive style after a reported divorce settlement off euro 36 million a year for his ex-wife, Veronica Lario was announced—a settlement figure that has most Italian's shaking their heads as they prepare for an austerity ridden New Year's celebration.
Monti is 69 years old, a professor, an economist, and former European Union commissioner. He, in fact, served under the Berlusconi government as a minister in 1994. Monti has urged everyone to continue to make additional reforms in the labor market and institutions. Monti has indicated that he is open to leading a centrist coalition that will be a new third party, a party for "continued reform." Monti has partnered up with Pier Ferdinando Casini, leader of Italy's oldest and largest centrist party, the UDC. It is predicted that this third party may win up to 15 percent of the vote. Thus, in all likelihood, this centrist party coalition will not be able to win the elections without the center-left Democratic Party (PD) led by Pier Luigi Bersani who is currently (according to the polls) slotted to win the most votes in the February general election. Opinion polls show that the center-left PD will win the lower house majority but will, in all probability, have to form a coalition with centrist forces in the Senate. Thus if Monti is to lead the country it will be with the blessing of the PD party. This does mean that Mr. Bresani will have to give up being prime minister if he indeed agrees to this arrangement. To date, everyone is denying a secret accord between Monti and the PD. At an impromptu interview at a train station, 76-year-old billionaire Berlusconi (traveling with his 27 year old fiancée, Francesca Pascale) cried foul and claimed Monti's announcement on Sunday was an attempt to steal votes from the center-right.
Having said all of this, as I stated in an earlier blog this month, it should be noted:
The key problem of pinning hope on Mario Monti running [for office] is that he is a hero outside of Italy, not inside. Austerity measures (spending cuts), tax increases, high unemployment and domestic demand (consumers spending) taking a hit have made him…[unpopular, especially among the unions]…If Monti runs for election, in all probability Italians will not vote him into office. While they all respect Monti for refurbishing Italian credibility they do not like the pain he is causing them.. Monti has started Italy on [a] difficult path paving the way for the next generations of Italians and expectedly so it has been a big strain on pensioners and the youth of today.
February 24-25 is still a long way away. We have to wait and see. Only one thing is for sure, the global stock markets are going to be on a roller coaster ride due to this election. Let's pray the right thing happens for Italy—even the Vatican is supporting Monti's bid as prime minister.
|Posted on December 17, 2012 at 12:30 AM||comments (0)|
"2013 Italian elections and Silvio Berlusconi." I never thought I would say that in the same sentence. Who would have thought any of this was feasible only a few weeks ago?
Thirteen months ago Professor Mario Monti was brought on as prime minister to oversee the technocrat unelected Italian government after Silvio Berlusconi (former Italian prime minister) was unceremoniously kicked out of office. Monti saved Italy from a southern European style sovereign debt crisis and perhaps even saved the euro—because Italy is too big to fail or save. Monti took on this Herculean task with his brother in arms Mario Draghi, governor of the European Central bank. Now Monti has resigned and he will leave office after the 2013 Italian budget law is approved (in all likelihood before the end of this year). Italian elections will probably be held in mid-February sometime.
The reforms in Italy are working, albeit slowly, but the people are very restless to say the least. The good news—yes there is some—is that Italians are not as financially overstretched as their southern counterpart Spain. For example, Italian mortgage debt is only 19 percent of gross domestic product compared to 63 percent in Spain. More good news, Italians are significantly less leveraged than their southern counterparts as a country. Yes, we know Italy is famous for its very large public debt problem but total debt i.e. bank, corporate, and household debt is low comparatively to its neighbors. Also Italian banks unlike their Spanish counterparts are under less deleveraging strain. So the main short-term risk is political risk and uncertainty. In the medium- to long-term Italian productivity must increase as must its overall competitiveness and sustainability of debt—that is a long and difficult path. Monti has started Italy on this difficult path paving the way for the next generations of Italians and expectedly so it has been a big strain on pensioners and the youth of today. Italy cannot be fixed in a year—Monti needed more time. The next government must continue to carry out the reforms. I am worried.
There may yet be salvation…Monti could run as an elected official. This could shake Italian politics to the core and polarize the election debate for two reasons; first, because Monti, if he runs, will eat up the moderate "undecided" voters which will particularly impact the center-left Democratic Party (under the new leadership of Pier Luigi Bersani) which had a much better chance at the 2013 election booths than Berlusconi's People of Liberty (center-right party). Second, because Berlusconi's anti-austerity and anti-German mega media rant is taking on steam and might bring back the specter of World War II rhetoric of Germany's influence in the Europe Union as an election lightening rod. Italy's future depends on whether there is a center-left government voted into power that continues the reforms and budget controls—if that does not happen and we end up with a loose centrist coalition government then I think the whole reform path is probably going to unravel…and with it the hard fought uphill battle for continuing stability of the eurozone. There is a lot riding on the Italian elections for the whole world.
The key problem of pinning hope on Mario Monti running as an elected official is that he is a hero outside of Italy, not inside. Austerity measures (spending cuts), tax increases, high unemployment, and domestic demand (consumers spending) taking a hit have made him a scapegoat for the Italy economic mismanagement over the last two decades. If Monti runs for election, in all probability Italians will not vote him into office. While they all respect Monti for refurbishing Italian credibility they do not like the pain he is causing them. Enter stage-left Silvio Berlusconi promising to make "Italy Italian again…" whatever that means. Either way I think there is hope that Monti's steady hand will guide Italy's economic future through some venue.
So, no one knows what is going on or what will happen. Not unusual for a country whose politics for the last two decades have been influenced by the antics of one man (Berlusconi) and has left most Italians and non-Italians alike simply shaking their heads in disbelief. Having said that, most Italians are angry and fed up and want to go back to the good old days…maybe Silvio is on to something? Unfortunately the next government will face the classical horrible dilemma of growth, development, and crisis. "Do I look after you (the current tax payer) right now or do I look after your children's children? Pick one because I cannot do both…" Guess which one Silvio is peddling.
|Posted on December 10, 2012 at 12:25 AM||comments (0)|
This is the last in the series of discussions on "a new world order" which has focused on the possibility of the prime candidates (European Union, Russia, Turkey, India, Brazil, South Africa, and China) rising to the status of a superpower to potentially rival the world's only current superpower, the United States. This week it is about China. I left the most probable of emerging markets that could take on the mantel of superpower for last.
Let me reiterate that any discussion of a rising new superpower does not imply that the United States will lose its hegemony; it simply means that the United States will have a "balancer" or an "equalizer" next to it. As mentioned in an earlier blog in this series, the EU serves as the most likely candidate as a potential balancer. If China indeed becomes a serious contender it will not serve as a balancer but rather as an equalizer.
As stated in my opening blog in this series, the worse crash in the United States and Europe in 60 years showcased China's prominence as a global engine and its potential as a superpower. It was a stark reminder that everything Chinese is on a scale that we have never seen before; from the size of its population to…pick anything else.
Using almost any metric, the sheer numbers associated with China are overwhelming, be it the number for population, land mass, economic prowess, energy and food consumption, sovereign wealth funds, etc. The sheer size of these numbers are what convinces most people that China is going to rival the United States. Ironically it is the same set of numbers that make a convincing case that this rising power has much to do before it can pose as an equalizer to the world's only sitting superpower.
Let us examine this irony by using the most prominent "number" when we talk about China; its population. China has approximately 1.35 billion people which represent over 19 percent of the world's population. India has approximately 1.2 billion in case you were wondering, and then in third place is the United States with 315 million people representing 4.5 percent of the world's population.
Can you imagine the population numbers if China had not put the "one-child" policy in place? Family planning was put into place by the government in 1979 when the Chinese population was just under one billion people to ease future Chinese social, economic, and environmental burdens. Today, some 30 years later, with family planning still in existence but slightly looser, the newly installed Chinese government still has the same old problem: how to manage the social, economic and environmental future of 1.35 billion people. But this time there is an added twist…income equality.
China has had phenomenal economic success over the last 30 years. It has been growing on an average of 10 percent over the last three decades. Around the time the one-child policy was introduced China's gross domestic product was approximately $200 billion. Thirty years later the GDP has ballooned to $11.5 trillion. If you look at this from the point of view of China's GDP as a percentage of world total GDP (based on purchasing-power-parity) China went from 2.19 to 14.35 percent in 30 years. This boom was possible due to the sheer size of the population.
Now all this growth and subsequent wealth due to a very large and low cost labor population also brought with it the rise of the greatest nemesis for governments today: income inequality. What makes this enemy No. 1 for China is the sheer size of number of people involved in the income inequality equation. A little less than 500 million people live on $2 a day or less. This number goes up significantly if you count how many Chinese live on $10 a day or less: about 800 million. That is a lot of poor people living in difficult rural conditions (85 percent of China's poor live in rural areas, with about 66 percent concentrated in the country's west). China's GDP per capital is a bit above $8,450. This ranks China at 94th in the world; below Ecuador, Iran, Albania, and South Africa. Moreover, China ranks No. 53 worst worldwide in terms of income inequality (Gini Index). If the new Chinese government does not find a way to even this income gap between the rich and poor, it is in for a very bumpy ride.
The problem is that in order to close the income gap, the Chinese government must have high growth rates—the critical question is if the country can maintain its past 30 year record of high growth of about 10 percent? The answer…it is going to be very hard to do so. This is especially true since American growth is at a crawl and the European crisis is far from over now that Italy is being thrown into chaos with technocrat Prime Minister Mario Monti's resignation and Silvio Berlusconi running for office again.
The new Chinese government's 10 year economic objective of maintaining growth at a breakneck speed by moving towards domestic demand (consumers spending money) and relying less on exports due to the sluggishness of Western markets is a progressive one, but hinges on closing the income gap and making the average Chinese believe they are rich so they will save less. This will take time. China is also less reliant on foreign investment now; that is good, but is there enough domestic investment to keep their economic engine fired up? What will happen when Chinese savers turn into consumers, where will the investment dollars come from then?
If there is any government, however, who can manage the income inequality issue of 1.35 billion people it is Chinese government. If they cannot do it then no one can.
The new Chinese government is keenly aware of what will happen if they keep their very large population suppressed, poor, and hungry for too long a time—remember the Arab Spring! Hence, what they have to do right now is very clear: bridge the income inequality issue quickly. For China the bigger puzzle is what happens if they are indeed successful in bridging the income gap between the rich and poor for 20 percent of the world's population? Will a nondemocratic government, that controls 1.35 billion social media savvy consumers, be able to manage those unknown consequences that accompany development and wealth?
Next week we will start discussing the eurozone crisis and Italy. To be honest, I did not think that Berlusconi would be back; but I forget that this is Italy after all. For now I only have one word for this new development in the Italian election scene: insanity.
|Posted on December 5, 2012 at 12:20 AM||comments (0)|
We are nearly at the end of the "potential future super power" series. It would be remiss of me to skip the African continent in any discussion about the future. Every time we make a new acronym now for emerging markets, we try to insert an "S" for South Africa (for example, the "CIVETS", which includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). In fact, we even tried to insert an "S", after the fact, at the end of BRIC (Brazil, Russia, India, and China).
South Africa is the largest country in Africa with a throbbing population of 50.6 million. It is a very serious player in the commodities markets as a global mining and mineral processor which controls about three quarters of the world's platinum production and major shares in palladium, gold, manganese, and diamonds. There is a lot of buzz surrounding South Africa and it seems to have all the makings of a global emerging market with its multi-ethnic population and diverse cultures—11 official languages are recognized in its constitution.
The World Bank ranks it as an upper middle-income country, ranked 28th in the world with a gross national product in purchasing power parity terms of 555 billion (2011) with a GDP per capita of $10,973. It's stock market is ranked 20th largest in the world. South Africa burst onto the world's stage in early 2004 with high growth rates and ended that decade with a very successful World Cup in 2010. The question is where does it go from here? Do countries like Brazil and South Africa continually need mega events with strict, hard deadlines to stay credible in the eyes of private capital markets? (Perhaps this represents a new growth model for development i.e. continually hosting large sporting events as a central tenant to emerging markets development and investment plans).
The economy of South Africa is diverse; it is reliant on mining, farming, and tourism. The country has tried to base its future growth on high technology (entrepreneurship, IT, biotechnology, etc) as opposed to manufacturing. South Africa publicly acknowledged that competing with South East Asian economies in manufacturing would be futile—they are right. Thus, it is an unusually insightful country. It has instead decided to focus on scientific and technological innovations. Some noteworthy achievements have been, for example, the first human-to-human heart transplant, vaccine for yellow-fever, cutting edge work in molecular biology, x-rays computed tomography (otherwise known as CT scans to most of us)—all of which have earned South Africa numerous Nobel Prizes. This country has the unique ability unlike any other on this sub-Saharan continent to reinvent itself politically and economically—especially given its size.
Regrettably that does not diminish any of the significant and persistent social, political, and economic problems—unemployment, poverty, and AIDS taking the top slots. Unemployment is high (ranging from 25-40 percent unemployment depending on your source) and income disparity is one of the highest in the world (it is in the top 10 countries). Poverty is extremely prevalent amongst the majority of black South Africans. While most other emerging markets for better or worse, like Brazil or India, have thriving shadow economies (the informal market which is by and large not illicit, but just not taxed, not monitored by the government, and not included in the national GDP), South Africa has a relatively small shadow economy occupying about 15 percent of the jobs—thus not a sufficient outlet for the poor unemployed. Perhaps the most disturbing is that its public health system is being crippled fighting the deadly AIDS disease on a scale we have never seen before. South Africa has the highest number of infected people in the world, approx 6 million. The good news is that it also has the highest domestic investment in the disease in lower- and middle-income countries. The bad news is that it leaves the healthcare system venerable to other issues not being addressed.
Asides from the issues mention above, the list of "things to do" for South Africa is long and complex, for example:
- education levels among the black population is substandard
- high corruption
- economic growth plan is based on natural resources thus unsustainable in the long term
- public services requires an overhaul in many arenas
- high violent crime
- the transfer of agricultural lands owned by whites to black African owners is moving very slowly
- the "townships" (huge, informal housing settlements near big cities) are serious thorns in the country's underbelly
- the ever present shortages of clean water and electricity
- underdeveloped infrastructure restricting economic activity and social inclusion for its diverse population,
- abject poverty with more than 50 percent of children living in poverty. A 2012 UNICEF report found:
- 1.4 million children live in homes that rely on often dirty streams for drinking water
- 1.5 million have no flushing lavatories
- 1.7 million live in shacks, with no proper bedding, cooking, or washing facilities
- four in 10 live in homes where no one is employed (and seven in 10 in cases of dire poverty)
- 330,000 children and 5 million adults are currently infected with HIV and 40 percent die from the disease annually. [See a collection of political cartoons on healthcare.]
I think I should stop making the "to do list," as with all things African (good and bad), it is overwhelming.
Growth averaged 5 percent from 2004 to 2007, extremely impressive, but growth has slowed with the not so surprising dip into negative territory in 2009 due to the global financial crisis—it now rests between 3-4 percent. For South Africa to bounce forward it must deliver some serious growth numbers over a very long period of time. This is not in the cards unless there is a game changer in the system....I have yet to see one (even rising precious metals and mineral prices will not be enough). Let's wait and see if there is a game changer but keep in mind medium- to long-term has a different meaning in Africa than it does for private capital markets.
South Africa need to reduce the gap between the rich and poor or it will roll back into political strife—but this is the central modern challenge facing all governments to varying degrees—developed or emerging.
Despite the potential and richness of this country that in many ways represents the soul, rhythm, and heartbeat of Africa; long-term prosperity is still a distant dream for many South Africans.