Where to, Mr. Smith?

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In February of 2008, just several months before the eve of the Global Financial Crisis, French President Nicolas Sarkozy commissioned a team of esteemed economists to be led by Joseph Stiglitz (Nobel Laureate, 2001), Amartya Sen (Nobel Lauireate, 1998), and Jean-Paul Fitoussi. They were charged with the task of re-evaluating our present metric system, of producing a report that documents the extent to which our current conceptualization of Gross Domestic Product (GDP) is in fact an accurate measurement of what it purports to quantify: a country’s economic success and its people’s well-being. Needless to say, The Commission on the Measurement of Economic Performance and Social Progress, (“The Commission”) produced a fairly scathing report. In the post that follows, I will first reiterate some of their findings and suggestions for improvement as presented in the book “Mis-Measuring Our Lives Why GDP Doesn’t Add Up”. I will then provide my personal critique of the work and will draw a number of interesting connections to recent trends in the evolution of the international political-economy and business. I hope you find it both illuminating and enjoyable.

One of the first things that a college student learns in any Introduction to Economics course is the definition of Gross Domestic Product (GDP): the market value of all final goods and services produced in a country’s jurisdiction, within a given period of time. Our entire conceptualization of the strength of an economy (a measurement often assumed to indicate citizen well-being as well) is predicated on quantifiable metric of economic growth.

However, The Commission argues that the world, our economies, and our societies, have fundamentally changed…but the metric by which we measure ‘success’ has not. The market can provide us with invaluable information, but it cannot provide us with all the information which we need to properly structure the environment in which we live. For instance based on our market-based conceptualization of GDP, leisure activities have a negative impact since they are not contributing to market-valued goods that can be accounted for in the national accounts; and if the poor maintenance of infrastructure causes more car accidents which in turn creates more need for repair, production of new goods, increases in health care services , GDP views this positively as an increase in production and makes no account of the detriment to self and society caused by traffic fatalities and injuries. These are but two simple examples of the shortcomings of Gross Domestic Product as a metric of a nation’s well-being and ‘success’, for what is our notion of progress if this is how we choose to quantify it?

The fundamental argument which The Commission is making is that market-statistics are being made to say things that they were never meant to say. The Commission is not calling for the abolition of GDP as an accounting mechanism, but rather for a change in our conceptualization in the value of GDP as a metric. The Commission proposes that statisticians begin creating a new set of indices which can be used to complement GDP, and in doing so provide a more comprehensive and accurate indication of the health and well-being of an economy and the population it serves. Unfortunately this report does not offer any viable solutions to the issue, but rather is merely an attempt to commence a new dialogue and a new approach. In my humble opinion, this was more of a political activity initiated by Sarkozy than anything else, for the findings in this report are nothing novel. In fact, everything I have reiterated so far is something that a student of International Development or Development Economics would hear within the first week of his or her college career. That is my only criticism of this report; that it presents nothing truly novel, but merely introduces to “mainstream economics” and to public policy practitioners, what academics have been writing about for a long time in development economics and international development. With that said, the general consensus presented in the book: namely, that we are missing a big piece of the puzzle with our present manner of quantifying ‘success’, is directly in line with a larger trend that is underway in political-economics and business.

For some time now I have been interested in the emerging trends of a “new capitalism”, “green economics”, or “social capitalism”…all names for the same thing: a broad, fairly mainstream recognition largely brought on by the 2008 financial crisis, that our economic system is fundamentally flawed; not that capitalism must be done away with, but that it is incomplete and shortsighted in its present profit-maximizing strategy. Often associated with this trend are topics of microfinance, social entrepreneurship, and most recently of impact investing, and the b-corporation. I mention this in the context of “Mis-Measuring Our Lives” because it appears to be a very tangible manifestation of a growing recognition of the exact shortcomings which The Commission acknowledges. After some further digging into the roots of this “new capitalism” movement, I have concluded that it in fact pre-dates The Commission’s findings by well over a decade, however at that point the concept was still reserved for the far-left hippies that wanted to do-away with the traditional capitalist system. Now, it is all the trend. For instance, in a quick study of Harvard Business Review publications, I found that the search terms “social entrepreneurship” returned 14 HBR-published articles, 4 books, and 298 case studies; “impact investing” returned 7 HBR-published articles, and 27 cases; “benefit corporation” returned 84 HBR-published articles and 180 cases! To have such a prominent interest at the pinnacle of business academia is, in my opinion, representative of a significant shift in the way that we (the business world, consumers, policy makers) conceptualize the purpose and potential of capitalism. So where does all this fit into international political-economy? Well, for one, it is a contemporary discussion of what could turn out to be as fundamental a shift in economic thought as the post-WWII period when Keynesian economics rattled the status-quo. I certainly won’t go attempting to predict the future, but we are living in the midst of a radical re-thinking of the purpose which capitalism can and should serve, and I have a hunch that some of the new indices and metrics which The Commission recommends are not too far off from being constructed and used to enhance our understanding of what true progress means.

-BAE

Keeping Up With the Times

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In continuing this series on the Globalization of Law, I would next like to discuss what is likely to be one of the major issues which my generation will face during our lifetime:  intergovernmental bodies‘ legitimacy.

The present framework of our international legal structure rests on the continuing legitimacy of the Bretton Woods institutions. While international treaties certainly did exist prior to 1945, the post-WWII reconstruction period put in place the foundations of today’s modern international political-economy. Constructed in the aftermath of a global calamity, the United States undoubtedly wrote the rules of the game in its favor; silencing some actors, and leaving many others out of the discussion entirely. Needless to say, the global political-economy has evolved tremendously since 1945; many of the individuals who were not even present at the Bretton Woods discussions are now (or soon to be) major players in the global economy. To put the monumental change in perspective, in 1945: China had not even commenced The Great Leap Forward, yet alone the Cultural Revolution; India was still in the process of “decolonization”, as were the South American and African countries. OPEC did not exist, and the Middle East was not yet known as a major player in petro-politics, the Asian Tigers were not even baby-cubs, and none of the technological innovation which my generation has grown up with was even remotely in the making.

It is safe to assert that the world has undergone some amazingly radical changes since 1945, yet in many ways the institutions underpinning these market-driven changes have not evolved accordingly. For example, the World Bank was bankrolled principally by the United States, and emerged to provide financial and administrative support in the efforts of European Reconstruction. Today, it continues to have incredibly close ties to Washington as it acts out its mandate of reconstruction and development around the world, only it is finding itself suffering from a fairly significant scarcity of resources, and has been the recipient of the repeated scrutiny of disgruntled aid recipients. It could be (and certainly has been) argued that to remain efficacious in the coming decades, the World Bank needs to become more of a truly multilateral international development body.

To provide another example, The World Bank Group (which is a related but separate entity from the World Bank), and its department: the International Center for the Settlement of Investment Disputes (ICSID), has recently suffered from repeated charges that its arbitrators are inherently biased towards developed-state-entities. While legal scholars such as Susan Franck have made persuasive arguments dispelling such claims, the fact that they continue to persist, and that a number of countries have recently withdrawn themselves from inclusion in this tribunal (Venezuela, Ecuador), is an immediate threat to its continued legitimacy. Lastly, I cannot discuss the issue of legitimacy without hearkening back to the Seattle 1999 riots surrounding the World Trade Organization (WTO), in which labor unions, environmentalists, and activists for the developing world took to the streets calling for “No Globalization Without Representation”.

In recent years we have seen more and more efforts being made by “emerging markets” to politically assert themselves on the global scale; Brazil is a seminal example. But the question remains as to whether or not the United States will adapt to this changed global environment in which true leadership means compromising to achieve win-win diplomatic results, while maintaining one’s core value of individual freedom. Or whether we, as a nation, will hold onto the past and fight for our hegemonic status.

-BAE

How Is the Law Responding to Globalization?

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From economics, to politics, to religion, culture, and national identity, mainstream globalization-junkies are duly accustomed to contemplating the multifaceted ways in which global-integration is impacting our daily lives; seldom discussed however, is the impact which globalization is having on the law. Perhaps this is because the tortuously slow pace at which legal systems evolve makes it difficult (or uninteresting) for non-lawyers to discuss; or perhaps the relatively static nature of law results in it being viewed as less-important than the rapidly changing and volatile international economy; or perhaps the dogmatic complexity of jurisprudence dissuades non-lawyers from investigating it further. Irrespective of the reason, globalization’s impact on our domestic legal framework, its relationship with, and integration into, the ever increasingly internationalized legal-system, is of paramount importance for non-lawyers to both follow and understand conceptually since its impact reaches far beyond the interests of researchers huddled away in an ivory-tower-law-school and the AmLaw-100 practitioners. If one wishes to have a comprehensive picture of the impact the globalization process has the domestic political-economy, then one must keep abreast of the general trends underway in the evolution of the law.

In the “traditional” US-domestic legal system, different courts have jurisdiction over different claims depending upon (amongst other things) where the claim arose from and what the basis of the claim is. For example, some cases fall under the jurisdiction of the federal courts, whereas others are issues which state courts have preliminary jurisdiction over. Jurisdiction in this sense extends only so far as the national-border.

How then does our legal system deal with a case involving one or more parties from outside the jurisdiction of the domestic courts? How do you force a foreign corporation to stand before a domestic court and argue its innocence? Or conversely, if you have been wronged, how do you expect to receive a fair trial if you are bringing a claim against a foreign corporation, in their domestic jurisdiction? If your thoughts are drifting to the World Trade Organization (WTO) as an intergovernmental dispute-resolution body, you are on the right track. However, the WTO functions only as an arbiter of disputes between nation-states; it does not hear cases brought by private-parties. International Commercial Arbitration is the answer. This sometimes-called public/private hybrid legal system functions on the basis of the New York Convention: an international treaty that has been ratified by 146 nations, and insures that, barring certain exceptions, any decision made by an arbitral tribunal in a NYConvention-signatory-state will be recognizable and enforceable in a foreig jurisdiction.

This is but an brief introduction to a forthcoming mini-series on The Globalization of Law. In the coming days I will elaborate further on the basic functioning of International Commercial Arbitration, and will culminate this week in discussing the recent Restatement of the American Arbitration Act, and the “American Exceptionalism” as it was described by visiting speaker George Bermann (Colombia Law School),during a presentation given last week at the Washington & Lee University School of Law. It is my hope that by the end of this series, non-lawyers who are interested in international political economy and the study of globalization, will have a more comprehensive understanding and appreciation of the impact which the forces of globalization are having on the law, and how the law is responding to reinforce those changes.

-BAE

Feel Any Better, Mr. Stiglitz?

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In “Making Globalization Work” (2006), the acclaimed Nobel-Laureate Economist, Joseph Stiglitz  commenced his argument by critically juxtaposing his recent experience at two vastly different gatherings of globalization-junkies:  the 2004 World Social Forum in Mumbai, India; and the 2004 World Economic Forum in Davos Switzerland.

He depicted the former as a hodge-poge of international activists and humanitarians, “a colorful crush of humanity” converging on the poverty-stricken city of Mumbai, India to discuss “the possibility of another world”; the latter, as a gathering of economic elites, looking to network and to proverbially scratch each-others’ back; nestled away high in the Alps of one of the world’s most powerful banking countries. What he coins the two faces of globalization, is perhaps best described in his own words:

“At both Mumbai and Davos, there was discussion of reform. At Mumbai, the international community was asked to create a fairer form of globalization. At Davos, the developing countries were enjoined to rid themselves of their corruption, to liberalize their markets, and to open up to the multinational businesses so well represented at the meeting. But at both events there was an understanding that something had to be done. At Davos the responsibility was placed squarely on the developing countries; at Mumbai, it was on the entire international community” (Stiglitz 5)

 

With the 2012 World Economic Forum having drawn to a close yesterday in Davos, Switzerland, I can’t help but wonder what Mr. Stiglitz is thinking regarding this most recent conference

While I will not venture to recapitulate all that has occurred at this year’s event, I would like to draw the readers’ attention to one simple fact:  our world  economic leaders have finally crossed a pivotal threshold in which they have recognized the potential for mutual-gains. This convergence between the interests and attentions of the economic elite with those of the “colorful crush of humanity” has likely ushered in a new era of globalization; one which, while it will certainly not be without difficulty, promises to create a better life for all.

From the arrival of the South at Davos, to impact investing, to reaching the hundreds-of-millions of children not in school, to innovating business models and Creating Shared Value, to sustainable growth models for businesses in emerging markets (to name but a few); this is an exciting step in  the evolution of global consciousness and what true, long-term, sustainable development means to us as citizens, not of a country, but of the world.

Certainly, the conference has not escaped unscathed from criticism; but for those individuals such as Mr. Stiglitz that have been studying the various aspects of this wave of globalization, and have been attending Davos for a number of years, I have to believe that this year has been invigorating and inspiring.

 

-BAE

 

 

The Visible Hand

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This is a fascinating time to be living as a student of political-economy. But while the international economic system has, is, and will continue to be tested in the years to come, liberal capitalism is likely here to stay; despite what doomsday-reporters might print in order to sell a magazine (even a credible one: “The visible hand” | The Economist). Yes, the West is floundering about in financial confusion; inevitably dragging the rest of the developed world with it. Yes, emerging markets such as Brazil, China, and Russia have been and are continuing to experience unprecedented growth rates with their state-centric-capitalism; but that does not merit the argument that “state capitalism is the most formidable foe that liberal capitalism has faced so far”. State capitalism most certainly works…in certain situations, in order to achieve a specific end aimed solely at economic growth. But there is likely a cut-off point at which it will no longer be sustainable; a point at which a country will be forced to turn to a more liberalized version of capitalism.

Here is why…

I struggle to ascertain how such an economic system could be compatible with a functioning democratic government in an advanced economy. Now, while the argument could be made that I am making a faulty assumption that a desire for democracy is universal;  I acknowledge that assumption, and I stand by it. I find it intuitive that individuals below a certain threshold of well-being would agreeably give up their freedoms and rights in exchange for an overpowering, centralized bureaucracy that is promising and producing growth (ie: an increased quality of living). But there comes a time in the economic development of a country where enough of the population has its basic needs met and begins to find itself with leisure time, or at least the desire for something more. At that point, economic growth is no longer sufficient in itself; and people press for freedoms. Now, whether or not state-capitalism has the internal capacity to evolve into liberal-capitalism, I do not know; but I imagine it would be at least as difficult as a democratic transition. But more on this later; I want to hear your thoughts first.

To come:

  1. Why does state-capitalism function at all?
  2. Diagnosing the “problem” with liberal capitalism.

A New Look at the 2008 Financial Crisis

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In today’s web-issue of Foreign Policy magazine, Haleen Mees provides an interesting new perspective to what drove the global financial crisis (How China’s Boom Caused the Financial Crisis).

In brief, China’s extended economic growth and the culture’s natural propensity to exhibit risk-averse behavior resulted in prolonged high savings rates which in turn depressed overseas long-term interest rates (Chinese savings rose from 38% in 2000 to 54% to 2006). In the United States, China’s profligate savings drove down interest rates on t-bills as investor demand increased dramatically. The depressed t-bill interest rates in turn helped to further fuel the fire of the “mortgage refinancing boom”, which spurred further US spending which translates into higher Chinese profits and savings. While Wall Street speculation and sub-prime mortgage lending did contribute to the crisis, it did not play as central a role as we have previously surmised (sub-prime lending accounted for <5% of new mortgages issued between 2000 and 2006).

In Europe, when the Eurozone formed, countries experienced an unprecedented price convergence in bond rates; resulting in a decreased perception of risk associated with Eurozone-country-bonds. As the perceived risk declined, demand increased, artificially driving down interest rates; leading to profligate spending by countries such as Greece and Spain, and to the subsequent European crisis.

While this is a fascinating new twist to story of the 2008 financial crisis which we have been telling; and one which may well be economically sound; it is dangerous to draw attention away from the social mores that surely contributed to the collapse: lack of fiscal austerity and individual greed. While Chinese growth policy likely contributed in that it drove down interest rates thereby making it cheaper for the West to spend and live extravagantly, China did not compel us to spend recklessly. That was a choice which we made by ourselves, and for which we are now paying the consequences. It is dangerous for us to try and shift the blame for our current predicament to an easily identifiable whipping-boy. Should we do so, we will fail to learn from this recent mistake; and worse, we may even heighten geopolitical tensions as we would likely direct our displeasure at the Dragon in the East.

-BE

ON: “Despite Globalization, Lawyers Find New Barriers to Practicing Abroad”

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A recent American Bar Association journal highlighted the internationalization of the legal profession in an article titled: Despite Globalization, Lawyers Find New Barriers to Practicing Abroad – Magazine – ABA Journal. While what this article has to say is certainly valid and makes numerous salient points about the impact of globalization on the legal field, it makes a significant error in its framing of the issue.

While I am not a lawyer, I do have some limited exposure to the international legal community; particularly to U.S. expatriates practicing abroad. Based on that experience, it seems as though the ABA has it backwards. Rather, the article should have been titled: “Due to Globalization, U.S. Lawyers Finally Encounter the Difficulties of Practicing Abroad”.

In no way is this meant as a slight to Mz. Alfaro’s testimony as discussed in the article, but rather to highlight the mainstream U.S. legal profession’s tepid response to globalization.  These are not  “new barriers” to foreign-practicing lawyers that have been doing business with the United States for decades; but rather are  issues which U.S. licensed lawyers are only beginning to encounter now, as they seek to practice outside of the United States.

These are fascinating times we are living in. As more and more U.S. lawyers are drawn into the international stage, perhaps we will see more concrete measures for a transnational judicial system begin to form. There have already been numerous calls for increasing the legitimacy and reach of an ‘extra-estatal’ (“outside the state”) dispute resolution system, but when the United States is in opposition, it is difficult for any concept to develop. Perhaps that will begin to change as more U.S. lawyers experience the frustration and difficulty of practicing in and engaging with foreign jurisdictions.

For more reading on the evolution of international law; I would suggest reading on the topic of ‘International Arbitration’. For specific authors, begin with Susan D. Franck; she has some interesting empirical evaluations of the present state of investment treaty arbitration.