Re: Briefing - South Korea's Industrial Giants

Dear Sir,

In the article's penultimate paragraph you mention that 'What's more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength'.

The fact is family ownership is always a strength because public ownership now-a-days is without any regulation at all. Any Hedge-Fund can wreck a company's share-price even without owning the shares.

Specifically on the point quoted by you regarding Toyota family, the fact is that Mr. Toyoda is cleaning up the mess created by his predecessor who was under pressure from the 'outside share-holders' to increase the market-share disproportionate to the Toyota's 'Toyota Way' Culture of five points viz., 1. Genchi Genbutsu 2. Chosen 3. Teamwork 4. Sonkei, Soncho 5. Kaizen.

As the recent financial wreck has shown so lucidly that the present system of Western Corporate Governance doesn't take care of all the stake-holders viz., Customer, Employees, Community & Share-holders in that order. The present system is rigged totally in favor of Top Employees i.e., Company Executives and Big Share-Holders facilitated by the Investment Bankers and the M&A Community.

Regards,

Pradeep Kabra
London

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The chaebol conundrum
Mar 31st 2010
From The Economist print edition


Korea Inc is back and booming. So it’s time to stop coddling the all-conquering chaebol


PERHAPS it is the result of being sandwiched between the imperial dynasties of China and Japan. It may have something to do with having a nuclear-armed hermit to the north. Whatever the reason, South Koreans nurture a deep sense of insecurity. That makes them good capitalists. So good, in fact, that if any rich country can claim to have done well in the recent global crisis, it is theirs. Last year, despite its dependence on exports and the collapse of world trade, South Korea’s economy grew faster than any other in the OECD.

South Korea’s remarkable resilience is partly down to clever economic management. The government provided lashings of stimulus. But it was not just domestic demand that kept the economy going. The export prowess of those peculiar corporate beasts, called the chaebol (see article), was also responsible.

In the years after the Asian financial crisis of 1997-98, these unwieldy conglomerates, known disparagingly as Korea Inc, were regarded as villains, because of their habits of crony capitalism. Their shabby corporate governance and their dominance of the economy were widely criticised. Since then, bosses have been jailed, transparency increased and corporate governance improved.

Since the global economic crisis they have been regarded as saviours in South Korea. Though the country’s exports slid, its biggest companies, such as Samsung Electronics and Hyundai Motors, gobbled up market share from competitors in Japan, Europe and America. Granted, they benefited from a cheap won. But they also made a fine job of selling things like electronics, chips and ships in fast-growing emerging markets to make up for some of the sales lost in the West. Samsung’s profits this year are forecast at a record $10 billion, and its sales at $130 billion, which would confirm its lead over Hewlett-Packard as the world’s biggest technology company by revenue.

BlackBerry and Apple crumble

The national paranoia has served them well. Though Samsung, for example, is a world leader in televisions and flash memory chips, it continues relentlessly to measure itself against its competitors. Having rebuilt their balance-sheets over the past decade, the chaebol have invested enough in technology, design and branding to remain far ahead of low-cost competitors in China and elsewhere. What’s more, they artfully avoided Japan’s trap of fetishising expensive, state-of-the-art technology for its own sake.

So the chaebol are certainly due an apology from those, including this newspaper, who thought they would be too unwieldy for modern business. But from South Korea’s point of view, they are a narrow base on which to build a country’s economic future. First, they face competition in new forms for which their hierarchical management structures and complicated, dynastic ownership are ill suited. Apple’s iPhone and the ubiquitous BlackBerry crept up on Samsung Electronics, exposing its shortcoming in smart-phones.

Second, the size and strength of the chaebol risk stifling entrepreneurialism elsewhere. By and large, their local suppliers are the only medium-sized South Korean companies to have thrived in recent years. Some young businesses such as internet search and gaming have done well, but these are in fields where the chaebol cannot yet be bothered to tread. If they ever do, they may smother rather than nurture independent talent.

President Lee Myung-bak still seems to be promoting the chaebol. He has just pardoned Lee Kun-hee, the boss of Samsung, who was convicted of tax evasion in 2008, enabling him to retake the reins of Samsung Electronics. The president has also successfully championed his chaebol chums in a contest to provide nuclear power to Abu Dhabi. And his government wants to relax holding-company laws that would make it easier for the conglomerates to own financial firms.

It is one thing to provide leadership. It is another to choose favourites and pick winners. If President Lee wants to promote anyone, it should be South Korea’s underdogs—the small companies that risk getting squashed by the country’s privileged monsters. The chaebol have proved themselves highly successful capitalists. Let them take care of themselves.

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South Korea's industrial giants

Return of the overlord
Mar 31st 2010 | SEOUL
From The Economist print edition


A tycoon comes back as the saviour of Samsung Electronics, leader of South Korea’s remarkable business success. But where’s the crisis?


South Korea's industrial giants


LEE KUN-HEE is a man of few words. So when the 68-year-old decided to come out of court-induced purgatory this month to retake the helm of Samsung Electronics, now the world’s biggest technology company, it was appropriate that he chose Twitter, a keep-it-brief social-networking site, to spread the news.

Mr Lee’s message was not just for employees of Samsung Electronics, by far the biggest part of his empire, but also those of the other 64 firms within the conglomerate that he controls. It was delivered with the sort of attention-grabbing hyperbole that any tweeter would be proud of: “It’s a real crisis now. First-class global companies are collapsing. No one knows what will become of Samsung. Most of Samsung’s flagship businesses and products will become obsolete within ten years. We must begin anew. We must only look forward.”

It did not quite have the pithiness of Mr Lee’s rhetoric in 1993 when he said Samsung was a second-rate company and that its employees should “change everything except your wife and children.” But his words had the same urgent ring of truth about them.

How can that be? It is a question that could be asked by anyone who has recently turned on a flat-screen television, bought a mobile phone, stored masses of data on a flash memory or watched Chelsea’s footballers in shirts sporting Samsung’s name. Far from being a disaster in the making, Samsung Electronics has become one of the world’s strongest brands, known for sleek design, razor-sharp technology and good value.

Think of anything with a screen, from a few centimetres square on a mobile phone, to a laptop, a wide liquid-crystal display or a giant 3D television, and Samsung Electronics will be one of the top two firms in the world making it—or at least the memory chips inside it (see chart). The company’s global market shares are staggering: more than 40% of the flash memory used in sophisticated electronics like the Apple iPhone, almost one in five of the world’s mobile phones and one in six of its television sets. It even makes screens for Sony’s TVs.



Having invested aggressively in new products in 2008, Samsung Electronics sailed through the global financial crisis, almost doubling its operating profit in 2009. This year analysts expect it to generate record profits of over $10 billion. Sales are forecast to be about $130 billion, which is likely to confirm its lead over America’s Hewlett-Packard as the world’s biggest technology company by revenue. Not to be outdone, other parts of the Samsung group have notched up successes. The construction division recently completed the tallest building in the world in Dubai and Samsung Heavy Industries is flush with shipbuilding orders.

In a way that General Motors can only have dreamed of, what has been good for Samsung has been good for South Korea. The group’s products account for about 20% of the country’s GDP, making it huge even by the standards of an economy top-heavy with big firms. When the won tumbled in 2008, raising fleeting fears of a currency crisis, exporting champions like Samsung, Hyundai and LG quickly took advantage, betting that their customers would be willing to buy newer, better models if the price was right.

South Korea’s conglomerates were also well diversified globally—only one-tenth of the country’s exports go to America. That meant sales lost in America were partly made up for by those gained in fast-growing emerging markets like China. Thanks to generous promises of government stimulus, South Korea, one of the rich world’s most export-dependent countries, pulled off the surprising feat of surviving the worst slump in global trade since the second world war with only a fleeting dip into recession.

For that, South Koreans give much of the credit to their industrial conglomerates, or chaebol as they are known, and the rich, inscrutable families who control them and live like royalty in South Korea. Yet Mr Lee’s comeback causes nervous speculation. If Samsung really does face a crisis, what does that mean for South Korea? If Mr Lee believes he is the only person who can avert disaster, what does that say about the business acumen of his potential successors? And if he can walk back into the corner office without even having board approval, can it really be argued that the country is progressing to Western-style standards of corporate governance? Business people have watched, with a mixture of suppressed glee and dread, former role-models such as Toyota and General Motors struggle with huge financial and technical problems. Could this be the fate that Mr Lee fears for his firm?


Get out of jail free
These are pertinent questions for Korea Inc, the business model that has so recently undergone a remarkable rehabilitation. Just over a decade ago, when the South Korean economy was reeling from its near collapse in the Asian financial crisis of 1997-98, it was the chaebol that were widely blamed by the public, the centre-left government of the time and the IMF.

The extent of the mismanagement was shocking. In the 1960s and 1970s, under the dictatorial regime of Park Chung-hee, the chaebol soaked up cheap government financing and relied on official protection from foreign competition. Loosely, the models were the zaibatsu conglomerates that had helped turned Japan into an imperial—and militaristic—power before the second world war.

The chaebol, some of which were started by war racketeers, had the same vast ambitions, albeit for industrial conquest—and they had public money to back them. Samsung expanded from sugar and wool into electrical goods, chemicals and engineering. Hyundai’s founder, Chung Ju-yung, started building roads and then decided to build the cars to drive on them. But many chaebol overburdened themselves with debt as they tried to move up the technological ladder in the 1980s. As they borrowed lavishly to buy capital equipment, South Korea’s current-account deficit soared. Some thought the chaebol had become so big the government could not let them fail. They were spectacularly wrong.

The conglomerates failed in droves. The collapse of Daewoo in 1999 was followed by the bankruptcy of more than half of the then top 30 conglomerates. Four of the country’s five carmakers (even Samsung had ventured into the market) went bust. South Koreans, many of whom had flocked to hand over their gold jewellery in a patriotic gesture to help pay off the foreign debt, were appalled at the level of government and business collusion that came to light.

Under two consecutive left-of-centre governments, many of the chaebol bosses—some now being run by the children of their founders—were prosecuted. Suspended sentences were handed out to the boss of SK in 2003, the former chairman of Doosan group in 2006, and the owner of Hanwa group in 2007. But this was justice for the rich—quite different from justice for the rest. Chung Mong-koo, chairman of Hyundai Motor (which also owns Kia, the country’s second-biggest carmaker) was convicted of embezzlement in 2006. But his prison term was reduced to community service and a $1 billion donation to charity because of his economic importance to the republic. Then in 2008 Mr Lee was convicted on tax-evasion charges, but also spared prison after paying a fine.

Partly chastened, both business and government have embarked on reform. Balance-sheets have improved, as has corporate governance, increasing the rights of minority shareholders and the responsibilities of company directors. Since then, some—though by no means all—of the cross-shareholdings used to disguise the weakness of subsidiaries and protect them from hostile takeovers have been rooted out and replaced with more transparent holding-company structures.


A friend in the Blue House
The reputations of the chaebol—especially in the eyes of South Koreans—recovered further during the 2008-09 global slump. So much so that when you ask experts in Seoul how their conglomerates fared during the crisis, some ask: what crisis? It was not just Samsung Electronics that sparkled. Hyundai increased market share in America every month last year, as its small, well-equipped cars with long warranties benefited disproportionately from the cash-for-clunkers programme.

For the first time in many years the chaebol have a political wind behind them. Lee Myung-bak, who became president in 2008, is a former chief executive from within the Hyundai extended family of firms. In December he pardoned Mr Lee, freeing the way for his return to Samsung. The same month he championed a successful bid by a chaebol-heavy consortium under the aegis of the Korean Electric Power Company to provide nuclear power to Abu Dhabi, pulling the rug from under industry leaders in France and Japan. This year, his government is pushing to relax holding-company laws that would make it easier for the chaebol to own financial firms. “The business community has not seen a political environment this accommodative in the past decade,” CLSA, a broker, said in a recent report.

Japan looks on aghast as the chaebol catch up with more of its large firms. “Of all their competitors on the global stage, the Japanese fear the South Koreans most,” writes Mark Anderson, author of Strategic News Service, a technology newsletter. Some Japanese industrialists acknowledge this publicly. “Korea is much more full of vitality than Japan,” Osama Suzuki, head of Suzuki Motor, lamented in a recent talk to foreign journalists in Tokyo. “Japan is coasting.”

All of which makes Mr Lee’s strident warning, as the head of South Korea’s most successful company, more puzzling. The charitable view is that it may have been just a rhetorical device to soften up opponents to his rehabilitation—and to the eventual transfer of power to his son, Lee Jae-yong, Samsung Electronics’ chief operating officer. But it may also reflect deeper fears that the days of relying on manufacturing as a growth strategy, for all its technical sophistication, are numbered. The most obvious cause for concern is China. The acquisition on March 28th of Volvo by Geely, a Chinese carmaker, is the latest example of low-cost Chinese producers’ determination to build global brands.

In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more, as Mr Anderson points out, China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.

An even bigger threat comes from America. Late last year Apple finally got permission from South Korea’s telecoms authorities to waive a rule prohibiting the domestic sale of iPhones. Demand for the iPhone has since exploded, leaving Samsung and its domestic rival LG (which together have sold seven out of ten phones in South Korea), looking uncharacteristically leaden. Smart-phones accounted for just 1% of the market, but Apple has been selling some 4,000 iPhones a day, making South Korea one of the gadget’s hottest markets. Even the finance ministry has launched an iPhone application—the Glossary of Current Affairs in the Economy—to unexpected popular appeal.

For Samsung and LG this problem is magnified at the global level, and not just against Apple but also against firms like Google and Research in Motion, maker of the BlackBerry. For all its success in mobile phones, Samsung is an also-ran in the global smart-phone market. The South Korean company has rushed to remedy that with its own smart-phone platform, Bada, and by producing mobile phones that use Google’s low-cost Android operating system. As a result, Samsung hopes to sell more smart-phones in America than any other firm this year.

To win, however, Samsung needs more than sleek hardware. It is also outgunned by the iPhone’s 140,000 applications, which means it needs more creative input into its products. That will mean encouraging a less hierarchical, more inventive, corporate culture. The fluid ecosystem surrounding mobile technology may mean Samsung will need to engage more openly in partnerships with other firms, as it already has with DreamWorks Animation, creator of films such as “Shrek”, to help in the launch of 3D television. But such team efforts are not naturally in the DNA of a company that likes to keep its suppliers in the corporate family.

To their credit, Samsung executives did not appear to be complacent, even before Mr Lee’s call to action. They do not want to abandon what Samsung does best—making cutting-edge hardware—just because China is on the warpath or to chase Apple. They greatly value the Samsung brand, which has been painstakingly built through good design over many years.

But they do speak of change, albeit in an evolutionary way. They intend to offer affordable smart-phones to the masses, not just to the top of the market. To improve content, they are concentrating on hiring software engineers rather than hardware experts. And to help stimulate ideas they have offered flexible hours to their notoriously hard-working employees, as well as hiring more young people and women. Nor have they stopped benchmarking against their competitors.

But there is still the bottom line to worry about. “Samsung Electronics may be the largest technology company in the world by sales, but it’s far from global number one by profit,” Lee Keon-hyok of the Samsung Economic Research Institute acknowledges. Profit margins leave something to be desired. In the quarter ending on December 31st, Samsung Electronics reported operating-profit margins of 9%. Apple’s were 36%. Moreover, the South Korean firm can hardly dispute that its market-share gains—especially against Japanese rivals such as Sony—were helped by a cheap won. But in a country where being number one is almost an obsession, these are elements that are likely to make Samsung strive harder.


No leeway
Arguably the most difficult challenge Samsung Electronics faces is internal, and as in most things at the company that ultimately comes back to the patriarch. As Steve Jobs has proved at Apple, nothing beats having a visionary leader—and Mr Lee is one of those. It was his decision, back in 1993, to concentrate the sprawling empire on certain world-class technologies, like chips, mobile phones and display screens. He is credited with instilling the mantra of first-class product design among his staff.

But the manner of Mr Lee’s return may raise as many problems as it solves. When he stepped down in 1998, the hope was it would usher in a reform in Samsung Electronics’ corporate governance so that investors outside his sphere of influence—about half are foreigners—would have a clearer view of the way the company was run. His son was given different managerial posts, which groomed him for the top job better than many other “chaebol princes”. A murky Strategic Planning Office that sat atop the Samsung family of companies and allocated resources was disbanded. No one doubted that Mr Lee continued to pull strings from behind the scenes. But the first traces of Western-style corporate governance were apparent.

His return, without a board meeting to approve it, appears to have put that process into reverse. Already there is speculation that he will revive the “control tower” system of group-wide oversight. His comeback may make it even less likely that Samsung will embrace a more transparent holding-company structure as, say, LG has.

Most troubling, argues Jang Hasung, dean of the University of Seoul’s Business School, is that the “emperor-management” approach suggests Mr Lee is not confident enough in the company’s numerous other executives around the world—including his son—to lead the company into the future. This problem is true of the chaebol in general; succession issues loom everywhere. What’s more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength.

“His decision to come back gives the impression that he’s the only one who can fix whatever crisis it is he’s talking about,” Mr Jang says. With so much of South Korea’s future at stake, maybe it is the next generation of leadership that Mr Lee should be tweeting about.

Re: China and Germany unite to impose global deflation

Dear Mr. Wolf,

Thanks for this insightful article which goes beyond economics and enters the realm of political double-talk deduction.

Many articles on this topic by distinguished journalists/economists including yours repeatedly and with some obvious merit mention that 'Germany should "consume" more'. From what I see, Germany is one of the richest countries on the planet with a per-capita of $35,000. Majority of the Germans live in comfort with all the modern amenities including world-class infrastructure.

My question is in what sphere can Germany increase its consumption? When the East Germany was integrated they spent billions on its infrastructure. Now that is almost at par with the West. Isn't it the time to enlarge the debate from self-consumption where none required to spending where it is a matter of life & death for people i.e, poor Africa to India? That would not just lead to a balanced growth but also create new markets for future?

Your thoughts on this would be appreciated.

Regards,

Pradeep Kabra


China and Germany unite to impose global deflation
By Martin Wolf
Published: March 16 2010 22:59 | Last updated: March 16 2010 22:59, Financial times


“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.

You may have heard of Chimerica – a neologism invented by Niall Ferguson, the Harvard historian, and Moritz Schularick of the Free University of Berlin, to describe a supposed fusion between the Chinese and American economies. You may also have heard of Chindia, invented by Jairam Ramesh, an Indian politician, to describe the composite new Asian giant. Let me introduce you to Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291bn this year and Germany, with a forecast surplus of $187bn (see chart).



China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses. (See charts.)

Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

I am beginning to wonder whether the open global economy is going to survive this crisis. The eurozone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly.





The core of Mr Schäuble’s argument was not about the mooted European Monetary Fund, which could not, even if agreed and implemented, alter the pressures created by the huge macroeconomic imbalances within the eurozone. His central ideas are: combining emergency aid for countries running excessive fiscal deficits with fierce penalties; suspending voting rights of badly behaving members within the eurogroup; and allowing a member to exit the monetary union, while remaining inside the European Union. Suddenly, the eurozone is not so irrevocable: Germany has said so.

Three points can be drawn from this démarche from Europe’s most powerful country: first, it will have an overwhelmingly deflationary impact; second, it is unworkable; and, third, it might pave the way for Germany’s exit from the eurozone.

I explained the first point last week. If Germany gets what it wants, the world’s second-largest economy would play an altogether negative role in the search for a way out from the global slump in aggregate demand. The eurozone would not be exporting the demand the world now needs. It would export excess supply, instead.

Imagine that weaker eurozone countries were forced to contract their fiscal deficits sharply. This would surely weaken the entire eurozone economy. But the result would also be fiscal deterioration in Germany and France. Imagine that Germany then did don the hair shirt. Would it instruct France to do the same? After all, France already has a general government deficit forecast by the Organisation for Economic Co-operation and Development at close to 9 per cent of gross domestic product this year. Does Mr Schäuble imagine France could be fined? Surely not. Yet it is not Greek public finances that threaten the stability of the eurozone. These are a mere bagatelle. The threat is the public finances of big countries. Since Germany could not force such countries to behave and has no chance of expelling any member it disapproves of from the eurozone, it would have to leave itself. That is the logic of Mr Schäuble’s ideas. This must be obvious to him, too.

Germany is in a supposedly irrevocable currency union with some of its principal customers. It now wants them to deflate their way to prosperity in a world of chronically weak aggregate demand. Mr Wen has the same idea. But the economy he wants to pursue this goal is the US. Fat chance!

Speaking at the end of the National People’s Congress, Mr Wen declared: “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism.” He also insisted he was worried about the safety of China’s dollar investments.

What, I wonder, does Premier Wen mean by this, apart from telling the US to leave China’s exchange rate policies alone? If the US desire for a weaker dollar is “protectionist”, how much more so is China’s determination to keep its currency down, come what may? There is nothing evidently “protectionist” about asking a country with a huge current account surplus to reduce it, at a time of weak global demand. If I understand China’s declared position correctly, it wants the US to deflate itself into competitiveness, instead, via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the US. But it would be dreadful for China and the rest of the world, too. It is also not going to happen. China surely knows that.

Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.

In this battle, the surplus countries are most unlikely to win. A disruption of the eurozone would be very bad for German manufacturing. A US resort to protectionism would be very bad for China. Those whom the gods wish to destroy, they first make mad. It is not too late to look for co-operative solutions. Both sides have to seek to adjust. Forget all the self-righteous moralising. Try some plain common sense, instead.

Adam & Paul - Movie Review

Is this drugs movie season or what? After 'Requiem For A Dream' now comes 'Adam And Paul'. In the former, the guy sends his gal to get fucked and raped for money and drugs. In the latter, Paul takes drugs from Adams pockets after the latter dies and leaves him on street.

Addicts are brain dead. They are shredded of any ability to make, build or maintain any kind of relationships. Unfortunately, they are worse than slaves.

I read in today's Financial Times Lex Column that Reckitt Benckiser's anti-addiction drug for Heroine called Suboxone created profits of £345 million for this year and they are unhappy because it has lost its exclusivity and it's generic counterparts will be in the market soon.

What a society we live in. The West 'rich kids' buy the drugs from Afganistan/Mexico/Columbia to sponsor their guns/arms and the research community in the West in-turn spends its budget on finding cure for the addiction. I thought there were 'bigger' problems in the world!!!

Re: Staff ownership can save a company's soul

Dear Mr. Skapinker,

Thanks for the article in today's FT. You mention that 'if the owners had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market'

Well, what about regulation then? A company is owned by not just the share-holders but but stake-holders viz., employees, customers, society-in which they serve and share-holders ofcourse. It is the job of the government and the regulation to make sure that the rights of the stake-holders are maintained. But unfortunately, it is a jungle-raj out there. There is no regulation at all.

The saddest part is good writers like you rather than pointing out the deficiencies in regulation, say that 'the owners should not have sold if they were so concerned about the short-term investors'

Regards,

Pradeep Kabra

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Staff ownership can save a company’s soul
By Michael Skapinker
Published: February 8 2010 19:38 | Last updated: February 8 2010 19:38 in Financial Times

“Stand up if you hate Manchester United.” This tribal cry from the football club’s enemies doesn’t stir me. I do not hate Manchester United. I am indifferent to them. Adult passion for football clubs has always struck me as slightly ridiculous.

You do not, all the same, have to be a football fan to think that United’s current state is a shabby advertisement for capitalism. The club listed on the London Stock Exchange in 1991. Malcolm Glazer, the US sports tycoon, and his family bought it from its shareholders in 2005, loading it with so much debt that the club has laboured under it ever since.

United refinanced the debt last month with a £500m bond issue, which required the Glazer family to reveal that they had extracted £23m in management fees from the club. The fans think it wrong that outsiders can borrow millions to take over their club, use its takings to pay the interest, and then pay themselves a handsome fee. Who can blame them?

Also feeling cross are descendants of George Cadbury, who built up the UK confectionery company. Last week, Cadbury passed into the hands of Kraft of the US.

Felicity Loudon, George Cadbury’s great-granddaughter, said her ancestors would be “turning in their graves” over the sale to a company that “makes cheese to go on hamburgers”. Peter Cadbury, a great- grandson, said: “It is regrettable that a company which took 186 years to build up has had its future decided by investors whose aims are short term.”

Perhaps, but if the Cadburys had wanted to keep the company out of the hands of short-term investors, they should not have listed it on the stock market.

There are alternatives to a public listing, for both football clubs and companies. The Spanish clubs Barcelona and Real Madrid, as illustrious as United, are owned by club members.

John Lewis, the UK retailer, is owned by its 69,000 employees. I may not be a football supporter, but I am a fan of John Lewis. The mood in its stores is markedly different from any other company. The staff are more attentive and professional. They own the place and it shows.

I am not alone. John Lewis was recently named Britain’s favourite retailer for the third year in succession by Verdict, the research group. Its Christmas sales outstripped those of its rivals and Waitrose, its food arm, was the fastest-growing food retailer.

John Spedan Lewis, the founder’s son, was stricken by the discovery, early in the 20th century, that he, his brother and his father earned more between them than the entire workforce in the two stores they then owned. Rather than saying this was what he needed to stop him becoming a banker, he shortened the working week, set up a staff committee and eventually, after his father’s death, transferred ownership to the staff.

Not all employee-owned companies tell the same happy story. Another attempt at employee ownership, United Airlines of the US, ended up with the mechanics calling a strike, which was only narrowly averted. They, along with their fellow employees, were majority owners of the company and had their own people on the board, which meant they would have been striking against themselves.

United was not a healthy company to start with. Like most old-style airlines, its staff costs and working practices were dragging it down. The staff received their 55 per cent stake in 1994 in return for concessions on pay and benefits. The September 11 2001 attacks led to a sharp downturn in United’s business, exposing the flaws in the company’s setup.

Employee ownership should align employees’ interests with those of the company, but as Jeffrey Gordon of Columbia Law School explained in a 2003 paper, United staff hired after 1997 held no shares, so that half the mechanics had no stake in the company. Even for those who did, their stakes were small and they could not cash them in until they retired or left.

John Lewis’s partnership was set up to avoid these problems. Everyone has a stake, in return for which they receive an annual bonus. Each successful year provides the incentive for the employee-owners to do even better.

Not that the John Lewis tale has been an unbroken idyll. In 1999, encouraged by stories that selling the company could give them a windfall of £100,000 each, some staff members started pressing for John Lewis to go public.

The move came to nothing, but the temptation for the owners of a successful company to cash in is always there. A stock market listing provides advantages, such as ease of raising capital, but it also means the company could fall into the hands of complete strangers. Those who take that risk should not complain when it goes bad.

michael.skapinker@ft.com
More columns at www.ft.com/michaelskapinker

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Dear Pradeep,

Many thanks for your email. The problem is precisely the one you have mentioned: the shareholders do own the company and no regulator can stop them selling their shares, unless there are monopoly issues. That's the situation in the UK, anyway. Most other countries are more protectionist.

Regards,
Michael

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Dear Michael,

Thanks for the reply. I was referring to the context of debt. In the specific case of Cadbury/Kraft, Kraft has a debt of $30 billion. Correct, the regulators can't stop the share-holders from selling the shares. But there can be a regulatory structure vis-a-vis share-holding pattern/division, debt/equity etc., I don't believe in protectionism for the sake of it. What I'm referring is regulation so that all the stake-holders are rewarded fairly.

Regards,

Pradeep

----------------------------------------

Pradeep,

Thanks. The question of how much debt acquirers should be allowed to take on is a relevant one which I hope to address.



Michael

-----------------------------------------

Thank you. I know our debate can only do that much.

The real rules are set by the politicians who are financed and lobbied by the vested powerful interests.

But then, no harm in trying.

Regards,

Pradeep

-----------------------------------------

Re: Britain's strategic chocolate dilemma

Dear Mr. Wolf,

Thanks for your article in today's Financial Times.

In the article, you mention that "shareholder value maximisation and the market in corporate control also bring benefits: the takeovers liberate assets from the hands of incompetent managers and so should frighten them into action". Earlier in the article you also mention that "companies exist to provide valuable goods and services to their customers"

If companies exist as you say to provide valuable goods and services to their customers, then the success of failure of a company and its management should be primarily judged by the customers, by customers not buying/rejecting their products in the market place. I believe that is only fair.

So, the comprehensive system is not to have the empire-building CEO's with the help of investment bankers to take-over and destroy companies built over decades but to have the frame-work for good and fair competition and let all the stake-holders including customers decide.

The argument that 'companies do not have to go public. If they do, they live by the markets' judgement' is good only when you add fair-regulation to the issue.

Coming back to this specific case of Kraft & Cadbury, with more than $30 billion of debt in this economic environment, what this deal has done is as you say just made the management, share-holders of Cadbury and Investment Bankers rich. The stake-holders who will primarily suffer is the employees and in the long-run customers.

When I was in primary school, I was taught that company means 'breaking bread together' - that is where people come together to build goods and services to serve their customers and in the process get a decent livelihood for themselves. That was true 200 years ago and it is true today. The job of the regulation is to make sure that balance between all the stake-holders in a company like employees, customers and share-holders is always maintained. Just saying that "markets' judgement" is ultimate shows not just ethical but cultural decadence. It makes me sad when it comes from distinguished and knowledgeable authors like yourself.

Regards,

Pradeep Kabra
-------------------------------------------

Britain’s strategic chocolate dilemma
By Martin Wolf
Published: January 28 2010 20:19 | Last updated: January 28 2010 20:19

Briefly, during the takeover bid for Cadbury by Kraft, I thought the UK might proclaim a “strategic chocolate” doctrine. Fortunately, that did not happen. Less fortunately, if history is any guide, the takeover of Cadbury is quite likely to be a flop. If so, the winners will be the shareholders of Cadbury, the advisers for both sides and those who arranged the loans. The right question, then, is not about chocolate. It is about the market in corporate control itself.

For high priests of Anglo-American capitalism, this question is heresy. They would insist that shareholders own the business and have a right to dispose of their property as they see fit. They would add that an active market in corporate control is an essential element in “shareholder value maximisation”, on which an efficient market economy rests. Yet, after financial markets have gone so spectacularly awry, the question whether companies should be left to the markets is being raised.

The response to the first of these arguments is that ownership rights are never absolute. In fact, the ownership of companies by their shareholders is highly diluted, as my colleague, John Kay, has noted on several occasions.

Shareholders enjoy limited liability. As a result, the responsibility they bear for the malfeasance or incompetence of management is highly circumscribed. The claim of shareholders is solely on the residual income of the company. But, since shareholders can diversify their portfolios with ease, their exposure to the risks generated by an individual company is far less than the exposure of workers with firm-specific knowledge and skills. Shareholders lack the ability to assess or monitor a company’s performance. If they are able to sell their shares in liquid markets, they do not have incentives to do so either. Failures of corporate governance in widely held public companies are, it follows, inevitable.

As problematic as the notion of shareholder ownership is the recommendation to maximise shareholder value. Harvard university’s Michael Jensen has argued that “in the absence of externalities [and when all goods are priced] social welfare is maximised when each firm in an economy maximises its total market value”. This is a statement of the efficiency properties of perfect markets. But markets are imperfect, not least financial markets. They can lead managers in what prove to be wealth-destroying directions: just consider the stock market bubbles in Japan in the late 1980s and the US in the late 1990s. Companies exist to provide valuable goods and services to their customers. The market’s evaluation of profitability may well be a defective measure of progress towards this broader objective.

This general point has particular force for the market in corporate control. As we have known since the Nobel-winning work of Ronald Coase, companies exist because hierarchies are superior to markets. One reason for this is the cost of defining and monitoring specific contracts. Instead of detailed contracts, long-term relationships based on trust need to emerge inside businesses and between businesses and suppliers. But the knowledge that management may be ousted by opportunistic buyers could well act as a disincentive to forming such relationships in the first place. Everybody will then become an opportunist. If so, the companies likely to thrive are those for which these relationships are unimportant. An active market in corporate control might distort a country’s comparative advantage and even undermine its long-term success.

Evidently, there exist countries with highly successful companies – Germany and Japan come to mind – that do not permit an active market in corporate control. For the Japanese, the idea of selling a company over the heads of its management is as ridiculous as that of selling their mothers. In these eyes, a company is a social institution with wide obligations, particularly to long-term employees, not an entity to be bought and sold.

Yet shareholder value maximisation and the market in corporate control also bring benefits: markets may be imperfect, but they are arguably the least bad measuring rod; shareholder value at least gives a company a clear criterion; and the takeovers liberate assets from the hands of incompetent managers and so should frighten them into action.

Since a market in corporate control will never be a global norm, we enjoy the benefit of learning from a natural experiment. There is no theoretically correct answer, but we can learn from the corporate performance of countries with divergent approaches.

Where does this leave the UK? A shift to more restrictive British takeover rules is most unlikely to help. We need only think back to the dismal performance of UK companies in sleepier times. If that means we have to swallow the takeover of a Cadbury by a Kraft, so be it: strategic chocolate should not be on the agenda. Companies do not have to go public. If they do, they live by the markets’ judgment. In the UK, shareholders rule.

martin.wolf@ft.com
More columns at www.ft.com/martinwolf

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Could we post this excellent comment on our economists' forum?

Martin Wolf

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Hi Pradeep,

Good comments, keep it up.

Regards,

Kamlesh

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Well done, Pradeep.
I personally feel that this Kraft/Cadbury business is a disgrace. I fear that the great ethical basis that the Quaker Cadbury founders held will be discarded very quickly, quite possibly along with the well-regarded quality of the Cadbury group products.
Furthermore, surely a debt-based takeover like this is not one jot more ethical than the toxic international banking system has recently fallen into.
Kind regards
Clive

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Re: Too early to write off democracy in China

Dear Mr. Skapinker,

Thank you for your article in todays Financial Times.

Couple of things I find amusing in your article - "Successful economies depended on the free exchange of ideas. Innovation came from the clash of competing products and services with consumers free to choose the best"

Just to give you one example, I don't see that in the sports television in UK - where Sky dominates not by any innovation but by having the sole rights. If your remarks are true then the way sports should be auctioned is have 2-3 networks the ability to show the games with superior commentary team or HD close-up views/replays or ability to watch the highlights online etc can be called as innovations to attract and keep customers. But that doesn't happen.

Secondly, in the Western world less than 50% people on average vote. Where is the universal suffrage?

Finally, though you have passingly mentioned that India is an imperfect democracy - the fact is democracy is actually the bane of India in practical terms. I know this sounds as if I'm somebody from an communist era but that is not true. In the present day India, 40% of the country is run by Naxalites. The government has no control whatsoever. Due to frequent elections, the politicians gets elected and pay themselves and their cronies off and then they give way to the next lot all in the name of Democracy.

The fact is Democracy in Western style is OK for one set of conditions i.e., good physical infrastructure, educated population etc., For the poor parts of the world, the Chinese model is what works. We have been seeing the Chinese miracle for the last 20-30 years up-close. Nobody can deny it. Yes, there needs to be a common denominator to deal with West for the Chinese & other third-world countries but setting the rules for the common denominator is not the way ahead. That is where most of the Western commentators go wrong. The key is to understand them with an open mind. Comparing communist Russia with present day China is as misleading as comparing the world's largest democracy (India) with the richest (USA).

Regards,

Pradeep Kabra

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Too early to write off democracy in China
By Michael Skapinker
Published: January 25 2010 20:41 | Last updated: January 25 2010 20:41
At the South African university I attended during the apartheid years, several of my fellow students disappeared during the night. Taken away by the police, they were held in solitary confinement, without access to lawyers, family or reading matter, for weeks and sometimes for months. A few were tortured.

Yet, being white, we were mostly a lucky bunch. We enjoyed an excellent standard of living and a fine education. There was anxiety about who at the university might be police informers, but for us, the security apparatus was never as all-enveloping as it was either for black South Africans or for those living in communist dictatorships.

But the experience left me with an enduring commitment to democratic government and the rule of law, and a horror of unaccountable authority.

Both apartheid and Soviet communism have, happily, collapsed and South Africa has, equally happily, opted for parliamentary constitutionalism over the communism of many of apartheid’s opponents.

More than 50 years ago Richard Nixon, then US vice-president, and Nikita Khrushchev, the Soviet leader, argued in a mocked-up American kitchen in Moscow about whose system was superior. By the time the Soviet empire imploded in the late 1980s, the answer was obvious.

Democratic countries were better. Not only were their people freer; they were more prosperous.

How could they be otherwise? Successful economies depended on the free exchange of ideas. Innovation came from the clash of competing products and services, with consumers free to choose the best.

A successful economy was also impossible without an independent legal system, which ensured that people’s property, both physical and intellectual, could not be stolen by criminals or government cronies.

Yet democracy was not easy. Russia may no longer be communist but it is hardly a model democracy either. Iraq and Afghanistan are proof that democracy cannot be imposed from outside.

Nor does it always produce the expected results. As a letter writer pointed out in the Financial Times on Friday, democracy is viewed as dysfunctional in the Philippines and has failed to produce stability in Thailand.

Run your eye down the list of wealthiest countries as measured by gross domestic product per capita. Alongside democracies such as the US, Switzerland, Austria and Canada are less-than-democratic Qatar and Brunei, as well as semi-democracies like Hong Kong and Singapore.

Does this invalidate the economic case for democracy? Not entirely. Qatar and Brunei would not be there without oil and gas. Hong Kong and Singapore inherited their legal institutions from Britain. They are rare examples of the rule of law co-existing with less than vigorous political systems. Their model is even harder to emulate than full-blown democracy.

Look at it another way. The countries that achieve scores of more than 90 per cent on both the World Bank’s Worldwide Governance Indicators “voice and accountability” and its “rule of law” ratings are all prosperous (although one, Iceland, is admittedly in serious trouble). Most of those scoring below 20 per cent on both are deeply impoverished.

What of countries on the way to becoming prosperous? Of the Bric countries, two – India and Brazil – are democracies, albeit imperfect ones. During a visit to Brazil last year I met many people who pointed to the country’s democracy as a key to its progress. As for Russia, it is heavily dependent on oil and gas exports and some have said it does not really belong in the Bric group.

It is China, now the world’s third largest economy and tipped to become the largest by 2041, that is the democrat’s biggest challenge. Unlike the Soviet Union, it appears to have found a way to lift millions out of poverty while still locking up its dissidents. Many have pointed toChina’s clash with Google over censorship as evidence that the country will not become more democratic as it prospers.

Perhaps, but this story has a long way to run. China may, within the next few decades, become the world’s biggest economy, but it will take far longer for it to have the world’s richest people. Measured by per-capita gross domestic product, International Monetary Fund estimatesput China behind Armenia in 2008.

It was the Chinese leader Zhou Enlai who, asked for his assessment of the French revolution, is reputed to have said that it was too early to tell. Whether he actually said it or not, it is certainly too early to tell what the consequences of China’s economic revolution will be.

Perhaps the Chinese people will be content, one day, to be rich and unfree. But the hunger for liberty is strong, and it is not confined to any time or place.

Send your comments to michael.skapinker@ft.com
More columns at www.ft.com/skapinker

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Dear Pradeep,

Many thanks for your email.

I take many of your points, but if, as you say, for poorer countries, it's the Chinese model that works, where are the other examples of the Chinese model (one party dictatorship, semi-market economy) working?

Regards,
Michael

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Dear Mr. Skapinker,

Then what is the way ahead?

Presently all the 'rogue' nations are either shunned or lectured by the West which makes no difference whatsoever to the final outcome. What China is doing is building the platform for the Chinese model by starting to build their infrastructure without worrying about human rights or proper way of doing things.

I'm pretty sure once the infrastructure is set and the population doesn't go to sleep hungry, then they aim to get educated. The so-called political freedom is bound to follow.

Hopefully you will focus on few of these issues in your future articles.

Regards,

Pradeep

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Re: Funding and the Patriotism Test

Dear Gillian,

Many thanks for the wonderful insight. You are one of the few journalist who is honest and speak with clarity.

My only issue is you have started the article with credit rating agencies prospective behaviour. I say that by doing this you are giving credibility to the rating agencies. The rating agencies job was to act like a guide to the real investors (not investment banking speculators). But they not just failed in their job but have deliberately misled them.

I would have thought that till the rating agencies are reformed (by removing the conflict of interest - the rating agencies are paid by the companies whose products they rate) the rating agencies should be totally ignored or ostracized. It doesn't matter what they think.

I hope you do not disagree.

Regards,

Pradeep Kabra

----------------------------

Funding and the patriotism test
By Gillian Tett
Published: January 7 2010 21:03 | Last updated: January 7 2010 21:03
In recent months, some of the brightest minds at Moody’s rating agency have been mulling a fascinating question: should they introduce a formal rating of “social cohesion” into sovereign debt indices, when they judge whether a government is likely to default on its debt – or not?

So far, neither Moody’s nor any other agency has actually done this, after all it is pretty hard to feed a specific “cohesion” number into any model.

But the discussion points to a fundamental issue that will hang over bond markets this decade.

In the past few years, when markets have tried to judge the risk attached to western government bonds, they have typically done so looking at hard macro-economic data, such as projected gross domestic product. Such data, of course, continue to be critically important, given the size of the western fiscal hole.

What is becoming clear is that hard numbers do not tell the entire tale. What will be equally crucial in the coming years is not the sheer scale of debt, but whether governments can implement a rational and effective way of cutting it – and potentially allocating pain – without unleashing (at best) political instability, or (at worst) full blown revolution.

Does a country, in other words, have enough political and social “cohesion” to take truly tough choices, or even rewrite the social contract? What makes that issue doubly fascinating is that the answer may well vary in different parts of the bond market, in the years to come.

At one end of the spectrum there is a country like Japan. A decade ago, I worked in Tokyo as a reporter and was often struck by the skill with which Japanese institutions shared out pain, without triggering social unrest. Whenever companies ran out of cash, for example, their instinct was usually to spread the impact (by, say, cutting everyone’s salary) rather than pick winners and losers (sack a few staff.)

Some observers blame that on Japan’s obsession with maintaining cultural harmony; many Japanese point to the fact that they live in an island with constrained resources. Either way, this emphasis on sharing pain in an equitable manner is likely to shape how the government tries to impose public spending cuts in future years.

It may impact bond market behaviour. One striking feature of the Japanese government bond markets in recent years is that domestic investors (who own 95 per cent of outstanding JGB stock) have continued to buy bonds, even amid ratings downgrades in the JGB market, with an extraordinary sense of quasi-patriotism. That is bad in some respects, since it removes pressure for change; but it may also make it less likely that Japan will rip itself apart.

However, in the US, the government has less experience of dividing up a shrinking pool of resources. Instead, in a land built by pioneers, Americans prefer to spend time thinking about how to make the pie bigger – or to find fresh frontiers – than about making shared sacrifices.

Thus it remains an open question whether Washington will be able to slash without real political or social upheaval. Signs of tension are already there: Bill Gross of Pimco, for example, this week warned that “our [American] government does not work any more; or perhaps more accurately, when it does it works for special interests and not for the American people”.

The situation of the UK is perhaps even more fascinating, given that it faces an election this year – and is at more immediate risk of a ratings downgrade. The British government has the “advantage” (if one can call it that) that voters are long used to the concept of national decline, and relatively recent memories of fiscal belt-tightening.

But social cohesion and patriotism in the UK are fragmenting, and investors in gilts are apt to be far less patriotic than in Japan (not least because only 50 per cent of the gilt market is in domestic hands).

So will UK politicians be able to implement radical reforms with a spirit of shared sacrifice? Or will they do what Icelandic voters have done this week – and derail a government plan? And how will gilt investors react, as a country such as the UK starts fighting this out, or loses its triple A credit rating?

Right now, the answer is simply unknown. But the key point is this: if the past two years were a crucial test for global financial markets, the next two will be an equally critical test for the system of western government.

Stand by to see plenty more volatility and uncertainty in the government bond markets. The really big risk factors, be it in Iceland or the UK, the US or Ukraine, can no longer be easily factored into a spreadsheet.

gillian.tett@ft.com

Re: Beware the crisis around the corner

Dear Mr. Crook,

Thanks for the article in today's Financial Times.

Your approach on rejecting categorically 'the restoration of Glass-Steagall act' and 'too big to fail' concept reminds me of the blind men and elephant story - from Indian fables - http://en.wikipedia.org/wiki/Blind_men_and_an_elephant

The real issue of the implementation can only be resolved when the issue of political funding is sorted. The real conflict of interest arises when the politicians who are elected to make decisions for the welfare of all are funded not by tax-payers money by the wall-street and other big businesses. Unless, this issue is tackled, you will see that even a dynamic elected leader like Barack Obama is nothing more than a 'domesticated representative of the vested interests'

Regards,

Pradeep Kabra

--------------------------

Beware the crisis around the corner
By Clive Crook
Published: January 3 2010 19:36 | Last updated: January 3 2010 19:36

The US economy is sickly, but the mood of impending doom has lifted. The response of US and other authorities to the emergency is unfinished business and needs continuing attention – but in 2010, if the crisis continues to ease, the danger is that politicians will relax and minds will wander from the need for new financial rules.

The next model of US financial regulation is unclear. The House of Representatives has passed a bill concentrating on regulatory structure: that is, on which regulators are responsible for what. What the Senate will do is anybody’s guess. Important as the regulatory organisation chart may be, however, it is not the key thing. The rules regulators apply are what matter.

The need for better rules is greater now than before the crisis. Critics of the US government say its response has made another financial collapse more likely – and they have a point. They worry about institutions that are too big to fail. The authorities encouraged consolidation as a way to restore short-term stability, but at what cost in the longer term? Attacking this concentration, critics say, is crucial.

One way to do this, they argue, is to restore the Glass-Steagall separation of commercial and investment banking. Create a heavily regulated, safe, utility-like system of deposit-taking banks and fence it off from the more lightly regulated casino of the securities markets. You would get institutions that are both smaller and more conservatively run.

It sounds plausible, but the debate over a new Glass-Steagall is unhelpful. The degree of interest in the idea is puzzling. After all, the financial collapse did not show that universal banks are more hazardous than separated commercial and investment banks. If anything, it showed the opposite.

Investment banks such as Bear Stearns and Lehman Brothers were thought to pose big systemic risks even though they were not deposit-takers. Moreover, the commercial banks that failed did so mainly through losses in traditional banking. So far as dealing in securities was concerned, the repeal of Glass-Steagall actually made little difference: the law permitted most of the securities transactions that commercial banks were undertaking when the crisis hit. Forget Glass-Steagall.

“Too big to fail”, on the other hand, is no distraction. It matters, and the reason why is familiar. A financial institution thought, or explicitly deemed by the authorities, to be too big to fail has a licence to take excessive risks. The problem is moral hazard. The implicit government guarantee will make its managers less cautious, and its creditors too. The burden of prudential oversight falls entirely on regulators, one they cannot hope to carry alone.

All this is correct – but it is not the whole, or even the larger part, of the problem. Remember that the US authorities, acting out of concern over moral hazard, let Lehman fail. In a way, they were right. It was not too big to fail: its collapse did not imperil the payments system and its counterparties did not fold. Yet praise for that principled decision was less than universal. Many argued, and continue to argue, that it was the worst mistake of the whole saga. The authorities are unlikely to forget this when another institution – which, regardless of its size, might be “too interconnected to fail” – looks ready to topple. And everybody knows it.

The precondition for big financial busts is always the same: unwarranted optimism. When everybody gets it into his head that inflation is tamed, interest rates will stay low, asset prices will keep rising and economic growth will never stop, overborrowing is sure to follow. In other words, moral hazard is only one factor reducing perceived risk. In a prolonged upswing, investors feel safe regardless – not because a bail-out will protect them from losses, but because they expect no losses.

Also, in that kind of climate people will tend to make the same mistakes. Many small banks making bad bets on property may be safer than a system with a few big ones doing the same thing – but only a little. The first small bank to fail might cause a crisis of confidence that would bring down others, and then the rest. After 2007-09, what government is going to risk finding out?

So judge the new rules by one criterion above all. In the words of a former Fed chairman, William McChesney Martin, do they take away the punch bowl before the party gets going?

Interest rates that take into account asset prices as well as general inflation are part of this, of course. But when it comes to financial regulation, the key thing is rules that recognise the credit cycle, and change as it proceeds. Most important, as argued by Charles Goodhart in these pages, capital and liquidity requirements should be time-varying and strongly anti-cyclical. In good times, when lending is expanding quickly and financial institutions’ concerns about capital and liquidity are at their least, the requirements should tighten. Under current rules, they do the opposite.

Fixing financial regulation is a hugely complex task, and the details matter. But no repair – whether it concentrates on ending “too big to fail”, on separating commercial and investment banking, or you name it – is going to succeed unless this simple principle is adopted. Financial institutions will oppose the idea, because it amounts to a tax on their growth. Of the many battles that one might fight in this area, this is one that simply has to be won.

clive.crook@gmail.com

To
The Editor,
Financial Times

Sir,

Thanks for your insightful editorial in today's FT on the procurement practices in the defence industry in UK. In the last paragraph you object to one of the major recommendation by Mr. Grey not being followed by the govt. i.e., outsourcing the buying because it will bring in the efficiency and improve the project management.

What is appalling is that even after burning the fingers after privatizing the major utilities in UK (via one of the highest rates for consumers in Europe is paid by UK consumers) including transportation - you still recommend the privatization option. When it comes to utilities and defence, it should be a part of the government because of its utility function which cannot be reconciled with just the profit motive of private industry especially when the regulators are not just toothless but who have no clue on how to regulate at all. We have seen the latest example of the disasters which it brings when a utility like bank is in private hands.

What you should be recommending is - why can't the project management skills be taught to the existing department? What is needed is some cultural change initiatives, investment in good/fresh leadership and training. Is that too much to ask for?

But the problem is any sensible debate is squashed in the name of 'free enterprise spirit' of the West Vs the old communist practices of the past USSR. Well the fact is in any society, the utilities have to be run as a co-operative movement for the good of all. The utilities includes not just the transport department but also the water/electricity suppliers, banks, defence etc.,

What is needed is not more of 'free enterprise' but more training/leadership/management practices. If the private industry can follow that why can't the co-operatives and the government departments?

That is the real point to ponder !!!

Regards,

Pradeep Kabra

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Affordable defence
Britain must heed the lessons from procurement inquest
Governments across the western world are under huge pressure to slash spending programmes as a result of the global financial crisis and its impact on national budgets. In many states, few areas of expenditure are being scrutinised as closely as defence. In the US, Bob Gates, the defence secretary, has already signalled that he wants to overhaul his department’s spending priorities, cutting back on programmes such as the F22 fighter jet deemed surplus to requirements. Now it is the turn of the UK to take a long hard look at the ministry of defence’s equipment budget, long seen as bloated and inefficient. Yesterday, the MoD published a report by Bernard Gray, a former departmental adviser, into its procurement record. His is a damning indictment. Mr Gray finds that annual expenditure on equipment – from aircraft carriers to fast jets – is well beyond what the MoD can possibly afford. Its project management record is also abysmal. The average equipment programme overruns by five years. The average increase in cost of those programmes – over initial budget – is £300m. All told, the MoD spends up to £2.2bn every year just on the cost of managing delays and overruns. The reasons for this sorry state of affairs are well analysed by Mr Gray. Britain’s service chiefs compete in a scramble for scarce resources, demanding ever-increasing amounts of kit. Once contracts are approved, ministers are too embarrassed to admit they can no longer afford – or even need – what they once approved. Mr Gray has come up with a list of reforms that the government will now rightly implement. There must be a Strategic Defence Review in the first year of every parliament. There must be 10-year budgets in keeping with the longterm nature of defence projects. There must be an annual audit to regularly ensure the equipment programme is still affordable. However, the government has made a serious mistake in ruling out one of Mr Gray’s core recommendations. He says Defence Equipment & Support, the organisation that buys and supports military equipment, should be outsourced to the private sector to improve project management and delivery. This would be a radical step with big security implications and needs thinking through. But Britain does not have the luxury of eliminating the idea now. A government that fails to undertake this initiative is not challenging vested interests in either the MoD or the defence industry.

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Re: Business Schools REFORM!!!

To
The Editor,
Economist

Dear Sir,

This article looks only at peripherals. But the issue of Business Schools REFORM deserves honest analysis, solutions and actions.

Even though it is debatable whether management can be taught, whether it is an art or a science, whether it is objective or subjective etc., but the root cause of the problem is as long as management is divorced from ownership, things cannot improve.

Why would a CEO who has no stake whatsoever in the business apart from few stock-options to his name bother about long-term sustainability of the business? His interest would be to keep the share-price moving North so that he can en-cash his options on time.

So how can ownership and management be tied together? 1) in a joint stock company with tradable shares or 2) in a family owned business listed on stock exchange without limiting the management to just family members

The solution is simple - remove the 'limited liability rule'. Business means risk. Only people who have a 'real stake' in business are capable and equipped to manage that risk better. You don't need CSR (Corporate Social Responsibility) lessons from HBS (Harvard Business School) to teach that. It is common-sense.

I'm sure with unlimited liability Dick Fuld would have thought 100 times even before thinking about the word 'leverage'. But the fact is with no personal real stakes involved Lehman Brothers was leveraged 44 times its capital. (don't tell me he was holding majority of his wealth in Lehman Stocks. The fact is, even after Lehman went bust he had 'fleeced' enough money to last many life-times with no criminal liability attached) Similar stories of leverage ranging from 20-45 times the capital run for Goldman Sachs, UBS, RBS, HBOS, Northern Rock, BOA, Citi Bank etc. in the banking sector alone. We can narrate similar stories across the whole corporate business land-scape.

If business schools cannot teach the simple basics, then I don't think adding history lessons, CSR case-studies and other jargon-spewing stuff will add any value.

When liability is not limited and when it affects the management directly then peer-pressure, self-regulation, responsibility etc., are all automatically taken care of.

Sadly, the 'business education' (MBA) has transformed itself into 'education business'. The saying 'what you sow, is what you reap' has never been more true. By sowing the 'eduction business' seeds, we have reaped 'crooks' like Dick Fuld, Andy Hornby, John Thain, Adam Applegrath.....just to name a few from this round of disaster.

The fact is, it is not just business education problem, it is the problem of how business is structured in a market-place.


Regards,

Pradeep Kabra

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The pedagogy of the privileged
Sep 24th 2009
From The Economist print edition


Business schools have done too little to reform themselves in the light of the credit crunch.

THIS has been a year of sackcloth and ashes for the world’s business schools. Critics have accused them of churning out jargon-spewing economic vandals. Many professors have accepted at least some of the blame for the global catastrophe. Deans have drawn up blueprints for reform.

The result? Precious little. Business schools have introduced a few new courses. Students at Harvard Business School (HBS) have introduced a voluntary pledge “to serve the greater good” among other worthy goals, which about half of this year’s graduates embraced. But for the most part it is business schooling as usual. The giants of management education have laboured mightily to bring forth a molehill.

That is too bad. You do not have to accept the idea that the business schools were “agents of the apocalypse” to believe that they need to change their ways, at least a little, in the light of recent events. Most of the people at the heart of the crisis—from Dick Fuld at Lehman Brothers to John Thain at Merrill Lynch to Andy Hornby at HBOS—had MBAs after their name (Mr Hornby graduated top of his class at HBS). In recent years about 40% of the graduates of America’s best business schools ended up on Wall Street, where they assiduously applied the techniques that they had spent a small fortune learning. You cannot both claim that your mission is “to educate leaders who make a difference in the world”, as HBS does, and then wash your hands of your alumni when the difference they make is malign.

The real question is not whether business schools need to change, but how. One of the most common stances—often heard outside and sometimes within the schools themselves—is that management education needs to start again from scratch. On this view, these institutions are little more than con-tricks at the moment, built on the illusion that you can turn management into a science and dedicated to the unedifying goal of teaching greedy people how to satisfy their appetites.

That is not true. A study by two economists, Nick Bloom of Stanford and John Van Reenen of the London School of Economics, concluded that companies that use the most widely accepted management techniques, of the sort that are taught in business schools, outperform their peers in all the measures that matter, such as productivity, sales growth and return on capital. Many companies in the developing world, not least China, are desperate to hire more MBAs in order to improve their traditionally slapdash approach to management.

A second popular argument is that business schools need to put more emphasis on business ethics and corporate social responsibility (CSR). There is a great deal of talk about embracing “principles of responsible management”, such as “sustainability” and “inclusiveness”.

This makes some sense. A 2006 study of cheating among graduate students found that 56% of business students had cheated, compared with 47% in other disciplines. The authors attributed this to “perceived peer behaviour”. Presumably more talk of ethics might change those perceptions. But it would be a mistake to expect too much from CSR. Both business schools and businesses have been talking about it for years without turning business people into angels (one of the loudest advocates was Ken Lay, the chairman of Enron). Moreover, many admirers of CSR confuse the sort of creative destruction that makes us all richer, in the long run, with corporate skulduggery.

So what should business schools do to improve their performance? More history classes would help. Would-be business titans need to learn that economic history is punctuated with crises and disasters, that booms inevitably give way to busts, and that the business cycle, having survived many predictions of extinction, continues to prey on the modern economy. The 2008 debacle might have come as less of a surprise if all those MBAs had been taught that there have been at least 124 bank-centred crises around the world since 1970, most of which were preceded by booms in house prices and stockmarkets, large capital inflows and rising public debt.

History courses aside, business schools need to change their tone more than their syllabuses. In particular, they should foster the twin virtues of scepticism and cynicism. Graduates in recent years, for example, seem to have accepted far too readily the notion that clever financial engineering could somehow abolish risk and uncertainty, when it probably made things worse. It is worth noting that such scepticism is second nature to the giants of financial economics, as opposed to the more junior propellerheads. Andrew Lo, of MIT’s Sloan School of Management, was fond of pointing out that in the physical sciences three laws can explain 99% of behaviour, whereas in finance 99 laws can explain at best 3% of behaviour.

Boosters beware

The original sin of business schools is boosterism. Professors are always inclined to puff the businesses that provide them, at the very least, with their raw materials and, if they are lucky, with lucrative consultancy work. HBS has produced fawning studies of almost every recent corporate villain from Enron (which was stuffed full of HBS alumni) to the Royal Bank of Scotland. A taste for cheerleading has been reinforced by the rise of a multi-million-dollar management-theory industry. Professors with dollar signs in their eyes are always announcing the birth of the latest revolutionary management technique or the discovery of the hottest new “supercorp”.

Business schools need to make more room for people who are willing to bite the hands that feed them: to prick business bubbles, expose management fads and generally rough up the most feted managers. Kings once employed jesters to bring them down to earth. It’s time for business schools to do likewise.

Re: Turner is asking the right questions

Dear Mr. Wolf,

Thank you for the article and continuing the debate.

On the issue of Capital Reserves - You have argued back that it will not work because the mainstream banks will go off-shore via off-balance sheet vehicles or unregulated shadow banking.
Don't you think this leveraging process grew exponentially since 1999 when Bill Clinton repealed the The Glass-Steagall Act of 1933. That act sustained the financial system in a reasonable form for almost 60 years. Of-course, the lobbyist of financial industry and the political donations lead to chipping it slowly for few years before the final nail was laid.

On the issue of Pay and Bonuses - Gillian Tett's article in today's FT "What bankers can learn from Chelsea football club" is more insightful. Also it suggests a solution.

So agreed that there cannot be a single comprehensive solution to a problem like this. But a combination of actions including Capital Reserve Ratio Guidelines, Industry wise guidelines on pay, guidelines on political contribution etc., will definitely bring better results.

Final 'food for thought': The US Economy grew from less than 6 trillion dollars to more than 13 trillion dollars in just 15 years. In the same period the size of Japanese economy (from a much lower base of US) grew by about 1/3 and I presume the same of Europe's main economies. I don't see any great relative innovation coming out of America. It is just financial engineering in the name of globalization.

Pradeep Kabra
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Thanks for these interesting comments. I largely agree.

I don't know whether the result would have been different if Glass-Steagal had remained in place. The distinction never existed in continental Europe. But it did not have the same kind of crisis. The big issue may rather be the domination of investment banking over commercial banking in the US and, to a lesser extent, UK.

Maybe, the approach you suggest to regulation would work. I don't know.

Finally, I think there has been a great deal of fundamental innovation in the US - it dominates IT and life sciences business innovation. It is not just finance.

Martin Wolf

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Turner is asking the right questions
Martin Wolf
I like and admire Lord Turner, chairman of the UK’s Financial Services Authority. He is more than an acute analyst. He is also brave. He showed that in his struggle with Gordon Brown, then chancellor of the exchequer, over plans for pension reform published in 2005. He is showing that again today in the lively debate he has initiated on the future of financial regulation.

This financial crisis was no minor blip, to be forgotten as quickly as possible. On the contrary, the UK (and other significant countries, not least the US) have just received a monstrously expensive warning. That is why Lord Turner’s willingness to raise unpalatable questions is both welcome and refreshing. His report for the FSA is among the best analyses of the crisis. Now, in a discussion for the British journal Prospect, he has taken the debate into even more controversial territory.

I will address five of the issues raised there: the case for moving the responsibilities of the FSA over banking into the Bank of England; the supposedly excessive size of the financial sector, particularly in the UK; the levels of capital required of banks, particularly on their trading activities; the possible role of taxes on financial transactions – the so-called “Tobin tax”; and, finally, the vexed question of bankers’ pay.

On the first, Lord Turner is right to argue that “the institutional architecture is the least important issue here”. The fundamental issue is not structure, but philosophy. The UK authorities adopted the same view as the US: market forces guaranteed both efficiency and stability. They were wrong. Now that the view has changed, the upheaval caused by transforming the regulatory structure is unnecessary. Worse, it might make things worse: giving any institution a monopolistic position would surely be a mistake.

Now turn to whether the financial sector is “too large”. John Gieve, former deputy governor of the Bank of England, argues that it is not “very helpful to try to define the right size for the financial sector”. I agree. But the sector enjoys subsidies from the state, via access to the lender-of-last-resort function of the central bank and explicit and implicit guarantees against insolvency. These need to be offset.

This leads us to the third point, the case for higher capital requirements. Here Lord Turner is a part of the choir: the Group of 20 finance ministers and central bank governors meeting in London last weekend also agreed to require banks “to hold more and better quality capital”.

Yet higher capital requirements are far from a panacea. One danger is that banks may take on even more risk, to sustain high returns on equity. Another is that banks would again find a way around higher capital requirements via off-balance sheet vehicles and exploitation of risky derivatives strategies. A third is that higher capital requirements would again trigger an explosive expansion of an unregulated shadow banking system. In short, higher capital requirements will only work if they come with a huge increase in regulatory will and effectiveness. I am not holding my breath.

That leads naturally to the “Tobin

tax”. Obviously, it would have to operate in all significant financial centres. So the chance of its happening is zero. As a way of shrinking the financial sector it also seems ill-designed. The argument for it would have to be, instead, that it would be desirable to reduce the liquidity of markets in this way.

Until recently, I would have viewed that as unacceptable. But I might now entertain the argument that willingness to invest in costly “due diligence” on what investors are buying may be undermined by the perceived ease of selling. For these reasons, market liquidity no longer seems an unambiguous good. Maybe shifting the structure of incentives towards “buying and holding” might be better.

Finally, how far are changes in the structure and levels of pay the answer? I agree with Lord Turner that “the honest truth is that bad remuneration policies, though relevant, were far less important in the unravelling of the crisis than hopelessly inadequate capital requirements against risky trading strategies”. The issue cannot be the level of bonuses, unless we want to decide the “just rewards” of everybody. Nor should it be the principle of bonuses, since a link between performance and reward is desirable. The issue should be the nature of incentives. Employees must not be rewarded for breaking the bank, particularly if it is then rescued by the taxpayers.

Lord Turner is making important contributions to a debate we must have. It is horrifying that this industry inflicted such damage. It is horrifying, too, that it is guaranteed by the taxpayer, even as it returns to business as usual.

But the more one analyses both the debate and what is happening, the more difficult it is to believe that a safer and more responsible industry is emerging. I love Lord Turner’s willingness to raise difficult questions. But I am not persuaded that he, or anybody else, offers convincing answers.

by martin.wolf@ft.com  

Re: China, Bernanke, and the price of gold

This is consistent with our understanding that china is creating a good bank for its new investments (including gold, Euros, Yen, investments in metals, commodities, oil firms etc., ) and keeping all its old investment in bad bank. The new good bank will be well diversified firm which is not dependent on US Govt and complements its own needs as well.

The bad bank will have US Dollars, UK Sterling.

The question is how much hit does it have to take on Bad Bank. I'm sure it will be much more than standard 20-25% it used to write off from local creditors. It should be in the range of 50-75%. Quantitatively it will be far-far higher than the usual 40-80 billion US dollars. It has to be at-least half a trillion US dollars.

Well the intervention in the second world war was the price US paid to change the world order form UK Sterling/Gold to US Dollars. This at-least half a trillion dollars will be the price I believe China has to pay to change the world order from US Dollar to a multi-currency world of Dollar/Euro/Yuan/Yen.

The only question that remains to be answered now is how long will this take? 1 year, 5 years, 10 years???

Regards,

Pradeep

From, 2009/9/8 Amin Merchant

China, Bernanke, and the price of gold

By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2009


China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.
I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global
strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a
number of American guests tore President Obama’s economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of
economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for
mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls
himself simply “a survivior”.
What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held
belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold
standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the
market,” he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly
what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle,
some big force steps in from the unknown.
Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054
tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming
US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve. “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall
hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.
“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”
“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”
Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China’s exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. “We have lost 20m jobs in this crisis,” he said.

China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.
Where is the gold going to come from?

Re: Future of Food - Facts about Food

Dear All,

If you have missed this on BBC 2, this is worth watching. (unfortunately, it is for UK users only) (If you are busy, download it on your iplayer - then it becomes available for the next 30 days)

Three eye-opening episodes on Food, Food, Food. The focus is on UK but the perspective is truly Global. It is really educational - just like spending 3 good hours in University from the comfort of your desk!!! Unfortunately, they don't teach these things at School/Uni.

Example: Question: Why is UK cancer prone? (they say 1 out of every 3 people in UK is cancer-prone)
Answer: Processed Food (primarily thanks to our American friends)

Many more fascinating and eye-opening facts.

Share it with you near and dear ones.

Thank you BBC and a big Thank You to George Alagiah for opening my eyes.

Regards,

Pradeep

----------------------------------------------------------------------

1. http://www.bbc.co.uk/iplayer/episode/b00m9xk9/Future_of_Food_Episode_1/

George Alagiah travels the world to reveal a growing global food crisis that could affect the planet in the years ahead. With food riots on three continents recently, and unprecedented competition for food due to population growth and changing diets, the series alerts viewers to a looming problem and looks for solutions.

George joins a Masai chief among the skeletons of hundreds of cattle he has lost to climate change, and the English farmer who tells him why food production in the UK is also hit. He spends a day eating with a family in Cuba to find out how a future oil shock could lead to dramatic adjustments to diets. He visits the breadbasket of India to meet the farmer who now struggles to irrigate his land as water tables drop, and finds out why obesity is spiralling out of control in Mexico.

Back in Britain, George investigates what is wrong with people's diets, and discovers that the UK imports an average of 3000 litres of water per capita every day. He talks to top nutritionist Susan Jebb, DEFRA minister Hilary Benn and Nobel laureate Rajendra Pachauri to uncover what the future holds for our food. (R)

2. http://www.bbc.co.uk/iplayer/episode/b00mffbk/Future_of_Food_Episode_2/

George Alagiah travels the world to reveal a growing global food crisis that could affect the planet in the years ahead. With food riots on three continents recently, and unprededented competition for food due to population growth and changing diets, the series alerts viewers to a looming problem and looks for solutions.

George heads out to India to discover how a changing diet in the developing world is putting pressure on the world's limited food resources. He finds out how using crops to produce fuel is impacting on food supplies across the continents. George then meets a farmer in Kent, who is struggling to sell his fruit at a profit, and a British farmer in Kenya who is shipping out tonnes of vegetables for our supermarket shelves. He also examines why so many people are still dying of hunger after decades of food aid.

Back in the UK, George challenges the decision-makers with the facts he has uncovered - from Oxfam head of research Duncan Green to Sainsbury's boss Justin King. He finds out why British beef may offer a model for future meat production and how our appetite for fish is stripping the world's seas bare.

3. http://www.bbc.co.uk/iplayer/episode/b00mk723/Future_of_Food_Episode_3/

In the past year, we have seen food riots on three continents, food inflation has rocketed and experts predict that by 2050, if things don't change, we will see mass starvation across the world. This film sees George Alagiah travel the world in search of solutions to the growing global food crisis.

From the two women working to make their Yorkshire market town self-sufficient to the academic who claims it could be better for the environment to ship in lamb from New Zealand, George Alagiah meets the people who believe they know how we should feed the world as demand doubles by the middle of the century.

He heads out to Havana to find out how they are growing half of their fruit and vegetables right in the heart of the city, investigates the 'land-grabs' trend - where rich countries lease or buy up the land used by poor farmers in Africa - and meets the Indian agriculturalists who have almost trebled their yields over the course of a decade.

George finds out how we in this country are using cutting-edge science to extend the seasons, recycle our food waste and even grow lettuce in fish tanks to guarantee the food on our plates.

He hears the arguments about genetically modified food and examines even more futuristic schemes to get the food on to our plates.

Re: How Tamiflu became a global blockbuster

This is a good article on smart marketing of rubbish products - all in the name of 'growth'. That is what American Consumerism is all about. Rather than spending resources on the 'real problems' - there are too many to list (few like Malaria, Alzheimers, HIV, Cancer Detection etc., can at-least be prioritized) - the resources are spent on 'growth products'

The best solution is to ban stock market listing for all the pharma firms. The growth then can be driven by small boutique firms which provides the innovation and capital can be provided by the governments depending on the priority for their people. For example, for Africans it will be Malaria and HIV. For Americans it can be Cancer Detection and other developed world diseases.

After all, as the current financial crisis shows, there are lots of things wrong with the present form of Capitalism!!! I think the world 'leaders' should be brave to try practical alternatives. But then how will they? When they themselves are bank-rolled and financed by the same crooks?

Pradeep Kabra

------------------------------------------------------------------------

How Tamiflu became a global blockbuster

By Andrew Jack

Published: September 7 2009 03:00 | Last updated: September 7 2009 03:00

When senior executives from Roche host a briefing for journalists today in Basel, their chosen topic will be unusual for a drug company that focuses on oncology and other hospital-prescribed niche medicines.

William Burns, head of pharmaceuticals, will instead discuss Tamiflu, the antiviral drug that has become an unexpected "blockbuster": with projected sales this year of SFr2bn ($1.9bn, €1.3bn, £1.1bn), it has become Roche's fourth-biggest selling product. For a drug that was almost stillborn when it was launched in 1999, it provides a case study in how to create a commercial success.

With seasonal flu long dismissed as a relatively minor threat, in spite of killing up to 500,000 people globally a year, Japan had been the only large country to widely adopt Tamiflu to treat it.

What changed for other governments was the growing fear of a pandemic. In 2003, the H5N1 bird flu virus, which killed millions of animals and dozens of people, raised concerns that there could be a repeat of the 1918 Spanish flu outbreak.

Politicians were under pressure to avoid repeating previous failures to prepare and respond to emergencies such as Hurricane Katrina in 2005, the 2003 heatwave in France that killed thousands, or the foot and mouth outbreaks in the UK.

Tamiflu became a key part of their response. First, it met a clinical need. While far from a cure, clinical studies show that it can reduce the severity and duration of infection, especially if taken within two days of the onset of symptoms.

Second, it offered an advantage over the alternatives. Flu strains including H5N1 are resistant to older antiviral drugs. Only one other drug exists in the same class: GlaxoSmithKline's Relenza, which was launched just ahead of Tamiflu. But Relenza has to be inhaled, making it more difficult for patients to take than Tamiflu, a capsule that is swallowed.

Third, Tamiflu filled a psychological gap. With no vaccine able to protect against flu until after the specific pandemic variant of the evolving virus emerged, stockpiling the drug allowed politicians and policymakers to show that they were doing something to prepare.

Moreover, its brand name - snappier than oseltamavir, its generic prescribing name, and more clearly linked to the name of the virus it was designed to treat than Relenza - helped raise its public profile. Searches on Google for Tamiflu even briefly surged ahead of those for Viagra in 2005 and again this year.

Fourth, by supporting and circulating studies that compared the widely varying levels of stockpiles purchased by different governments, Roche added pressure for the laggards to purchase more.

Fifth, the company has extended its franchise. It has supported sales to private doctors and to companies concerned that supplies through national health systems would not be sufficient to meet demand. It has funded research on whether the drug can be used in combination with others, in higher doses and over longer periods, to further boost efficacy - and sales.

Roche has sold bulk versions of the drug's ingredients to governments prolonging its shelf-life even beyond the seven years regulators have allowed. And it is now proposing ways for governments to send back older stock of the drug for reprocessing and reuse - at a price.

Finally, Roche has attempted to deflate criticism that while it makes profits from richer countries, poorer ones cannot afford the medicine. It has made donations to the World Health Organisation, and introduced discounts in the developing world.

Not everyone is impressed. Generic drug companies claim Roche's discounting has kept them out of the market. Some doctors are sceptical of Tamiflu's efficacy and concerned about side effects.

The expanding market has also spurred its rivals to accelerate research on at least two new experimental antiviral drugs, and GSK has made improvements to Relenza.

By the time of the next pandemic, Tamiflu's patent may have expired, its efficacy been reduced and it will face greater competition.

But fear, need and a clever marketing strategy have helped it far exceed Roche's expectations.

Re: Japan’s continuity we can believe in

Dear Mr. Rachman,


Many thanks for the informative article on Japan and the merits of its systems.

The only exception I take to is when you say US public-sector debt could hit 80%. Officially it is less than 50% but that is excluding Fannie Mae and Freddie Mac (kindly refer today's analysis sheet in FT). That way US debt is already above 100% and can easily surpass Japan's if things don't improve soon (they look bleak anyway)

My suggestion is to use real figures rather than those dished out by govt. officials.

Infact you have mentioned that fact in the unemployment section of your article wherein you mentioned 'there is probably a lot of disguised unemployment'

Infact this gives you or your colleagues two topics for next few articles: a) disguised statistics b) disguised hype (remember, few months back, "China's stimulus will save the world" changed to "China's stimulus will save itself" few weeks ago )

Regards,

Pradeep Kabra

----------------------------------------------

Japan’s continuity we can believe in

By Gideon Rachman

Published: August 31 2009 19:32 | Last updated: August 31 2009 19:32

pinn

When the great recession began last year, the fate of Japan was often held up as an awful warning to the west. If the US and the European Union failed to adopt the right policies, it was said, they too might suffer a Japanese-style “lost decade”, followed by years of feeble growth.

Now that the Japanese have used Sunday’s election to elect the Democratic party – breaking with more than 50 years of rule by the Liberal Democratic party – a new western narrative is taking hold. This is a political revolution; it is Japan’s big chance to break with the years of stagnation.

But both these stories are wrong. The Democrats are unlikely to shake things up hugely. Nor should they. For the story of Japan over the past 20 years is by no means as dismal as much western commentary would have it.

It is true that, since its asset-price bubble burst in 1990, the country’s economy has grown slowly, the stock market has slumped and national debt has risen to awesome proportions. But, despite these trials, it has remained a sane, stable, prosperous and exciting country. Politically, culturally and even economically, it offers not so much a warning as an inspiring example of how to deal with a long period of adversity.

The fact that, throughout the years of relative stagnation, the Japanese kept electing the LDP puzzled many outsiders. A few even saw it as evidence that Japan is somehow less than democratic. But it was willing to try and change. The country gave a mandate to Junichiro Koizumi, the flamboyant LDP prime minister, who pushed Japan in a more free-market direction from 2001 to 2006. Now it has turned to Yukio Hatoyama and the Democrats, who are less enamoured of the American model.

However, Japan has always gone for change within well-defined limits. Europeans and Americans worry that a deep recession could stoke political extremism – not without reason, perhaps, given the hysterical tone of politics in the US and the increase in the vote for far-right and far-left parties in Europe. But during almost 20 years of tough times, the Japanese have never flirted with political extremism.

That could be because they have coped much better with economic difficulty than foreigners sometimes acknowledge. The Economist, for example, has occasionally lamented Japan’s “amazing ability to disappoint”. It is true that foreign investors will have found the country’s stock market a particularly disappointing venue in the past two decades; the Nikkei currently stands at a little over 10,500, compared with 39,000 at the peak of the bubble. The Japanese have also been chastised by outsiders for their reluctance to deal more ruthlessly with “zombie” companies, and for clinging to outmoded traditions such as “lifetime employment”.

But the efforts to cushion the worst social effects of an economic downturn have paid off. Last week there were shocked headlines proclaiming that the global recession had driven Japanese unemployment to a new high – 5.7 per cent. That still compares pretty favourably to 9.4 per cent in the US and the euro area. There is probably a lot of disguised unemployment behind the official number – but the same is true in the west.

The Japanese determination to preserve jobs made their labour market less “flexible” and the economy paid a price – but not an unbearable one. The days when academics wrote breathless predictions about “Japan as number one” are long gone. But after 20 years of alleged stagnation, it is still number two – the world’s second largest economy. Its biggest companies still make world-beating products. Toyota, for example, has led the world in developing hybrid cars, such as the Prius.

Tokyo certainly does not feel like the capital of a country in the grip of terminal depression. The city’s restaurants have accumulated more Michelin stars than are to be found in Paris. Tyler Brûlé, the Financial Times style guru, prowls the streets of the city, searching relentlessly for examples of cutting-edge design – a tribute to the country’s reputation for style. When Japan hosted the soccer World Cup in 2002, just after its “lost decade”, it presented a cheerful and welcoming face to the world that contrasted pleasantly with the spooky nationalism of its South Korean co-hosts. The Japanese can even play soccer. The national team went to Beijing for the final of the 2004 Asian cup, beat China – and got out of the country alive.

Of course, Japan has its problems. Its average age is rising steadily and its population is shrinking. One in five Japanese is over 65. The Democrats have promised to raise pensions and payments to parents – and to cut taxes. It is hard to see how the sums add up. While the US and the UK worry that their public-sector debts could hit 80 per cent of gross domestic product, Japan’s debt is heading for 200 per cent.

Some of its efforts to deal with an ageing society are positively unnerving. The country has led the world in developing robots as companions for the elderly. These include a “snuggling Ifbot” that, according to press reports, “lives in an astronaut suit, chats about the weather, sings and plays games”.

It is best not to laugh. As the US and Europe struggle to come to terms with the aftermath of a bubble economy, rising public debt and the retirement of the baby-boom generation, they should look to Japan with respect. It may be the future.

gideon.rachman@ft.com