The late C.K. Prahalad and his co-author Hrishi Bhattacharyya wrote an article on how companies can integrate three strategies — customization, competencies, and arbitrage — into a better form of organization since, in their view, many multinational business models are no longer relevant.

Excerpts:

During the high-growth years between 1992 and 2007, the globalization of commerce galloped at a faster pace than in any other period in history. Now, amid the chronic unemployment and anti-trade rhetoric of the post-financial-crisis world, some observers wonder whether globalization needs a time-out. However, the experience of multinational companies in the field suggests the opposite. For them, globalization isn’t happening rapidly enough. [...]

The problem is not globalization, but the way our current institutions are set up to respond to this new demand. The prevailing corporate operating model does not work well with the structural changes that have taken place in the global economy.

Most companies are still organized as they were when the market was largely concentrated in the triad of the old industrialized world: the U.S., Europe, and Japan. These structures lead companies to continue building their global strategies around the trade-offs and limits of the past — trade-offs and limits that are no longer accurate or relevant.

One of the most prevalent and pernicious of these perceived trade-offs is the one between centrally driven operating models and local responsiveness. In most companies, an implicit assumption is at play: If you want to gain the full benefits of economies of scale — and to integrate common values, quality standards, and brand identity in your company around the world — then you must centralize your intellectual power and innovation capability at home. You must bring all your products and services into line everywhere, and accept that you can’t fully adapt to the diverse needs and demands of customers in every emerging market.

Read the rest of this entry »

In a new paper (Possible Unintended Consequences of Basel III and Solvency II), IMF staff explain that in “today’s financial system, complex financial institutions are connected through an opaque network of financial exposures. These connections contribute to financial deepening and greater savings allocation efficiency, but are also unstable channels of contagion. Basel III and Solvency II should improve the stability of these connections, but could have unintended consequences for cost of capital, funding patterns, interconnectedness, and risk migration.”

Excerpts:

Efforts to strengthen the quality of capital for banks and insurers through Basel III and Solvency II are well advanced. On the one hand, the Basel Committee on Banking Supervision (BCBS), the organization responsible for developing international standards for banking supervision, adopted the Basel II framework in 2004 and, in response to the financial crisis, has taken steps to strengthen it in an incremental fashion to form what is now known the Basel III framework (BCBS 2009, 2011a, 2011b, and 2011c). On the other hand, the European Commission (EC) is leading the Solvency II project, in close cooperation with the European Insurance and Occupational Pensions Authority (EIOPA), to develop harmonized standards for insurance supervision within the European Union. A directive was adopted in 2009, and work—which included a series of quantitative impact studies—has been underway to develop supporting rules.

The regional scope of application of the two accords varies. Basel is an  “accord”/agreement with no legal force but potentially global applicability, whereas Solvency II is a legal instrument that will be binding in 30 European Economic Area (EEA) countries4 (27 European Union (EU) states plus Iceland, Liechtenstein, and Norway).  However, Solvency II has also implications beyond Europe through, for example, its influence on the international standards being developed by the International Association of Insurance Supervisors (IAIS), and because external insurance groups will be more easily able to operate in the EU if their home supervisory regimes are considered equivalent.

Read the rest of this entry »

IMF staff published a new report on stability in the global banking network.

To know whether the system get more or less prone to a banking crisis, the authors use “model simulations and econometric estimates based on a world-wide dataset,” and “find an M-shaped relationship between financial stability of a country’s banking sector and its interconnectedness.”

In particular, “for banking sectors that are not very connected to the global banking network, increases in interconnectedness are associated with a reduced probability of a banking crisis. Once interconnectedness reaches a certain value, further increases in interconnectedness can increase the probability of a banking crisis.” Their “findings suggest that it may be beneficial for policies to support greater interlinkages for less connected banking systems, but after a certain point the advantages of increased interconnectedness become less clear.”

More excerpts here, where you can ask for a PDF copy too. Or you can order a print copy (broken link as of today): http://www.imfbookstore.org/IMFORG/WPIEA2011186

An IMF working paper by Xavier Debrun says (summary):

Despite growing interest among policymakers, there is no theory of independent fiscal institutions. The emerging literature on “fiscal councils” typically makes informal parallels with the theory of central bank independence, but a very simple formal example shows that such a shortcut is flawed. The paper then illustrates key features of a model of independent fiscal agencies, and in particular the need (1) to incorporate the intrinsically political nature of fiscal policy – which precludes credible delegation of instruments to unelected decisionmakers – and (2) to focus on characterizing “commitment technologies” likely to credibly increase fiscal discipline.

Introduction:

The fiscal legacy of the economic and financial crisis of 2008-09 brought to the fore serious concerns about the capacity of governments to maintain sustainable public finances. Several vulnerable countries came under severe market pressure, while government bond yields in countries considered so far as safe havens also started rising. Of particular concern is the fact that the large fiscal deficits and ballooning government debts caused by the crisis came on top of already substantial inherited liabilities and ahead of intensifying demographic pressures on entitlement spending. These trends are on a collision course with the intertemporal budget constraint, making ambitious and sustained consolidations unavoidable.  The challenge is formidable and markets are on the watch, pushing governments to look for ways to firm up the credibility of their commitments to sound public finances.

While formal fiscal policy rules have long been used to contain tendencies toward fiscal profligacy (e.g. Fabrizio and Mody, 2006; and Debrun and others, 2008), it has been argued that many of the limitations and failures associated with numerical rules—most notably their inflexibility in the face of unusual circumstances—could be overcome by establishing nonpartisan agencies. Through independent analysis, assessments, and forecasts, such bodies could enhance policymakers’ incentives to deliver sustainable policies.

Read the rest of this entry »

A new IMF working paper by Nese Erbil explains:

This paper examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures – government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance – and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.

Among the conclusions:

The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

Read the rest of this entry »

A recent IMF Working Paper by staff of the Middle East and Central Asia Department, “Iran — The Chronicles of the Subsidy Reform,” [1] analyses the December 2010 changes in subsidies of domestic energy and agricultural prices, which increased about 20 times, making it the first major oil-exporting country to reduce substantially implicit energy subsidies.

Their paper reviews the economic and technical issues involved in the planning and early implementation of the reform, including the money transfers to households (via newly created bank accounts) and the public relations campaign that were critical to the success of the reform. It also looks at the reform from a chronological standpoint, in particular in the final phases of the preparation. The paper concludes by an overview of the main challenges for the second phase of the reform.
Read the rest of this entry »

To better help our customers, we at TradeFlow21 always stride to keep up to date with the distilled wisdom of those working in analysis and understanding of other cultures. Last June Jeannie L. Johnson and Matthew T. Berrett published in the CIA Studies in Intelligence a paper titled “Cultural Topography: A New Research Tool for Intelligence Analysis.” [1]  Among several examples we find this one:

US analysts vastly underestimated the duration and expense of the 1999 [bombing campaign against Serbia], in part because they undervalued the role of historic narratives of victory and defeat. Serbia’s national holiday is not a celebration of a past battlefield victory but of a glorious defeat in 1389 at the hands of the Ottoman Turks. Serbs celebrate the valor of the war’s hero, Prince Lazar, who received a heavenly visitation on the eve of battle and was told that unless he surrendered he faced certain defeat the next day. Given the choice, Lazar declared that it was better to die in battle than to live in shame. He did precisely that—and became cemented in Serbian legend.

[...]

Understanding the weight of this narrative for Serbs in defining honorable conduct during war would probably have disabused planners of the idea that the bombing campaign would be over quickly. Instead of projecting a three-day campaign, we might have helped policymakers plan for a campaign closer to the almost 80 days it eventually took.

Read the rest of this entry »

TradeFlow21 — AFGHANISTAN. The recent epochal events taking place in the Middle East and North Africa (collectively referred to as MENA), starting with Tunisia last December, have created a domino effect in the region.  The reverberation of this movement was felt by some of the most secure governments in the two regions, and one by one we have seen masses of repressed people follow the footsteps of the courageous youth of Tunisia.

Some have called this movement the “Arab Spring” or the “Arab Movement,” however, the “Arab Renaissance” is more befitting since for the first time in generations the overwhelming majority is willing to question the powers of authority.  Respective peoples are no longer willing to stand idle and take direction from one ruler or one family of rulers.  For so many years the gap between the have and have-not has grown in the two regions by leaps and bounds, thus making it more difficult, if not impossible, for the average person or family to grow and enjoy the financial security that only a handful have monopolized. Read the rest of this entry »

Procyclical fiscal policies and the build-up of contingent liabilities during the boom years exacerbated the severity of the crisis. The crisis in the global financial system was a complex event with far-reaching consequences, especially in countries that had had expansionary fiscal policies and a build-up of contingent liabilities prior to the crisis. While the world economy is now in the recovery stage, the debate on the preponderant causes of the financial meltdown is still far from over. Given the unprecedented severity and complexity of the crisis, it would be misleading to put the entire onus on financial excesses and regulatory weaknesses and ignore the role of fundamental imbalances. The United Arab Emirates (U.A.E.) — a major hydrocarbon-exporting country with diversified sub-national economic structures—experienced its own unraveling of macro-financial imbalances and thus presents an interesting case to analyze the underlying fragilities.

Read the rest of this entry »

Excerpts from the World Bank new publication on MENA:

There are historic opportunities for greater openness and citizen participation in economies across the Middle East and North Africa (MENA) that, if strongly managed over the transitions ahead, could see a significant boost to economic growth and living standards in the medium term.
Read the rest of this entry »