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An Experts’ View

Opinion:

EU Affairs:

THE PHARMACEUTICAL SECTOR

THE HEART OF EUROPE

COMMUNICATION AS A POLICY TOOL

ISSUE 2 - 2013 / YEAR 17th • PRICE € 10,00 / $ 12,00

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CHANGE needed for Business of the Future


Konstantinos C. Trikoukis

Chairman Athanase Papandropoulos

Publisher Christos K. Trikoukis

Editor in Chief N. Peter Kramer

Editorial Consultant Anthi Louka Trikouki

Issue Contributors Adela Cortina, David Lascelles, John Bruton, Leonor Coutinho, Konstantinos Frouzis, Richard Phillips, Marios Kyriacou, Tony Wagner, Susan Ariel Aaronson, Holger Schmieding, Justin Fox, Jimmy Hexter, Jan Mischke, Niels Schreuder, John Hontelez, Dominique Reiniche

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Founder

04 EDITORIAL Editorial, by N. Peter Kramer, editor in chief

08 OPINIONS

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The heart of Europe What a eurozone break-up might look like

14 EU AFFAIRS Can Germany bail out all of Europe? Communication as a policy tool: Important lessons from Cyprus New EESC President Malosse put citizens at the heart of the EU public debate

20 AN EXPERTS’ VIEW Our Mission: Patients’ access to treatments

22 BUSINESS TRENDS Huawei abandons US but still optimistic about future

23 SPECIAL REPORT Change needed for business of the future

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34 FAREWELL Thatcher, Merkel and the Euro

36 INTERVIEW Kristiina Ojuland: ‘Putin’s politics more and more like Stalin’s totalitarian politics’

38 ECONOMIC OUTLOOK The end of economists’ imperialism

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40 THE WORLD Fixing the world’s infrastructure problems Taiwan’s new EU Ambassador wants: ‘a more far-reaching EU-Taiwan relationship’

44 SUSTAINABILITY “Let There Be Daylight” and let it come in! Using and conserving forests at the same time with FSC®

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50 LAST PAGE Water - blue gold for a thirsty world

Reproduction without official permission of the publisher is strictly forbidden. Every case is taken in compiling the contents of that magazine, but we assume no responsibility for the affects arising therefrom. The view expressed are not necessarily those of the publisher nor of the European Business Review magazine.

For previous editions archive and up-to-date information on major topics and events you may visit our website http://www.europeanbusinessreview.eu


EDITORIAL

Another EU crisis: the lack of political and democratic legitimacy! by N. Peter Kramer, Editor-in-Chief

‘Europe was always hope, always a common future, always an ideal’, France’s Minister for Finance and Economy Pierre Moscovici said recently, ‘and if Europe is no more to be any of that but just common rules that lead to pain, then how can people love Europe’? Reading a recent survey of Eurobarometer, the European Commission polling institute, in the 6 biggest EU memberstates, the answer to Moscovici’s question is quite clear; a growing majority of Europeans do not love the European Union! Five years ago, no country, not even Britain, showed more than half its voters hostile to Europe. Now distrust runs 53% (from 28%) in Italy, 56% (41%) in France, 59% (36%) in Germany, 69% (49%) in the UK and 72% (23%) in Spain; but also in a Europhile country such as Poland, the biggest beneficiary from the transfers of tens of billions of Euro’s from ‘Brussels’ (read: from German, Dutch, Finnish and other ‘net paying’ memberstates) the percentage of no-trust rose in five years from 18% to 42%. Although Poland remains the sole country surveyed where more trust than mistrust still exists. The six countries jointly make up more than two out of three EU citizens or around 350 million of the EU’s 500 million population. Will it be different in smaller memberstates? Public support for the EU dropped by 16% in Greece; 66% of Greeks now have a ‘negative opinion’ about the EU. We have

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seen what happened recently in Cyprus. You can’t call the public opinion in Finland, the Netherlands, and Austria really EU friendly. Look at Croatia, EU youngest memberstate from July 1; the turnout for the elections of the Croatian MEP’s was only just above 20%. The head of the European Council on Foreign Relations office, José Ignacio Torreblanca said: ‘the damage is so deep that it doesn’t matter whether you come from a creditor or debtor country, euro would-be member or the UK: everybody is worse off. Citizens now think their national democracy is being subverted by the way the eurocrisis is conducted.’ President of the European Commission, José Manuel Barroso, explained the result of the survey by mentioning a ‘lack of understanding’ both of the politics of austerity and of ‘who does what, who decides what, who controls whom…

and where we heading to’. A resulting ‘resurgence of populism and nationalism’ was threatening the ‘European dream’, he said. But dreams make dangerous politics, we often have seen in the past. The ongoing requirement to impose of ‘yet more Europe’ by Federalists like Barroso is against the run of the public opinion. Another study, by the European Social Survey, linking university researchers across the EU, found that soaring unemployment, anxiety and insecurity had eroded faith in politics. ‘The EU has hit home and is here to stay as a watchdog of budgets, labour markets, pensions etcetera. This is unprecedented and risky’, said Torreblanca. ‘Unless it is fixed, it will feed the vicious circle between anti-EU populism and technocracy which we are currently seeing operating’. What we desperately need is an EU-reality check!


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OPINION

The heart of Europe by Adela Cortina*

The crisis has accentuated the selfishness of EU countries, triggering the abandonment of cooperative European integration. A Spanish philosopher argues that cohesion and interdependence must be regained before an irrational north-south divide tears the EU apart.

T

he European Union’s actions are causing well-deserved dissatisfaction among its citizens. The union is being tagged a “European disunion”, in which national leaders scramble for votes without caring about that supranational institution that once made us so proud. We Europeans, inventors of the nation state, also devised a com-

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munity of shared sovereignties and laid the groundwork for a cosmopolitan society. Economic union would reinforce political cooperation, founded on the principle of a citizens’ Europe. However, the current crisis has shown none of these goals have been reached. Countries have conducted themselves in their own self-interest, not in the cooper-

ative spirit essential for the union to follow the political and economic agendas that would best benefit its citizens. There is no genuine European democracy: leaders make agreements bilaterally, changing their loyalties for the sake of shortterm convenience, and neglecting European aspirations. It’s a suicide mission, not just because it goes against the grain


OPINION

of democracy, and not just because it is immoral to make decisions above the heads of those who suffer the consequences, but because it is as foolish as it is irrational. If we assume humanity to have benefited from the rationality advanced in Europe, we have ended up in the most puerile irrationality. After all, we have known for a long time that what is rational is not to seek the maximum selfish benefit and let others fall by the wayside, but to summon up sufficient intelligence to work together from a starting point of social cohesion. The old anarchists got this right: it is mutual support that benefits the species, not ruthless competition, and it is wiser to make allies than adversaries, friends than enemies.

The cooperative human Inherent human reason is not egoistic, but cooperative. As Michael Tomasello of the Max Planck Institute for Evolutionary Anthropology has pointed out, “you will never see two chimpanzees carrying a log together.” The ability to cooperate led the human species to leave the jungle behind. Those who work shoulder-to-shoulder not only succeed in moving a log, but also create links that have their own intrinsic value and that help them work together in the future. That seemed to lie at the heart of the project for a united Europe. It is disheartening to see how the Europe that invented democracy in classical Greece, that coined the notion of human dignity as the core of a shared life, that promoted not only sci-

entific but above all a moral rationality, that discovered the social state and the possibility of a supranational community, has betrayed its own identity with a tenacious drive to self-destruction, without the least affection for the ideals that constitute it. The events in Cyprus, which are clearly the results of selfish and bumbling improvisation rather than intelligent concern for the good of the population, add to a recent history of grievances among the countries of the south, in which a deep aversion northern states is brewing. This situation benefits the populisms and totalitarianisms of one or another stamp, which in a just society would have no chance of thriving. How is it possible that the welloff find it so hard to learn that countries and people depend on each other, and that it is not true that “my win is your loss”? Just the opposite is true. If we in the south end up poorer, which is what is happening, not only we come out the losers, but those from the north end up worse off as well.

Even devils prefer rule of law Kant, the German of Königsberg, said that even a town of devils, beings without moral sensibility, would prefer the rule of law to a state of war every man for himself. But, indeed, he added they must have sufficient intelligence. I would add they must show authentic human intelligence, as is revealed in the ultimatum game. In this game, one player offers to share a sum of money with another player, who can ac-

cept or reject the offer. If the second player accepts, they both come out ahead. If not, neither gets anything. If it were true that human rationality attempts to maximize profit unilaterally, the second player should accept any offer that is greater than nothing, and the player making the offer should offer a share as close as possible to nothing. But those players who are offered the share tend to say no to anything less than 30 per cent of the total, because they want to avoid saying yes to any amount that would humiliate them. For that reason, the players making the offer tend to propose 40 to 50 per cent of the total in order to take away at least something. If the offer is a little short, those who demonstrate a maximising rationality when they enter a game of ultimatum adapted for them are chimpanzees, not people. The bad thing is that, in itself, the humiliation of the worse-off is also not even intelligent. What is intelligent, in the case of Europe, is to recover one’s own identity and so create a genuine democracy, based on social cohesion and mutual assistance.

*Adela Cortina (b. 1947) is Professor of Ethics and Political Philosophy at the University of Valencia and Director of Etnor Foundation on business ethics and organisations. In 2008, she became the first woman to become a member of the Academy of Moral and Political Science, she is part of the discourse ethics movement of German philosopher Jürgen Habermas. She writes regularly for El Pais daily.

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OPINION

What a eurozone break-up might look like by David Lascelles*

The collapse of Europe’s single currency is something few of the eurozone’s political leaders care to contemplate. But David Lascelles says that although less likely than in mid-2012 it’s still not unimaginable

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A

bout a year ago, leading British businessman Lord Wolfson offered a prize for the best analysis of how a country could leave the euro while causing the least damage. The prize money was eye-catching – £250,000 – but then so was the topic. Greece seemed to be on the point of dropping out of the single currency, closely followed by Spain and others, and the whole euro area looked doomed. The prize was, of course, viewed within the eurozone as yet another piece of mischief by British eurosceptics out to destroy the EU. But it also had a more serious purpose. For people within the eurozone, the idea of the single currency’s break-up seems inconceivable, not merely as a practi-


OPINION

cal proposition but as an article of European faith. Such feelings are scarce in Britain, where people view the eurozone’s troubles more dispassionately. The UK is, furthermore, home to the City of London, Europe’s largest financial centre and the heart of the most important euro markets. If anyone was to address the question of the euro’s break-up, it arguably made sense to do so in the UK since ideology did not stand in the way, and the financial expertise to study the question existed in abundance. In awarding his prize, Lord Wolfson might indeed have argued that he was doing the eurozone a service by offering its members a piece of research that they would have difficulty putting together themselves. The prize received considerable publicity, and attracted more than a dozen entries. That may not seem a lot, but each entry was more than 100 pages long, stuffed with technical analysis: financial, legal and political. The winner was a City of London firm called Capital Economics, headed by Roger Bootle, a wellknown economist and, it has to be said, a prominent eurosceptic. But before exploring what he and the other entrants said, it is worth mentioning that a euro break-up is by no means a new topic in Britain. There’s a long tradition of disbelief in the euro, mainly because it has been seen as lacking sound political and fiscal foundations. Break-up scenarios were being put together as early as the mid-1990s, before the euro was even launched, and the body of expertise in this area has been building up ever since. Once the crisis really erupted in

2008 - 2009, the UK spawned a mini-industry in euro break-up research, led by currency experts, contract lawyers, constitutional specialists, accountants, political analysts and so on. The level of understanding of the issues involved became very high, centred on such questions as: • Is it legally possible for a country to leave the euro? • How can an exit be managed? • What are the implications for euro-denominated obligations such as bank deposits and contracts? • What would happen to the banking system? • How would the changeover back to a national currency be managed? • How would the country’s access to the EU single market be affected? • What would happen to the economy of the departing country, and of the rest of the eurozone? And so on. Many of the research papers were produced by nonBritish firms, underlining the fact that these questions were being very widely asked. Switzerland’s UBS, for example, produced a paper in January of last year entitled: “Breaking up the eurozone: Unlikely but not unthinkable.” As the title indicates, UBS did not expect the eurozone to break up, but it felt under pressure to show an understanding of the issues and to offer financial advice. “We expect investors to be well prepared for upcoming eurozone troubles by following our baseline recommendations,” it said, and these were basically to avoid Greek obligations. The key point that emerged from

all this work was that, contrary to what was being asserted by the euro’s more ardent supporters, an exit from the eurozone was technically possible: messy, yes, unlikely, yes, but not impossible. This was an important shift from the assertion by the EU that the euro was forever, to an acknowledgement that a break-up was possible. Arguably, this shift can never be reversed because once the eurozone had put special rescue measures in place, the magic spell which had protected the euro was broken. Even though the situation has calmed down since many of these reports were produced, the fundamental situation continues to deteriorate. The various rescue programmes so far have merely transferred most of the risk of default by countries like Greece to the European Central Bank, and to the rescue funds which will have to bear the losses and then be re-capitalised by the stronger countries. Meanwhile, the problem countries continue to slide into an ever-worsening economic abyss from which it is impossible to forecast recovery. This is why the question of a euro exit continues to be crucial, because there will still come a point where the necessary adjustment for a country like Greece may only be achievable outside the single currency. Leaving aside the legal question of whether a country can actually leave the euro (in a crisis this question will be ignored), the essential points to consider are: 1. Planning. Roger Bootle’s team – and indeed many of the other competitors for the prize – were certain that an exit would have

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OPINION

to be planned ahead in the deepest secrecy. Even other eurozone members might have to be kept in the dark to prevent leaks, and that includes the ECB which would not be able to condone an exit in silence. Actions that would have to be planned ahead of time (the exit would take place over a weekend when financial markets were shut) include shutting down the banks, introducing cross-border capital controls (which might mean temporarily shutting the borders), and ordering production of the new currency. 2. Managing the changeover. The change would have to be instantaneous. A proclamation would be made that all prices, wages and financial assets were now denominated in the new national currency. The legal basis of this proclamation would have to be sound since this change would be certain to trigger an avalanche of lawsuits from people who believed their contractual rights had been damaged. 3. Minimising the domestic impact. The first priority would be to prevent a flight of money by shutting down the banks and even the borders. The big worry would be for the safety of the banks, many of which would already be in a weakened state and not able to cope with the shock. These would have to be supported with increasingly scarce public money. The second would be to preserve as far as possible foreign confidence in the country. This would require, among many other things, a co-operative attitude towards other eurozone members, who might (secretly) be rather thankful that the “diffi-

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cult” member had quit the euro, and therefore be willing to help. The impact on the economy would come in different ways. For an ordinary company operating only in the domestic market, the shock would be huge: currency changeover, economic disruption, severe danger of inflation and further recession. On the other hand, shocks of this kind usually lead eventually to economic recovery, and there is a chance that business confidence could at some point improve. For export-minded companies, the advantages would be large: they would recover lost competitiveness and see a surge in sales (always assuming that relations with the rest of the EU single market remained unchanged). But for more import-dependent companies, it would be the opposite: business costs would soar, and many would undoubtedly fail. 4. Introducing a new monetary regime. A key task would be to build confidence in the new currency as fast as possible. This could only be done by running a tight monetary policy to combat inflation and support the currency in foreign exchange markets. This would be costly because the central bank would not have the foreign reserves to intervene, or even the expertise to run monetary policy in such very challenging circumstances. 5. Minimising the external impact. The damage would not only be to the exiting country. Outsiders who held that country’s obligations (bonds, bank deposits, payments due, etc.) would almost certainly suffer heavy losses as the value of the new national currency declined. There would

be legal questions about the country’s right to re-denominate obligations to foreigners, but in practice there would be little choice; one of the purposes of exit, after all, would be to reduce the country’s debt. But legal actions in the courts could drag on for many years. What is clear is that leaving the euro would be very costly for the country concerned. It would have to support its currency, prop up its banks and pay the huge costs of changeover. On the other hand, one of the benefits of issuing your own currency is that you can print as much of it as you want, so you can pay all your bills. But that freedom also contains its dangers, notably inflation in an economy already weakened by years of recession. We are talking here about circumstances which are very hard to imagine, but not unprecedented. In recent history, many countries have left monetary unions: the break-up of Eastern Europe and the Soviet Union and more recently the division of Sudan into north and south. These break-ups were achieved with widely varying measures of success, but they all went ahead and succeeded in the end. A euro break-up still looks unlikely, but if it does happen many of the issues and consequences will already have been considered in great detail. *David Lascelles is Senior Fellow of the Centre for the Study of Financial Innovation, a London-based think tank, a former Financial Times Banking Editor and author of “The Crash of 2003,” a euro break-up scenario published in 1996.


EU AFFAIRS

CAN I GERMANY BAIL OUT ALL OF EUROPE? by John Bruton*

There is a tendency, whenever a euro zone country gets in to difficulty, and needs help from its neighbours, to blame Germany for the severity of the terms imposed, and to say there is bullying involved.

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n both Greece and Cyprus, we hear references to the Second World War, as if offering Greece a low interest loan to keep its state functioning , was equivalent to a military invasion, of the kind Greece experienced in 1941. There is also talk of the “solidarity” that Germans ”owe” the rest of the rest of the euro zone, even though any money Germany might pay has to be raised from German citizens, under the German tax system. This is the way it has to be done, only because there is no common euro zone tax system, applicable to all euro zone citizens, from which the money might otherwise come. Indeed those who call most loudly for “solidarity” would probably be the first to object, if a common euro zone tax system, equally applicable to all euro zone citizens, was proposed. Others criticise Germany for insisting on “austerity” in spending by

countries that are spending more than they are earning, as if there was some alternative to spending less in those circumstances. The fact is that some countries, including Ireland, are still spending more than they collect in taxation, even after one has left out of account the interest paid on past debts. Such countries have what is called a “primary deficit”. Ireland had a huge primary deficit in 2010, has a small one today, and hopefully will have a tiny primary surplus next year. But if it is to reduce its debts, and thus not be vulnerable to disaster, if there was to be a sudden increase in international interest rates, of the kind that occurred in 1979/80, Ireland will have to have a primary surplus for many years to come. That is the only way to reduce the debts it ran up through the primary deficits it ran in the recent past. This is not something “imposed


EU AFFAIRS

by the Germans”, it is imposed by the rules of mathematics, and by compound interest in particular. Of course there is one alternativeinflation- the alternative of inflating debts away. Inflation devalues everything. It reduces the value of money, and in so doing, it also reduces the value of debts ... and, of course, of savings. If inflation is greater than the rate of interest, debts will reduce. But the value of pension funds, of bank deposits and of life assurance policies would also reduce. Inflation would mean falling living standards all around, because, if a country is to stay competitive, wages would have to increase at a slower rate than prices. Those on fixed incomes would see their living standards decline even more, because they could buy much less each year with their fixed income. Inflation is very hard to keep under control, once it starts to take hold. Germany tried to inflate away its First World War debts in the 1920s, and the experience was a complete disaster. Understandably, it does not see inflation as a solution to Europe’s debt problems today, and nor should we. Some argue that Germans themselves should spend more and

save less, and say this would help other countries in Europe. This is already happening to some extent. German imports were 10% higher in 2011, than they were before the recession, whereas almost every other European country is importing less now that it was then. It is fair to say that Germany’s balance of payments surplus, at 6% of GDP, is very high indeed, too high, and that this surplus is not being used all that wisely. Germany could do more to free up its own internal market, and the OECD has been critical of it on that score, but that offers a long term, rather than a short term, solution for the rest of Europe. It is also important to deal with the myth than Germany is a terribly wealthy country, that it can afford to bail everyone else out. Germany’s present competiveness is of recent origin. A dozen years ago it was the “sick man” of the European economy, struggling with the unexpectedly high costs of absorbing East Germany. Germany got a big bonus from the opening up of China, which imports a lot of German engineering goods, while other European countries (eg.Italy) have lost for the same reason, because Chinese consumer goods are undercutting them in their specialist markets. Germany is an elderly country, with far more people approaching retirement age than are preparing to enter the work force. Probably for this reason, its medium term growth potential, and thus its medium term debt repayment potential, is low, by comparison with other countries in Europe. The OECD did an estimate of real growth potential for different countries from 2016 to 2025. Its es-

timate for Germany was only 1.2% pa over the ten year period, for Netherlands 1.4%, for Italy 1.5%, for Portugal 2.1%, for Spain 2.3%, and for Ireland it was projected to be 2.7% a year! German families are apprehensive about the future, and if those OECD figures are to be believed, it is hard to blame them. German families do not FEEL wealthy. Only 44% of Germans own their own home, as against 58% of French people, 69% of Italians, and 83% of Spaniards. According to a recent Bundesbank study, the average household wealth in Germany is 195,000 euros, as against 229,000 euros in France, and 285,000 in Spain. This is the reality with which German politicians have to cope. It does not mean that they are always right, but it does mean that they have to be cautious. It also means that Germany alone cannot solve Europe’s financial problems.

*John Bruton is a Friends of Europe Trustee and former Prime Minister of Ireland’s Rainbow Coalition government (1994-1997).

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EU AFFAIRS

Communication as a policy tool: Important lessons from Cyprus by Leonor Coutinho*

I

nformation is part of any policy-maker’s toolkit. In the context of monetary policy this fact has been widely recognised; the communication strategy of modern central banks is as important as the decision whether to increase or lower interest rates. The communication strategy of policy-makers anchors expectations and builds credibility. One thing is clear about the recent policy actions in Cyprus to resolve its banking crisis: a well-structured communication strategy has been conspicuously absent. As a result, expectations have not been anchored, and credibility is being questioned. Nicosia, Saturday March 16th: Cypriots wake up to the troubling news that bank deposits have been frozen and that levies of 6.7% and 9.9% will be charged on deposits below and above €100,000, respectively. The announcement comes after Cyprus’ politicians had repeatedly reassured people that their deposits were safe. No further details and no official communication came that morning. Many questions were left unanswered: on what balance would the levy be

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applied (on an average monthly balance, the balance at closeof-business on Friday, on the balance on Sunday March 17th, etc.)? From that morning on traffic at the cash machines started to increase, with some residents withdrawing money simply to ensure that they would have enough liquidity to meet their everyday needs for a few days; others trying to ‘rescue’ as much of their savings as they could from the impending levy, just in case. Queues then started to form at the cash machines, and in subsequent days became more notorious outside Laiki Bank, as rumours began to spread about its insolvency. Throughout the weekend many more questions were raised about the details of the operation, and speculation came from many different directions. On Monday March 18th, the parliament rejected the government’s proposal. There was no information about any ‘plan B’. Hence there was more speculation: ranging from a possible exit from the euro to a plan to issue GDP-indexed bonds. The rush to cash points continued, demonstrations were starting to take

place and there were rumours about food and fuel supplies running out as the country became more liquidity-strapped. All signs of confusion. Nicosia, Sunday March 24th: the long-awaited plan B is announced. The plan broadly consists of the alienation of Cypriot bank branches operating in Greece, and the resolution of Laiki Bank – the second largest bank operating in Cyprus. Performing loans of Laiki Bank and deposits below €100,000 are to be incorporated into the Bank of Cyprus, but deposits in excess of €100,000 in both banks will be used to finance the rescue package. The exact value of the losses to be borne by large depositors is uncertain at this point. Official communication about the plan and its possible implications is poor: incitement to national pride, courage and hard work provide little information about what to expect in reality. Many important questions remain unanswered. How many bank employees may lose their jobs? Is there any plan to replace older workers, close to retirement age, by younger workers? Will there


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be any support for couples with children where both members of the couple lose their banking sector jobs? What will happen to large institutions like schools, which may have all the money they need to pay teachers and other current expenses deposited at Laiki Bank or at the Bank of Cyprus? Pension funds are also likely to be hit. Have these issues been factored into the bailout calculations? Will the resolution of only Laiki Bank be enough to restore the stability of the Cypriot banking system, or will further restructuring be needed? The policy strategy chosen in Cyprus is not without precedent. A very similar solution was adopted in the case of Iceland. Iceland allowed its three largest banks to fail as part of the solution to the banking crisis that struck the country in 2008. These banks had assets that were about ten times the size of the country’s GDP; a ratio not dissimilar to the ratio of banking assets to GDP in Cyprus. The Icelandic experience could hold many lessons for Cyprus, since the impact of the re-structuring could be similar. The central bank of Iceland, for instance, suffered heavy losses in the value of the collateral pledged by the three collapsed Icelandic banks, accumulated during the time when the attempt was made to save them (see FT, 2013).1 The fall in GDP in Iceland reached -6.6% (see Figure 1, below). It is true that this was accompanied by large currency devaluation, but experts agree that the devaluation has had a limited cushioning effect on the economy, due to its minimal impact on fish exports; a sector with rigid supply, and

due to the effects of imported inflation. It is important, however, that any rescue programme for Cyprus does factor in a fall in GDP, certainly in the range of -6% to -10%, or it risks jeopardy from the start. Furthermore, the crisis in Iceland imposed a restructuring of the economy: the downsizing of the banking sector and its gradual replacement as a motor for growth by other economic activities, including traditional industries like fisheries and the energy sector. Cyprus will also need to reinvent itself. The Icelandic experience has also shown that it is not easy to live with capital controls, and that these, once in place, are difficult to dismantle. Capital controls should be carefully studied so as to minimise the strain on businesses, as well as the disincentives for the banking sector to effectively restructure. This will be the case, for instance, if restrictions on domestic transfers or on loan restructurings are imposed. This type of restriction will not only deter depositors from undertaking a sensible diversification, but will also lead to complacency on the part of banks. Additionally, the crisis in Iceland has actually brought the island closer to the EU than before: isolation is not an option for a small island economy. Finally, to end on a positive note, the Icelandic economy (as shown in the figure) has recovered incredibly quickly, performing well above the EU27 average in both 2011 and 2012. There are alternative strategies for solving a banking and financial crisis. But there is a textbook premise that is important to keep in mind: the financial sector is

based on trust. Whatever the plan is it should be coherent and spelled out in a clear and transparent way, so that agents’ expectations are anchored in the success of the plan from the outset. Destabilising leaks or statements that are later withdrawn should be avoided. In the case of a banking crisis it is even more important for policy-makers to treat communication as an important component of the policy toolkit, even beyond the borders of central banking. Figure 1. GDP Growth Iceland and the EU (boom and bust)

Real GDP growth rate, percentage change from previous year. Source: Eurostat.

*Leonor Coutinho is Senior Researcher at Europrism Research (Cyprus) and a Special Scientist at the University of Cyprus. CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The views expressed are attributable only to the author in a personal capacity and not to any institution with which she is associated. Available for free downloading from the CEPS website (www.ceps.eu) © CEPS 2013 1. “Doubts Cast on Icelandic Crisis Model”, Richard Milne, Financial Times, 3 March, 2013.

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New EESC President Malosse put citizens at the heart of the EU public debate by N. Peter Kramer

The Frenchman Henri Malosse kicked off 2½-year tenure as head of the oldest EU institution that represents civil society. With the public increasingly at a loss to understand decisions taken by the European Union, the new president is determined to make the EESC once again a force to be reckoned with in the European debate. ‘This has to be our priority’, he said, ‘given the crisis Europe is now facing’.

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EU AFFAIRS

As

he takes up office as the EESC’s 30th president, Henri Malosse is keenly aware of the disconnection between the EU and its citizens, a fact again brought home by the Greek and Cyprus crises. Convinced that one of the answers lies in a rebalancing of forces in Brussels, he wants the European Union’s second assembly to do more to embody people’s real expectations in areas such as job creation, combating youth alienation, protection of savings and access to health care. Striking was that before the usual ceremonial attention for predecessors and explaining that he had made Europe his passion and his life’s mission, President Malosse started his inaugural speech with welcoming the young people from the European schools whom he had invited to the session. ‘You have the unique privilege of a European education which teaches you tolerance and understanding of others. Very few Europeans get such an opportunity today. You must be our vanguard and our message bearers’, he told them. ‘Young people expect concrete action and initiatives for their future, not woolly strategies expressed in wooden jargon. We have to move away from the technocratic approach to EUpolicy making’. Mr. Malosse showed that he, a French member of the EESC since 1995, is aware of the role his institution is playing in ‘Brussels’. ‘We do a good job but the other institutions are only half listening to us. I would like to generate a ‘wind of change’

by improving the quality of our work and making it a top priority to follow up our opinions. I want us to make judicious use of a very powerful tool we have, own initiative opinions; to ensure that the concrete actions citizens expect are tabled before the European Council and the European Parliament. The new President continued with pointing to the power of the EESC: ‘Due to the way we are appointed, EESC members have tens of millions of citizens behind them!. To this end, the EESC will step up its capacity to anticipate developments, open up its work and scrutinise EU policies.’ ‘EU’s citizens are growing increasingly sceptical of the Union’s ability to provide concrete and timely responses to their concerns’, EESC President Malosse continued. ‘Those who used to be Europe’s strongest supporters – farmers, businesspeople, craftspeople, retailers – are finding it more and more difficult to identify with overly detailed decisions which they mainly perceive as constraints’. He also mentioned workers and families, ‘austerity is the only thing they hear as their purchasing power shrinks. Saver confidence has been lost since the disastrous events effecting Cyprus’. In Mr. Malosse’s opinion ‘the crisis facing Europe is first and foremost a crisis of estrangement between the EU and its citizens’. He wants a change and the role of the EESC is clear, it has to ensure that civil society has a voice in EU decision-making.

*President Malosse has served as president of the EESC’s Employers Group since 2006 and will be assisted by Vice-presidents Jane Morrice, former deputy-speaker of the Northern Ireland Assembly and an EESC member since 2006, and Hans-Joachim Wilms, European Affairs Officer, Trade Union for Construction, Agriculture and the Environment (IG BAU) and a German EESC member since 1994.

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AN EXPERTS’ VIEW

Our Mission: Patients’ Access to Treatments by Konstantinos M. Frouzis*

The pharmaceutical sector is one of the most dynamic sectors: intrinsically connected with human life and the viability of societies, it has not ceased, not for a single moment, to face challenges, as its activity is centred on human health. In this difficult time it is important to highlight the value of medicines for human life and the contribution of our industry to the national economy.

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AN EXPERTS’ VIEW

A

ccording to authoritative studies on Greece, the recent study by McKinsey & Company being a notable example, our sector is considered one of the six “rising stars” that can be drivers of GDP growth. The industry’s contribution to GDP is estimated at about €3 billion, while it has been calculated that every €1,000 spent on domestically produced medicines translates to an increase of €3,420 in GDP. At the same time, Greek pharmaceutical companies export to more than 100 countries worldwide; bringing in fact, last year the industry ranked first in terms of export performance. However, in a recession like this and in an economy that has been ailing and contracting for six years in a row, business firms cannot but be directly affected. The pharmaceutical sector in particular has been hit by two factors: on the one hand, the adverse macroeconomic environment took a heavy toll on the industry, through an unfair and overly severe haircut on its Greek government bond holdings; on the other hand, we have been targeted as a key area of public expenditure cuts. The challenges we are facing are numerous: the growing debts of EOPYY and public hospitals; difficulties in access to liquidity; declining sales due to the shrinking of the market, which has sometimes been forced and without a plan; and last but not least the losses from the PSI. We in the pharmaceutical industry have repeatedly stressed that the path to growth passes from the ability to restore a stable and reliable business environment in which conditions will not subject to constant change, including a predictable tax regime, a sound pricing process, and, above all, the timely settlement of public sector debts. Furthermore, we are facing constraints on our business activity, as imports of new medicinal products have been effectively banned for 2.5 years now. Instead, we believe that it is high time that Greece opened the door to innovation, which is the oxygen that stokes the fire of bold entrepreneurship. For us, the pharmaceutical industry, this means uninhibited access to innovative medicines. Innovative medicines are the achievements of research and repre-

sent investment in health; they are instrumental to improving the quality of life and at the same time they are economic tools that can contribute to growth and prosperity in our country, through investment in clinical research and manufacturing. Innovation involves multifaceted investments, substantial capital inflows that can boost growth, expertise, jobs, modernisation and progress! This is a direct contribution to GDP growth. It should be noted that it is not so much the decline in GDP that prevents growth as the fact that we do not seem to be willing to change, although we can. Actually, the contraction in GDP could to some degree act as an incentive, implying that we have more potential for growth than e.g. Luxembourg which has a very high GDP per capita. The country just needs to convince that it is determined to follow an upward path, not a downward one. This is something we have not done as yet. We need to convince that we can be productive and reliable. A business firm can of course work out survival solutions, including more flexibility or downsizing, but this would entail sacrifices in terms of jobs, investment in Greece and contribution to the economy. However, the industry’s main concern is not its own survival at any cost, but rather the welfare of Greek patients. Specifically, for 2013, total pharmaceutical spending by the citizens of the 27 countries of the EU is projected to be 50% higher than for the citizens of Greece. For 2014, the comparison should be even more unfavourable for Greek patients. It is therefore certain that the target of 1% of GDP for pharmaceutical spending is a disaster waiting to happen. I repeat that pharmaceutical policy should be guided not only by absolute figures but also by social and living standards considerations. There must be an objective level that can ensure decent conditions of healthcare and, most importantly, patients’ access to new treatments and medications.

*President of the Hellenic Association of Pharmaceutical Companies, Vice-President and General Manager of NOVARTIS Hellas

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BUSINESS TRENDS

Huawei abandons US but still optimistic about future by N. Peter Kramer

Huawei, a leading global information and communications technology (ICT) solutions provider, has given up its quest to conquer the market for telecoms network equipment in the US, where the Chinese company’s sales efforts have been blocked by security fears.

‘We are not interested in the US market anymore’, Eric Xu, executive vice-president of the world’s second largest supplier of network gear by revenue. US security officials and politicians have repeatedly identified Huawei as a threat to US national security. An allegation that the Chinese company has denied. Although Huawei is doing business with 45 of the world’s top carriers, it failed to get contracts from any leading operators in the US. Huawei hired a number of senior executives from rivals as Nortel and Motorola in an effort to build a massive US research and development presence specially to target leading US carriers as AT&T, Verizon and Sprint. But a Congressional report from October last year made it even more difficult for Huawei to do business in the US.

and development (R&D). The company has established 16 R&D centers and 28 joint innovation centers across the world. In the next five years, Huawei forecasts a compound annual growth rate of 10%. According to Guo Ping, Huawei’s Rotating and Acting CEO, ‘Telecom networks are yet to meet the requirements for ubiquitous connections - zero wait time, ultra broadband, and smart applications. In the future, ICT will continue to grow, with new opportunities coming from cloud computing, BYOD (Bring Your Own Device), and big data, and feature phones being replaced by smartphones at a faster rate. Huawei will continue to focus on its pipe strategy, integrate and develop businesses around the information pipe, and create value for customers, while achieving sustainable and effective growth.”

Huawei still optimistic about its future Huawei released its audited 2012 global financial results. The company achieved steady business growth, recording sales revenues of US$35.4 billion and net profit of US$2.5 billion. In 2012, Huawei invested US$4.8 billion, or 13.7%, of its total sales revenue into research

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Huawei’s full-year results, which have been independently audited by international accounting firm KPMG since 2000, are outlined in the company’s 2012 annual report. The annual report can be found at http://www.huawei.com/en/annualreport2012


SPECIAL REPORT

SPECIAL REPORT: Change Needed for Business of the Future by N. Peter Kramer, Editor-in-chief, European Business Review

Over the past several decades, the world economy has been subject to two dominant influences: increasing global integration and increasing reliance upon market-based economic structures. It is no longer business as usual as it was. CEO’s have to play a different role, students are becoming the innovators, the internet is now an expanding opportunity for growth‌

In this EBR Special you can find the spotlight shines on 5 remarkable subjects in the context of the world that has changed. We advise you to keep this EBR Special new style; and to read the articles once more, later!

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SPECIAL REPORT

Bringing About Real Corporate Change in Bad Industries by Richard Phillips*

Until recently, socially responsible investors have focused on excluding “bad” companies or industries from their portfolios whether alcohol, tobacco, firearms or nuclear energy. New advances, however, are making it easier for capital to flow to responsible and ethical companies. An explanation how socially responsible investing is coming of age.

S

ocially responsible investing has been around for several decades, dating back at least to the launch of the Calvert Social Investment Fund in 1982. Since then, ethical investing has brought about many improvements in the way companies conduct their business. Only today, however, does socially responsible investing stand ready to fully come of age and realize its potential as a force for sustainable and ethical behavior among major participants in the world economy. Over the past several decades, the world economy has been subject to two dominant influences: increasing global integration and increasing reliance upon market-based economic structures. These two influences, supported by technological innovation, have worked interactively to present national governments with significant regulatory challenges. In some cases, they have made effective regulation impossible to enact. In others, they have diluted regulatory initiatives to the point where enacted regulation is hollow and ineffectual. Faced with a global sprawl of disparate and often conflicting regulation, it has been all too easy for

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corporations to avoid responsibility by arbitraging regulation to find the least restrictive environments. In the United States, for example, the implied threat and resulting fear is that companies will simply relocate their operations to a more tolerant jurisdiction. That effectively puts a muzzle on lawmakers, often rendering them mute in the face of potential injustice. Socially responsible investing, however, creates an effective mechanism that enables the markets to self-regulate in the current global environment. Simply put, capital is the only practical force capable of restraining capitalism’s own excesses. Socially responsible investing examines a company’s environmental, social and governance practices, referred to as “ESG” in the parlance of practitioners. Within these three pillars reside the chief risks facing the global economy. They are environmental degradation, social dislocation and the undermining of confidence in capitalism itself, due to disingenuous and opaque governance practices. These also happen to be the overarching risks facing those responsible for the allocation of global capital. To date, several factors have held ESG investing back from reaching its full potential. Until recently, most socially responsible investing applications have focused on excluding “bad” companies - with varying definitions as to what constitutes “bad.” For example, many socially responsible investors seek to strip certain industries and companies out of their portfolios. Examples may include alcohol, tobacco, firearms and nuclear energy. This approach allows investors the opportunity to allocate in accordance with their value systems. However, as many academ-


SPECIAL REPORT

ics have suggested, negative screening undermines sound investment management processes. Perhaps a better approach would be to identify those companies in the relevant sectors that are the most environmentally and socially responsible and are governed most effectively. In this way, some companies would be rewarded for responsible and ethical behavior by having greater access to capital. Companies that act irresponsibly and unethically will be punished by being denied access. A second drawback to socially responsible investing has been that it has historically been nondemocratic. As a practical matter, the raw input data needed to define ESG efficiency is extensive and highly complex. Significantly, the key metrics must be applied to a broad universe of thousands of global stocks and bonds. Its sheer complexity makes ESG data inaccessible - and often incomprehensible - to the vast majority of investors. Only when investors are fully empowered with fair, impartial and transparent tools for measuring a company’s ESG compliance with socially responsible principles will socially responsible investing become relevant in the vast cross-section of global capital formation. As long as standards are expensive, arcane and inconsistent, broad-based acceptance will fall short. A final drawback is that, to date, many corporate executives have viewed corporate social responsibility (CSR) at best as an investor relations’ initiative - and at worst as a cynical public relations stunt. This has tarnished the image of ESG investing.

For example, BP had to deal with major environmental issues - pipeline leaks on the Alaskan tundra, a refinery fire in Texas and an offshore oil rig blowout in the Gulf of Mexico - even as it stood behind its totally organic sunflower logo. Apple has presented itself as socially responsible, a friend to man and child alike, even as it employed sweatshop labor through its Chinese contractors. Similarly, JPMorgan Chase had presented itself as the very model of good governance, a position that lost some credibility with the revelation of losses caused by a corporate deformity known as the “London Whale.” The point here is not to single out these three companies, although our opprobrium may be fully warranted. Rather, it is to underscore the complex issue of duplicitousness in corporate principles. The only effective way to diminish this duplicity - and to mitigate the risks associated with it - is for owners of capital to make corporate managements increasingly more accountable for maintaining sustainable ESG operations. Only when there is consensus that strict adherence to sound ESG principles is a positive determinant of corporate performance and risk - and not some Pollyannaish expression of do-goodism - will it take hold. Today, these drawbacks are being addressed both by market forces and the technology that drives those forces. ESG investing is rapidly transitioning to a “best in class” approach that is inclusive and respectful of key investment considerations. ESG data and ratings are becoming more readily available at lower cost, democratizing the functionality of the process. And shareholders are becoming more cognizant of the risks associated with noncompliance with ESG standards and what that means in terms of risk and reward. These three steps will put capital back in control of capitalism and allow CSR investing to finally come of age. *Richard Phillips is the senior index analyst for S-Network Global Indexes, a publisher of over 200 stock market indexes that are widely used by financial services organisations around the world. Among his responsibilities is the compilation, maintenance and analysis of the S-Network Eurozone Bank Index, a capitalisation weighted index of the 52 largest eurozone banks.

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SPECIAL REPORT

Aligning Economic Policy to Taxation: Reality or Utopia? by Marios T. Kyriacou, Senior Partner, KPMG

I am often asked whether the national economic policy should be aligned with the taxation strategy. On first sight the question posed seems peculiar since how can you have an economic strategy that will not be aligned with your taxation policy. Surely the only way that you can achieve your economic policy targets would be if you have the necessary funds; inevitably, the next question arising is where do these funds come from? In principle taxation is also supplemented of course by other sources of revenue such as income from investments that any administration would have made at some time in the past. Of course the bulk of the revenues of any administration will generally come from direct or indirect taxation. Therefore why is such a question being raised? It is well known that all administrations will develop an economic strategy that is multifaceted which will include social criteria as well as investment and infrastructure ones and so forth. The extent of that economic policy being implemented will depend on the availability of funds. It is well recognized that it may not always be possible to raise the money required either from taxation or other activities of the State for it to be able to implement the desired economic model. Therefore this is where the question arises; do I modify my taxation system to provide the necessary funds so as to execute the economic policy or do I adapt the economic policy to be within the boundaries of the taxation system and the funds that it generates. Obviously the answer is not either or. As previously mentioned the economic policy of any government is multifaceted and caters both to short and long term goals. To the extent that the economic targets cannot be supported by the revenues generated through prior investments or taxation a government can

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SPECIAL REPORT

always turn to borrowing to secure all or some of the necessary funds in order to be able to implement the desired economic plan. Therefore, the alignment of economic policy and taxation although intertwined are not necessarily always aligned since the taxation burden must be weighed against a series of other criteria, the most crucial one being the ability of the financial activity of the population to generate the amount of taxation required. In other words will the taxation on income and other direct taxation levied on the population be of a sustainable level and as a consequence, will the burden be acceptable? If there is not enough economic activity in the market place to generate revenue at an acceptable taxation rate, be it direct or indirect, what alternatives would there be? Certainly one can decide to increase the tax rates in an effort to collect more but that may have a negative impact if the tax burden goes beyond a reasonable level. This would normally result in increased tax evasion or to delays in tax collection and consequently the economic targets will not be fulfilled. Therefore, considerations should be given into determining the level of taxation not only in terms of relationship between direct and indirect taxation but also in the mechanisms that will ensure that whatever is decided is actually workable and enforceable. If enforcement is lacking then a spiraling effect comes into place i.e. not enough funds being collected, leads to increased rates of taxation, resulting in a bigger inability or unwillingness by people to pay. Hence the anticipated revenue increase will not materialize leaving the administration with no alternative, other than going back to increasing taxation with further spiraling! Assuming for a moment an inability to collect the right amount of tax the question is then, what is the impact on the economic policy? If the State wishes to pursue the locally unfunded economic policy obvi-

ously the easiest thing is to turn to borrowing money to fund its policy targets. As recent history has shown in Greece the borrowing of funds is quite easy in the initial stages where the economy can support repayment of such loans but if the level of borrowing increases significantly then obviously the willing lenders will decrease until ultimately disappear. The problem that we are currently facing in Greece is that our normal lenders were not willing to provide more funding in the open market and our level of taxation and other revenues do not seem to be at the level that can pay off the creditors. Taxation, being one of the elements of raising the additional funds in such a situation, probably would have reached its limits both in terms of tax rates, but more importantly, of the implementation of collection measures. In an attempt to be able to pay off the creditors the normal attitude of any State would be to increase taxation (because cost cutting measures are extremely difficult to implement) only to finish up in the spiraling effect mentioned above. So at the end of the day although economic policy and taxation should be aligned, the reality of life, both in terms of ambition of politicians or mismanagement due to lack of competency, or even political games, the economic policy divests from the taxation policies and when that happens the result is that a country begins to live beyond its means. Unless that situation is dealt with promptly, it might get out of hand, as it has happened in Greece and some other European countries. The result is that anybody willing to lend money without which the country cannot survive, will, as expected, impose its own economic agenda to ensure that the country generates those revenues that are necessary to fulfil its new obligations. In this case the economic policy will now be dictated by the creditors and fully aligned with the tax policy both short and long term, otherwise the creditors will not provide further funds and an uncontrolled bankruptcy of the country will occur.

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SPECIAL REPORT

HOW DO WE EDUCATE STUDENTS TO BE INNOVATORS? by Tony Wagner*

Knowledge today is a free commodity and growing exponentially. Because it is accessible on every internet-connected device, students who merely know more than others no longer have a competitive advantage. Students now compete for jobs with talented students around the world who will work for far less.

As

a result, the high school and college graduates who will get and keep good jobs in the new global economy and who will contribute solutions to the world’s most pressing problems are those who can bring what journalist Thomas Friedman calls “a spark of imagination” to whatever they do. They will be problem-solvers who create new ideas for improving products, processes, or services. What does it take to “create an innovator?” My recent research has turned up some surprising answers to this question. The assumption of many business leaders is that we need more STEM (science, technology, engineer-

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ing, and math) education in order to graduate students who can innovate. But the scores of young STEM innovators and social entrepreneurs whom I interviewed learned to innovate most often in spite of their “good” schooling-not because of it. David Sengeh and Laura White are two examples. While an engineering undergraduate at Harvard College, David co-founded the organisation Lebone Solutions, which uses microbial dirt to generate electricity and won a $200,000 prize in the 2008 World Bank Lighting Africa competition. When I first interviewed him a few days before his commencement in 2010, David said, “I don’t

remember anything from any of my classes at Harvard-except for Spanish. Everything I’ve learned that I value happened outside of the classroom.” Laura is a social entrepreneur who created a swimming program for disadvantaged youth when she was fifteen and has since helped start several social ventures. She recently told me that her best courses at Tulane, where she is now a senior, were her two independent studies. Most of her other academic requirements simply got in the way of doing what she called her “real” work. Some argue that innovators like Steve Jobs are ‘born” and not “made,” and so the schooling they


SPECIAL REPORT

get doesn’t matter. However, I have come to understand that most young people can be taught to innovate in whatever they do. We are all born curious, creative, and imaginative. And the best schoolsfrom pre-k to graduate schoolbuild on and develop these capabilities. They do so not by delivering more-of-the-same education, but rather with a very different education. What and how these schools teach are radically at odds with conventional education. Schools that teach innovation focus primarily on teaching students skills and not merely academic content-including critical thinking and problem-solving, effective oral and written communication, and many of the other “survival skills” I researched in my last book, The Global Achievement Gap (2008). They do so by engaging students in rich and challenging academic content, but content mastery is not the primary objective of their courses. In all of the classes, students must use academic content to pose and solve problems and generate or answer complex

questions. They are required to apply what they have learned and show what they know. Frequently, they do this work in teams. But it is the culture of learning that is especially different in these schools. All of them require collaboration in the classroom because they know that innovation is a “team sport.” Most courses are interdisciplinary because, in the words of Judy Gilbert, Google’s director of talent, “problems cannot be understood or solved within the bright lines of academic subjects.” Understanding that innovation, as well as real self-confidence, come from taking risks and learning from mistakes, teachers at the schools I’ve named encourage trial and error. As a student at a new engineering school in the US, Olin College, told me, “We don’t talk about failure here. We talk about iteration.” And students must create new knowledge or products in their classes, rather than merely consuming information passively. Perhaps my most significant discovery is the extent to which young innovators are much more

motivated by intrinsic rather than extrinsic incentives. Their parents, teachers, and mentors encouraged exploratory play, finding and pursuing a passion, and “giving back.” All of the innovators whom I interviewed want to make a difference in the world. It is this combination of Play, Passion, and Purpose-rather than the carrots and sticks of grades and competition used in most classrooms-that best develops the discipline and perseverance required to be a successful innovator. To graduate all students “innovation-ready” will require experiments very different from those currently being touted in education. First, we need to explore ways to assess essential skills with digital portfolios that follow students through school and better tests like the College and Work Readiness Assessment (www.cae.org.) Second, we need to fund true “R&D” labs for educational innovation-schools that are developing 21st century approaches to learning. Finally, we need to incorporate a better understanding of how students are motivated to do their best work into our course and school designs. Our students want to become innovators. Our economies need them to become innovators. The question is: As educators, do we have the courage to “disrupt” conventional wisdom and pursue the innovations that matter most? *Tony Wagner is the first Innovation Education Fellow at the Technology & Entrepreneurship Center at Harvard. His most recent book, from which this article is adapted, is Creating Innovators: The Making of Young People Who Will Change The World.

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SPECIAL REPORT

Can trade policy set information free? by Susan Ariel Aaronson*

The internet is an expanding opportunity for growth. This column argues that in recent years, however, policymakers and market actors have been undermining its potential. Governments and market actors are reducing both access to information and freedom of expression, as well as moving towards a splintered, non-global internet. Commitment to an open, free and global internet will be hard, but if bilateral, regional or multilateral trade agreements encourage interoperability, we might see some harmony among signatories’ privacy, online piracy, and security policies.

A

lthough the internet is creating a virtuous circle of expanding global growth, opportunity, and information flows, policymakers and market actors are taking steps that undermine access to information, reduce freedom of expression and splinter the internet (Herald 2012). Almost every country has adopted policies to protect privacy, enforce intellectual property rights, protect national security, or thwart cyber-theft, hacking, and spam. While these actions may be necessary to achieve important poli-

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cy goals, these policies may distort cross-border information flows and trade. Meanwhile, US, Canadian and European firms provide much of the infrastructure as well as censor-ware or blocking services to their home governments and repressive states such as Iran, Russia, and China (Heacock 2011, Horwitz 2011, Ungeleider 2011). As a result, although the internet has become a platform for trade, trade itself and trade policies have served both to enhance and undermine both internet freedom and an open internet.


SPECIAL REPORT

Trade agreements as internet governance Trade agreements and policies have become an important source of rules governing cross-border information flows: • Policymakers recognise that when we travel the information superhighway, we are often trading – and internet usage can dramatically expand trade. • The internet is not only a tool of empowerment for the world’s people, but a major source of wealth for US, EU, and Canadian business. Moreover, internet commerce will grow substantially in the future as much of the world’s population is not yet online (OECD 2008, Internet World Stats 2012). US, European and Canadian policymakers want to both protect their firms’ competitiveness and increase market share. • US, European and Canadian governments understand that while some domestic laws can have global reach, domestic laws on copyright, piracy, and internet security do not have global legitimacy and force. Hence, they

recognise they must find common ground on internationally accepted rules governing crossborder data flows.

The WTO In theory, the WTO should be an appropriate venue for such discussions. WTO members agreed not to place tariffs on data flows. In addition, the WTO’s dispute settlement body has settled two trade disputes related to internet issues: internet gambling and China’s state trading rights on audiovisual products and services (WTO 2007, WTO 2012). However, the member states have not found common ground on how to reduce new trade barriers to information flows. In 2011, several nations stopped a US and EU proposal that members agree not to block internet service providers or impede the free flow of information online. Moreover, the members of the WTO have made little progress on adding new regulatory issues such as privacy and cyber security that challenge internet policymakers. However, many

new online activities will require cooperative global regulation on issues that transcend market access – the traditional turf of the WTO. These issues will require policymakers to think less about ensuring that their model of regulation is adopted globally but more about achieving interoperability among different governance approaches. Alas, policymakers are not consistently collaborating to achieve interoperability.

Trade giants and the internet In a recent policy brief, Miles Townes and I examined how the US, the EU, and Canada use trade policies to govern the internet at home and across borders. We found the three trade giants use bilateral and regional trade agreements to encourage ecommerce, reduce online barriers to trade, and to develop shared policies in a world where technology is rapidly changing and where governments compete to disseminate their regulatory approaches.

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SPECIAL REPORT

Policymakers also use export controls, trade bans or targeted sanctions to protect internet users in other countries or to prevent officials of other countries from using internet related technologies in ways that undermine the rights of individuals abroad. Finally, policymakers may use trade agreements to challenge other governments’ online rules and policies as trade barriers. We discuss how these policies, agreements, bans and strategies could affect internet openness, internet governance, and internet freedom.

USA The US is actively pushing for binding provisions in trade agreements that advance the free flow of information while challenging other nations privacy and server location policies as trade barriers. However, the US provisions are incomplete. Hence, we recommended that as trade agreements have long addressed governance, the US and other governments negotiating binding provisions to encourage cross-border information flows should also include language related to the regulatory context in which the internet functions; free expression, fair use, rule of law, and

due process. Moreover, the US and other nations should coordinate policies to promote the free flow of information with policies to advance internet freedom. Policymakers may need to develop principles for the proper role of government in balancing Internet freedom and stability at the domestic and global levels. Finally, governments may also need to develop shared principles for steps governments may take when countries do not live up to these principles (a responsibility to protect the open internet).

Internet openness We also believe that the US, EU and Canada should also show their commitment to internet openness by annually reporting when and why they blocked specific applications or technologies and/or limited content (or asked intermediaries to limit access) to sites or domains. With this information, policymakers may get better understanding of how to achieve a flexible and effective balance of internet stability and internet openness.

Is censorship a barrier to trade? Policymakers don’t know if censorship is also a barrier to trade. The US and EU have issued reports

describing other countries’ internet policies – regarding privacy, censorship, server location and security policies – as potential barriers to trade. However, none of the three governments has yet challenged internet restrictions as a barrier to trade. We recommended that trade policymakers ask the WTO secretariat to analyse if domestic policies that restrict information – short of exceptions for national security or public morals – are also barriers to cross-border information flows which can be challenged in a trade dispute. Moreover, policymakers should develop strategies to quantify how such policies affect trade flows. Without deliberate intent, domestic and trade policies may gradually fracture a unified, global internet. Given that countries have different priorities for privacy, free speech, and national security, the international harmonisation of strategies to advance the open internet is unlikely. Thus, when they negotiate bilateral, regional or multilateral trade agreements, policymakers should use language that encourages interoperability among signatories’ privacy, online piracy, and security policies.

*Associate Research Professor of International Affairs, George Washington University

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FAREWELL

Thatcher, Merkel and the Euro by Holger Schmieding*

Love her or hate her, it cannot be denied that Margaret Thatcher completely transformed the economic fortunes of the United Kingdom. The reforms of her 11-year turn as prime minister traded short-term pain for long-term benefits. This legacy is one that Europe’s periphery needs to embrace in order to turn around its own fortunes.

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FAREWELL

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egardless of where one stands politically, it is hard not to pay tribute to Margaret Thatcher. She was one of the truly great leaders of the last century. Before she came to power, Britain was the “sick man of Europe.” When I first traveled to the island from Germany, where I had grown up in the late 1970s, I was struck by the dismal quality of life there. There was a pervasive lack of basic household amenities and a poor quality of goods and services. In fact, if it hadn’t been for the British soldiers based near my home village back in Germany, I might have doubted which country had won the war. Now that I have lived in London for the past 15 years, I have come to appreciate life in a world-class city and country is largely the result of her reforms. Thatcher turned Britain around through labor market and other reforms. She did not hesitate to incur short-term pain in order to pave the way for long-term benefits. She also showed to the world that supply-side reforms work. In her day, Thatcher saw that parts of Europe’s left were trying to use the European project to impose center-left ideas in an across-the-board fashion. Using the back door of the then-European Community, they tried to impose their policy views on all members. In a creative and growth-enhancing response, Thatcher helped to drive the completion of the common market. But she failed to grasp the power of the European idea. Worse, she did not fully appreciate that most of what Brussels did was to open up the economies of its member countries. In the vast majority of cases, the common regulations for the common market, while cumbersome, were and are much more liberal than the plethora of national rules they replaced. It is almost tragic that, steeped in a tradition of Euroscepticism, many of her British admirers today fail to see that what Germany did in 2004-05 - and what the Eurozone periphery is doing today - is almost exactly what Thatcher imposed on Britain in her time: thorough structural reforms. These reforms are painful and unpopular. But they promise great benefits once the initial pain is over. It is more than ironic that many of her followers today argue that the European periphery should rather try an inflationary gimmick - namely, the likely collapse in value of a new national currency. They are thus undermining the Iron Lady’s own legacy, which is to persevere with the harsh austerity and

supply-side reforms which those countries need in order to turn around their fortunes for good. Thatcher’s reforms turned Greater London into the thriving services center of Europe. Unfortunately, the Euroscepticism of many her followers today threatens this status through an unlikely, but not fully impossible, exit from the common market after the envisaged inor-out referendum on the EU in 2017.

Germany and the euro Angela Merkel is not exactly a German Margaret Thatcher. She doesn’t have to be. Germany reformed itself largely under the stewardship of her predecessor, Gerhard Schröder. Merkel, then the opposition leader, played a major role in shaping those reforms through her party’s majority in the upper house, the Bundesrat. But like Thatcher, Merkel is not afraid to follow her convictions and persevere with policies, even though they do not promise instant popularity. To be sure, it is not popular at home to put German taxpayer money at risk to shield reforming countries on the eurozone periphery from market panics. But Germans are ready to reward her leadership. They also acknowledge that, by and large, Merkel is on the right track with her euro policies. A new anti-euro party, Alternative für Deutschland (AfD), could make some small waves in coming months, mopping up some of the Eurosceptic sentiment in parts of the German population. In my view, the AfD won’t get the 5% of votes required to make it into the German Parliament. Parties trying to prevent the introduction of the euro also failed 15 years ago. Of course, we cannot rule out an upset with the AfD clearing the 5% threshold. As the anti-euro group would probably draw most of its support from conservative voters, the AfD could add to the difficulties of the center-right CDU/CSU-FDP coalition to defend its current majority in Parliament. If so, the likely result would be a CDU/CSU-SPD grand coalition. And you can count on it pursuing almost exactly the same euro policies that Merkel has pursued so far. *Dr. Holger Schmieding is Chief Economist at Berenberg Bank in London. Before joining Germany’s oldest private bank in October 2010, he was chief economist for Europe at Merrill Lynch, Bank of America and at Bank of America-Merrill Lynch in London.

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INTERVIEW

Kristiina Ojuland: ‘Putin’s politics more and more like Stalin’s totalitarian politics’ by N. Peter Kramer

In spring 2010, EBR had the honour of interviewing MEP Kristiina Ojuland, the former Foreign Minister of Estonia, about EU-Russia Relations. At that time, Mrs Ojuland, member of the EP Committee on Foreign Affairs and the EP delegation for Russia, showed a glimpse of optimism: ‘relations between the EU and Russia have to be built up, step by step; we need mutual trust, on both sides’. Meeting the Estonian former minister again in her EP office after some three years, she sounds pessimistic, disappointed and concerned.

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INTERVIEW

‘There is a huge deception and concern about Kremlin policies taking Russia away from its own constitution and from international engagement. There were a number of resolutions of the EP calling for those in power in Moscow to respect their own undertakings. Russia is not at all implementing their obligations to the OSCE, the Council of Europe or the EU. Promises to modernise society are dead. In my opinion, modernisation is only possible in a democratic process and with respect for human rights. We have seen what happened during the last two major Russian elections, December 2011 and March 2012. President Putin politics are not only against his political enemies but also against the Russian people, against civil society. He wants to control the economy and the major businesses. His politics look more and more like Stalin’s totalitarian politics.’

If I heard Commission President Barroso correctly when he and 15 (!) Commissioners visited Putin and Medvedev mid-March, the message was not really pessimistic. He said to Prime Minister Medvedev: ‘I am very satisfied with the positive spirit of our discussions which were a step forward in the consolidation of our strategic partnership’. ‘Please don’t misinterpretate these words; that meeting wasn’t an exception to the downward spiral trend. At the moment everybody is looking at the upcoming Summit in Yekaterinburg. There EU leaders will raise serious questions as Council President Herman van Rompuy did at the Summit in St. Petersburg. Human rights will be the major focus. As you might know the Russian Helsinki group has been relaunched’. Do you expect that with Putin’s ‘Eurasian Union’ with Belarus and Kazakhstan plus perhaps Georgia and Uzbekistan more or less returning to Russian influence in the near future, that this is threatening for the EU? Especially in the field of energy delivery for those EU countries dependent on Russian energy? Regarding the influence of Russia on former Soviet Republics I can only say that there is no fatality. For instance Estonia, my home country, has been nearly 50 years under Russian occupation. But now we are members of the EU and of the NATO. It depends on the will and determination of the

political elites and civil society. As far as energy is concerned there are new sources of energy like shale gas. And green energies for southern countries, like solar energy for instance, might be interesting. So the dependency on Russian energy is an issue to be overcome. And of course, it is also a matter of political will!’

What do you think about the visit of the new Chinese leader Xi Jinping to Moscow? His first foreign trip as Chines President was to meet his Russian colleague President Putin. ‘Russia-China relations are a grateful subject of studies and of speculation! Don’t forget these two countries share the longest border in the world. However I would like to focus on Human rights. Comparing the two, I can say that fortunately Russia has an ambition to share European values, China doesn’t. I don’t see Russia shifting into the arms of China. Historically and culturally Russia belongs to Europe. On the other hand, undoubtedly, in many global policy areas China and Russia’s positions are close. Syria is a good example of this’. My conclusion is, when I compare your vision of Russia today with that of three years ago: you are deeply disappointed and not very optimistic about the future… ‘As Guy Verhofstadt and I stated two months ago, from its inception the EU-Russia partnership was expected to become more than a simple exchange of Russian hydrocarbons for Europeanmade manufactured goods, medicine, food and, not least, luxury items. It was seen as a process for normalising relations with Russia and encouraging it down the path towards becoming a modern, stable country with a more open society. But this ambition is elusive…’.

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ECONOMIC OUTLOOK

The End of Economists’ Imperialism by Justin Fox*

“By almost any market test, economics is the premier social science,” Stanford University economist Edward Lazear wrote just over a decade ago. “The field attracts the most students, enjoys the attention of policy-makers and journalists, and gains notice, both positive and negative, from other scientists.”

L

rialist era of economics might fisubsequent economic downturn azear went on to describe nally be coming to an end? -which Lazear somewhat infahow economists, with the mously downplayed while in ofUniversity of Chicago’s Gary Lazear acknowledged one such fice- have put a big dent in the Becker leading the way, had been indicator in his article -the invasion credibility of the macro side of running roughshod over the other of economics by psychological the discipline. The issue isn’t that social sciences - using economic teachings about cognitive bias. economists have nothing intertools to study crime, the family, acTwo years later, in 2002, the coesting to say about the crisis. It’s counting, corporate management, leader of that invasion, Princeton that they have so many different and countless other not strictly psychology professor Daniel Kahthings to say about it. As MIT finaneconomic topics. “Economic imneman, won an economics Nobel cial economist Andrew Lo found perialism” was the name he gave (the other co-leader, Amos Tversky, after reading 11 accounts of the to this phenomenon (and to his had died in 1996). But while behavcrisis by academic economists article, which was published in the ioral economics has since solidified (along with nine by journalists, plus February 2000 issue of the Quarits status as an important part of former Treasury Secretary Hank terly Journal of Economics). And in the discipline, it hasn’t come close perhis view it was a Triumphalism like that calls for a comeuppance, of course. Paulson’s sonal account), benevolent reign. there is massive disagreement not “The power of economics lies in its to conquering it. On the really big just on why the crisis happened rigor,” he wrote. “Economics is sciquestions -how to run the econobut on what actually happened. entific; it follows the scientific methmy, for example- the mainstream “Many of us like to think of finanod of stating a formal refutable view described by Lazear has concial economics as a science,” Lo theory, testing theory, and revising tinued to dominate. Economists wrote, “but complex events like the theory based on the evidence. have also continued their imperialthe financial crisis suggest that Economics succeeds where other ist habit of delving into other fields: this conceit may be more wishful social scientists fail because econ2005’s Freakonomics, co-authored thinking than reality.” omists are willing to abstract.” by Becker disciple Steven Levitt, was Part of the issue is that Lazear’s a prime example of this -and sold Triumphalism like that calls for description of the scientific way millions of copies. As for Lazear, he a comeuppance, of course. So, in which economics supposedly got himself appointed chairman of as the nation’s (and a lot of the works (state a theory, test it, revise) President George W. Bush’s Council world’s) economists gather this doesn’t really apply in the case of of Economic Advisers in 2006. weekend in San Diego for their a once-in-a-lifetime financial crisis. annual hoedown, it’s worth asking: And then, well, things didn’t go I tend to think it doesn’t apply for Are there any signs that the impeso well. The financial crisis and

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ECONOMIC OUTLOOK

macroeconomics in general. As economist Paul Samuelson is said to have said, “We have but one sample of history.” Meaning that you can never get truly scientific answers out of GDP or unemployment numbers. That’s why Lord Robert Skidelsky recommended a couple of years ago that while microeconomists could be allowed to proceed along pretty much the same statistical and mathematical path they’d been following, graduate education in macroeconomics needed to be dramatically revamped and supplemented with instruction in ethics, philosophy, and politics. I’m not aware of this actually happening in any top economics PhD program (let me know if I’m wrong), despite the efforts of George Soros’s Institute for New Economic Thinking and others. What I’ve noticed instead, though, is an increasing confidence and boldness among those who study economic issues through the lens of other academic disciplines. A couple of years ago I spent a weekend with a bunch of business historians and came away impressed mainly by how embattled most of them felt. Lately, though, I’ve found myself talking to and reading a little of the work of sociologists and political scientists, and com-

ing away impressed with how adept they are in quantitative methods, how knowledgeable they are about economics, and how willing they are to challenge economic orthodoxy. The two main writings I’m thinking about were unpublished drafts that will be coming out later in HBR and from the HBR Press, so I don’t have links - but I get the sense that there are a lot of good examples out there, and that after years of looking mainly to mainstream economics journals I should be broadening my scope. (Two recommendations I’ve gotten from Harvard government professor Dan Carpenter: Capitalizing on Crisis: The Political Origins of the Rise of Finance, by Sociologist Greta Krippner, and The New Global Rulers: The Privatization of Regulation in the World Economy, by political scientists Tim Büthe and Walter Mattli.) Even anthropology, that most downtrodden of the social sciences, has been encroaching on economists’ turf. When a top executive at the world’s largest asset manager (Peter Fisher of BlackRock) lists Debt: The First 5,000 Years by anthropologist (and Occupy Wall Streeter) David Graeber as one of his top reads of 2012, you know something’s going on. What’s going on is probably not the incipient overthrow of econom-

ics. As described by Lazear, its imperialistic power has in large part been the result of its uniformity of approach over the past half century. (That, and economists have actually been right about some things.) As best I can tell, there is no such methodological consensus in sociology, political science, anthropology, or history at the moment. But the economists’ consensus is wobblier than it’s been in a while (especially in macro), there is ample motive for insurrection, and the non-economists’ stores of intellectual ammunition are growing. Economics may well have reached the stage of imperial overstretch. Interesting times lie ahead. *Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.

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THE WORLD

Fixing J the World’s Infrastructure Problems by Jimmy Hexter and Jan Mischke*

We all have a stake in the infrastructure surrounding us - the roads, buildings, power lines, and telephone networks that we rely on daily. How well they’re built and operated is crucial to economic growth and is a key arbiter of an economy’s competitiveness - and yet, virtually every economy faces an array of infrastructure challenges.

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ust a few examples illustrate some of the pressing issues: South Africa’s power distribution network has an estimated maintenance backlog of $4 billion - equivalent to half of the country’s total investment in electric power generation and distribution in 2011. The U.S. Department of Transportation estimates that 15% of the country’s roads are in an unacceptable condition and says that road congestion costs the U.S. an estimated $100 billion per year. In Jakarta, from 2005-2009, the number of cars rose by 22% annually, while the distance of usable roads actually declined (PDF). The UN Economic Commission for Latin America and the Caribbean estimates that investment equivalent to 7.9% of GDP (PDF) is necessary to raise infrastructure in the region to the standard of developed East Asian countries. Just to keep pace with anticipated global GDP growth, the world needs to spend $57 trillion, or on average $3.2 trillion a year, on infrastructure over the next 18 years. That’s more than the entire worldwide stock of infrastructure on the ground today - and nearly 60% more than the world has invested over the past 18 years. Tackling maintenance backlogs, future-proofing infrastructure to cope with climate change, and meeting development goals such as access to clean water and all-weather roads to transport goods to markets would cost a great deal more.

The bill for all of that looks prohibitive at a time when many governments are highly indebted and capital is tight. A focus on the huge need for additional investment and potential difficulties in financing it dominate the debate. Pessimism rules, but it needn’t be that way. There are ways of cutting the bill down to size and meeting the challenge. The answer lies in improving the way we plan, build, and operate infrastructure - in other words, we need to boost its productivity. We have analyzed 400 case studies that show that there’s plenty of opportunity to boost infrastructure productivity, and in turn save 40% on the global infrastructure bill (or $1 trillion a year) and boost global GDP by about 3% by 2030 if reinvesting the savings. There are three routes to getting there: 1. We need to make better choices about the projects we’re investing in. Projects need to be clearly linked to broader economic and social development, rather than being vanity exercises. Governments need to evaluate costs and benefits rigorously and prioritize accordingly. South Korea’s Public and Private Infrastructure Investment Management Center has saved 35% on its infrastructure budget by rejecting 46% of the projects it reviews, compared with only 3% previously. Making more strategic choices has the potential to save $200 billion a year worldwide. 2. We need to streamline delivery. There is huge poten-


THE WORLD

tial to speed up permits and land acquisition particularly for new transport infrastructure, to structure contracts to encourage innovation and cost savings, and to strengthen collaboration with contractors. This could save up to $400 billion a year and accelerate the timeline for the completion of projects. For example, in Australia, the state of New South Wales cut approval times by 11% in just one year. 3. Instead of rushing to build new capacity, we need to do more with what’s already on the ground. This, too, has the potential save $400 billion a year. The United Kingdom, for instance, achieved reductions of 25% in journey times, and 50% in accidents on the M42 motorway by implementing an intelligent transportation system solution

that directs and controls traffic flow. Smart grids could help the United States avoid $2-$6 billion a year in power infrastructure costs. None of this is rocket science, but bringing these opportunities to fruition will require a much less fragmented way of running infrastructure policy. The many agencies involved in various kinds of infrastructure (roads, power, water, etc.) at different levels (city, state, country) need much better coordination. And the public and private sectors need to forge far deeper and broader partnerships. Most collaboration between the two is around financing and construction, but the private sector could certainly do much more with planning and delivery. This isn’t an overly radical thought - Chile, the Philippines, South Africa, South Korea, and Taiwan are all developing frameworks for giving private players greater roles in project and portfolio planning. Saving money with higher infrastructure productivity is a win-win that would be particularly useful at a time of capital constraints and anemic growth in many parts of the world. There is every incentive to be smarter about tackling our infrastructure problems. *Jimmy Hexter is a McKinsey & Company director and Infrastructure Practice leader based in Washington, DC. Jan Mischke is a senior fellow of the McKinsey Global Institute based in Zurich. Richard Dobbs, director of the McKinsey Global Institute based in Seoul, also contributed to this post.

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THE WORLD

Taiwan’s new EU Ambassador wants: ‘a more far-reaching EU-Taiwan relationship’ by N. Peter Kramer

Mr. Kuoyu Tung recently took up his role as Taiwan’s Ambassador to the EU, one of his country’s most important postings abroad, replacing his predecessor David Lin who was appointed Foreign Minister late last year. Mr. Tung, speaking at an event to mark his arrival in Brussels, told a 200-strong audience that ‘tremendous progress’ has been made in EU-Taiwan relations in ‘various fields’ in recent times but said that he is determined to pursue ‘a more far-reaching relationship’. In other words, Mr. Tung is aiming at an Economic Cooperation Agreement between his country and the EU.

T

he ambition of Taiwan to have ‘a more far-reaching relationship’ with the EU was also mentioned by President Ma Ying-jeou when members of the European Parliament visited Taipei in March. “As the EU is Taiwan’s fourth largest trading partner and leading source of foreign investment, while Taiwan is the EU’s sixth largest trading partner in Asia, an Economic Cooperation Agreement (ECA) is needed to further cement the collaborative relationship’ and he stretched that his country has now signed or is negotiating economic cooperation agreements with its top three trading partners. ‘Three years ago Taiwan inked a break-through Cross-Straits Economic Agreement (ECFA) with

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the People’s Republic of China. Last year we concluded an investment protection pact with Japan and we are now preparing to resume talks with the US under the Trade and Investment Framework Agreement (TIFA)’, Taiwan’s President noted.

‘Economic integration important for de-escalating East Asia’ In April, during a seminar ’Taiwan’s role in regional security in East Asia’, Ambassador Kuoyu Tung said that all parties involved should acknowledge their responsibilities, not only China but also Taiwan, and the international communities. ‘No one should be demonised. Taiwan is a living proof that a mature democracy is possible in a Chinese speaking society and we hope we can someday be a model for the democratisation process of our neighbours’. MEP Charles Tannock, chairman of the European Parliament-Taiwan Friendship Group stated that further economic integration of the region and international trade agreements are of major importance in de-escalating tensions in East-Asia. ‘Thanks to the efforts of President Ma’s administration, Mainland China-Taiwan relations went from confrontation to conciliation. But now Taiwan is left behind. Other countries in the region are signing or are negotiating Free Trade Agreements with the EU. We don’t want to see peaceful and democratic Taiwan suffering from its competition. Taiwan as a friend of peace and democracy is a natural partner of the EU’.

Brian McDonald, former head of the EU Trade Office in Taipei and retired EU Ambassador to Korea, agreed with Mr. Tannock and made even a step further: ’Growth rates in Taiwan are under pressure not only caused by the global financial crisis but also by a lack of trade agreements. The Chinese market alone, although growing fast, is not capable of keeping the Taiwanese economy alive. The international community therefore has a responsibility towards Taiwan, a full member of WTO’. Taiwan and the US have started further talks about strengthening bilateral economic cooperation under the TIFA. An American interagency delegation including officials from the Departments of State, Commerce and Agriculture and headed by Deputy US Trade Representative Demetrios Marantis visited Taipei last month.

Why is the EU still backing off a trade agreement with Taiwan? The European Parliament is a longtime supporter of a trade agreement with Taiwan. Is the European Commission (especially DG Trade of Commissioner De Gucht) afraid that such an agreement will affect EU’s economic ties with China? Or are there, behind the Brussels’ scenes, EU member states blocking it for the same reason? But a Taiwan freely moving on the global market would also benefit China as Taiwanese investments in China are considerable…


SUSTAINABILITY

“Let There Be Daylight” and let it come in! by Niels Schreuder*

The social and economic benefits of glazing add up to the sustainability of buildings

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SUSTAINABILITY

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nlocking Europe’s economic potential starts by stimulating domestic demand for a better life. For any economic recovery the construction sector is key and as soon as Europe starts (literally) building again economic revival will be on its way. We have entered a new era where “sustainability” is the buzz word and really there is more to it than one would think. Building products for construction projects have evolved over time. Today, glazing for instance is no longer the weak point of a building‘s envelop but rather the building’s interface with its surrounding environment. A new release by David Strong Consulting Ltd recently published independent research evidence regarding human health, happiness and wellbeing associated with glazing. In this report, commissioned by flat glass industry association Glass for Europe, Prof. Strong provides a comprehensive summary of the non-energy benefits provided by glazing. Glass enables daylight penetration into buildings and a visual link with the natural world outside. Analyses of the differences and effects of daylight deprivation in buildings versus increasing the daylight to come in shows huge damaging consequences when the human body-clock becomes disrupted by lesser access to daylight. Medical evidence suggests that humans become stressful and agitated when not receiving adequate daylight. “Getting daylight into buildings is a key element of sustainable building design. It not only saves energy

but it greatly enhances the health, happiness and well-being of occupants”, explained David Strong after having analysed the positive impact of daylight in healthcare, educational buildings, workplace, retails buildings and living places. We talk about realizing genuine sustainable buildings here that is more than energy efficiency, life cycles of products and awarding ecolabels. Looking into different building segments Prof. Strong’s work shows that access to daylight provides a reduction in the average length of hospital stay, quicker postoperative recovery, reduced requirements for pain relief, quicker recovery from depressive illness and disinfectant qualities in the healthcare sector. There is also evidence that daylight plays an important role in the prevention and treatment of obesity, heart disease and other illnesses exacerbated by stress. In educational buildings access to daylight has shown to result in a huge improvement in student academic achievement, behaviour, calmness and focus. Numerous studies have identified a preference to work near windows and under conditions where natural light is utilised rather than artificial light. For retail establishments, research shows that even a substantial improvement in sales can be achieved in shops with good daylight penetration. The report highlights the sustainability need for more research into optimum use of daylight in residential buildings. Since a key function of homes is to provide a place to rest and sleep, Prof. Strong recommends more research to determine the health and wellbeing benefits associated with daylight in the home environment. At a time when the focus on sustainable building design is growing, the glass industry firmly believes that policy-makers and architects need to be aware of the socio-economic aspects of sustainability linked to the provision of daylight into buildings and its benefits to occupants. Designers can no longer neglect the social impacts of sustainability and better assure adequate daylight and views to the natural world in their building designs through inclusion of appropriately sized and positioned glazing in sustainable buildings. Sustainable buildings let the daylight come in. Let’s unlock our economic potential and make life better! *Niels Schreuder is Public Affairs Manager at AGC Glass Europe David Strong’s report can be found on: http://www. glassforeurope.com/en/issues/natural-daylight.php

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SUSTAINABILITY

Using and conserving forests ® at the same time with FSC by John Hontelez*

According to many scientists, the use of natural resources in the last 50 years has surpassed the natural carrying capacity of the planet. This is manifested in global warming, depletion of fish stocks, deforestation, loss of fertile soils and water scarcity, among other issues. Civil society, governments and business have started to react: the protection of exceptionally valuable or sensitive natural areas and promoting resource efficiency are among the responses. But the challenges are enormous and require proactive responses by people with the potential to make a difference.

©FSC A.C.

Focus on forests Forests are one of the world’s most precious natural resources, for local people, for societies and for the planet as a whole. They provide food, building materials, paper, shelter, medicines and fuel. They keep soils in place and act as giant sponges, globally providing an estimated 75% of usable water. They are home for most of the world’s plants and animals; they provide genetic diversity; they play an important role in climate regulation. And they provide livelihoods for more than a billion people. Over time, we have seen the planet’s forest cover reduced. And, despite global efforts to address this, we have lost 10% of the remaining forests over last twenty years. Every year, an area the size of Nicaragua (around 130,000 km2) is deforested, mainly in tropical areas.

ply), but their biodiversity and environmental value is normally much less than natural forests. Deforestation and forest degradation have serious environmental and social impacts. These processes are responsible for approximately 17% of anthropogenic greenhouse gas emissions, more than either the agriculture or transport sectors. They cause the loss of important fertile soil and clean and reliable water reserves, as well as destabilizing weather and wiping out plant and animal species. Deforestation and degradation also destroy the livelihoods of people dependent on forests. There are further economic impacts: the United Nations Environment Programme (UNEP) estimates the cost of annual losses of natural forest capital due to deforestation and degradation to be US$2-4.5 trillion per year.

Our increasing dependence on forests Impacts of deforestation and forest degradation Not all forests have the same value in terms of biodiversity, the environment, and social and economic meaning. As well as deforestation, we are facing forest degradation – a reduction in the quality of forest cover. Plantations replace some of the natural forest lost, and are important for the production of timber (providing around 65% of global industrial wood sup-

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WWF’s recent Living Forests Report predicts that by 2030, the demand for timber will more than double by 2050, timber demand will be three to four times the demand in 2010. This is true for a ‘do nothing’ scenario in which forest use continues as it is currently, and for a scenario that sees a global shift towards the use of renewable and climate-neutral resources, including forest products, which WWF label ‘bioenergy plus’ (see Table 1).


SUSTAINABILITY

Table 1: Project annual rate of wood removals in 2030 and 2050

The role of the Forest Stewardship Council® In 1993, in response to the failure of governments to take effective global action, private sector companies and environmental and social organisations set up the Forest Stewardship Council (FSC). Their aim was to create a market-based tool to promote sustainable forest management. Essential elements were a shared vision that environmental, social and economic objectives could be brought together in a robust certification scheme. They agreed to create an organisation based on balanced, multi-stakeholder decision-making, with equal influence for the three types of organisations (private sector, environmental, social), as well as a balance between stakeholders from the global ‘North’ and ‘South’. The FSC certification scheme ensures that forest products with the FSC logo are based on responsible forest management, defined by the organisation and refined in national, balanced multi-stakeholder consultations. While FSC sets the requirements, independent audit companies, accredited and controlled by a separate organisation, guide and control the certified foresters and the industry. Figure 1: The role of certification bodies and accreditation in the FSC system FSC accreditation controls at least once a year

spot checks

(© [December 2012] WWF (panda.org). Some rights reserved.)

WWF expects a dramatic increase in the rate of wood removal, particularly for the non-household use of wood as a fuel as biomass becomes increasingly popular as a carbon-neutral alternative to fossil fuels. The demand for saw wood, veneer and pulp is also likely to increase considerably. Environmentally sound construction will require wood to replace concrete and other materials that have a large ecological footprint. And forest materials will increasingly be used to replace petrol-based chemicals, plastics and other materials. Using more forest materials can be an important contribution to fighting climate change and other environmental challenges, if they replace more energy-intensive materials and products. But the net environmental benefits will only be achieved if this goes alongside robust forest management and protection policies.

certification body controls at least once a year

controls at least once a year

FSC certified forest

FSC certified manufacturer

FSC labeled product

Source: FSC

Benefits for business For foresters, an FSC certificate means access to the fast-growing market for products from sustainable sources and, in some cases, higher prices. The foresters work according to mature forest management

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SUSTAINABILITY

guidance, which prevents ecosystem degradation, increases safety at work, and ensures social fairness for people dependent on the forest. By following these principles, they are investing in sustainable forest management, including economic investments. A big advantage of FSC is that it is a truly global organisation. Stakeholders and buyers can be sure that the requirements for sustainable forest management are matched in their region. The membership is organised into three chambers with equal power: environment, social, economic. There is also a north–south balance within these chambers. The membership of critical organisations such as WWF and Greenpeace means that FSC is sharp on relevant environmental issues; the Building and Wood Workers International Trade Union and representatives of indigenous peoples focus on the social side; while members such as Tetra Pak, IKEA, Kingfisher and Mondi ensure that the requirements and system remain economically realistic. The result is that FSC is widely recognised as the leading standard for responsible forest management certification. The WWF website describes FSC as “the most credible certification system to ensure environmentally responsible, socially beneficial and economically viable management of forests”. After 20 years, some 175 million hectares in 79 countries – 15% of the world’s managed forests – are certified to FSC standards. Over 25,500 companies in supply chains in 112 countries are committed to monitoring and controlling their purchase, trade and use of FSCcertified materials through the FSC Chain of Custody certification. These figures represent increases of more than 50% in the last three years. Graph 1: Growth in FSC Chain of Custody Certification since 2010

Source: FSC statistics

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The end user, when seeing FSC labels, can be confident that the product he or she buys uses resources from responsibly managed or controlled forests.1 With increasing awareness of FSC and its label among the general public, companies can be sure that consumers recognise and value their efforts towards sustainable forestry.

The role of the business sector Many of the leading timber-related companies in the world are active members and users of FSC. IKEA, one of the largest timber users in the world, increasingly relies on FSC-certified materials. Companies such as Tetra Pak, Elopak, SIG Combibloc and Kingfisher/B&Q aim to achieve 100% certification for their products, with a preference for FSC over other certification schemes. Sourcing sustainably produced wood or pulp as raw materials (for their furniture, construction materials, paper products etc.) is part of their social responsibility policies, and FSC has helped them to achieve this without having to compromise on quality or market share. Many major companies, including ‘Do it yourself’ (DIY) chains, publishing houses and packaging companies, have contributed to the popularity of FSC among the general public by having the FSC logo on their products. These companies are mainly in Europe and North America, and increasingly also in the Asia-Pacific region and Latin America. Public authorities in the same regions have started to develop green public procurement policies, recognising the value of FSC certification. The enthusiastic role of the business sector has played a major part in driving the uptake of FSC in the market.

Has FSC made a difference? In the global North, FSC has made a considerable difference. In Europe as a whole, more than 21% of forests are certified; in 11 European countries, half or more are certified. Almost 18% of Canadian forests are certified. And in Russia, the country with the largest forest area in the world, 33 million hectares have been certified. In the tropics, the percentage of FSC-certified forests is still low. The prevalence of illegal logging, poor enforcement of national legislation, uncertainties over traditional property rights and a lack of capital make certification difficult. This is regrettable, because the impact of FSC certification for


SUSTAINABILITY

these forests can be huge, in social, environmental and economic terms. Realising sustainable forest management will require determination on the part of concession holders, forest owners, communities, investors and sponsors. The success of FSC has also led to the emergence of alternative labels. These are of varying quality, even if most of them work together under the global Programme for the Endorsement of Forest Certification scheme. Together with FSC they have made certification in the forest sector a mainstream activity in the global North. But even more than for FSC, credible forest certification in the tropics remains a challenge for these schemes. More recently, national schemes have emerged that focus solely on the legality of forest activities, such as the Sistem Verifikasi Legalitas Kayu2 in Indonesia. And FSC is wholeheartedly supporting steps in the USA, the European Union (EU) and Australia to ban illegal timber from their markets. But legality should not be confused with sustainability; only when national laws entirely incorporate the environmental and social dimensions of sustainability will this difference disappear.

Can certification prevent further forest degradation? FSC cannot tackle all the causes of forest decline as long as the markets favour exploitative business practices and maximizing short-term profits. FSC is a market instrument for creating a green economy, but lacks the authority to simply bring this about. FSC has been increasingly successful in preventing forest degradation and improving the social and environmental impacts of forestry in certified entities. However, ensuring the maintenance of the world’s forests needs determined and permanent government leadership that promotes five essential approaches: enforcement of relevant laws; promotion of sustainable forest management (including through certification); protection of sensitive areas and intact forest landscapes; integrated spatial planning; and efficiency in the use of forest products. FSC contributes to efficiency in the use of forest products through its certificate and logo for recycled paper. This logo ensures that at least 85% of the material used is ‘post-consumer’. The remaining part can be ‘pre-consumer’, such as waste from printing houses. But FSC’s role cannot go much beyond forest cer-

tification and promotion of recycling. We need global leadership – particularly coordinated financial efforts to maintain the large tropical forests that remain, starting with the idea that they belong to the global commons while respecting national sovereignty. This should be combined with determined action against the illegal timber trade, following the examples of the USA, Australia and the EU. We cannot deny the spatial impacts of a fastgrowing global population on forests, such as the need for increased production of food and goods, or that the needs of the global population have surpassed the planet’s capacity. We must achieve sustainable and fair production and consumption patterns – in the environmental, social and economic senses – or face disaster. Saving the remaining forests and turning forest management into a key driver for sustainable development are common challenges for governments, businesses and civil society. They require us to look collectively at the longer term, while addressing immediate problems such as poverty, inequality and environmental degradation. FSC is determined to continue playing its role in meeting these challenges.

*John Hontelez is chief advocacy officer of Forest Stewardship Council® More information about FSC: www.fsc.org 1.Besides ‘FSC Pure’ products, FSC allows mixed products, in which up to 30% of materials used are not from certified forests but from ‘controlled forests’. No illegal logging takes place in controlled forests, no genetically modified organisms are used, no traditional and civil rights are violated, high conservation values are respected, and no forest conversion has taken place. 2. In English: Legality Verification System for Wood

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Water - blue gold for a thirsty world by Dominique Reiniche*

Water is a critical resource for the CocaCola business: our drinks consist to about 96% of water. Water is needed for cleaning and cooling in our production sites. And it is critical to our supply chain, in particular for the agricultural ingredients we use. Sustainable water use is therefore one of the Coca-Cola system’s key business priorities, both globally and in Europe.

W

e have naturally focused first on our ‘own four walls’ to Protect, Reduce, Recycle and Replenish the water we use in our bottling facilities. What does this mean? Firstly, nearly all of our about 100 plants in Europe have implemented detailed water protection plans to make sure the water resource they are using is sustainable, based on in-depth water resources assessments. Secondly, all plants in Europe ensure their process water is cleaned to a standard that supports aquatic life. Thirdly, across Europe, our bottling partners have reduced water use by 25% since 2004 and need only 1.8 litres of water for the production of one litre of product today. Finally, our most challenging but also the most impactful ambition is to replenish the equivalent of the water we use in Europe by 2020. This means, we want to make an additional 37mio m3 of water resources available for Nature and Communities. Our wetland and river restoration projects with WWF in the Danube basin or in the UK are just two examples of a growing list of replenish activities in Europe. I often get asked: why are you doing this? And in-

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deed, restoring wetlands is of course not part of our core business. However, I would argue that business will increasingly need to engage directly in the sustainability of water resources and work harder to protect our licence to operate. Policy is also playing a role: The implementation of the European Commission’s Water Framework Directive is coming ever closer to our doorsteps and the challenge for business will be to integrate water resource policy into our business strategies. As a business, we are also dependent on a stable supply chain, which has to grapple with water quantity and quality all over the world. We are working very closely across our global system to understand water sustainability impacts in our supply chains, especially agriculture, and define areas where we can leverage the size and scale of our business to find solutions together with our suppliers. As a closing note: one challenge for all stakeholders will be to make water stewardship transparent and communicable. The recently launched European Water Stewardship Standard offers a good opportunity for businesses to have efforts independently assessed. Having piloted and tested the standard, we have now committed to roll it out to all our production sites over the next few years. By leading the way in water stewardship we will demonstrate how businesses can reduce their impact on the freshwater environment and we encourage others to go on that journey together with us. *Dominique Reiniche is President of The CocaCola Company’s Europe Group.


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