However, the political controversy is far from being over. For one, the treaty needs to be approved by the European Parliament, which is now the main target for mobilization of both supporters and opponents. For another, the signing of ACTA has sparked surprisingly strong protests in some EU member states, above all in Poland (see video below). The intensity of the Polish opposition has in turn raised attention in neighboring states, most importantly in Germany, as well.

One, admittedly not very representative, indicator of the growing awareness of ACTA in Germany is that I have received an increasing number of requests for expertise, talks or comments on the issue over the last weeks. What puzzled me in this regard was that I had difficulties giving concrete examples why ACTA was problematic. Of course, the whole direction of the treaty as well as the secretive and undemocratic negotiation process deserve enough criticism to justify opposition. But when asked for detailed examples how ACTA endangers free speech and innovation on the net it was not so easy to come up with a convincing answer. After the initial leaks, the draft had been changed repeatedly and many of the most worrying provisions had been softened, reformulated or altered.

Jan Engelmann, head of the politics and society division at the German Wikimedia chapter, seemed to have encountered similar difficulties and has also blogged about it (German only). His bottom line: ACTA represents the ‘principle of fuzziness’. And I completely agree. ACTA is an exemplary case for what Raustiala and Victor (2004, PDF) call “strategic inconsistency”  and others have referred to as “strategic” (Alter and Meunier 2007, PDF) or ”constructive ambiguity” (Watal 2000, PDF; Yu 2007, PDF).

In its digital chapter (“Enforcement of Intellectual Property Rights in the Digital Environment“), for example, ACTA is not very specific on how online copyright protection should be enforced. Article 27 (3) reads as follows:

Each Party shall endeavour to promote cooperative efforts within the business community to effectively address trademark and copyright or related rights infringement while preserving legitimate competition and, consistent with that Party’s law, preserving fundamental principles such as freedom of expression, fair process, and privacy.

How do you “promote cooperative efforts within the business community to effectively address [...] infringement” while at the same time “preserving fundamental principles such as freedom of expression, fair process, and privacy”? In this clause, ACTA obviously calls for privatization of copyright enforcement measures following the US example of “Copyright Alerts” (see “‘Copyright Alerts’ against ‘Content Theft’: Three Strikes through the Backdoor of Private Regulation?“). How these “cooperative efforts” should be implemented stays diffuse and the commitment to “fair process and privacy” is obviously inconsistent with such private enforcement measures called for in the first sentence.

Consequently, critics such as LQDN argue in their analysis of the final version that “police (surveillance and collection of evidences) and justice missions (penalties) could be handed out to private actors, bypassing judicial authority and the right to a fair trial to block and take down allegedly infringing content.”

In the above cited studies on strategic or constructive ambiguity, the focus is on the people crafting international treaties. For them, introducing ambiguity into a text is a way out of gridlocked negotiations. Often, for some parties an ambiguous treaty is way better than no treaty. In the case of ACTA, this is the case for the entertainment industry, which has nothing to lose if ACTA fails but the resources to lobby for strong national and private implementation if ACTA passes.

But the ACTA case also elucidates another aspect of ambiguity in international treaties. While ambiguity might be constructive from a negotiator’s perspective, it might at the same time be obstructive for counter-mobilization. Since it is not obvious what will actually happen when the treaty is signed, warnings can easily be dismissed as excessive. At least, ambiguity forces opponents to actively create a narrative of how ambigous passages are likely to be implemented. Seen from this perspective, ambiguity provides both a threat and an opportunity for counter-mobilization: ambiguity requires more work to frame protests but it also allows such framing.

(leonhard)

PS: If anyone doubts that the entertainment industry has indeed nothing to lose if ACTA fails, I recommend to have a look at the most recent numbers provided in the report “The Sky is Rising” – the industry is doing great without ACTA and in spite of the economic crisis and the Internet (via irights.info):

(P.S. See also below for information about a debate at Harvard University on 2nd February with Guy Stuart.)

Roodman (“Due Diligence”); Bateman (“Why Doesn’t Microfinance Work?”)

The past few years have been particularly turbulent, with a succession of microfinance crises, growing overindebtedness, borrower suicides, disappointing impact findings, and a prize-winning Norwegian documentary contributing to Muhammad Yunus being removed from office as head of Grameen Bank.

The two debaters have met in the past. Bateman first brought a critique of microfinance into the mainstream with his 2010 book, which Roodman heavily criticised. Roodman has made a name for himself as a prolific and insightful blogger with the open book blog he kept while writing the book he recently published.

Whether Roodman’s book (endorsed by Muhammad Yunus) is anything as “impertinent” as it claims to be; what to think of Bateman’s musings about the “end of microfinance?”; and why the best evidence of microfinance’s impact on poverty still is “zero”, will be questions likely affecting the debate as much as the official debate question (which USAID succeeded in making so overwhelmingly dull I fear it may even scare off Washington development brass):

“If microfinance has not achieved its objective in substantially reducing poverty, what are the pathways to financial inclusion that will contribute to this objective?”

Suggestions were solicited from the public in advance. While I have no idea whether it was a realistic shot, I also submitted one (or three); certainly not the greatest question(s) ever, but at least fairly controversial, interesting and debatable, I thought:

“First, why is microfinance assumed to be effective until proven ineffective? Second, what could constitute proof of it being ineffective; or when does an absence of evidence begin to imply absence of impact? Third, if we are concerned for the poor, shouldn’t we stop lending to them [except to a small test populations] until it can be reliably established that microfinance helps the poor instead of having no impact, and therefore being a waste of time and effort, or worse yet, harming them?”

Sadly: rejected. I know of at least two other very interesting submissions which just disappeared. Somehow the organisers managed to drop these options and reduce the choice to six questions which (to me) appear six ways of phrasing three questions (after filtering out the aid newspeak):

1. What does microfinance do?
2. Can we do what microfinance does, any cheaper?
3. Can we rename “microfinance” “financial inclusion” without anybody noticing?

Out of these options came the final question. Well, perhaps it was more audience participation than USAID could handle. But no hard feelings. I have no doubt that – moderated by Chuck Waterfield of MicroFinance Transparency – the two argumentative and well-informed panelists will have a lively and open-minded debate which will focus on the questions which currently matter, above all what to make of the persistent lack of evidence for positive impacts of microfinance.

Just in case you won’t happen to be in Washington D.C. on Monday, USAID conveniently offer the option of signing up for a webinar which should allow you to follow the debate live.

P.S. (26 Jan 2012): Another debate, hosted by the Boston Microfinance Club and Harvard Business School will be held on Thursday, 2 February at 6:30 p.m. in the Harvard Business School, Aldrich 107. Milford Bateman and Guy Stuart discuss the far more straightforward question “Does Microfinance Work?”. 

This looks to be a highly interesting debate thanks to the participation of Dr. Stuart, who runs an excellent course on microfinance at the Harvard Kennedy School (which I was personally allowed to ascertain last year) and has been conducting insightful research on microfinance, not just microcredit, using financial diaries kept by clients in Africa.

(phil)

Nevertheless, this might not be all that much of a problem. Because if NYU’s Clay Shirky is right, SOPA and PIPA will come back with new acronyms but similar content. But see for yourself in Shirky’s 15 minute TED talk on the issue:

(leonhard)

The Wikipedia Academy is hosted by the Alexander on Humboldt Institute for Internet and Society, Freie Universitaet Berlin, and Wikimedia Germany. Extended abstracts can be submitted by March 31 (see Submission Process). Topics of interest are:

Wikipedia Analytics

• Wikis and Wikipedia as a research tool
• Analyzing Wikipedia as a source of “Big Data”
• Assessing and measuring the quality of Wikipedia articles

Wikipedia Global

• Relations and Differences between different Wikipedia language versions
• Differences between and critique of free/open knowledge ideologies
• Regional studies of Wikipedia and free knowledge with global lessons

Sharing Cultures and Practices

• Sharing culture(s) in Wikipedia and other projects of commons-based peer production
• Incentives, innovation and community dynamics in open collaborative peer production
• Wiki theory and wiki practices

Research on Users of and Contributors to Wikipedia

• Diversity among users of and contributors to Wikipedia
• Influencing participation by adapting user interfaces in open collaborative settings
• Using information visualization as information instrument to users and contributors

Economic and Regulatory Aspects of Free Knowledge

• Economic, regulatory and societal implications of (increased) access to free knowledge
• Different Modes of Governance: Emergence of Order and Coordination in Wikipedia
• The role of licensing decisions for Wikipedia and other collaborative forms of knowledge production

(leonhard)

Logo of the Wikimedia Foundation

The current governance structure of Wikimedia, the formal organization behind the global community of volunteers responsible for Wikipedia, had emerged comparably unplanned. The focal Wikimedia Foundation itself was founded two years after Wikipedia had been launched as a side-project of the quality-controlled “Nupedia“. And while Wikipedia had been transnational from the very start with versions in German, Catalan, Japanese, French and Spanish only two months after its launch, the Foundation was not. The first local Wikimedia branch in Germany was founded independently from Wikimedia headquarters and only formally recognized as a formal Wikimedia chapter after the fact. Following the German example, so far 38 membership-based chapter associations have been founded and formally recognized. Together, these chapters nominate two members to the Foundation’s Board of Trustees.

With the exception of two US chapters in New York City and in the District of Columbia, all these chapters are related to countries. One of the main reasons for tying local chapter organizations to countries is a financial one. Many Wikimedia chapter organizations such as the German, the Polish or the Swiss chapter receive tax exempted donations. This is one of the big advantages of local chapter organizations and even a rationale for founding them as grassroots organizations in the first place. The same time, however, this also restricts the flow of funds within the organizational network. Donations to the German Wikimedia chapter, for example, cannot easily be transferred to the focal Wikimedia Foundation in the US due to legal restraints.

Wikimedia Foundation executive director Sue Gardner (Photo by Lane Hartwell)

Moreover, this geography-based governance structure  is not without pitfalls for most of Wikimedia’s projects such as Wikipedia, which are structured mainly along different language versions. Adminstrators in Wikipedia, for example, are elected by editors of the respective language versions. And while the content of the English Wikipedia is provided by a globally dispersed community of English-speaking volunteers, chapters in English-speaking countries such as Australia or Great Britain do not profit from fund raisers to the same extent as chapters with a better match of language and geography. But this mismatch between geography- and language-based governance structures is about to change.

Having been asked by the Wikimedia Board “to make recommendations about fundraising and funds dissemination”, Sue Gardner crafted an extensive suggestion (Permalink) for re-drawing the borders of governance within the Wikimedia network. And her suggestions are fundamental:

The chapters are an important player in the Wikimedia movement. Having said that, they are not the only important player in the movement, and they are not the right tool for every purpose. I would argue that the Wikimedia Foundation has throughout its history overlooked the importance of other movement players, while over-emphasizing the role of the chapters. I believe the Wikimedia Foundation has behaved as though geography-based chapters are, and should be, the Wikimedia movement’s primary mechanism for getting things done globally in pursuit of the mission. I think that’s a flawed assumption for a number of reasons.

In what follows, Gardner forcefully advocates for abandoning the geographic structuring of the Wikimedia network:

Essentially: I believe that a model that privileges geography above all else is the wrong one for our movement: it doesn’t really support who we are and what we do. I believe this is why the number of editors involved with their chapter is fairly small: because chapter work is specialized and particular: it isn’t for everyone.

And Gardner seems well aware that her suggestions will not be welcomed everywhere. Particularly the German chapter role model is likely to resist such changes. Preempting German resistance, Gardner calls Germany a somewhat special case:

Pushing everything (or most things, or even many things) through a geography-based filter doesn’t make sense. It works pretty well in Germany, because the language/geography overlap is unusually high there – practically everyone in Germany speaks German, and only a relatively small number of people outside Germany speak German. It works less well in most other countries.

At the end, Gardner makes the following concrete recommendations:

• Recommendation #1: All donations received from visitors to sites operated by the Wikimedia Foundation should be received and processed by the Wikimedia Foundation.
• Recommendation #2: All movement entities should be free to fundraise outside of the wikis operated by the Wikimedia Foundation, in ways that are consistent with the guiding principles for fundraising laid out by the Wikimedia Foundation Board of Trustees.
• Recommendation #3: The Wikimedia Foundation should commit to significantly expanding grant-making activities to support decentralized work by movement members (including chapters, other groups, and individuals).
• Recommendation #4: The Wikimedia Foundation Board of Trustees should commit to delegating movement-wide allocation of funds (excluding Wikimedia Foundation’s core operating budget) to a newly-formed movement body that would make decisions on the best use of funds within the movement.

Specifically the first recommendation is explosive. In the case of Germany, the local Wikimedia chapter had collected 3.8 million Euro within 50 days of the most recent fundraiser. About 1.5 million of this amount is transferred to the foundation, the rest is spent in Germany. It is very unlikely that the German Wikimedia chapter would be able to raise close to that amount without donations from the official German Wikipedia page. As a result, recommendation #2 is no real compensation for recommendaton #1. Recommendations #3 and #4, in turn, would mean an enormous centralization of power within the Wikimedia network – empowering the board and a still fuzzy “movement body”.

Independent of substance, form and timing of these recommendations are puzzling. From 2009 to 2010, Wikimedia had executed a broad and participatory strategy process, which is documented at a separate strategy wiki. The outcome of this strategy process was a five year strategic plan, presenting five movement priorities. To propose such a far-reaching governance change only one and a half year after finishing this broad process under the heading of “fundraising” is prone to raise resistance.

In Germany, frustration is already being voiced on the local chapter mailing list. One of the comments criticizes that the call for globalizing the movement is available in English only and compares the situation to the setting in Douglas Adams’ “The Hitchhiker’s Guide to the Galaxy“. There the alien Vogons intend to destroy Earth to make way for a hyperspace bypass. The construction plan for the hyperspace bypass had been laid open to public - in the next galaxy nearby.

(leonhard)

In the past decade the rise in the use of the International Financial Reporting Standards (IFRS) in many countries around the world has moved the wave towards developing countries considering adopting these standards. Factually, about 120 countries presently use IFRS across the globe. Out of this number about 13 countries in Africa have already adopted (i.e as issued by the IASB without any modification) or adapted (.i.e with modification to meet local socio-economic needs of a particular accounting jurisdiction) to IFRS.

A diverse Continent a uniform accounting standard? Primarily, former Anglo-Saxon colonies have adopted IFRSs.

(Source: Data from PwC IFRS map, Own drawings)

However, it is quite surprising that Africa as whole is considering adopting IFRS given the chaotic nature of these standards on the international front and the often unseen justification given for the adoption of IFRS particularly in Africa. Many international organizations like the World Bank , the World Trade Organization , USAID and UNCTAD  have all been arguing for the adoption of IFRS in less developed countries . There are many reasons why Africa should not adopt IFRS. I will try to explain and to some extent justify this line of reasoning.

Politics over Economics

First, the merits of IFRS often mentioned include, improved comparability and uniformity of financial statements among companies and countries, resulting in a decrease in the equity cost of capital, improved transparency, a decline in information processing cost and a reduction in risk of international investment decisions amongst others. Whilst these benefits look very desirable, it is also the case that these benefits cannot be reached in every economy.

To be clear, IFRSs were designed for developed and matured capital markets. At least the economics speaks for itself. It is an undeniable fact that financial statements assist investors in making critical investment decisions. As pointed out in the general purpose of financial statements in the conceptual framework of the IASB, financial statements should aid users in valuing securities, be it when buying or when selling.

The argument for the use of IFRSs in developed countries in plausible. However, what I find puzzling is the push for IFRS adoption even in countries that have no stock markets or stock market listed companies. I do not deny that quality financial reporting should be present in economies where there are no capital markets. But I also admit that such countries have totally different financial reporting needs than industrialized countries. Accounting systems of a country are traditionally shaped by its socio- economic, cultural and political environment. Some economies are totally different from others and therefore we must recognize that these differences in accounting needs shape financial reporting.

The Strong converge while the weak adopt

What is even more intriguing is the fact that the highly industrialized countries have all, to some extent, cherry picked some parts of IFRS, ie. converged to IFRS on their own terms, whilst edging less developed countries to adopt unreservedly without any modification. For example, we might think that the larger economies like Canada, the European Union, China, India, Russia, and Japan have all adopted IFRS. Nearly all these countries have modified IFRS to suit their economies’ needs. In other words, they pick and choose which IFRSs are relevant and which are not. Unfortunately, many developing countries are in the terrain of adopting these standards without any thought to modification.

Accounting for double standards

Second, proponents of IFRS argue  that once a country is developing rapidly, there is the need for a sound financial system to complement and consolidate this development process – the heavy focus of development efforts on microfinance is a case in point. Thus, it is a well-established argument that many African countries are experiencing huge economic growth and an increase in Foreign Direct Investment and therefore, to attract investors, there is the need for a more transparent financial accounting systems like IFRS in addition to general capital market liberalisation.

However, many accounting scholars like Perera and Ole. Hope  argue that  the decision of an investor to invest in a particular country is actually independent of the financial accounting system of that country. In fact, it is the reverse that holds true. Countries that already have a sound accounting system together with strong investor protection laws are unlikely to adopt IFRSs. I argue that IFRSs are only adopted by countries where there is a weak financial regulatory system. The economic growth justification for the adoption of IFRS is further flawed in that, at the time these highly industrialized countries were developing, the accounting standards in place were fundamentally different from IFRS.

We may even consider whether, at the current stage of development in Africa, IFRS are not a solution at all, but rather possess real threats – A point I shall return to. A recent report  by the South African Institute of Chartered Accountants claimed that the IMF and UN have all projected Africa to grow in GDP terms by 5% in 2011; hence adopting IFRS is the only way forward. The report further iterated that for Africa to progress it is vital that the continent speak “one financial reporting language”.

I view this as having some amount of truth. However, speaking one financial language will not solve the many problems of unenforceability of regulation in Africa – enforceability of accounting standards is key. It does not also eliminate the question whether a complete adoption of IFRS will be more beneficial than IFRSs with modification.

I pause here to question; why is it that the larger economies are not adopting IFRSs as issued by the IASB? The world of accounting standards is clearly ruled by double standards. For example, the United States of America is taking too much time to reach a final decision if even at all US companies should adopt IFRS. Even then, their decision is not to consider a complete adoption of IFRS, but to seek to converge with IFRS. The same is true for China, India, Japan, Australia, New Zealand, Canada and Russia. And yet, it is often the case that African countries adopt IFRSs as given.

What is good for the goose is good for the gander. Designing accounting standards that you have no intentions of following fully should not be passed down to others to apply.

Uniformity for a diverse continent?

A third argument I would like to advance for the no suitability of IFRS in Africa is the fact there is to a larger extent a great diversity in the socio-economic setting in the continent. At least in the European Union (which happens to be the largest patron of IFRS), there exist differences between member countries. But one thing sets them different from the African Continent. The ability of the European Union to design regulations and directives that are enforceable by all member states makes it easier to have a uniform financial system. In Africa, even regional bodies such as ECOWAS and the AU are hardly able to agree on anything which can be enforced.

At a conference in South Africa, the outgone chairman of the IASB, Sir David Tweedie, commented that the process of designing IFRSs involves constituents from around the globe. These continents speak with one voice and have the backing of the representatives from the Institutes and Standard Setting Boards within the countries on those continents. When they speak, IFAC (the International Federation of Accountants) and the IASB have to listen. These other continents (excluding Africa) influence the development of the Standards to take care of circumstances within their continents. Africa is also there, but because its countries of this very diverse continent – 54 states! – do not have a united voice, they generally have minimal influence.

Even if African countries should adopt IFRS as given, it is unclear how the benefits of IFRS can be measured, as enforcement within the region will be left in the hands of individual countries. Apart from that, each country in Africa differs from the others economically. Thus, whilst some countries are clearly natural resources driven, some countries are only tax based economies. That is, whereas some countries are highly dominated by the public sector, other countries largely depend on the private sector. This makes their informational needs differ from each other and therefore putting IFRS in such economies will still not yield the desired goal of comparability of financial.

Fairer valuation thanks to Fair Value?

Fourthly, during the just ended painful financial crisis, it was often held that the IFRSs were part of the problem. Namely, the so-called fair value accounting beast! Whether IFRS was just the messenger, as often argued, or the fuel that fed the crisis, somehow IFRS was part of the problem.

Even, as I write, there are huge problems in countries that currently apply IFRSs. Take Greece and Portugal for a case. How valuable is the use of IFRS in such economies? Can we claim to have the same level of market efficiency in fair value terms in these countries? Now compare IFRS in Greece to that of a country that has not stock market let alone, an efficient and stable economy, like Somalia. How differently do investors view IFRS statements from Greece as opposed to the UK? This is open to different interpretations.

A recent report  by the IMF indicated that African resilience through the global financial crisis owes much to sound economic policy, citing steady growth, low inflation, sustainable fiscal balances, rising foreign exchange reserves, and declining government debt. I argue that, if IFRSs were part of the problem and that the G20, the EU and individual governments managed to avert the situation via bail out packages, how would Africa have responded to the crisis? I leave this point open for readers to think about and to send me comments, if they like.

For small players, cost is the bigger issue.

As accountants and users of financial statements, the concept of costs versus benefit analysis is nothing new to us. The idea of a switch to IFRS can be viewed in two cost dimensions. The first is that accounting standards are costly to design, let alone implement. That explains why most less developed countries may just fall upon already developed standards from industrialized countries; for example, Indonesia adopting US-GAAP and Ghana adopting IFRS. The second dimension is that the implementation these standards  very costly to firms and impose resulting costs on the adopting country.

The real benefits of IFRS are hard to quantify in monetary terms, but it may be easier to gauge the costs of implementation. Proponents of IFRS argue that, by adopting IFRS, an entity is likely to reduce its cost of capital. Unfortunately, there is simple no hard evidence that cost of capital reduces upon adopting IFRS. Unless a country has a well-developed stock market with equity participants willing to pay a premium for high quality financial reporting, the costs of IFRS implementation far exceed the benefits. As stated in an interview with the Christian D. Migan, president of the OHADA  (the Organisation pour H´Hamonisation en Afrique du Droit des Affairs.) he puts it bluntly,’’who will pay for the cost of implementation of IFRS in a countries such as Chad, Benin, Togo, Burkina Faso and all the OHADA regional countries which has no capital markets and nearly 80% of the companies as small scale entities?

Big four audit firms are happy, but clients are moaning in pain

The idea of adopting IFRSs seems to be driven by the big four audit firms. Literature documents their strong involvement in the setting of IFRSs. The real issue in the case of Africa is that, we lack the experts to foster the smooth transition to IFRS. What it means therefore is to hire the services of the big four audit firms. auditors like change. Change that clients have no idea on how to handle- for example Off Balance sheet transactions, see recent work by Matthias Thiemann.  Why cant we see that auditors are happy to advocate for IFRS? They stand to gain in every way.

I think it is time for Africa to pause and take a serious look at the possibilities of an accounting system that better reflects the needs of the continent and its individual countries. The question is; is Africa ready for IFRS? as opposed to is IFRS ready for Africa?

Solomon Zori is currently a Doctoral Fellow in the area of International and Transnational Accounting Standard Setting at the Max Planck Institute for the Study of Societies-Germany. He previously worked as a practicing accountant in the banking industry.Comments should be emailed to sz@mpifg.de

(solomon)

The central question that we would like to address during the mini-conference is what the implications of global shifts and transnational standards for domestic regulatory projects in labor and environmental fields are. On the one hand, we invite papers that seek to explain how local contexts shape implementation and effectiveness of labor and environmental regulation in a globalizing world. On the other hand, our focus is the intersection between public and private forms of environmental and labor governance. To sum up, we seek to examine transnational-domestic and private-public links in transnational labor and environmental governance.

We invite papers that examine new or reinvigorated forms of environmental and labor regulation, their dynamics and impact. Instead of focusing on the nature of rule-making – private, public or hybrid; local, national or transnational – we are interested in discussing cross-cutting conceptual issues and new empirical evidence on the relationships between various forms of environmental and labor regulation, global transformations and local regulatory effects.

We seek to garner theoretical, methodological, and regional diversity in the papers to foster exciting new conversations and insights.

The deadline for submitting extended paper proposals of max. 1000 words is January 15, 2012. - The deadline has been extended to January 22, 2012 - We will ask authors to provide a complete paper by June 1, 2012 and assign a discussant to each paper.

We are looking forward to seeing you in Cambridge!

You can find more information here: www.sase.org; http://sase.org/mini-conferences/themes_fr_115.html#MC3

Call for Papers

(olga)

However, what has been leaked in the Wikileaks cables on the influence of the US on the new Spanish copyright law is way beyond mere inspiration for lobbyists. As reported by the Guardian, in this case the lobbyist has been the US government itself:

The US ambassador in Madrid threatened Spain with “retaliation actions” if the country did not pass tough new internet piracy laws, according to leaked documents. [...] In his letter, Solomont  [i.e. the US ambassedor] issued veiled threats, reminding its recipients that Spain is on the Special 301, the US trade representatives’ list of countries that do not provide “adequate and effective” protection of intellectual property rights. Spain risks having its position on the list “degraded”, and could join the real blacklist of “the worst violators of global intellectual property rights.”

According to the Guardian, the resulting draft for Spain’s new copyright law is “similar to Protect IP and Sopa, the stop online piracy act, two pieces of anti-piracy legislation now being discussed in the US Congress”. This is not inspiration, this is implementation. And, of course, this is a case not of governance but of government across borders.

Finally, this case also evidences how powerful the list of so-called notorious markets published by the U.S. Trade Representative (USTR) still is (more on this list at infojustice.org and in Drahos and Braithwaite 2002). Not only developing countries but even large EU member states are effectively pressured with this trade whip.

(leonhard)

As I explained in part 1 of this series, securitization required the transfer of credits from banks’ banking books into shell companies, where the cash flows from these credits would be redirected to serve debt instruments that the shell company (or Special-Purpose Entity, SPE) emitted. The banks remained linked to the revenues and risks of these assets by providing liquidity lines to these shell companies in case the market fell dry.

When the crisis in the subprime mortgage market became evident, the buyers of debt instruments emitted by SPEs which had assets on the asset side whose cash flow was seen as deteriorating. Buyers in the market refused to take up the risk, as they could not price it and feared to have to take losses. In this moment, the liquidity lines of banks were drawn, and banks bought the papers from the SPEs they had initially set-up to get rid of these assets.

Now that they ended up refinancing the assets they had sold to the SPE, they in fact became again the owner of these assets, which is why they reappeared on their balance sheets, but only in the worst of moments. The first SPEs which experienced such a buyers strike were those which did not even have a liquidity line and where the buyers were supposed to carry the entire credit risk themselves. Rather than imposing losses on their clients, many banks took the assets they had transferred into the balance sheets of these SPEs (called Structured Investment Vehicles) back on their own books for reputational reasons. Banks argued that they could better cope with the deteriorating value of these assets by holding them to maturity and that imposing losses on their clients would endanger their future financing possibilities.

An important question for the impact of these developments on banking systems in Europe was how states dealt with the guideline issued by the Committee of European Banking Supervisors in 2004, which recommended to ignore any financial accounting treatment of these shell companies which forced them onto the balance sheets of banking groups, as long as a true sale from banking group to SPE had been achieved. This in essence meant that banks had to withhold no capital to deal with unexpected losses emanating from these assets and until the introduction of Basel 2 requirements (latest by 2008) did not even have to hold any capital against the liquidity risks posed by the liquidity lines banks had granted. In essence, if the banking regulators did not force regulatory actions upon their banks which contradicted the CEBS guidelines, their banking systems would be totally unprepared to deal with the shock.

Some European countries still forced banking groups to withhold regulatory capital for assets of shell companies which were on their balance sheet, and in order to make this more effective they made financial accounting rules more stringent, goldplating them (Spain, Portugal, s. Thiemann 2011). In these two countries, no short-term securitization developed which reduced the immediate fall-out of the financial crisis in these countries. Other prudential supervisors struggled to install prudential consolidation and gave up their resistance only late to finance ministries and banks, by replacing prudential consolidation with other restrictions. This is the case of France, which up until the end of 2005 used prudential consolidation, i.e. applying regulatory capital charges to SPEs on the balance sheets of banks, for then to switch under the pressure of their banks and the finance industry to the Basel rules on securitization. Importantly however, they moved capital charges for SPEs earlier, applying them from 2006 onwards. As a consequence, the shell companies of French banks were smaller and their impact in the financial crisis relatively small.

Lastly, nations like Germany or Netherlands had no linkage between the financial regulator and the accounting standard setter, which led to the fact that financial supervisors were either not involved (Netherlands) or resisted moves aiming at forcing shell companies on the balance sheets of banks (Germany). As a consequence of this lax regulation, we find in these two countries the largest markets for short-term Asset Backed Commercial Papers, which had the biggest impact during the crisis. Netherlands got lucky in that they developed a different measure, the liquidity coverage ratio which forced banks to have the capital at hand to serve all liquidity needs in the next months, so that the fall-out was not so immediate. In contrast, German banks had basically set aside no capital to deal with the liquidity risks associated with their SPEs, which led to the direct collapse of two banks in the summer and fall of 2007 (IKB and Sachsen LB)

But securitization in European countries had even more obstacles to overcome than only their accounting and prudential treatments. All these shell companies are part of the shadow banking system in that they don’t fall under the same regulation banks do while engaging in maturity transformation just as banks do. But how come they were not regulated? Did the state not see these constructs and their usage? In short, are we dealing with a clueless state, outmanoeuvred by cunning financial engineers?

A closer look at state action before the crisis reveals the tacit acceptance of these organizations, and indeed their promotion by providing regulatory relief. The German finance ministry, for example, wholeheartedly followed the measures proposed by a study of the Boston Consulting Group in 2003 and eliminated regulatory hindrances to securitization, going as far as categorizing SPEs as microenterprises and relieving them from business taxes (2003) (for other dubious microenterprises engaging in financing on a smaller scale, but no less dangerous, see microfinance in India). That is, a corporation with assets of up to 500 million Euro or more was counted as a micro-enterprise, due to its small equity.

Similar actions were taken with respect to financial regulation, excluding SPEs systematically from the perimeter of prudential regulation. The European banking directive specifies that in order to qualify as a credit institution, two cumulative criteria must be met: to receive deposits or other repayable funds from the public and to grant credits for its own accounts.” (s. EFMLG 2007)

SPE’s might be seen to fulfil both criteria, as they are at least implicitly involved in the generation of credit. Instead, what we find is that countries decided to ignore the credit creating function of SPEs, in order to avoid more stringent regulation which would impose costs on SPEs and therefore might make securitization unprofitable. This happened either explicitly or implicitly, such as in France where there seems to have been a tacit agreement to not identify SPEs as credit institutions (s. European Financial Markets Lawyers Group 2007 Legal obstacles on cross-border securitizations).

So summarizing this analysis of securitization from an organizational perspective: banks were setting up shell companies to make securitization possible. These shell companies were under the control of banks and were transferring the profits they generated in their operation as fees to the banks, now as service providers. States were not only well aware of these shell companies, they also engaged in their promotion in order to increase the credit supply in their domestic economies and strengthen their domestic financial market places (s. paradigmatically Asmussen 2006). In an interesting twist, Basel 2 was itself providing the rationale for these state actions in the case of Germany. The new rules regarding the need for credit ratings to be taken into account by banks when providing credit to enterprises generated the fear of a credit crunch for small and medium sized enterprises, the backbone of the German economy. In order to counter this threat, Germany supported securitization as a new way for SMEs to access the credit market.

Rather than financial engineering per say, securitization involved legal and organizational engineering, and rather than having a clueless state overwhelmed by the ingenuity of financial actors, we might speak of a state as an accomplice trying to increase the capacity of its financial system to provide cheap credit to its economy. In these relationships it can be seen how the state not only allowed banks to create a false sense of security in their books, but also failed to regulate against what in hindsight should have been obvious risks. How has the financial crisis changed the regulatory dynamics in this field, and how much policy space is left to individual nations when dealing with this issue? This will be the concern of the next and last blog entry.

(matthias)

When a TV crew from Russia Today had visited Berlin to film a short report on the pirate phenomenon, they also approached me as a “talking (research) head” on the issue. Unsurprisingly, only one sentence of the half an hour long interview made it into the segment featured below.

The reason the Russian TV crew had found me was this post-election blog post.

(leonhard)

Looking back at our own third year of blogging, I am happy to provide this year’s statistics (see stats for 2010 and 2009 respectively):

Top 5 blog posts 2011 (in terms of visitors):

1. Boarding Berlin: The Pirate Party Triumph in the German Capital (FAQ)
2. Transnational Studies and Governance # 3: Studies on ‘global’ markets in history*
3. The Dark Side of Copyright’s Force: LucasArts v. YouTube v. Greenpeace v. VW [Update]
4. Anonymous Attacks German Collecting Society GEMA
5. The “Why?” of Andhra Pradesh – An Interview with Malcolm Harper

* also #1 in the Top 5 of 2010

Top 5 search terms guiding visitors to our blog in 2011:

1. Andhra Pradesh microfinance crisis
2. post-socialism (also #2 in 2010)
3. anonymous gema
4. Milford Bateman microfinance (also #4 in 2010)
5. transnational institutions

Top 5 tags attached to blog posts in 2011:

1. Microfinance / Microcredit (16 out of 38 in 2011)
2. Google (7/15)
3. Creative Commons (7/22)
4. YouTube (6/9)
5. copyright (6/16)

Top series in 2011:

1. Bordercrossing Books (4 out of 6 posts in 2011)
2. The Series Series (3/7)
3. Wise Cartoons (2/4)

In total we published 56 new posts in 2011 – three more than last year but still short of the 64 posts we had in our first year of blogging in 2009. We thus did not manage to reach our self-imposed goal for 2011, which was to “beat the 2009 level of posts but keep the comment-per-article ratio at 2″ (see statistics for 2010). However, we still have on average one post per week and we received 208 new comments last year. This means that we managed to double the comment-per-article ratio the second year in a row, from 2 to 4.

We also very much appreciate a growing number of guest bloggers (see guestxborders). For 2011, we are indebted to Domen Bajde, Elke Schüßler and Matthias Thiemann, who will return in 2012 to continue his series “Securitization Revisited“.

(leonhard)

In spite of several term extensions over the last century, copyright law is still temporally limited. After the copyright protection term expires, works enter into the public domain (see “The Digital Public Domain: Relevance and Regulation“). In Europe, copyright protections terms are very long, lasting 70 years after the death of the creator. When a work finally enters the public domain, anyone is free to reproduce, distribute and remix it without asking for permission.

Celebrating prominent bodies of works that fall into the public domain on January 1 2012, fellow blogger Miriam Levenson has recently started the series “12 for 2012“:

During each of the twelve days of Christmas, the 1709 Blog is bringing readers some information concerning an author, composer, artist or creator who died in 1941 and whose works fall into the public domain in 2012 in countries which operate a “life plus seventy years” term for copyright in authors’ works.

Today, for example, Miriam Levenson features Virginia Woolf:

Some of Woolf’s most famous works include the novels Mrs Dalloway (1925), To The Lighthouse (1927) and Orlando (1928); the essayA Room of One’s Own (1929), and several autobiographical writings. To this day, Woolf is regarded as an innovator in the English language. Her writing tends to focus on the psychological and emotional motivations of her characters, experimenting with stream-of-consciousness and auditory or visual impressions amidst an often uneventful narrative.

Previous entries dealt with Elizabeth Madox Roberts, Isaak Babel, Mary Rose-Anna Bolduc, Andrew Barton ‘Banjo’ Paterson, and, probably the most prominent of them all, James Joyce.

I really love the series and I am looking forward to next year’s “13 for 2013″.

(leonhard)

The 17th climate summit in Durban has just concluded and the target of developing binding decisions for greenhouse gas emission caps post-2012, when the first commitment period of the Kyoto Protocol – the “only game in town”, as it is often called inside the climate policy community – will end, has moved further afar. The main outcome of a uniquely long and strenuous negotiation process in this South African city was to postpone the development of such a treaty to 2015.

In a previous blog entry, Leonhard Dobusch and I have analyzed the role of music industry conferences as so-called “field configuring events” and the role they play in the contestation and possibly innovation of copyright regulation. Together with Bettina Wittneben (WiSE Institute) and Charles-Clemens Rüling (Grenoble Ecole de Management), I am conducting a similar analysis of the role of climate summits in the field of international climate change policy.

This field was established by the Rio Earth Summit in 1992, and has since been marked by a series of international policy conferences carrying forward the United Nation’s climate change negotiation process: the annual ‘Conference of the Parties’ (COP) together with a series of mid-year ‘Meetings of the Subsidiary Bodies’ (SB) held in the context of the United Nation’s Framework Convention on Climate Change (UNFCCC). Recent research has underlined the role of international conferences as “catalysts of change, especially as organizations and governments struggle to develop global solutions to complex problems” (Hardy & Maguire, 2010: 1358).

In our analysis of COP summits since the year 2000, we find these events increasingly contribute to maintaining the field of international climate change policy – possibly at the expense of the momentum needed to advance institutional change. While early climate summits, most notably COP 3 in Kyoto, have created important field-wide institutions such as the carbon-emission trading scheme, recent COPs, probably most remembered the much-hyped COP 15 in Copenhagen in 2009, are characterized by the absence of any meaningful policy agreements. The focus rather seems to have shifted towards managing the more technical issues of the process of international policy making itself: postponing decisions, developing roadmaps, and scheduling further events (cf. the ZEIT-article “Aufschub mit Ansage”, 28.11.2011).

Nonetheless, the COPs attract a large number of participants each year (see the UNFCCC website for a breakdown of participation), many of which come from non-governmental “observer organizations”. For those actors, the COPs play an important role in that they provide a fixed reference point towards which their otherwise dispersed and unconnected activities are directed and from which new activities result (Figure 1). We argue that recurrent events such as the COPs lead to field-wide templates for legitimate forms of action and provide temporal routines, while local-level outcomes include an actor-specific opportunity structure and resource space that depends on networks and relationships formed at events, as well as on individual actors’ understanding of field-level issues. Event outcomes at both levels influence actors’ organizing and strategic positioning activities during both the follow-up of the COPs and the next run-up stages.

A cyclical process of field maintenance through recurrent events (Schüßler et al., 2011)

The COPs thus seem to play a more field-maintaining rather than a field-configuring role over time. However, effective field maintenance also implies the need to provide the field with opportunities for change and to balance continuity and momentum. As Durban has shown again, the COPs, organized by the UNFCCC Secretariat, seem to have a bias for the former, so that the actors most in need of change seek alternative fora such as the Durban Group for Climate Justice or the World People’s Conference on Climate Change and the Rights of Mother Earth.

While focusing on the process of international climate change policy is important, the UNFCCC Secretariat should, despite all the challenges inherent in international diplomacy, not forget about the content if it wants to maintain its strong “field mandate” (Lampel and Meyer, 2008), i.e. on facilitating the development of binding solutions that make our planet a more climate-friendly place.

References

Hardy, C., & Maguire, S. (2010). Discourse, field-configuring events, and change in organizations and institutional fields: Narratives of DDT and the Stockholm Convention. Academy of Management Journal, 53(6): 1365-1392

Lampel, J., & Meyer, A.D. 2008. Guest editors’ introduction: Field-configuring events as structuring mechanisms: How conferences, ceremonies, and trade shows constitute new technologies, industries, and markets. Journal of Management Studies, 45(6): 1025-1035.

Schüßler, E., Rüling, C.-C., & Wittneben, B.F. 2011. Field Maintaining Events: The Role of Conferences in Structuring the Field of Climate Policy. Paper presented at the Academy of Management Annual Meeting, San Antonio, 12.-16. August.

Securitization has had a very bad press reputation in recent years (but see “securitization is not that evil after all”), being related to overly complex re-securitizations, which became impossible to value during the financial crisis of 2007/2008. Before that crisis, securitization was en vogue, favored by most financial economists as a way to spread credit risk from banks into the financial markets, thereby increasing the resilience of the financial system as a whole (s. Bhattacharya et al 1997). The idea was to liquefy credits, to turn them into tradable assets, generating deep secondary markets in which traders could constantly readjust the amount of risk they held in their portfolio. Banks could refinance the credits they gave and thereby expand their lending. Credit would become cheaper, as the demand for securitized assets generated from credit increased, raising the available supply of credit.

Turning credits into tradable assets requires that the transfer of these assets into money is possible instantaneously and without loss of value. Otherwise, the entire idea of readjusting one’s portfolio to changing market circumstances; which is what underlies modern portfolio theory (also the Black-Scholes formula requires continuous adjustment of the traders position, which is why trading in continuous time is a necessary assumption for the pricing to work). Credits on banking books, in contrast, are held on the book of the banook  at historical cost accounting (s. Sigrids work on fair value accounting); i.e. not changing their value from the contracted valuethe moment the contract is signed. Only if banks undertake corrections in value to account for expected losses does the value of these credits in the books of the bank change.

In this blog I will look at the infrastructural preconditions of securitization (Special purpose entities, in the following SPEs) and the shifts in how they were proposed to be treated at an international level and how they were treated on a national level before the crisis and after the crisis. Before the crisis, there was pressure by the Committee of European Banking Supervisors to not force these SPEs on the balance sheet of banking groups (CEBS 2004). After the crisis, we can witness a 180° shift in the position of the financial stability board which states that it wants full prudential consolidation for sponsored SPEs. In my three blog entries I will have look at the impact these transnational recommendations had before the crisis on actions of national governments and will speculate about the fate of the current regulatory proposals in the future.

Going beyond the common presentation of the credit crisis: securitization and the banks

As several sociological authors and economists have remarked, liquidity always carries its “other” (Langley 2010, Carruthers 2009, Amato and Fantacci 2011), illiquidity. Liquidity needs constant continuous pricing of assets. As markets Tthe lower the volatility of these pricing movements, the easier to handle these assets in a portfolio. The moment the pricing offor securitized credits broke down, as markets fell dry, these assets became glued to the balance sheets where they stood at that moment, requiring write-downs.

This is part of what explains the reverberations of the rise in default rates in segments of the US market in global financial markets. Falling values of assets were hurting balance sheets, but the worst was that liquidity had come to a halt and central financial actors could not purge their balance sheets from these assets at a knowable price, but instead had to hold them with incalculable losses. In the old system, it would have wiped out the mortgage banks engaged in these credit segments and possibly some of their largest lenders, but the crisis would have had a slower pace and would have been more contained.

Focusing on the organizational infrastructure of securities markets

This is a legitimate story of the financial crisis and it points to the incapacity of the financial system to handle increasingly complex products; it points to information asymmetry and moral hazard in an originate-to-distribute model. However, this story remains at the surface level of trading and it thereby risks missing the underlying infrastructure of the markets observed, which indeed is complicated (s. first picture below from the BCBS, second picture with my additions to show the real linkage between banks and SPEs).

How banks securitize

Bankers were not simply selling their credits to financial markets, but instead to shell companieswhich they had set up themselves and,  which they controlled all but in legal form,  and which they using themed to generate extra fee-income. Paying attention to these shell companies, called special purpose entities (SPEs) will also allow us to explain better why banks were and are at the center of the financial crisis.

Banks remained linked to the SPE and earned fees

If the credit-risk transfer mechanisms had functioned as envisioned and all credit risk had been transferred out from the balance sheets of banks, the largest losses should have materialized anywhere else but in the banking system. However, this is where they arose, of all places (s. IMF April 2009, p. xii speaking of $2.6 trillion losses concentrated in banks), necessitating large bail-outs.

Besides the increased importance of the wholesale financing market for banking in the developed world (with UK banks financing 50% of their operations via wholesale finance), which increased the vulnerability of the banking systems in these markets, the biggest reason for the large impact the crisis in securitized credits had was the close relationship banks had maintained with the assets they had securitized. These linkages led to the reappearance of large parts of securitized assets credits on the balance sheet of banks, credits which had been sold before to the shell companies. Tthe largest example in this respect is being provided by Citibank, where $49 billions of assets reappeared (s. Acharya and Schnabl 2009, 2010).

This reappearance and the holding of securitized credits es of other banks in the banking sector itself led to the concentration of losses in the banking sector. In addition, this reappearance cast wider doubt in how far the banks had hidden further potential losses from their balance sheets, as assets appeared on the balance sheets of banks; which before were deemed as sold to the market. In this sense, the crisis was also very much a crisis of confidence into the balance sheets of banks, which explains the reluctance of banks and other lenders to lend to other banks.

But: In how far did the balance sheets of banking groups represent the actual risks banks were exposed to and how much was lurking off-balance sheet?

In order to understand these legitimate concerns of investors, we need to pay attention to the infrastructural preconditions of securitization. Doing so reveals how precarious this infrastructure is and how much aid of the state was given in order for securitization to work. Securitization is inextricably linked with the shadow banking sector, and the way the crisis was resolved also points to the power balance between banks and the shadow banking sector.

Securitization, the transformation of credits in the banking books of banks into tradable assets in the trading books of banks or other financial market agents requires not only the contractual reconfiguration of the cash flow generated by these credits, which give value to the new assets but also the change of ownership. In order for banks to be able to eliminate these credits from their balance sheets and to receive cash which they could reinvest into new credits, they had to sell them to a special purpose entity, which was bankruptcy remote. This means that the creditors of the bank did not have any right to these assets in case the bank goes bankrupt.

The special purpose entity, often in the legal form of a trust used these credits as assets, refinancing them by issuing debt instruments, to which they allocated the cash-flows from the credits. The transformation of contracts thus also required a transformation of ownership. What is remarkable about Special Purpose EntitiesSPEs, in contrast to banks is that they have almost no employees, make quasi no important business decisions and hold almost no equity to speak of. The actual decision making is made beforehand by the bank initiating these trusts, which specifies in the contracts what the trust is allowed and not allowed to do and also how much it has to pay for the ongoing services of the bank to the SPE. By transferring the assets to SPEs, the banks could achieve regulatory capital relief while at the same time generating fee income from the SPE.

Dutch Special Purpose EntitiesSPEs in the business of securitization usually held 18000 Euro as equity, when the assets they held were worth 500 000 000 Euro. Its equity to capital ratio was 0.000036%. From this construction, it is clear that the special purpose entity was not capable of withstanding the slightest unexpected credit risk. This credit risk therefore was contractually distributed to the bond-holders. In case the rate of default increased over a certain trigger, the assets were to be liquidated immediately and the generated sum paid out to bond-holders as the contracts specified.

Liquidity as the achilles-heel of the shadow banking system

This is how the issue of credit-risk was contractually dealt with. But this left the issue of liquidity risk which became the more central in the business model of special purpose entities, the greater the maturity mismatch between assets and liabilities. When Special Purpose Entities were used to refinance short term credit with short term debt, there was no maturity mismatch and liquidity risk was almost zero. But when long term assets, such as mortgages were refinanced with 60 day commercial paper, this meant that the maturity mismatch was huge and accordingly liquidity risk was great.

At the same time, the greater the maturity mismatch, the greater the interest rate differential between assets and debt and therefore the greater the gain to be had from undertaking this refinancing. But how was this liquidity risk dealt with? By asking banks to provide liquidity lines which could be used if refinancing in the markets was not possible. These liquidity lines generated fees for banks, and given that banks could determine how much SPEs had to pay, banks could appropriate approximately the entire interest margin SPEs generated.

Maturity mismatches were not regulated for special purpose entitiesSPEs, and so the temptation was huge for banks to use these vehicles to engage in large scale maturity transformation. At the same time, the bigger the maturity mismatch, the greater the probability that the liquidity line would be drawn and the bank would have to take up most of the debt instruments issued by the SPE.

However, before the crisis, liquidity in the markets for debt instruments was ever-increasing, making the probability of illiquidity seem highly unlikely. In this sense, banks were betting on the non-occurrence of a tail-event, while selling insurance on it.

In this sense, banks were still maintaining some exposure to these assets, while officially transferring them from their balance sheets. Or as Gorton and Souleles (2006) put it, they were exchanging their exposure to these assets with their exposure to these shell companies. This official status was important to the banks in order to reduce the capital requirements for their balance sheets, so that they fought all accounting standards that might threaten that off-balance sheet status of these shell companies like the SIC 12 of the IASB and its application nationally (s. Larsson 2008, for a further discussion s. Thiemann 2011, forthcoming).

Regulatorypermissiveness in Europe 2004

Interestingly, domestic finance ministries largely sided with the banks arguing for light touch regulation. But also the Basel Committee for Banking Supervision as well as the Committee for European banking supervisors issued a non-binding proposal on prudential filters (s. CEBS 2004) aligned themselves with these interests, requesting a prudential (!) filter that would remove these assets of SPEs onfrom the balance sheets of banks for prudential regulation if they were captured on the balance sheet of banking groups for financial accounting purposes a true sale had occured. But why did they do this? On the one hand one can say that they were simply expressing the spirit of the time in which securitization was seen as making the financial system more stable, so the more securitization the better. Next to that, an uneven global accounting framework meant that banks in some legislation would have to withhold regulatory capital for these assets while others did not. For example in the most significant market for securitization, the United States of America, the rule for qualifying SPEs (FAS 140, in force since September 2000) allowed all securitization vehicles to be off-balance sheet, thus pursuing a prudential consolidation of SPEs without changing US accounting rules in accordance with IAS 27 and SIC 12 would have imposed costs on European banks, but not on American ones. This competitive disadvantage might have convinced the Committee of European banking supervisors to favor this common exception rather than strict rules only for their banking groups. Banking groups in Europe were pointing out this disadvantage to their advisors repeatedly.

As I show in my forthcoming paper, these recommendations left large national policy space to European financial policy makers if they should pursue prudential consolidation of these SPEs or not. How this one was used, which effects it had on the national banking systems during the crisis and which regulatory consequences were drawn on an international level after the crisis will be part of my next blog entry.

Matthias Thiemann is a PhD candidate in the Sociology Department of Columbia University and has worked as a UN consultant on the question of financial market governance for emerging countries. His dissertation deals with the regulation of the shadow banking sector before the crisis, in particular the ABCP market which involved special purpose entities.

(matthias)

But “The Micro Debt” isn’t going away. It has been shown in over 14 different countries and awarded numerous prizes. Most recently, last Friday it was awarded the Lorenzo Natali Journalism Prize Grand Prize, a prestigious award for journalistic work granted by the European Union in co-operation with Reporters Without Borders. “The Micro Debt” was selected out of a field of 1,300 contenders and commended as “a shining example of world-class investigative journalism, challenging entrenched assumptions”.

Courtesy of the prize, “The Micro Debt” is now also viewable online.

Tom Heinemann was vilified for not whistling everyone else’s tune; now, the Lorenzo Natali Prize is rehabilitating the film and the filmmaker. It shows that telling an unpopular story and confronting received wisdom is still what investigative and independent journalism is about. Conversely, what (if anything) has the world learned from microfinance promotion films like “To Catch a Dollar“? As for the claims of factual inaccuracy levied by Friends of Grameen against Heinemann, a short follow-up segment, to be aired early next year in Norway, may bring more clarity; watch this space.

(phil)

So many functions … but can it cut?

I don’t expect CGAP to function as an independent evaluator of microfinance. What I do expect is that CGAP publications have minimum standards of research quality and logic.

The most recent CGAP report, entitled “Latest Findings from Randomized Evaluations of Microfinance” (Bauchet et. al.), however, is appalling on both counts. Nearly everything about this report is problematic. It is racked by wishful thinking – to paraphrase: “we may not have evidence that microfinance does what it was supposed to, but we still believe it works” – and it has a disturbing feel about it, which derives from: (1) what the authors have left out, and (2) the heavy tension between concern for the poor and patronising them.

Ignorance or ignoring?

The first main problem is that a uniquely important piece of literature is left out. Given that their report is supposed to give an overview of the available knowledge from RCTs, I was surprised – to say the least – that Bauchet and colleagues did without a single mention, let alone a discussion, of the systematic review by Duvendack et. al.

Published just this summer for the British DFID, Duvendack and her co-authors went through a whopping 2,643 publications on microfinance in order to systematically assess what is and what isn’t known about the impacts (Bauchet et. al., in comparison, looked at a total of 20). In what is the most comprehensive study to date, Duvendack et. al. found dismayingly that (after over 30 years) “there is no good evidence for” microfinance actually working – contrary to the message Bauchet et. al. wanted to convey. How could the CGAP report have missed this recent, huge and hotly-debated publication?

Either: the authors were genuinely ignorant of the Duvendack study, in which case they really have no idea where the research on microfinance’s impact currently stands. Or: they didn’t agree with the conclusions, and therefore conveniently chose to ignore them.

It doesn’t do what it’s supposed to do… but it certainly works!

And on to the second problem, which is about how to measure success (I’m picking out examples here, but I have many more in case it seems I am being selective)… The key message of the new CGAP report is: Microfinance works, but not in a miraculous fashion, and not in the ways it was expected to. It doesn’t reduce poverty, but it does practically everything else that we didn’t try to prove. A good example along these lines (emphasis added): “No evidence was found that microcredit was empowering women, at least along measured dimensions“.

“Now with nearly 200 million borrowers, microcredit has been successful in bringing formal financial services to the poor”, Bauchet et. al. proclaim. Success!! 200 million people have loans. But are these loans doing anything useful? Well… As was reported after the publication of the first RCT results, actually borrowers in India didn‘t earn higher profits, hire more employes, or see more revenues – but they did turn out to be 1.7 percentage points more likely to start a business. Wow: receiving a loan after telling a bank that I want to start a business makes me marginally more likely to actually start one. Come on. Shouldn’t the standards of success be higher than that?

Pausing to think about these results, in actual fact this means: people with small businesses, who voluntarily came forward to get a loan for whatever reasons they had, and who did not receive a loan, were no better or worse-off than their counterparts who had received a loan. What stronger proof could there be for microcredit being useless?

At least Bauchet et. al. are honest about this much:

Microcredit is not transforming informal markets and generating significantly higher incomes on average for enterprises.

But they immediately add:

And yet the industry has focused almost exclusively on the rhetoric of entrepreneurship and has overlooked the many important benefits to households that are using loans to accelerate consumption, absorb shocks, or make household investments, such as investments in durable goods, home improvements, or education for their children. …

While these uses of financial services are different from the uses initially anticipated, they are still valuable, and the ability to manage finances is a fundamental part of everyday life for all people.

If anything, this text is evidence of an industry searching for a new source of legitimacy. Microfinance used to be about “empowering women”, then it was about “microentrepreneurship”, now the slogan is “financial inclusion”; which may be little more than a catchphrase for the idea that bringing the poor access to finance is an end in and of itself.

Thank you for not smoking, thanks to microfinance

Worse yet, the new focus seems to be on making microborrowers better people. Now the measure of success is that borrowers should adhere to a Protestant work ethic:

Those who started a new business cut back on temptation goods (tobacco, alcohol, tea, betel leaves, gambling, and food consumed outside the home) and invested more – tightening their belts to make the most of the new opportunity. This switch from temptation goods to investment and durable consumption in the groups with businesses is an encouraging finding.

Perhaps the economist who wrote that sentence doesn’t smoke, and never eats a samosa at a roadside stall. Yet, the patronising audacity of categorising a cup of tea as a “temptation good”, as if it were a frivolous luxury (in India, mind you), is unsettling. While to a homo oeconomicus a foregone cigarette is merely one small step towards rationality, one can imagine the real-life borrower’s view of this: “Working to pay off this loan has even taken my daily cup of tea from me.” Only in the economist’s world is this an improvement thanks to microcredit.

Unsurprisingly, the authors of the report don’t dwell on significant findings (from the Philippines) that “subjective well-being slightly declined”. Instead, they contently note:

The new businesses created and the shift away from small “wasteful” expenditures implied that access to loans enabled households to make clear choices to reprioritize, invest, and make the most of the new opportunity: “The main objective of microfinance seemed to have been achieved. It was not miraculous, but it was working” (Banerjee and Duflo 2011, p.171.).

Is this really a positive thing? When read in a the cold light of reason, the evidence presented here shows: because of microcredit, poor people consume fewer locally-produced goods and services (like tea, hand-rolled cigarettes, and roadside food), thereby hollowing out the local market, and they now work harder (or do something, anything) to pay off loans for a microfinance bank with foreign shareholders; and (unsurprisingly) as a result they are less happy.

In this way, consistently throughout the report, Bauchet and co-authors (who are, in fact, mostly affiliated with the same institutes producing the RCTs) reproduce the subtle spin put on the evidence. The main objective, as they interpret it, is not to make the poor materially better-off: it is to get them to make sensible choices (as Western economists define them) and to get them to work. The new success of microfinance: re-programming people? Microfinance then clearly becomes a tool of governmentality, a sublte but forceful way of changing people’s behavior. In the section on savings products, they present poor people as irrational with regards to the future. Microfinance organisations should work to create savings discipline.

Despite the lack of evidence for positive effects on welfare from credit, the studies so far offer tantalizing evidence that there could be important potential benefits for some poor households to be gained by helping the poor reprioritize their expenditures.

When neither a lack of positive evidence, nor a fair amount of negative evidence can break the optimistic outlook, it seems that in reality, the irrational wishful thinkers are the evaluators themselves – not the borrowers.

Finally, the mind boggles as to what the minimum requirement is for being allowed to publish reports for CGAP are:

• is it high standards of evidence, solid logic, transparency of assumptions? High standards, good logic and transparency are a bonus, perhaps, since very insightful reports sometimes emerge from CGAP…

• or is the minimum requirement being “on message”? No matter what, microfinance has to be the solution. After reading this report, I am inclined to think it is that.

(phil)

Today, I stumbled upon an article in the Austrian weekly profil, dealing with another field of alleged ‘self-plagiarism’: architecture. They juxtapose several buildings by famous architects such as Frank Gehry, Daniel Libeskind or Zaha Hadid. Due to copyright issues I cannot simply provide all the examples below, but with the help of Wikimedia commons I managed to reproduce two examples of alleged ‘self-plagiarism’ and one of mere ‘plagiarism’ presented in the Article:

Frank Gehry

Disney Concert Hall in Los Angeles

Guggenheim Museum Bilbao

Daniel Libeskind

Military Museum Dresden

Art Museum Denver

Norman Foster vs. Jean Nouvel

Swiss Re Tower, London

Torre Agbar, Barcelona

Of course, all these cases differ from that of Bruno Frey or any traditional case of plagiarism. First of all, architecture always happens out in the open. The problem in Frey’s case was not so much that he published nearly identical articles in different outlets but his failure to openly point to the previous versions. Second, similar to the fashion industry (see Raustiala and Sprigman 2006, PDF), architecture is a field with low intellectual property protection. Third, to a certain degree, and in the words of Alfred Hitchcock, “self-plagiarism is style“. When a city invites an architect such as Frank Gehry to build a museum, his building is probably expected to be recognizable as “a Gehry”.

On the other hand, the tendency to reproduce one’s own previous works can also be a danger creators try to prevent. In an interview, Zaha Hadid was asked how she avoids “the besetting architectural tic of self-plagiarism”. Her response:

“Don’t draw on computer. Don’t draw and then put it onto computer…I have five screens…Different projects…You work on developing, oh, a table while at the same time you’re developing masterplans. It’s like you have different information coming from different directions. Like photography. Out of focus… then you zoom in. I’ll have a sketch–it’ll take a few times before it takes. Sometimes a few years. You see, not every idea can be used right then. But nothing is lost. Nothing.”

This made me think whether I should try out some strategies to avoid my own self-plagiarizing tendencies. Suggestions, anyone?

(leonhard)

“If you have an apple and I have an apple and we exchange apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.”

This leads to the conventional wisdom that sharing immaterial goods is different from material goods. In the digital age, more and more goods can be easily shared in form of perfect copies. And even when the economic value of a digital good might depreciate if it is shared freely, sharing can at the same time generate indirect returns (for examples see Anderson 2009). Consequently, authors such as Lawrence Lessig paint the picture of a “hybrid” or “sharing economy“, which they deem to be beneficial for all parties involved. Prerequisite for such a sharing economy to work is a sharing culture, which includes practices such as giving attribution or using open formats and licenses.

This made me think of other examples of mutually beneficial sharing practices outside the digital realm. Are there instances of sharing material goods that are also beneficial for all parties involved? What came to my mind is the practice of profit sharing between capital and labor (for a classic economic article on this issue, see Weitzman 1985). In the period between WWII and the 1980s, wages rose with productivity; productivity gains were shared between capital and labor. In a way, the prerequisite for this profit sharing had also been a sharing culture in industrial relations. And this sharing culture began to erode since the 1980s, as has recently been demonstrated by Berkeley’s Robert Reich with an impressive graph in the New York Times:

Interestingly, even the top fifth did not profit from ending the previous profit sharing regime. In a nutshell, mutually beneficial sharing practices might far from being restricted to the digital sphere. And a return to historic sharing practices and cultures might be a way out of current economic turmoil.

(leonhard)

You use it whenever you need it. You want it to be clean. You sit down, you stand, or you squat. You use paper, or maybe water. You flush… and whatever your business there may have been, it disappears. You leave, you wash your hands. So simple… you take it for granted.

If you’re lucky.

Any traveler to another continent soon learns that the toilet is a highly cultural thing. Sanitation is a cultural practice. Sometimes even a trip from one country to another is enough to cause mild shock and awe – for instance, how every German holiday-maker in France feels when they (re-)discover the French squat toilet. Or how a French traveler feels when discovering the German “Flachspüler“. Or the Irish, when voting on the Lisbon Treaty. Toilets are deeply culturally embedded, so much that Slavoj Žižek has a special theory about their differences and their effects on national mindsets, politics, and philosophical traditions.

Westerners have a lot to learn…

But despite all the cultural differences, as global events like World Toilet Day show, the problem of toilets and sanitation is increasingly addressed at a transnational level. November 19th is “World Toilet Day“, organised by the WTO (World Toilet Organisation), designed to draw attention to the lack of adequate sanitation faced by 2.6 billion people, over 1/3 of the world’s population.

Transnational toilet governance?

Awareness-raising about sanitation (increasingly across national and cultural borders) comes in all shapes and forms, often verging on tasteless, in a shock marketing style. “Give a crap about human rights“, “talk sh*t all week” – hey, whatever serves the purpose. But with regards to this “don’t eat shit” officially WTO-endorsed video from Singapore, I am inclined to play the is it racist? game.

Was skin colour central to the message? (Only watch if you have already eaten)

Thankfully, water and sanitation are an increasingly recognised objective for development aid programmes. For instance, the USA reports having raised its water and sanitation funding by 82 percent in three years; but the support is still not consistent, and with $495 million, it still only adds up to 19 cents on average for each person lacking sanitation, per year. So, while transnational development aid may be increasingly addressing the issue, the figurative drop in the ocean still comes to mind.

More promisingly, perhaps, thanks to the United Nations’ Committee on Economic, Social and Cultural Rights (ECOSOC), since 2002 a Human Right to Water and Sanitation is recognised at a transnational level. Legal scholars, above all by the late Erik Bluemel, have clarified what this means: “Categorizing a right to water as a human right means that: fresh water is an entitlement, rather than a commodity or service provided on a charitable basis”. But the codification of the Human Right in actual domestic law has – with very few exceptions such as South Africa’s lifeline water supply – not yet provided a basis for national or regional water policies. And even in South Africa, the free rights-based assured lifeline supply is far from ensuring a fair and equitable supply of water – and doesn’t include sanitation.

While such activities as the codification of the Human Right, holding a World Toilet Day, or increasing water and sanitation aid are far short of an establishment of a transnational toilet governance regime, they clearly signal moves in this direction. Despite the national differences in sanitary culture and practice, the transnational level is slowly but increasingly being involved in the governance of who takes a dump where, and how.

My crap is your crap, too

There are good reasons for sanitary practices not being treated as an individual issue. Not that it matters much in Tokyo or Bombay how I defecate in Cologne. But: the business of water sanitation is already a transnational one. While water privatisation has become less fashionable in recent years after hitting snags in countries like Bolivia, its isn’t off the agenda yet. So-called “public-private partnerships” are still the World Bank’s favoured solution. To address this, policy-making and advocacy activities have to be equally transnational and address a global public.

Furthermore, at another level, water and sanitation in and of themselves have to be dealt with not as individual, but as public problems. The argument in my recent MPIfG Discussion Paper, and of a paper soon to appear in 3.2 of the Journal of Infrastructure Development, is that (increasingly fashionable) microfinance models for water and sanitation miss the point. The reason is that – pardon the language – crap is a “public bad”, the opposite of a public good, and not a private issue.

Consider your office toilet: if one person uses it improperly, everyone in the office suffers. Now consider your neighbourhood, city, or region. If everyone disposes of their human waste whichever way they want to, everyone suffers. The inhabitants of a nearby slum have to use open land to “go”, so waste seeps into the groundwater from which everyone’s supply comes, the flies which land on your plate land on open sewage beforehand, etc., etc… Shouldn’t you be working to make sure they have decent sanitation, too? Wouldn’t you even be willing to pay for this, to lower the costs for yourself (for diseases, bottled water, etc.) as well as for everyone else?

(The same applies to basic private sanitation practices like hand-washing, where one unsanitary individual can infect many others.)

Sadly, policies currently on the agenda, like the “Senator Paul Simon Water for the World Act of 2011” waiting to be passed by the US Congress, show no awareness of this. The act formulates its implementation aims as encouraging “best practices for mobilizing and leveraging the capacity of business, governments, organizations, and civil society in forming public-private partnerships”… “business” is the first actor it thinks of.

As long as it is believed that sanitation is a private problem for private actors to solve, the public bad of inadequate sanitation will not be addressed inclusively, and therefore the levels of sanitation and hygiene attained in rich countries will not be attained elsewhere. Perhaps an increasing involvement of the transnational level in formulating water and sanitation policy in future may provide a better orientation? World Toilet Day is a day to think about this.

(phil)

While I have not managed to blog about the workshop so far, Anne-Catherine Lorrain from the COMMUNIA Association has now provided an extensive summary. There  she documents why mapping the public domain empirically is a worthwhile exercise:

The empirical mapping of the public domain should help identifying more precisely the economic relevance of the public domain. The regulation framework applying to the public domain can produce some direct effects on the economy, and more particularly on innovation. As a matter of fact, businesses can suffer genuine legal uncertainty when it comes to identify what is protected by IP rights and what is not. The positive economic impact of content being in the public domain is sometimes already acknowledged in practice. For instance, some patent rights holders can decide to donate patentable inventions in order to create a pre-competitive market. Like the “adjustment process” (Schumpeter), the utility of the public domain to improve competition should be demonstrated, although the question about how this aspect should be echoed within legislation remains.

Besides, her summary features the pink sky over Berlin towards the end of the workshop:

Pink sunset on the Spree behind the Public Domain session speakers from left to right Martin Kretschmer, Leonhard Dobusch, Felix Stadler, Juan Carlos De Martin; picture: Anne-Catherine Lorrain

 I can only thank Anne-Catherine very much for providing this great summary and endorse reading the whole transcript.

(leonhard)