The Brazilian Bar Association and the Citizenship

By Ophir Cavalcante Junior

[caption id="attachment_1557" align="alignright" width="327"] Ophir Cavalante Junior, National President of the Brazilian Bar Association[/caption]

The Brazilian Bar Association`s institutional and statutory role gave lawyers and its representative entity responsibilities that go beyond merely corporative interests, giving them an active participation on the work for the nowadays Rule of Law.

When the Brazilian Constitution recognized that “the lawyer is indispensable to the administration of justice and is inviolable for his acts or manifestations in the exercise of his profession, within the limits of the law”, the article 133 turned the lawyer into a professional of the citizenship, a defender of the society`s interests, of the correct application of the law and of the democratic institutions.

At the same time, the Brazilian Constitution gave the Brazilian Bar Association the prerogative of applying the abstract constitutional control of laws by the use of the Direct Action of Unconstitutionality filled at the Brazilian Supreme Court, every time laws jeopardize the collective interests. This prerogative, it is important to say, is inalienable. The citizens should not be massacred by the State inefficiency; this is why the Brazilian Bar does not hesitate about putting a magnifying glass over the acute social issues, aiming to open the debate and because it considers that Brazil, even though it has advanced in the last years, still faces serious structural problems.

With one of the worst tax systems in the world, Brazil also has one of the most chaotic tax legislations – complex, redundant, with too many laws, decrees, resolutions and other pieces of legislation, many of them contradictory, causing experienced lawyers to get confused, what to say about the taxpayer-citizen? The citizen, in addition to submit itself to an irrational chain of ancillary obligations, it needs to forbear a series of benefits for economic sectors more capable of contributing.

In this matter, the system has become terribly unfair to the poor ones. Workers that earn up to two minimum wages dedicate 197 days of work to pay taxes, according to a research of a renowned institute for economic research, in a perverse equation that reduces the weight of the taxes as the income increases. Who earn more than 30 minimum wages dedicates 106 days of work to pay taxes, according to the same research.

Therefore, when there is no equity and the social return of the tax collected is low, citizenship is not exercised, and the citizenship is essential for the achievement of the purposes established in our Constitution, of building a free, fair and altruist society; to guarantee the national development; to eradicate poverty and marginalization, to reduce social and regional inequalities and to support everyone’s welfare.

Nevertheless, Brazil needs an independent and also strong judiciary to meet social demands. Our democracy, unfortunately, is deprived of social content, for it does not fully meet the essential needs of the people, who are, after all, the agent, means and end of development.

Only with a strong judicial system we can strengthen civil liberties, the establishment of jurisprudence, the inviolability of constitutional rights of assembly and free expression of thought. The judiciary is the stronghold of citizenship. It no longer is the Moderating Power, but the Stabilizer Power, which promotes the balance of the democratic State. It is also the Assuring Power of legal certainty, of active freedom and of the Constitution.

And what does the Constitution say? That the Law is for everyone and everyone is equal before it. When I refer to “everyone”, it means from the top to the base of the pyramid, because only the Law, when seen in its rites and procedures, represents the antidote for any crime. It does not matter whether it is a mere misdemeanor, breaking the electoral law, or the most sophisticated attack to the public treasure.

"That the Law is for everyone and everyone is equal before it."

- Constitution of Brazil

In a democratic Rule of Law, the powers interact independently and harmoniously, without interfering in each other. These are basic concepts that date back to our Republican model that survived, thanks to a strong judiciary. Whenever there was an attempt to disrupt this balance, trying to discredit judicial decisions, there was the mark of the discretionary and arbitrary governments.

Quoting Rui Barbosa, one of the greatest Brazilian jurists of the twentieth century and patron of our organization, the courts do not use swords. The courts do not have the treasury, the courts do not choose representatives and senators, the courts do not make ministers and do not distribute candidacies, do not elect presidents; courts do not run militias, armies and navies. The courts judge. It is for fear of the courts that the tyrants tremble.

Then, the role of advocacy wins prominence as a tool to ensure social peace and contribute to changes. There is a social frame housing the lawyer’s profile, which the infra-constitutional legislator strengthened in the law 8,906/94, the Statute of Advocacy and of the Brazilian Bar Association, when it gave functional independence, and by providing the lawyer is inviolable for his acts, in the exercise of his profession, equating it to the judges and prosecutors. Moreover, in the large scope of the administration of justice, the lawyer’s soul is present, either in the judge or the prosecutor, because either one or the other became a member of the world of Law through the doors of the legal profession.

Therefore, we cannot accept that the lawyer, when exercising his constitutional right of defending the prosecuted, be evaluated with a certain tinge of complicity. It is also unacceptable that lawyers` activities be restrained by the most prosaic difficulties, mostly imposed by completely uninformed people – or who pretend to be uninformed – about the role of lawyer.

[caption id="attachment_1594" align="alignright" width="210"] Coat of Arms Brazil[/caption]

“There is no hierarchy or subordination among lawyers, judges and members of the Public Prosecution Service, and all must treat each other with reciprocal consideration and respect,” says article 6 of the Statute. Likewise, the lawyer must “freely exercise the profession throughout the national territory; have respected, in name of the defense of freedom and of professional secrecy, the sanctity of his or her office or place of work, of his or her files and data, his or her correspondence and communications, including telephone or related communications, except in the case of search and apprehension determined by a judge.”

The lawyer can enter freely “in court session rooms, even beyond the gates that separate the area reserved to the judges; in hearing rooms, secretary offices, court record’s offices, justice offices, notary and registration services, and, in the case of police stations and prisons, even outside of working hours and regardless of the presence of those in charge of them”.

Many confuse such treatment with corporative privileges, but the lawyers’ prerogatives are, in matter of fact, the citizens’ prerogatives. It is the client’s right that is being discussed. It does not matter if the client is poor or rich, if he has influence or not. Everyone has right to presumption of innocence, to the contradictory, to the due legal proceeding. No one can be condemned unless by res judicata. And the lawyer is the effective link between these fundamental rights of citizenship and the Justice.

It is quite important to emphasize that the legal provisions of our class, since the 30’s, assigned the legal profession the practice of a pure liberal profession. Throughout the years, however, the profile of the lawyer has changed. There was the “proletarization” phenomenon of the legal profession, turning the professional, most of the time, into an employee, who depends on a job relation, either in the public sector, or in the private sector. The Statute, by contemplating the figure of the employer lawyer and the employee lawyer, took into consideration the maintenance the lawyer’s personal independence, as well as the obedience of his prerogatives and of the ethical principles, essential concepts from the practice of the legal profession, including giving prominence to the social mission of the lawyer.

It must be mentioned the importance of the requirements of moral and ethical nature that the lawyer incorporates, when he comes into contact with the learning and knowledge environment. The lawyers must remember that the ethical principles are part of their moral and professional responsibilities, starting from respect. The lawyers must also to keep in mind the fidelity principle, always pursuing credibility.

The lawyer only subordinates himself to his conscience and to the law, this is a classic principle to be followed. His mind must be enlightened by the flame of responsibility and by the light of truth, without which ethics is only an illusory game. Moreover: the individual conduct of the lawyer is reflected in the collective image. What a lawyer comes to represent, as concept and identity, ends up spreading itself over the social spectrum. So causing the bond of ethics solidarity that should unite the advocacy body.

As far as it fights for these issues, the Brazilian Bar Association establishes itself as a result of collective work, the amalgam between the practice of law and the citizenship, a fundamental condition for the consolidation of a just society.

About the author: Ophir Filgueiras Cavalcante Junior is the current president of the Federal Council of the Bar Association of Brazil. Dr. Ophir Cavalcante was born in Belén, Pará, having graduated in Law from Universidade Federal do Pará in February 1983.

About OAB: Currently with 733,597 lawyers and almost 100,000 law clerks, the Brazilian Bar Association is made by a Federal ("Conselho Federal") and several Regional Associations ("Seccionais"), one per state and federal district. It fully and legally controls law practice by private attorneys in Brazil.


DESERTEC: Clean Power From Deserts

By Michael Düren

Solar power from deserts can contribute significantly to a future renewable energy system. The technically accessible solar potential in deserts exceeds the global energy demand by a factor of 20. In the DESERTEC concept, a smart super grid based on HVDC technology interconnects wind, solar and other renewable energy sources with distant consumers on a scale of several thousand kilometres. The large grid averages out the natural fluctuations of renewable energy sources to a large extend. A large-scale production of solar energy in desert countries has important socio-economic implications. The interconnection of continents by large power grids introduces new economical interdependencies, which can help to reduce the North-South gradient of economic wealth.

Abundant Solar Power

For 200,000 years, mankind had a sustainable energy system, based on biomass, wind, sun and water for cooking, heating, mobility and mechanical work. 250 years ago, during the period of industrialization, fossil fuels became available at large scale, and today, they cover 85% of the worldenergy system. The abundant solar power that is available in the deserts of the world can play a key role for a future renewable energy supply. The “clean power from deserts” or “DESERTEC” concept is an inherently international, transcontinental approach, where the central technical starting point is a super grid that distributes electric power over distances of thousands of kilometres and averages out fluctuations of the renewable sources as well as of the energy consumption. The challenge to replace coal, oil and gas also in the non-electricity sector is often forgotten in the public discussion about local renewable energy systems.

"The world is facing an increasing world population and an increasing energy demand per capita..."

Mission Impossible – the IncreasingWorld Power Demand

Today, the world power consumption is approximately 15,000GW, averaged over day and night and over the whole year. The world is facing an increasing world population and an increasing energy demand per capita, what may lead to an expected global power demand of approximately 24,000 GW in 2050. Figure 1 illustrates how the primary power divides into fossil, nuclear and renewable energies. Taking the climate goals serious, the fossil contribution has to be reduced by at least 50% in the coming decades to have an significant effect on the accumulated CO2 at all. This means that capacities of 15,000 GW of primary power have to be newly installed without exploiting the remaining fossil resources. For illustration, one should keep in mind that 1 GW corresponds to the electrical power of one nuclear power plant. To build and run 15,000 additional nuclear power plants (fission or fusion) in the next 40 years (i.e. 1 new reactors per day) is simply impossible from the point of view of the qualified manpower that is needed to do so.

[caption id="attachment_1606" align="aligncenter" width="609"] Figure 1[/caption]

The Future is Electric

If fossil fuels are drastically reduced in future, they will have to be replaced by other energy carriers. Options are synthetic fuels (liquid, or gaseous like hydrogen), or electricity. Electric power is a prime choice, as the transport and distribution of electric power is very efficient and simple and the demand of electric power by the consumer is increasing.

"... the technically accessible power exceeds the world energy consumption by a factor of 20."

The Solar Potential in Deserts

The total solar irradiation in the deserts of the world is immense. Using current technology of thermal concentrated solar power plants (CSP), the technically accessible power exceeds the world energy consumption by a factor of 20. Figure 2 shows a map of those desert areas that are well suited for standard CSP technology. Overlaid is a satellite photo of the earth at night. The yellow lights indicate areas where there is a high consumption of electricity at night. It illustrates the concentration of electrical power consumptions in the USA, Europe and Japan and also the lack of electrical power in the populated areas of Africa and South America.

[caption id="attachment_1607" align="aligncenter" width="572"] Figure 2. The red colour indicates desert areas that are well suited for solar power plants due to large direct solar irradiation. Overlaid is a satellite image of the earth at night. The yellow lights indicate the areas with concentrated electricity consumption (Source: DESERTEC; based on data from NASA and DLR). Click to enlarge.[/caption]

Solar Power Plants in Deserts

There are two competing technologies (PV - photovoltaic and CSP - concentrated solar power plants) available for converting solar radiation into electricity. The CSP systems consist of a mirror system that follows the position of the sun, an absorber that converts the solar radiation into heat and a steam engine with generator that converts the heat into electricity.

The Parabolic Trough

There are several technological realizations for CSP. The most mature one uses a parabolic trough that follows the position of the sun by a one-axis rotation. It focuses the solar radiation in one dimension onto an absorber pipe.

The absorber pipe has the purpose to absorb light and to convert it into heat. The absorber pipe is usually made from special, double walled glass with a vacuum in between (like a thermos jug), to minimize heat dissipation. The inner part of the absorber pipe has a special coating which absorbs light but has a small radiant emittance in the infrared to minimize losses by heat radiation. The absorber pipe has to resist large heat loads and steep temperature gradients, e.g. when a cloud is passing. The thermal power is transported to the steam engine by a liquid. Standard technology uses a heat transfer oil at temperatures up to 400°C. Newer power plants directly evaporate water at high pressure and reach temperatures above 500°C. Here the technological challenges are the phase transition and the high pressure of the vapour. Some plants have parts of their mirror fields at different temperatures to optimize temperature and heat emission at the same time.

The steam engine with a generator converts thermal energy into mechanical and electrical power. According to the laws of thermodynamics, its efficiency depends on the temperature difference between the incoming steam and the outgoing water. To optimize the efficiency, most steam turbines use water-cooling. For desert use air condensers are needed that have a closed-circuit water-cooling system, leading to a loss of about 10% of efficiency compared to water-cooled systems. An alternative to air-cooling is cooling with seawater.

Parabolic trough systems are a proved, mature technology. Commercial systems have been operational in the desert for over 25 years in a reliable way. Prominent examples are the SEGS plants in the Mojave Desert in California, USA. CSP power plants use components that can, to a large extent, be produced in desert countries themselves. The materials used are mainly glass, steal, concrete and copper and those are sufficiently available on the world market, also for large-scale production. The energy repayment period of a parabolic trough system is 5–6 months for a location in Spain and shorter in sites of higher solar irradiation as e.g. in North Africa.

The Power Tower

While the parabolic trough and Fresnel systems focus the sunlight in one dimension, power towers focus in two dimensions and can therefore reach higher temperatures and higher Carnot efficiencies. Higher temperatures also mean a more efficient heat storage. The technology of power towers is very promising for the future, but currently there is little commercial experience, as only very few power stations are in operation. One big advantage of the power tower compared to the parabolic trough is that the power tower can be built in a hilly area whereas the parabolic trough needs a flat surface. The heat carriers that have been investigated are steam, liquid sodium, and others. The research tower in Jülich/Germany uses ambient air that is aspirated through the absorber.

CSP offers a largely unexplored field to synthesize gaseous and liquid fuels using catalytic reactions at high temperatures. A prominent example is the generation of alcohol using synthesis gas that is generated in a solar tower from CO2 and water.

Click 'Play' to see Professor Michael Düren of DESERTEC argue that we can harness the African desert sun to power the world:

Thermal Storage Using Molten Salt

Solar thermal power stations use heat as intermediate energy medium and allow for a cost effective storage of energy at large scale. First commercial systems are operated that combine a parabolic trough power plant with a large-scale storage capacity using molten salt as storage medium. During the day the molten salt from the “cold” container is pumped into the “hot” container using a heat exchanger that transfers the thermal energy from the thermo oil coming from the solar mirror field to the molten salt. After sunset the salt is pumped back to the original container through a heat exchanger that gives the energy to the steam system. This way the steam turbine can continue to operate during night. In the commercial systems in Spain the size of the heat storage is optimized to deliver electricity during the evening peak hours. The investment of the heat storage system pays off for two reasons: it allows an electricity production on demand when the electricity price is highest and it allows to operate the steam turbine at full load for a longer time every day without having to cut the solar peak power during midday.

Hybrid Power Stations

As CSP power stations use conventional steam turbines, one can combine solar power and fossil power in the same power plant without doubling the investments for the power block. Even though CSP stations with heat storage can deliver power day and night, there may be reasons to operate a CSP station with fossil fuels, e.g. to bridge a bad weather period.

Another reason for building hybrid power stations is to minimize initial investments. Starting from an existing modern combined cycle gas turbine, the fossil fuel can be replaced by solar energy step-by-step by adding a solar field that delivers part of the exergy.

The fossil water sources are limited and the demand for water is increasing due to the population rise.

Seawater Desalination in Desert Countries

For many desert countries the future fresh water supply is an even more serious issue than the energy supply. Today, many desert countries exploit fossil water reservoirs for drinking water and for agriculture. The fossil water sources are limited and the demand for water is increasing due to the population rise. The problem may be intensified in future by reduced rainfalls due to climate changes, especially in many regions of Africa. Seawater desalination can mitigate the problem. As seawater desalination is inherently energy intensive, it is important to integrate seawater desalination into an overall energy concept. An elegant way to combine electricity production and seawater desalination is to use the waste heat of CSP stations for desalination.

Wind Power in Deserts and Off-Shore

In many desert countries there are trade winds that allow for an efficient and reliable production of wind power. Modern wind power stations are a highly cost efficient way to produce renewable energies. Due to the fluctuating nature of wind, wind power has to be integrated into a large grid to average out fluctuations and it has to be combined with other sources of renewable energy in a common concept. Naturally, wind energy is not limited to deserts. There is a large unused energy potential offshore that is waiting to be harvested. Wind power increases with the third power of the wind speed, and therefore offshore wind power is significantly larger than on-shore wind power. What the desert is for solar energy, the sea is for wind energy.

The Ideal Solar Thermal Power Station

To summarize, the ideal solar thermal power station in the desert focuses the light by a large concentration factor, reaches highest temperatures, stores the heat using a large volume of cheap storage material, and uses the stored heat to produce electricity on demand.The waste heat is used for seawater desalination and as process heat for industrial processes.

Power to the People – the Super Grid

The electric power produced in deserts has to fulfil first the growing power demand of the local population in the desert country. The large potential will exceed the local demand by far and can be used to export electrical power to the neighbouring countries. By the use of a super grid that spans continents, all kind of distant, renewable energy sources can be interconnected among each other and with the consumers.

[caption id="attachment_1610" align="aligncenter" width="622"] Figure 5[/caption]

The idea of DESERTEC is to interconnect the local grids on a scale of thousands of kilometres for three reasons: to transport energy from deserts to distant consumers, to average out fluctuations of renewable energy sources, and to minimize expensive local storage and backup capacities.

HVDC Technology

The super grid became feasible by recent progress in the technology of high voltage direct currents (HVDC) which is needed for long distance transmission and allows for point to point connections with small power losses.

Averaging out Fluctuations

Sun and wind are fluctuating energy sources. The sun has a daily and a yearly cycle, and due to clouds and weather conditions there is a stochastic behaviour in addition to the predictable oscillations. For wind energy the stochastic fluctuations dominate the cyclic variations. The fluctuations are spatially correlated, and the correlations decrease with distance. By interconnecting a large number of fluctuating energy sources, part of the fluctuations are averaged out.

Demand Control - Smart grids do not only adjust the production to the consumption, but in addition they adjust the power consumption to the availability of power.

Energy Security

Energy has to be available 24h per day, every day in the year. Our current fossil energy system based on coal, oil and gas uses storage capacities to ensure permanent availability. In the electricity sector, today’s base load power stations fired by coal and nuclear energy are supplemented by gas and oil power stations to account for peak hours of electricity demand. If in future a major fraction of the electrical power comes from sun and wind, the fluctuations and the daily and yearly cycles of these renewable energy sources have to be taken into account for a secure energy supply. The main ingredients for a stable, renewable energy supply based on energy from deserts are:

A large-scale smart super grid

CSP thermal storage

Overcapacities and a “fine-tuning” of the selection of various power sources

Large scale water pump storage

Power to gas production

Back-up power stations

Environmental Issues

The apparent (relative) cost advantage of fossil and nuclear energies are deceptive and caused by not internalising external costs.

Numerous large-scale solar power stations, wind parks, overhead lines, and large pump storage stations certainly have an impact on the environment that has to be carefully studied. Nevertheless, all conceivable impacts of this renewable energy concept are put into perspective compared to the impact of global warming, air pollution, oil pollution, nuclear accidents, or coal and uranium mining and radioactive waste repositories.

The Learning Curve and the Internalization of External Costs

The change of our global energy system requires huge investments. Conventional power plants, like e.g. gas turbines, need a comparably small initial investment, and a large proportion of the electricity costs comes from the costs of the fossil fuel. Renewable energy systems have small running costs and the major part of the electricity costs are investment costs, i.e. manpower and material during construction and the interest of the investor. In addition, there is a learning curve to pay in the coming years, as the required technologies are partially still in the precommercial development phase and not yet in mass production. All that makes the switch from an exploiting energy system to a renewable energy system economically difficult, and political regulations or incentives are needed so that  renewable energies can compete with the old technologies on a free market. Possible political tools are feed-in tariffs, carbon certificate trading or energy taxes. A first and overdue measure is the cancellation of governmental subsidies for the mining or use of fossil fuels. A more difficult step is the internalization of the external costs.

Examples for external costs of fossil fuels are the long-term costs of global warming, the costs of air pollution to the health of the population and the costs of oil pollution by accidents during drilling and transport of the oil. Examples for external costs of nuclear industry are the long term costs of nuclear accidents, the costs for keeping nuclear radioactive waste repositories safe over centuries and the costs to prevent the proliferation of nuclear weapons. A first political measure to bring the old and the renewable energy industries to an equal footing would be to force energy companies to re-insure those risks. A full risk assessment and insurance against costs of possible terroristic attacks in nuclear industry would certainly make nuclear power economically unattractive. The same will be true for oil and coal companies if the impact of global warming is internalized.

It can be predicted that even without internalizing external costs and without special feed-in tariffs, wind, CSP and PV power stations will be economically competitive in many areas of the world in the coming decades, due to the rising costs of fossil fuels and due to the cost reduction by mass production of components for renewable energy power stations. This fact makes investments in new fossil or nuclear power stations uncertain already today, as a power station that is constructed today will not be competitive during its whole life span any more. In addition, future investments in fossil and nuclear industry will face an increasing risk of penalties (taxes, re-insurance, environmental conditions, etc.) due to the decreasing acceptance in the public opinion. Therefore, feed-in-tariffs and other political measures are not needed to make the energy revolution happen, but they are urgently needed to make the energy revolution happen in time, i.e. before humanity runs into serious problems of energy shortage and climate change.

The Special Situation of MENA and Europe

In MENA (Middle East and North Africa) the population and the need for electricity are growing rapidly. There is little industry in North Africa, a high unemployment rate and a lack of prospects for the young generation. The idea of DESERTEC is to construct solar and wind power stations in MENA. The excess of energy that is not needed in the country itself can be exported to Europe. That creates an economical interdependence between MENA and Europe and is a basis for a stronger future collaboration. It is a classical win-win situation. Europe has the knowledge how to build the power plants and the HVDC grid. It also has the money to pay for the learning curve. MENA has the optimum sites for solar energy power stations and the manpower to construct them. Europe can profit from a cost-effective clean solar power generation, from a political stabilization of North Africa due to the economic growth, and from a new business market in its vicinity. The rising problem of migration and extremism can be mitigated by a close collaboration of Europe and Africa.

The rising problem of migration and extremism can be mitigated by a close collaboration of Europe and Africa.

Africa has the advantage of getting sustainable energy, fresh water from seawater desalination, new possibilities for industrial growth and a large number of new jobs and perspectives for the future of the young population. The power connection of the continents can bring the continents closer together in an economical and may be even in a cultural way. Representatives from North-Africa have expressed that they do NOT want turnkey power stations made by European companies any more, but that they want to gain the know-how themselves how to build solar power stations and have local value added. The DESERTEC foundation supports this concept and has set up an academic and a university network where institutes from most of the North African countries are represented. A large number of (local) engineers is required, so that the goal to build a large amount of power stations in the coming decades can happen sufficiently fast.

DESERTEC Ready to Go

Clean power from deserts is ready to go. It has an overwhelming potential for a sustainable world energy supply. Basic concepts and technologies are available to be implemented. Nevertheless, the way to an almost 100% renewable, carbon free energy supply still requires huge efforts of technical R&D, and more important, significant changes in the political and socio-economic boundary conditions. Looking at today’s economical and political decisions, it seems that many people either ignore or underestimate the range of the required changes of the world energy system.

Source: Edited excerpts from "Clean Power from Deserts" paper (October 2011) by Michael Düren.

About the Author

[caption id="attachment_1612" align="alignleft" width="142"] Michael Düren[/caption]

Michael Düren studied Physics at the RWTH in Aachen, Germany and obtained his PhD in 1987 in the field of particle physics. After being a postdoc at the Max-Planck-Institute for Nuclear Physics in Heidelberg,he habiltated at the University Erlangen-Nürnberg, was interim professor at the University Bayreuth and, since 2001, he is full professor for experimental physics at the JLU Giessen. Since 1988, he is member of the Energy Working Group at the German Physics Society. In 2006, he was co-founder of the interdisciplinary SEPA working group (Solar Energy Partnership Africa-Europe) at the Univ. Giessen and in 2008 co-founder of the DESERTEC foundation. Since July 2011, he is coordinator of the DESERTEC Academic Network.

About DESERTEC

The DESERTEC Foundation is a global civil society initiative aiming to shape a sustainable future. It was established on 20 January 2009 as a non-profit foundation that grew out of a network of scientists, politicians and economists from around the Mediterranean, who together developed the DESERTEC Concept. Founding members of DESERTEC Foundation are the German Association of the Club of Rome, members of the international network as well as committed private individuals.

SEPA-DESERTEC International Conference 2012


Kuala Lumpur: ‘The Next Big Thing’ in Asia-Pacific Business Circles

It is Asia’s best-kept secret: business insiders are shunning the cost and congestion of Asia’s mega-cities and plumping for Kuala Lumpur’s strengths: cost competitiveness, profit potential and a first-rate lifestyle – a combination unmatched anywhere else in Asia.

[caption id="attachment_1686" align="aligncenter" width="583"] Kuala Lumpur skyline. Click to enlarge.[/caption]

InvestKL CEO Zainal Amanshah describes it this way:

[caption id="attachment_1682" align="alignright" width="140"] Zainal Amanshah, CEO InvestKL[/caption]

“In today’s world, any discussion of a corporation’s ability to drive profit in a new city, let alone in Asia, really has to be a function of a number of factors.

Will it be prohibitively expensive to set up shop? Can I manage my costs? Will my staff be happy? Will things work? Will we do business in a stable environment, free of socio-political, sovereign risk? Above all, will my family adjust well, and will they enjoy living here?

We have found that for those who have made the leap, the answers to these questions have been an emphatic affirmative.

Here are some headline stats we are especially proud of:

16.4%: The cost of starting a business in Malaysia as a percentage of income per capita. By contrast, the East Asia and Pacific average is 22.7%. For Indonesia it is 17.9%. (2012 World Bank ‘Ease of Doing Business’ report)

102nd: Kuala Lumpur’s ranking in terms of cost of living. By contrast, Singapore is the No. 3 most expensive city in Asia for expatriates and the sixth-most expensive overall. (Mercer’s 2012 cost of living survey)

‘A’: Malaysia’s local currency rating, according to Standard & Poor’s. S&P also gives Malaysia a foreign currency rating of A- and a transfer and convertibility (T&C) assessment of A+

Top three for Best Retail Property Investment Destination (Pacific Star Group’s Asia Property Outlook and Strategy Report, 2011)

21st: Malaysia’s ranking out of 183 nations (sixth in the Asia- Pacific region and second in Southeast Asia), in the World Economic Forum’s 2011-12 “Global Competitiveness Report”

From a business perspective, will KL be a place where multinational corporations can carve a niche?

Forge ahead, innovate and develop a world-class product?

In the words of some satisfied KL-dwellers:

"Malaysia is today the intellectual centre of Islamic finance worldwide."

- Mukhtar Hussain, Global CEO, HSBC Amanah

Q: Why did HSBC choose to place the global CEO for HSBC’s Shariah Finance arm out of Kuala Lumpur?

Mukhtar Hussain, Global Chief Executive Officer, HSBC Amanah:

“The basis of the decision was really a reflection that Malaysia is today the intellectual centre of Islamic finance worldwide.

It is the country where there is the greatest institutionally coherent approach towards the development of the industry, and we’ve seen tremendous steps taken by Bank Negara to grow the industry, very successfully, to sit alongside the conventional industry.

HSBC felt it was right to be at the nerve centre of where the industry is growing and developing the fastest – and we are delighted to be here! “

HSBC and Kuala Lumpur:

1910: HSBC opens its first branch in KL.

2007: HSBC Bank Malaysia becomes the first locally incorporated foreign bank to be awarded an Islamic banking subsidiary licence in Malaysia

2011: Wins Best Islamic/Most Innovative Islamic Finance Deal of the Year in Southeast Asia (Government of Malaysia’s $1.2 Billion & $800 Million Wakala Global Sukuk. HSBC were Joint Lead Managers and Joint Bookrunners. (Alpha Southeast Asia)

Q: Having lived and worked all around Asia and Europe, why do you describe Malaysia as “Easy Asia”?

Continental Tires Malaysia Sdn Bhd CEO Benoit Henry:

“Malaysia is ‘Easy Asia’ when you compare it to some other places around Asia. In terms of infrastructure, Malaysia is really a great place. The basic services are guaranteed.

Also, you have a stable political system. This is of course, for investors, an element that will drive the decisions. And we have proficiency in English, which is quite important to us, because communication is everything.

Liveability? I rate KL very high. It’s not a major city like Shanghai, but it has absolutely everything you might need.”

Continental and Kuala Lumpur:

2003: Continental establishes a joint venture with Malaysian conglomerate Sime Darby Bhd. Operating under the name of Continental Sime Tyre Sdn. Bhd., establishes two tyre plants.

May 2012: Continental AG acquires entire 100% stake in Continental Sime Tyre Sdn. Bhd. from Sime Darby, underscoring its long-term interest in the Asia-Pacific region.

---

There is no greater proof of KL’s appeal than these real-life success stories of global conglomerates who have decided to make Malaysia’s capital their regional headquarters.

"From a commercial, professional and personal perspective, KL is truly a winning proposition” (InvestKL CEO Zainal Amanshah).

About InvestKL:

Focuses on attracting Fortune 500 and Forbes 2000 companies to strategically grow their businesses by setting up operational headquarters, international procurement centres and/or regional shared services in the Greater Kuala Lumpur and Klang Valley areas.


UN Economic Commission for Africa: Domestic Resource Mobilization in Africa

By Emmanuel Nnadozie, Chief Economist and Director, Economic Development and NEPAD Division (UN Economic Commission for Africa)

A major challenge facing African countries is how to mobilize adequate, stable and predictable domestic resources to finance priority programmes and projects of the New Partnership for Africa’s Development (NEPAD), the development framework designed by African leaders in 2001. For example, it is estimated that Africa’s infrastructure financing needs is as much as $93 billion per year with a gap of about $31 billion per year.  There are also significant financing gaps in other priority areas such as health, education, and science, technology and innovation. Closing Africa’s financing gap requires strengthening domestic resource mobilization and developing innovative approaches to mobilize development finance.

This problem has been aggravated by the impact of global economic crisis and the eurozone debt crisis as it has negatively affected financial inflows into Africa.  From the work done so far by the Economic Commission for Africa (ECA) and the NEPAD Planning and Coordinating Agency, we know a number of things about domestic resource mobilization in Africa:

"Africa’s infrastructure financing needs is as much as $93 billion per year with a gap of about $31 billion per year. "

1. African countries generally have low savings ratios relative to other comparable regions.

The average ratio of domestic savings to GDP in Africa over the period 2005-2010 was about 22 percent compared to about 45 percent inEast Asiaand the Pacific and 30 percent for middle income countries (Table 1 column 2). Within Africa, (outside of North Africa), savings ratio is particularly very low indicating that if African governments want to close the existing gap between domestic savings and investment requirements, they have to do more to strengthen domestic resource mobilization.

2. The average tax ratios in Africa today is comparable to that in high income countries and is actually higher than in the average middle income developing economy.

Over the period 2005-2010, tax ratio in Africa (tax revenue as a percentage of GDP) was 20 percent compared to 15 percent for high income countries, 13 percent for middle income countries, and 11 percent forEast Asiaand the Pacific (Table 1 column 3). In other words, African countries on average have tax ratios higher than what is observed in other regions. However, tax ratios in the western countries of the European Union are much higher than the African average. Furthermore, Africa’s  high average tax ratio masks the reality in several countries in the region where the tax ratios are below 10 percent (Central African Republic, Republic of Congo, Ethiopia, Liberia, Nigeria, Sudan etc). The relatively high tax ratio observed in Africa suggests that for African countries to increase tax revenue they should not rely on increasing the tax rate. Rather they should focus on expanding the tax base, improving tax administration, and tapping relatively underutilized sources of taxation such as property and environmental taxes.

Gross domestic savings*
Tax revenue*
Tax on goods & services**
Tax on income & profits**
Tax on trade**
Other taxes**

Africa
21.87
20.34
42.19
31.95
21.05
4.80

Sub-Saharan Africa
16.22
17.64
43.07
25.57
27.37
3.98

North Africa
30.67
26.26
42.26
44.64
7.84
5.26

East Asia & Pacific
44.52
10.67
41.98
40.21
7.15
10.66

Latin America & Caribbean
22.50
13.05
44.21
38.26
7.62
9.91

High income
19.47
15.34
45.85
45.62
0.65
7.88

Middle income
30.27
13.56
50.70
30.77
7.77
10.75

Low income
10.07
11.09

*(% of GDP) **(% of taxes)

Table 1: Domestic Savings and Taxes in Africa Compared with other Regions (2005-2010 average)

Source: Based on computations by Economic Commission for Africa.

3. African countries on average rely on international trade taxes much more than middle income countries and developing countries in East Asia and Latin America.

African countries depend on international trade taxes more than any other region. Over the period 2005-2010, taxes on international trade represented about 21 percent of total tax revenue in Africa compared to about 7 percent for East Asia and the Pacific and about 8 percent for middle income countries and also Latin America and the Caribbean (Table 1, Column 6). They also rely relatively less on  taxes on income and profits (Table 1, column 5). Overall the ratio of  “indirect” to direct taxes is significantly higher in Africa than in middle income and other developing countries. The continental average masks a sharp difference between North Africa and the rest of the continent, the latter having higher incidence of international trade taxes  and relying more on consumption taxes.

4. Tax ratios are strongly related to the structure of the economy and quality of governance.

There is a very strong negative association between the tax ratio and the share of agriculture in GDP; in other words, the higher the share of agriculture in the GDP, the lower the tax ratio.  The correlation coefficient between these two variables is (-0.61). This might reflect the tendency for agricultural activity to occur within the informal sector. A larger share of manufacturing and services, instead, tends to be associated with greater tax revenues to GDP ratio. Interestingly, while there is a strong correlation between gross domestic savings and oil exports, there is virtually no evidence of correlation between tax rates and the proportion of fuel exports in total country exports. Turning to the quality of governance, there is indication that a better government might effectively be more likely to mobilize larger volumes of resources via taxation. Quality of governance is viewed in terms of government effectiveness, control of corruption, rule of law, regulatory quality, political stability and absence of violence, and voice and accountability to citizens.

5. Illicit financial outflows constitute a major obstacle for mobilizing domestic resources for development in Africa

A key issue that requires urgent attention by African countries is illicit financial outflows from the continent. The trend has been increasing over time and especially in the last decade, with an annual average illicit financial flow of US$ 50 billion between 2000 and 2008.  Illicit financial resources are drained out of Africa through various channels, including trade mis-invoicing, transfer pricing, investment related transactions, and bank transfers. Multinational companies (MNCs) are the most significant perpetrators and they have a variety of techniques at their disposal to protect their profits from taxation by employing complex, country-specific strategies. The most popular of these is ‘transfer pricing,’ which is the manipulation of prices of cross-border transactions between related affiliates. The motives and mechanisms are generally similar to those utilized in trade mis-invoicing. Other forms of illicit commercial activities include tax avoidance and tax evasion. These activities basically shift money beyond the reach and appropriate use of domestic authorities.  As much as 60 percent of global illicit financial flows originate from commercial transactions through multinational companies.

In conclusion, African countries have made some progress in mobilizing domestic revenue over the past decade. Nevertheless, there are still significant gaps between domestic revenue and investment requirements, indicating that more needs to be done to boost domestic revenue, address illicit financial flows and also exploit other sources of financing.  There is improvement in tax collection in the continent, leading to revenue increases. Yet, tax administrators face enormous challenges. The right policies must be put in place for more effective, efficient and fair taxation through deepening the tax base, removing tax preferences, dealing with the use of transfer pricing techniques of multinational firms, taxing extractive industries more fairly and more transparently and addressing capacity constraints of tax administrators.

About the Author

Professor Emmanuel Nnadozie is the Director of the Economic Development and NEPAD Division at the United Nations Economic Commission for Africa (ECA). He was formerly Senior Economist and Chief responsible for the UN Coordination Unit for AU/NEPAD Support at ECA and Focal Point for the African Peer Review Mechanism at ECA.  Before joining ECA in June 2004 he was Professor of Economics at Truman State University (1989-2004), Visiting Professor at the University of North Carolina (1996-97), and Research Fellow at the University of Oxford, England (1994).  Prof. Nnadozie was also formerly Chief Planning Officer at the World Bank’s Agricultural Development Program in northern Nigeria.  His scholarly works have appeared in both academic and non-academic journals all over the world, most notably African Economic Development, Academic Press/Elsevier, 2003.  An award-winning educator, Professor Nnadozie was recognized as The Most Outstanding Black Missourian of the Year in 2003.  He served as President of the African Finance and Economics Association of North America (1999-2001), and Editor, Journal of African Finance and Economic Development [currently Journal of African Development] (1998-2002).

Prof. Emmanuel Nnadozie
Director
Economic Development and NEPAD Division
United Nations
Economic Commission for Africa
P. O. Box 3001
Addis Ababa, Ethiopia
Phone: 251-11-544-3163
Mobile: 251-91-121-6747
Fax: 251-11-551-0389
E-mail: ennadozie@unca.org


Baker & McKenzie: Kazakhstani International and Domestic Securities Offerings

By Edward A. Bibko

[caption id="attachment_1746" align="alignright" width="300"] Ak Orda Presidential Palace, Kazakhstan[/caption]

With its large natural resources and relatively transparent legal regime, Kazakhstan has long been a destination for international companies. In addition, its domestic companies have been attracting international capital for years.  Within the CIS, the country has been one of the most active in terms of cross-border listings, particularly those involving the listing of a Kazakhstani business in London through a newly formed topco in a tax-neutral jurisdiction such as the Isle of Man. However, recent changes in law may significantly impact future cross-border listings from Kazakhstan.

On 28 December 2011, Kazakhstan adopted amendments to its Securities Market Law. The express purpose of these were to streamline the legal framework for the offering and placement of securities and provide stronger investor protection. However, these amendments included, among other things, significantly increased penalties for conducting an international securities offering without a domestic listing and a sizeable domestic tranche. They also appear to provide a basis for enforcement against companies who used a popular, but noncompliance issuance structure. Most of the amendments came into effect on 1 February 2012, including those relating to international and domestic capital markets transactions. The main features of the amendments are described below.

"... recent changes in law may significantly impact future cross-border listings from Kazakhstan."

Background

For several years Kazakhstani companies looking to "place securities in a foreign state" have been required under Article 22-1 of the Kazakhstani Administrative Code to obtain the consent of the National Bank of Kazakhstan and to also list the securities on a Kazakhstani stock exchange. For purposes of this requirement, a Kazakhstani company is one which is managed from Kazakhstan or has at least two-thirds of its assets within Kazakhstan.  In addition, the prevailing view is that the “placement of securities in a foreign state” covers placing securities by way of listing and placing on a foreign stock exchange. Article 22-1 also required, for equity securities, that at least 20% of the securities be offered through a Kazakhstani securities market.

Although these obligations existed, it was never clear how they could be enforced against a foreign topco issuing securities under its home jurisdiction, outside of Kazakhstan. Under law, the financial regulator could seek cancellation of the state registration of securities issued in breach of applicable regulations. However, this enforcement mechanism was of no use where the topco's securities were issued under the foreign law and not registered in Kazakhstan. The only other available sanction was a provision under the Administrative Code which authorised modest fines against issuers breaching requirements relating to the issuance and placement of securities. As a result Kazakhstani businesses often ignored the provisions of Article 22-1 in listing shares abroad.

Explicit Listing Requirement; Substantially increased administrative liability

[caption id="attachment_1749" align="alignleft" width="300"] Bayterek, Astana[/caption]

The amendments introduced a new requirement providing that securities issued by Kazakhstani companies may be listed and remain so on a foreign stock exchange provided that there is consent from the NBK and the relevant securities are also listed, and remain listed, on a Kazakhstani stock exchange. This in effect makes explicit the prior interpretation that these requirements would apply to foreign listings as these would constitute "foreign placings" under the old wording.

The recent amendments also sought to address noncompliance by significantly increasing the applicable administrative penalties. Now, the placement of securities made in breach of the applicable legislative requirements is punishable by a fine of up to 50% of all of the proceeds of such placement. Authority to levy this fine rests with the National Bank of Kazakhstan.

The amendments also seemingly clarify that compliance is measured at initial issuance and so long as the foreign listed securities remain listed abroad. This suggests that the National Bank of Kazakhstan (NBK) could enforce penalties against companies that had issued securities prior to the amendments without complying with the local listing and offering requirements.

20% Local Offering Requirement Extended to Bonds

The Amendments extended the local offering requirement, previously applicable to share offerings and offerings of derivative instruments such as global depositary receipts (GDRs), to bond offerings.  Now, under Article 22-1 of the Securities Market Law, an issuer an issuer placing bonds outside of Kazakhstan must offer at least 20% of the bonds through the local securities market in addition to obtaining the permission of the financial regulator for the foreign offering.

Although it is not absolutely clear, based on the 2012 NBK Rules (discussed below), it is likely that the above requirements would apply to a foreign special purpose vehicle issuing bonds which is (a) at least 50% owned by a Kazakhstani company, or (b) which benefits from a guarantee provided by a  Kazakhstani company.

2012 NBK Rules

On 24 February 2012, the National Bank of Kazakhstan (NBK) issued new rules specifying procedures for giving consent for issuance and placement of securities outside of Kazakhstan. The new Rules establish certain additional requirements which the issuer must meet before being legally able to obtain the Financial Regulator's consent for issuance and/or placement of securities in a foreign state. The additional requirements include that the: issuer must not have defaulted on its previously issued debt securities; debt securities previously issued by the issuer and currently in public circulation have not been de-listed; and the leverage ratio of the issuer must not exceed 2:1. These requirements existed previously for bonds issued under Kazakhstan law, but did not apply to foreign-law-governed securities.

With respect to shares and derivatives representing shares, the new Rules introduced a new requirement that these securities may be issued in a foreign state only if the issuance will not trigger an event of default and acceleration of debt securities previously issued by the issuer. In particular, equity securities may not be issued in a foreign state if: the issuer has outstanding debt securities; the prospectus of the relevant debt securities contains a change of control restriction that would be triggered by such issuance; or the new securities will result in breach of this restriction and acceleration of debt securities.

Domestic Bond Issuances

The Securities Market Amendments make a number of changes concerning domestic securities issuances. For example, they impose new obligations on issuers of bonds regarding preservation and disposal of assets. Now an issuer of domestic bonds is obligated by law: not to dispose of assets with a value more than 25% of its total assets; not to be in default with respect to more than 10% of its assets; not to change its legal form; and to redeem the bonds when delisted.

Under the amendments the issuer is obliged to engage a "representative agent of bondholders" when it issues domestic that are in public circulation. The Amendments also exempt holders of domestic bonds from the requirement to pay a state duty in a legal action in connection with the issuer's default on bonds. Prior to this change, the state duty was 3% of the value of the claim.

Qualified Investors

Finally, the amendments introduced the concept of "Qualified Investors" which are defined to include Kazakhstani and international financial organisations and other entities recognised as such by Kazakhstani brokers and dealers in relation to the National Bank of Kazakhstan's regulations. To be recognised as Qualified Investors these entities need to meet certain criteria showing they are sophisticated in dealing with financial instruments.

Accompanying this change, certain securities and financial instruments are designated for purchase only by Qualified Investors, these include: securities and other financial instruments of foreign issuers issued under foreign law and not admitted to trading on the Kazakhstani stock exchange; and derivative securities and instruments not admitted to trading on the Kazakhstani stock and commodity exchanges.

Conclusion

The changes created by the Securities Market Amendments clarify longstanding rules relating to foreign listings and provide real teeth for their enforcement. In the past issuers have often ignored the requirement to make a local offering and listing because of the additional burden and cost to the transaction or for other practical reasons. It remains to be seen whether having to strictly comply with these requirements will dampen enthusiasm for cross-border listings involving Kazakhstani companies. In addition, it is unknown whether the NKB will impose penalties for past non-compliance or otherwise force Kazakhstani companies with a foreign listing to list their shares locally as well.

About the Author

Edward Bibko is a partner in Baker & McKenzie’s International Capital Markets Group based in London. He joined Baker & McKenzie’s London office in February 2001. Prior to joining Baker & McKenzie, Edward practiced in New York and Chicago law firms and worked as a financial analyst for IBM. Edward is ranked as a leading capital markets practitioner in Chambers Global 2009 and currently serves as a member of the Firm’s International Capital Markets Group. Mr Bibko  specialises in international equity and debt capital markets transactions. He received a doctorate from Syracuse University.

About Baker & McKenzie

Baker & McKenzie is the world's leading law firm, with 3,750 lawyers who "speak" 75 languages in 71 offices worldwide. The company had $2.27 billion in revenue in 2011.


IBGC: Progresses in Corporate Governance - Brazil is Also on Board

By Heloisa B. Bedicks

[caption id="attachment_1785" align="alignright" width="300"] Heloisa Bedicks, Managing Director of IBGC[/caption]

In a hindsight, we can identify several milestones in the evolution of capital markets, as well as national and international organizations that underpin such evolution. As part of an ongoing process, crises in corporate and financial systems and dynamics have been followed by improvements in regulatory and self-regulatory frameworks, driven either by changes in the legal system or voluntary adoptions of Corporate Governance practices encouraged by codes.

In the mid-90s, the Cadbury Report was published in the UK as the first so-called Corporate Governance code, detailing a great number of recommendations focusing on corporate checks and balances that would subsequently influence similar publications around the world. This initiative came in response to shareholder dissatisfaction with the way in which the companies they invested in were being managed at that time.

Meanwhile, the adoption of corporate governance best practices in Brazil has accelerated as the country returned to international markets and initiated its privatization process and opened the domestic market. During this period, the Brazilian Institute of Corporate Governance - known by its Brazilian acronym, the IBGC - was created in 1995 to encourage businesses to adopt transparent, responsible and equitable practices.

"... the adoption of corporate governance best practices in Brazil has accelerated ..."

Following a global trend and inspired by the German Neuer Markt model, the Brazilian stock exchange created the Novo Mercado in 2000, offering higher Corporate Governance standards for companies voluntarily willing to be listed on such level. The expression "corporate governance" was defined in the Code of Best Corporate Governance Practices, published by the IBGC in 1999, as a "system whereby organizations are run, overseen and incentivized. It involves relationships between the shareholders, the Board of Directors, the Officers and oversight bodies".

The reform of the Corporation Act, allied with IBGC’s Code and a growing interest for corporate governance by institutional investors boosted the Brazilian capital market The Novo Mercado, which companies opt to join voluntarily, also encouraged Brazilian companies to adopt best practices and was inaugurated with by CCR’s IPO and Sabesp’s migration from a lower level. A few years later, when Natura also went public on the Novo Mercado, this opened a new door to other companies to access the Brazilian capital market.

While Brazil was creating and strengthening its corporate governance structures, the US worked quickly to pass the Sarbanes-Oxley Act (SOx) after a number of accounting related corporate scandals, setting out much stronger rules on risk management, internal controls and management liability. Subsequently, a number of major European companies saw themselves facing corporate governance problems which culminated in several countries adopting stronger rules, with greater disclosure and a "comply or explain" based policy, on which companies must indicate whether they have adopted specific corporate governance practices or explain any lack of compliance with the rules.

A similar debate began in Brazil as attempts were made to improve corporate disclosure practices. As an example, the rules issued by the Brazilian Securities and Exchange Commission (CVM) can be cited, including rules 480 and 481, both published at the end of 2009. Rule 481 empowered shareholders and made it easier for them to attend company meetings and exercise their voting rights. Under rule 480, companies were required to disclose the average, maximum and minimum compensation for directors and officer of listed companies as well as their compensation policies. This was a very controversial issue on a market which was not used to reporting management compensation. This information must be disclosed by companies on the reference form, a very important tool used to increase transparency and accountability.

In a constantly changing environment increasingly connected to the rest of the world, Brazil has seen a significant increase in the number of companies issuing only voting-shares and the first companies with dispersed capital started to appear.

"... Brazil has seen a significant increase in the number of companies issuing only voting-shares ..."

As shareholder control has become more dispersed among companies listed on the Brazilian market, there have been changes to corporate governance systems. Processes change so quickly that there is not always sufficient time to disseminate and implement corporate governance practices and, as a result, management political power can be excessively strong while the corporate governance practices that could provide equilibrium to the system are not consolidated.

In such cases, the role and performance of the board of directors are increasingly important to counterbalance management and ensure that corporate decisions are taken in the best interest of the company’s interests. Previously considered little more than an addendum, the Board of Directors has become a major player in strategic decisions and supports implementation of best practices separating management from ownership.

A stronger board represents greater corporate transparency and champions the principles of corporate responsibility, accountability and fairness, with corporate governance as a channel of value creation. Companies with a greater focus on best corporate governance practices tend to be more competitive, as they find it easier to raise funds in the market and survive for longer. Although there are exceptions, we now find there is greater balance between the agents of corporate governance: shareholders, the Board of Directors, management and stakeholders.

The evolution observed signals and is influenced by board maturity, as boards take on a wider range of responsibilities. The board is charged with safeguarding the company's objectives and governance system. Among other recommendations detailed in the IBGC Code, board members must act independently, have time available to fulfill their responsibilities and a strategic vision, as well as congregate gender and backgrounds diversity.

The debate on the importance of individual board member attributes in Brazil has evolved into a discussion of board efficiency. Board members have become more aware that everybody should follow recommended best practices because board decisions are taken on a collegiate basis and responsibilities are shared. Board member independence is often held to be a key factor for propagating good governance throughout an organization's structure.

[caption id="attachment_1792" align="alignright" width="371"] Itaim Bibi Financial Disctrict, São Paulo[/caption]

In an environment where and officers hold more and more responsibilities, four organizations – the Association of Capital Market Investors (Amec), the Association of Financial Capital Market Organizations (Anbima), the BM&FBovespa and the IBGC, supported by the CVM - launched the Brazilian version of theTakeover Panel (CAF in Portuguese). Inspired by the UK’s Takeover Panel model, this self-regulated body seeks to "ensure equitable treatment for shareholders of publicly traded Brazilian companies during tender offers and corporate restructuring operations". From October, the CAF will be providing opinions and issuing rulings, when asked to do so, and is likely to improve  market’s predictability and fairness, as explained by then CVM chairwoman, Maria Helena Santana, during the International Corporate Governance Network (ICGN) conference in Rio de Janeiro.

During her four years’ term, which ended in July, Maria Helena took steps to advance and improve Brazilian capitals market regulation. This initiative has resulted in more complex corporate governance issues faced by some companies: conflicts between minority shareholders, management of companies with dispersed ownership, related-party transactions and long-term versus short-term outlooks.

The CVM will be responsible for ongoing enforcement efforts to ensure that companies provide higher-quality information on their filings; it will also have to take a strong stand in related-party transactions, during potential conflicts of interest and when supervising and punishing transgressions or even crimes, such as insider trading.

We must continue to drive the debate on best corporate governance practices and their benefits, particularly when we realize that the advances we have achieved so far are concentrated mainly in the South and Southeast regions of Brazil.

Engagement of corporate governance agents is a continuous and gradual process which tends to have a greater effect in the long term, as time is required to show the benefits of the adoption of best practices, such as the increase in companies’ value, and the easier access to funds.

The IBGC believes that the challenges we face can be overcome and that the best way forward for any company is to adopt the principles and best practices of Corporate Governance.

* General Superintendent of the Brazilian Institute of Corporate Governance - IBGC

About the Author

Heloisa B. Bedicks is the managing director of the Brazilian Institute of Corporate Governance – IBGC, the leading corporate governance organization in South America.  She is also president of the IGCLA (Latin American Corporate Governance Institutes), a networking of 11 Latin American countries Institutes and she is governor of the Board of International Corporate Governance Network (ICGN). Mrs Bedicks is an IBGC Certified Director, a member of the board of directors of Mapfre Garantias e Creditos SA. She also serves as a member of the advisory board of Anbima (the Brazilian Financial Capital Markets Association) and the advisory board of the Guia Exame de Sustentabilidade (Exame is the leading business magazine in Brazil). She holds a MBA from Universidade Presbiteriana Mackenzie, a degree in Economics from Unicamp, in Accounting from PUC Campinas and a post graduate degree in Finance from Universidade Salesianas. She has attended corporate governance and directors programs in the Yale University, University of Chicago and Stanford University.

About IBGC - Brazilian Institute of Corporate Governance

Founded on November 27, 1995, the Brazilian Institute of Corporate Governance - IBGC is a domestic and international non-profit institution which seeks excellence in Corporate Governance in a very wide variety of organizations. As a reference center, the Institute organizes courses, surveys, talks, forums and an annual congress, in addition to other Corporate Governance activities.

In line with its practice, IBGC was honored in an annual award sponsored by the International Corporate Governance Network (ICGN) on the category Excellence in Corporate Governance. Currently, it is also considered Centre of Excellence in Corporate Governance in Latin America, Caribbean and Lusophone Africa, a title conferred by the Global Forum on Corporate Governance (GCGF). Internationally, is hosting, up to this year, the Global Reporting Initiative (GRI) activities in Brazil, a global network that seeks to promote good practices adoption in organizations. This way, The Institute contributes to sustainable performance and influences the agents of society towards more transparency, fairness and responsibility.

For more information, visit the IBGC website.


New ‘Pacific Alliance’ Upbeat and Seeking Competitive Advantages

Leaders of Pacific Alliance: Ollanta Humala, President of Peru; Juan Manuel Santos, President of Colombia; Sebastián Piñera, President of Chile; Felipe Calderón, President of Mexico.

The new bloc’s integration opens up significant opportunities for incremental economic development through increased trade. The implicit expansion of the region’s home market and the new supply chains could help boost exports, including those to Asia. Also, the creation of the first combined Latin American stock exchange as well as the trade, tariff and other agreements will enhance investor security and confidence and bring increased foreign direct investments.

On 6 May at the Paranal Observatory in the Atacama desert of Chile, the presidents of Chile, Colombia, Peru and Mexico signed an agreement establishing a regional group to be know as “Pacific Alliance” at their summit meeting.

The Presidents of Costa Rica and Panama, who attended the summit as observers, have expressed interest in joining this new bloc.

The Pacific Alliance idea was initiated by Alan Garcia, the then President of Peru in April 2011 in the first summit he convened. It took two more summits to give shape and finalise this new regional integration.

The Pacific Alliance is a Latin American bloc formally launched on 6 June 2012 at Chile's Paranal Observatory at the organization's fourth summit. It groups Chile, Colombia, Mexico and Peru. Panamá and Costa Rica are associate members. The organisation's goals include free trade, economic integration and boosting trade with Asia.

Chile’s President Sebastián Piñera, in his speech at the signing ceremony said, “The Pacific Alliance is much more than a Free Trade Agreement. It is an Agreement of deep and broad integration that involves the exchange of goods, services, investment, people, and at the same time is committed to physical, infrastructure and energy integration.”

Colombian President Juan Manuel Santos described the new bloc as “one of the most significant processes towards integration that has taken place in Latin America.” The Alliance, as a start, will have free movement of goods and people by the end of 2012.

The bourses of Lima, Bogotá and Santiago joined together in 2011 and formed an integrated exchange known as Mila, which will soon include Mexico’s main stock exchange too.

The new economic bloc has a combined population of 204 million (36% of the Latin American population), GDP of 1.7 trillion dollars (35% of the region’s GDP) and global trade exceeding $1 trillion, which is half of the region’s global trade.

The new block’s strategy for trade has already been at work in India:

The Indian business community on August 13th, 2012 was presented with the business opportunities offered by this economic bloc, according to the Embassy of Colombia in India.

The presentation was given by the Colombian ambassador in New Delhi, Juan Alfredo Pinto, at a ceremony held by the Chamber of Commerce and Industry in the capital.

In the presence of hundreds of Indian businessmen, Pinto said the "innovative strategy" launched by the bloc, which collaborates in the political, economic, business, trade and tourism has forward momentum on projects involving foreign investment.

[caption id="attachment_1832" align="aligncenter" width="206"] Pacific Alliance: Chile, Colombia, Mexico and Peru[/caption]

Pinto said the Alliance saw good recent economic performance of the four economies with sustained GDP growth of close to five percent. The Alliance receives 41 percent of foreign investment in Latin America.

The Colombian ambassador said the business opportunities in the bloc are apparent in areas such as chemicals, mining, metallurgy, agribusiness, food, technology, tourism, communications and financial services.

Its members have a head start as they already have free trade agreements amongst themselves, and can thus move on to more ambitious goals, such as creating a united front to negotiate free trade deals with Asia, the world’s most dynamic economic region.

“This is an alliance that will go far beyond free trade, because it seeks an integration that allows the free flow of goods, services, investments and people.”

-  Sebastián Piñera, President of Chile

“This is an alliance that will go far beyond free trade, because it seeks an integration that allows the free flow of goods, services, investments and people,” Chilean President Piñera said at the signing ceremony. “And additionally, it seeks physical integration through joint infrastructure and energy projects.”

The combined economies of Pacific Alliance members represent amount to the world’s 9th largest economy, and their total exports amount to 55 percent of Latin America’s overall exports. The Pacific Alliance’s current exports are already nearly twice those of South America’s MERCOSUR common market, made up of Brazil, Argentina, Uruguay and Paraguay.

The key stated objectives of the Pacific Alliance include increased trade with Asia and of signing a free trade deal with the 10-nation Association of Southeast Asian Nations (ASEAN), which includes Indonesia, Thailand, Vietnam and Singapore.

Chile and Peru have signed FTAs (Free Trade Agreement) with China, Japan and Korea, while Colombia and Mexico are in the process of negotiating FTA with China, Korea and Japan.

The Alliance have agreed to set up joint export promotion offices in Asian countries, eliminate visa restrictions for their citizens, and create a joint university system where — much like in Europe — students will be able to get credits for their studies in any of the bloc’s member countries.

[caption id="attachment_1830" align="aligncenter" width="194"] Mercosur: Argentina, Brazil, Paraguay, Uruguay, and Venezuela[/caption]

On the trade side, they agreed that the Pacific Alliance will seek to eliminate all import duties and country-of-origin rules between member countries by the end of 2012. The four leaders also agreed to start negotiations to create a supranational joint dispute resolution system, which — as countries in Europe — would give extra security to companies investing in any of the member countries.

The new Pacific Alliance makes sense as no Latin American country on its own — even the biggest ones, like Mexico — has the export capacity to supply manufactured goods to Asia’s giant markets. If Latin American countries want to sell cars, refrigerators or shoes to Asia, they will have to create joint production chains, and negotiate joint trade deals.

The four member countries of the Alliance have some common features: All four have investment grade markets. They are open economies, outward looking and are keen to diversify their trade and economic partnerships. Chile and Mexico have signed the maximum number of FTA with other countries around the world. Peru and Colombia are following their examples. All four of them have FTA partnerships with the US.

The Pacific Alliance could be viewed as a political club to counterbalance the Atlantic-facing, Brazil-led Mercosur group.

Mercosur (Southern Common Market) is an economic and political agreement from 1991 between Argentina, Brazil, Paraguay, Uruguay, and Venezuela.Its purpose is to promote free trade and the fluid movement of goods, people, and currency. It is now a full customs union. Mercosur and the Andean Community of Nations are customs unions that are components of a continuing process of South American integration connected to the Union of South American Nations. Bolivia, Chile, Colombia, Ecuador, and Peru currently have associate member status.

A case could be made that politically some of the Pacific Alliance countries have a more center-right and liberal approach to international business than certain of the countries of Mercosur which in some cases tend to be more orientated towards nationalistic (e.g. Argentina), socialist (e.g. Venezuela), and/or protectionist (e.g. Brazil) economic policies.

The rivalry of the new alliance with Mercosur was revealed by President Calderon of Mexico, who pointed out in his speech, “Even though we are lesser in population and the size of our economies as compared to our brothers from Mercosur, we export double the volume and value of Mercosur. We have extraordinary potential”.


Frugality, Education, Infrastructure and Attitude Change is Needed in the West: We Should Not Rely on Keynesian Nostrums to Pull Us Through

[caption id="attachment_1859" align="alignright" width="173"] Jon Moynihan, Executive Chairman, PA Consulting Group[/caption]

By Jon Moynihan

The West’s economic dilemma will not be solved until those countries have not just restructured their balance sheets, by significantly lowering expenditure, but have also significantly changed the mix of that expenditure.

In the UK and the US, and across most of Europe, the debate about national economic woes is framed as ‘austerity’ versus ‘growth’. This Keynesian vocabulary, assuming as it does a static environment, and therefore that there is all the time in the world to turn things around, ignores the steadily mounting debt of most Western countries. Worse, it obfuscates a far wider problem that has led to the debt in the first place: the vast disparity in wages that exists between the developed and the developing economies, and the jobs drain that has resulted from it (Chart 1).

The average worker in developed countries (‘the West’) earns around $135 a day.  The average trained worker in developing countries (‘the East’) earns around $12 a day; a non-trained worker in the East, between $1 and $2 a day.

[caption id="attachment_1873" align="aligncenter" width="566"] Chart 1[/caption]

With globalisation, it becomes impossible to ring-fence most work so as to preserve the jobs for these privileged workers in the developed countries. As a result, not only are jobs draining from the developed nations, but that in turn forces significantly lower wages on those whose jobs have not yet moved to developing nations (Chart 2).

[caption id="attachment_1876" align="aligncenter" width="566"] Chart 2[/caption]

For decades, since 1945, job growth in the western economies was around 2% a year, and annual growth in real wages (for the same job) was around 3% a year.  This became, as it were, a democratic ‘right’ for the workforce; there will be jobs as my kids seek them, and I will earn more at my own job each year, for the same effort.  This paradigm, lasting for the last fifty years of the twentieth century, was abruptly broken with the abandonment of Marxist and socialist economic policies across the developing world, and their replacement by capitalism, in the period 1990-2000.

The change did not take long to have massive effect; the new paradigm since the year 2000 has been for growth, in both the number of jobs and the annual growth in real wages, to be negative (Chart 3, Chart 4).

[caption id="attachment_1879" align="aligncenter" width="566"] Chart 3[/caption]

In the western economies, with few exceptions, GDP (and job) growth over the cycle has disappeared, whilst at the same time, the size of China’s economy has quintupled.

Five years after the 2007 crash, US employment is still six million jobs below the 2007 number. (Chart 4) This job loss is of a different order of magnitude to previous recessions, and speaks of a different reality (Chart 5).  Real wages, too, have plummeted, although much of that impact is concealed behind the steady pernicious tick of inflation, devaluing static wages.

[caption id="attachment_1880" align="aligncenter" width="566"] Chart 4[/caption]

This dynamic has been apparent since at least 1995, yet ignored --so that for almost two decades the western economies have been “fiddling while Rome burned”.  With workforces that expected --and in many cases, particularly in the public sector, received-- significant real rises in wages every year, and a public and commentariat that was unable to envisage anything but a steadily increasing standard of living, the consequence of trying to stay with that prior, broken paradigm is that the western economies have been, year by year, increasingly living about their means.  The consequent build-up in debt – corporate, individual and government – has now become an enormous overhang, the servicing of which will --as has been shown by the systematic analytic work of Carmen Reinhardt and Ken Rogoff-- drain wealth from Western societies and lead to further, and much greater, impoverishment.

[caption id="attachment_1881" align="aligncenter" width="566"] Chart 5[/caption]

The UK’s total debt of all sorts –Personal, Corporate, Financial and Government--  is now, as a percentage of GDP, lower only than Japan’s and Ireland’s – higher than that of Greece, Spain or Italy (Chart 6). In any event, apart from the obvious exception of Germany, most developed countries are much in the same boat: the fact that the West has been living above its means for so long means that its situation is qualitatively no different to that of Greece and Ireland, countries who have recently learned to their cost what happens when reality is ignored.  Sooner or later, if a country does not recognise that its overall standard of living is unsustainable, the market brutally enforces that fact on the country, leading to major economic disruption and widespread immiseration, of a sort that most in the West currently find unimaginable, despite the chaotic scenes being played out in Euro fringe countries in recent months.

"... if a country does not recognise that its overall standard of living is unsustainable, the market brutally enforces that fact on the country, leading to major economic disruption and widespread immiseration ..."

The failure to recognise the problem, or do anything about it, over the years was exacerbated by commentariats who by and large took a Keynesian view, asserting that the issue was to get the economy back into full employment through kick-starting it into ‘growth’.  The trouble with this view is that for ‘growth’ one only has to substitute the words ‘continuing to live above our means, without any expectation of being able to pay for it’ and the fatal flaw is seen.

[caption id="attachment_1916" align="aligncenter" width="566"] Chart 6[/caption]

The consensus, against all the lessons of economic history, is clear:  We should spend our way out of this.  Since 1987, when Alan Greenspan took over the Federal Reserve, the response to any economic downturn has been to flood the system with cheap money so that governments, corporates and consumers could continue to live above their means.  As a result, the Fed Funds rate declined from the mid-teens in the ‘80s, to now one quarter of one percent.  Since the beginning of the 1990s, the US and the UK have had only 3 years (out of 22) each in which (very small) surpluses were achieved: the Euro area has run a deficit in every single one of those years.

The need to keep consumption high led to ever-diminishing investment in western economies (apart from the notable example of Germany).  For example, in the most recent Spending Review, capital investment by the UK Government has been massively cut – 30% less in real terms in 2014 than in 2010, even though Government’s running costs are increasing slightly over the same period.  To keep people in jobs, and preserve entitlements in the short-term, the long-term is being made even worse than it would otherwise be.

When a company in the Private Sector goes badly wrong, and is no longer financially viable, the bankruptcy code (particularly Chapter 11 in the US) has proved effective in getting the failing organisation out of the hands of those who led it into failure, and into the hands of those who have demonstrated a better understanding of the problem, and an ability to solve it. Bankrupt organisations in the US tend to carry on after reorganisation with very little loss of the underlying assets, since the process is swift and the chief change is that those managing the assets are replaced.

In the UK national context, the failing institutions and organisations who have led our economies into failure are the governments, regulators, central banks, and commentariat who, over decades, failed to spot these trends, or speak out against the polices that led us to now.  It’s not surprising that acceptance of the need for radical change has been so slow in coming, because those running these institutions are strongly entrenched, and captive to the status quo.

In the UK and even more so in continental Europe, the governing castes have an iron grip on the policy levers, and it is unrealistic to expect them to even recognise that the policies that they pursued for decades were wrong, and that radical change is essential.  Yet the vast majority of discussion is still about how to preserve our current standard of living – a standard of living which is unsustainable. In the words of Herb Stein: “that which cannot go on forever . . . won’t”.

[caption id="attachment_1883" align="aligncenter" width="566"] Chart 7[/caption]

Basic industries – steel production, and the like – have already been taken over by China and other developing countries.  More advanced industries, such as car production, are going the same way.  With each stage of advancement up the industrial ladder in the East – from low know-how, to medium and high capital intensity, to scientific and creative, and on to professional services and other high know-how businesses (Chart 7) -- there is a corresponding jobs drain from the West to the East.  And while the West focuses on spending money to sustain existing standards of living, with capital investment dropping year after year, China’s investment levels (however misdirected some of those investments may be) have risen to almost 50% of GDP (the West is at around 15%, and falling).

The barriers with which the West has been able to keep the East and South at bay are disappearing, and for the first time in centuries we have to compete on an even playing field with the rest of the world.  It is infeasible that we will be able to offer competitive wage rates – you are not going to get to Eastern levels of wages without a complete collapse of the economy, and general destitution.  Even as wages in developing countries increase (a slow process, given all those workers on $1 a day waiting to join the industrial workforce, and exerting downward pressure on industrial wages), any equilibration of Western with Eastern wages will result in an average level well below the west’s current $135 a day: our preliminary analysis indicates a crossover, in the 2020s or 30s, of around $60 a day (Chart 8) –a number that poses enormous societal and economic questions. Even at that equilibrium, there is no reason why the West’s wages will not continue to slide further, through inflation or currency collapse, if existing policies are continued with and our barriers to competition continue to erode (Chart 9).

[caption id="attachment_1882" align="aligncenter" width="566"] Chart 8[/caption]

Our existing physical and intellectual capital base is disappearing fast, eroded by technological advance, the internet, to some extent cyber-theft of much of our IP, and the fact that our best universities are (arguably quite correctly) educating the future business and economic leaders of the developing countries.  Our propensity to invest new capital is lower than the East; our encouragement of venture capitalists and entrepreneurs is not notable (in the alleged words of Deng Xiaoping, “Zhifu Guangrong” – “to get rich is glorious”;  we can compare that with the UK’s Nick Clegg: “we need to get tough on irresponsible and unjustified top remuneration” and the UK’s general focus on increasing taxes rather than incentives).

[caption id="attachment_1884" align="aligncenter" width="566"] Chart 9[/caption]

The pioneering work of Daron Acemoglu and James Robinson at MIT has shown that in every society, ‘extractive’ groups emerge over time to take an unfair share of society’s wealth, thus diverting it from more productive uses (see their book, ‘Why Nations Fail’).  In the UK, for example, we have a variegated group, ranging from bankers to civil servants to middle-class and other benefit claimants, who arguably fall into this category.  These entitled groups will kick very hard against losing their hard-won privileges.  But freeing up that extractive share of the national wealth that they have their hands on is an essential part of restructuring the economy to be competitive with the East.

In the UK, as in Europe, government is such a large part of GNP that the need to tighten our belts, which in the private sector most families have already been doing, is crucial for the public sector --both for public sector employees, and for recipients of benefits.  Productivity in the public sector has declined over the past decade, while in the private sector it has massively increased, yet wages in the public sector have gone up significantly more than in the private sector.  On the recipient side, the economy has grown fourfold in real terms since the 1950s: welfare spending has increased tenfold.  We all want a compassionate society that seeks to help the disadvantaged.  But if that is done in unaffordable ways, it defeats itself – when the economy craters, there will be no tax monies available to pay over-large benefits.  Indeed, many benefits paid out by the government are not at all to the needy, and are far more a function of the perceived need to capture voters.   Nearly 80% of maternity pay goes out to middle class households in the UK: over 40% of child benefit, and 40% of student support.  Why do middle class pensioners need winter fuel allowances, or free bus passes?  How can that be justified when our public finances are in such disarray?

There will of course be real choices to be made, beyond removal of such fringe benefits.  One choice that has been made in the UK since the 1950s has been to grow health expenditure at a much faster clip (nearly 5% a year, real terms) than education (3% a year); over 60 years, due to the magic of compounding, this has been a huge reallocation of resources (Chart 10).

It has been said that 22% of health care is spent in the last year of life.  Which is more important for our future: the last year of life, or the first twenty?  Indeed, education, particularly the shrinkage of science teaching both in schools and in universities, is at the heart of the dilemma we face.  60% of current STEM (Science, Technology, Engineering, and Mathematics) graduate students in universities across the UK have come from abroad and most of them will leave again after graduating (particularly given the UK’s unwelcoming approach to immigration).  And yet, it is in a highly educated workforce, particularly but not just in the sciences, that our future lies.

[caption id="attachment_1885" align="aligncenter" width="566"] Chart 10[/caption]

Almost 20% of our children leave school without having attained “the essential reading skills to participate productively in society” (OECD 2009).  The comparison statistic in Shanghai is, by the way, under 4%.  It is the least educated who suffer the most in terms of low pay. Again from the OECD, the two things a government can spend money on that have the most impact on the long-run growth of an economy are education, and infrastructure.  With an educated population, we can develop the technologies and companies that can give employment and continue to grow the economy.

"... the tax mix needs to be reformed, away from corporate and personal income taxes and more towards consumption and property taxes ..."

The government has a central part to play.  Apart from reorienting government spending, the banking sector clearly needs to be transformed (and that, with currently planned legislation and regulation, is not happening); the tax mix needs to be reformed, away from corporate and personal income taxes and more towards consumption and property taxes (again, from the OECD, shifting to the latter two improves GDP per capita; to the former two reduces it).

Moreover, support must be given to the development of new technologies; and an integrated industrial policy needs to be driven through, that focuses on the building of technology ecosystems across the country, ties into innovation centres near to universities, and focuses on the multiple technologies (in current cod parlance, bio/nano/info/neuro/cogno/anti-carbo) where future economic growth is going to be found.

It’s particularly essential to reduce welfare-type distribution from government, if only because to grow the economy in the longer term, significant infrastructure investments need to be made in the UK, and our debt situation is such that we cannot borrow further to make those investments.  Lord Wolfson’s ‘brain belt’ (the Oxford to Cambridge motorway/science park ecosystem); local bypasses; universal WiMAX or other ultra-high speed broadband; ‘Boris Island’ (a Thames estuary-located airport); a Manchester to Sheffield motorway; university/science/business ecosystems; all these are crying out to be invested in, and each should grow the economy significantly.

"... a 15% immediate decline in living standards is needed just to balance Western economies today ..."

But above all, a national consensus is needed on what is necessary to implement the above vision, and in particular to accept that we have been living above our means. Until such time as we have grown the economy through the above vision, an increasingly lower standard of living for most is inevitable.  OECD and World Bank numbers indicate that something like a 15% immediate decline in living standards is needed just to balance Western economies today, never mind what happens in the future as more jobs slip away to the East – 15% is a level that many private households have already implemented, but with government spending so large, private retrenchment alone cannot accomplish that over the entire economy (and of course with the inevitable knock-on effect that retrenchment will have on the economy, the shorter-term shrinkage is likely to be larger).

This restructuring of consumption should by gradually managed, as otherwise it will be forced on us, in more brutal fashion, by the markets. We cannot expect Government or opposition to stand up and say this to us unless we all of us start being prepared to accept the fact and say it ourselves.  This is the alternative to the Keynesian “growth” story.  It’s a bleak view, but it contains the truth in it that all of us in our hearts know – that in order to recover, you have to pull back.

[caption id="attachment_1887" align="alignleft" width="256"] This article is an abridgement of a recent talk by Mr Moynihan at the London School of Economics (LSE).
 A video of the talk[/caption]

In order to grow, you have to invest. Capitalism works by creating surpluses and investing them in productive ways, not by borrowing monies and squandering them on consumption.  There are still major issues that would face us even if we were able to get a national consensus behind this idea --for example, I challenge anybody to show an existing, carefully worked-through example of how the US or the UK are going to unwind Quantitative Easing without enormous pain and possibly disastrous disruption-- but if the West is to avoid more generally suffering the fate of countries such as Greece and Ireland, and even before them, Argentina (a hundred or so years ago, one of the richest countries in the world), we have to make a start by owning up to our true situation, and the fact that the current consensus and approach is only digging us even further into trouble.

For reasons of space, this article focuses on the UK as an illustration, but its points are intended to apply to the developed economies overall.

About the Author

Jon Moynihan, Executive Chairman, PA Consulting Group

Jon has been first, Chief Executive Officer and now, Executive Chairman of PA Consulting Group, overseeing PA’s worldwide activities. Prior to working with PA Consulting Group, Jon worked with First Manhattan Consulting Group in New York, Strategic Planning Associates in Washington, McKinsey and Co in Amsterdam, Roche Products in London. Jon has written and been quoted in publications ranging from the Economist to the Financial Times, the American Banker, Barrons and Newsweek. Jon has lectured at Wharton, University of Michigan, Massachusetts Institute of Technology. Jon was educated at Balliol College, Oxford University; North London University – MSc Applied Statistics; Massachusetts Institute of Technology – SM Business/Finance. Jon was appointed an OBE in 1994.

About PA Consulting Group

PA Consulting Group (PA) is a management and IT consulting and technology and innovation organisation with specialist expertise across sectors: financial services, life sciences and healthcare, government and public services, defence and security, energy, telecommunications, consumer goods, automotive, transport and logistics. Founded in 1943, PA has annual turnover of approximately US$ half billion. The 2,154 employees (PA is employee owned) operate globally from offices across Europe, the Nordics, the United States, the Gulf and Asia Pacific with headquarters in London. See www.paconsulting.com.