Saving the Global Trading System


May 22, 2017

Saving the Global Trading System

By Editors,  Eastasiaforum.com

International trade and investment lift living standards. The evidence for this is irrefutable. And modern economic development is not possible without opening up to international markets, competition and capital.

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But the world is re-learning the hard way, through Brexit and the rise of Donald Trump, that institutions and policies that protect the immediate losers from trade are needed to realise and sustain the benefits of open markets. Having a healthy and a well-functioning macroeconomic environment — one that delivers what economists call full employment — and a flexible labour market are crucial. So is having an effective social protection system.

When economic growth slows it is harder for the winners from globalisation to compensate the losers. The United States’ slow recovery from the global financial crisis, which hit close to 10 years ago, has brought these underlying structural problems into sharp focus. The social safety net is in tatters with the healthcare system, education system and redistributive policies exacerbating inequality — inequality in both opportunity and outcome — and bringing into question the American dream.

Australia, Japan, and many other countries have been able to avoid the retreat from globalisation thanks to well-functioning social protection systems. There may have been an inclination in many countries to adopt US institutions since it is the richest, most advanced and powerful economy in the world, but the lesson from Trump’s rise is a clear warning that now is the time to double down on the social safety net when embracing free and open markets.

When times are tough in any country there is immense pressure to put up barriers to foreign competition as a way to protect domestic producers. Protection may bring short-term relief to some parts of society and have short-term political appeal but is a cost to society as a whole, as well as to other countries.

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The global trading system has been stopping countries from committing self-harm for 70 years. The General Agreement on Tariffs and Trade (GATT) which later became the World Trade Organisation (WTO) was created in response to countries’ retreating to protectionism after the Great Depression. Countries voluntarily signed up to be bound by the rules and norms of that system and to have disputes with other countries settled within that system.

The 153-member WTO is far from perfect but it has underpinned successful globalisation. The large membership and diverse interests of the WTO have frustrated the completion of the Doha Round of trade negotiations. The WTO does not cover foreign direct investment and many other issues relevant to commerce in the 21st century. But its dispute settlement mechanism continues to function well and has resolved trade frictions that in an earlier time may have escalated into trade if not military conflict. High profile, geo-politically charged disputes such as the alleged Chinese rare-earth metal export embargo against Japan have been resolved peacefully in the WTO with China accepting the ruling against it.

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Three Amigos from of WTO, World Bank and IMF

In this week’s lead essay, Director General of the WTO, Roberto Azevêdo, reminds us that a ‘strong, rules-based trading system is essential for global economic stability’ and explains how that system can be re-energised.

Multilateral trade deals required all members to sign on to the entire agreement, called a single-undertaking, that made it harder to complete the latest round of negotiations, the Doha Round, as the issues became more complex and the number of countries increased. Azevêdo explains the WTO is ‘learning to be ambitious, but also to be pragmatic, realistic and flexible’, as well as ‘creative, finding innovative solutions and engaging in flexible formats’.

That is all good news for making progress on freeing up trade and reviving slumping global trade growth. But the bigger risk is that the WTO itself could be under threat from the United States, the very country that led its creation and which has underwritten the rules-based order for the past 70 years. The United States and Europe have provided a tailwind for the global economic system but have now turned to become the headwind against its forward movement.

President Trump has not carried through on many of his campaign promises and the world holds its breath in the hope that continues. While he withdrew the United States from the 12 member regional trade agreement the Trans-Pacific Partnership, he has not acted on tearing up existing trade agreements, starting a trade war with China or Mexico, or withdrawing from the WTO. But if jobs do not return in the American rust belt — perhaps as US interest rates rise and the dollar strengthens, or just because many of those jobs are gone for good — and Trump needs to demonstrate action on trade, the world will need to be ready to hold the line against following suit and to save the entire system.

Azevêdo explains that East Asia and the Pacific have a key role to play in boosting trade for jobs, growth and development. Asia will play the key role in saving the global trading system and global economy, if it is to be saved.

China is the world’s largest trader, a remarkable story only made possible with its accession to the WTO in 2001. The world, including the United States, has benefited greatly from China’s success. China’s economy is now the second largest in the world and still depends on open markets for development and its pursuit of prosperity. But China alone cannot lead the global fight against protectionism if the United States turns its back on globalisation.

South Asia and many countries in Southeast Asia need open markets to bring millions out of poverty and into the workforce. Japan and South Korea need open international markets to execute difficult reforms to manage shrinking populations. Asia is now a major growth engine in the global economy and has the interest, ability and responsibility to save the global rules-based order.

The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Amy King, Liam Gammon and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.

America and China–Managing the Possible


May 21, 2017

America and China–Managing the Possible

by Tan Sri  Dr. Munir Majid@www.thestar.com.my

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The  Go It Alone Eagle and The  Globalist Dragon

THE contrast could not be greater. While United States President Donald Trump raves and rants – and belts this or that person – China’s President Xi Jinping looks measured and assured as he offers an alternative global future to the world.

Xi is no angel of course, as his political opponents would know, but his system conserves and protects him, as Trump’s would not. If only Trump were the leader in a centrally controlled political order – but even then his temperament would blow it apart.

Leadership, like politics, is the art of managing the possible. Trump does not understand this, and does not know how. Xi does, knows why, and knows how.He has a growing economy too behind him, whatever the hiccups. Trump only promises one, without any clarity or logic.

His plan to boost the American economy, based primarily on slashing corporate tax from 35 to 15%, is likely to flounder in an American Congress seriously concerned about its causing the fiscal deficit to balloon.

Already Trump has had to climb down from trying to secure funds from Congress for his dreaded border wall with Mexico in order to avoid budgetary shutdown in September.

The stock market has fallen back from the boost to the price of banks and industrial products following his election. Interest now has returned to what might be termed “American ingenuity stocks” such as Google, Apple and Microsoft on Nasdaq – a proxy for much that is great about America, which Trump’s immigration and closed-door policies threaten to destroy.

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Meanwhile Xi has been rolling out his “Belt and Road” plans – something he first envisaged at the end of 2013 – for greater world connectivity and development, committing funds from China and the Asian Infrastructure Investment Bank, and engaging global financial institutions such as the World Bank.

Malaysia, for instance, will be an actual beneficiary with additional projects thrown in. China is Malaysia’s largest trading partner. But the US has not been a laggard, being Malaysia’s fourth largest trading partner. And indeed the US remains the largest foreign investor in Malaysia, both new investments and total stock.

A staggering statistic not often recognised is that total American investment in ASEAN is more than its investment in China, Japan and India COMBINED!

The point, however, is that this position is being eroded. Trump’s policies are hastening this process. Abandonment of the Trans-Pacific Partnership (TPP) means there is no American strategic peaceful challenge to the Chinese economic juggernaut in Asia-Pacific.

Balance is important to afford choice. Absence of choice means serious exposure to risk. Price, quality and after-service standards are affected, not to mention a new geo-strategic economic underlining.

Over-dominance by China in the region is a price not only countries in the region will pay, something that most probably is on Trump’s mind. It is a price that America too will sooner or later have to pay.

China’s Belt and Road proposition is not without its challenges, of course. India is deeply suspicious of the connectivity with Pakistan which cuts across India-claimed Azad Kashmir, about 3000km of it.

The link to the Pakistani port of Gwadar, in southwest Baluchistan on the shores of the Arabian Sea, is seen by India as a Chinese presence at the entrance to the Indian Ocean and a hawk eye on the Indian sub-continent. With the Chinese also in Sri Lanka, India is circumspect on China’s Belt and Road initiative.

There have also been commentaries on some uneconomic linkages which extend right across the English Channel.

All these reservations, however, do not take into account the benefit of connectivity to economies, the time it often takes to get those economic benefits and, most of all, the patience, persistence and long view of history of China and its leaders.

One of the most striking things about the Belt and Road map is that America is not there. Of course, Xi Jinping does not preclude America just as much as the US did not say that China was not permanently excluded from the TPP. And of course, in the Old Silk Routes and shipping lanes, the New World – America – had not been discovered.

But in their revival, led by now rising and then ancient China after 150 years of national humiliation to the present time, there is the irony that the last three quarters of a century of America world dominance is on course to be marginalised, if not supplanted, by the old Eurasian world centred in an ancient civilisation.

Trump does not seem to understand history. The art of the deal is purely transactional. Short-tempered and short-term gratification does not a strategy constitute.

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So we have leader, system and economic promise distinguishing the two leaders – and the two countries.

Instead of America first, what we are seeing is Trump hurrying America’s decline relative to a rising China. We are not seeing a world changed from people wanting to be like a kind of American to being people wanting to be a kind of Chinese. Actually, the Chinese people themselves want to be like a kind of American, with all that wealth, influence and power.

What we are seeing is China – not America – leading the way to that desired, if not always desirable, end. It is China that is driving the next phase in the evolution of world economic development.

Under Xi Jinping, China appears to be heroically moving towards an epochal point in its Peaceful Rise. With Donald Trump, America is being led backwards and inwards, with all the problems of its governance now all coming out. It is in grave danger of losing in the peaceful competition.

Not knowing how to play that game – certainly under its current President – there remains the danger of the status quo power lashing out against the rising one.

The Greek historian Thucydides observed: “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.” A Harvard professor has studied what is now called the Thucydides Trap and found in 12 out of 16 cases in which this occurred in the last 500 years, the outcome was war.

There are many potential flash points against the background of China’s rise – the North Korean Peninsula and the placement of THAAD missiles in the south, the South China Sea – where Trump may temperamentally find cause to lash out. This is the trapdoor he might take the world down because of failure to compete peacefully.

The Real Crisis in North Korea–A Perspective


May 21, 2017

The Real Crisis in North Korea–A Perspective

by Gianluca Spezza

PhD candidate at the International Institute of Korean Studies, University of Central Lancashire, and founding contributor at NK News

https://www.irinnews.org/opinion/2017/05/18/real-crisis-north-korea-not-one-you%E2%80%99ve-been-hearing-about

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The Democratic People’s Republic of Korea has been in the news a lot lately, with the DPRK testing new missiles and the United States moving a naval strike group off the Korean peninsula. The commentary almost always revolves around strategic issues, especially North Korea’s nuclear programme.

In focusing so narrowly on the country’s military and its leader, Kim Jong-un, however, the debate largely overlooks the North Korean people.

This has two major implications. First, it perpetuates an image of the country that is not in line with reality. In fact, the younger Kim does not enjoy the kind of monolithic influence held by his grandfather, Kim Il-sung, or his father, Kim Jong-il. Power structures in North Korea began to disintegrate under Kim Jong-il and are now widely ramified. Security apparatuses are no longer under one single point of command; neither are military corps. This is something that the administration of US President Donald Trump seems to be oblivious to, but it should take into account when formulating policy.

Second, and most important, the world’s myopic attention to Kim Jong-un precludes recognition of the nearly 26 million people that live in the country. They represent the true issue at stake, once the current regime – which is living on borrowed time – is gone.

What do we know about DPRK and its people?

Oddly enough, since the early 1990s the international community has accumulated a larger knowledge base on North Korean society than intelligence agencies have ever had on its military. Yet, most media insist on reporting obsessively on the latter. This is shortsighted.

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The Hermit Nation–Kim and his Military Men

The questions we ought to ask instead, if we are to understand where the country is headed, are: What is the current state of North Korea? What do we know about its society and economy? What kind of country will emerge once the regime is gone?

These questions matter, because with each crisis, the possibility of regime change or collapse becomes more real. With that, the risk of a humanitarian catastrophe increases, and neither South Korea nor China are well prepared to respond.

North Korea represents an anomaly, for both aid organisations and experts of international politics. But things are changing.

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For a long time, the country may have deserved its moniker of the hermit kingdom. But today, after 22 years of humanitarian assistance and development, the DPRK is an aid-dependent country, stuck in a paradoxical situation. Its economy crashed in the mid-1990s and never recovered, while its social indicators went from good, to terrible, to decent over the last two decades.

The North Korean development indicators for children’s welfare, as well as immunisation and education, are well above countries with a much higher GDP, but the economy does not reflect this relatively healthy development status. The DPRK produces very little of value, and its people find survival in the black market rather than state-provided jobs.

North Korea, in other words, has the economy of an underdeveloped country, with levels of social development of a middle-to-high income country. It is time to take a look at the country beyond military parades.

How did North Korea get so poor?

Upon the demise of its first leader, Kim Il-sung, in 1994, the DPRK faced a combination of domestic and international factors that negatively affected all sectors of society and state institutions. External circumstances included the loss between 1991 and 1993 of its main allies and economic partners, the Soviet Union and China. In addition, in 1993, China started to demand payments at regular market rates for oil and fuel, which had until then been provided at very low prices and constituted the main source of energy for the DPRK.

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In this rapidly changing international scenario, the DPRK, which had become heavily dependent on subsided trade with its former communist partners during the Cold War, found itself with no economic safety net. At the same time, the country was hit by a series of droughts and floods, along with a sudden shortage of energy sources. This devastated an agriculture system almost entirely dependent on chemical fertilisers and mechanised irrigation.

With diminishing amounts of food, the effectiveness of the Public Distribution System that regulated the allocation of basic goods decreased gradually, forcing the population to seek alternative means of subsistence. Housewives, factory workers, doctors, nurses, teachers and students alike had to fend for themselves in order to secure food and heating material during winter.

The crisis caught many North Koreans by surprise, and it was aggravated by economic mismanagement. It should be noted that the Public Distribution System did not collapse altogether, but the degree of functioning of the system varied between different provincesBetween 1994 and 1998, GDP declined by almost half. This, in combination with the progressive dysfunction of the PDS, severely reduced access to food, medications, and primary goods, leading to a famine and to the general deterioration of the population’s ability to withstand further calamities.

The economy: China dominates

Today, it is safe to say that, in effect, China runs North Korea’s economy. Chinese currency is widely used in the unofficial markets that have mushroomed around the country since the crisis of the mid-1990s.

China gets the lion’s share of trade with North Korea and provides the bulk of its food and energy. Luxury items, if and when they manage to come into the DPRK, do so from across the border region of Yanbian or Chinese ports.

To be sure, North Korea does have a few economic niches, but these too are largely influenced by China’s presence. The DPRK’s significant mineral resources are almost exclusively exploited by Chinese companies, and Chinese visitors make for the majority of customers in North Korea’s trade fairs and Special Economic Zones.

In other words, simply by looking at the economy of North Korea, one could surmise that as long as China is there to support it, the country could muddle along with no substantial changes for a very long time. A look at North Korean social indicators, however, offers a different perspective.

Demography is destiny

The key indicators of a country’s state of health and future prospects are its social statistics, particularly those on demographics. According to combined data from the Central Bureau of Statistics in Pyongyang, the World Bank Institute, and the UN gathered in 2008, and data by UNICEF gathered in 2014, the DPRK’s average population growth rate for 1990-2004 was 0.9 percent, or equivalent to that of upper middle-income countries. The same data provide trends for 2004-2020 that place growth at 0.4 percent, or equivalent to that of high-income countries.

At the same time, North Korea’s birth rate dropped to 16 per 1,000 people in the late 2000s – the level of middle-income countries – whilst the fertility rate is slowly approaching the levels of most Western countries. It sits between parity – two children, which is the minimum requirement for a population to continue replacing itself over time – and one child or none per couple, which is deemed not enough to avoid extinction in the long run. The latter is where Germany, Italy, and most EU countries are at present.

What does this mean for the future of North Korea?

If we read population increase as an indication of economic and social stability, the DPRK looks further removed from the so-called “failed states” it is often compared to – like Somalia, Yemen, or South Sudan – which are all on the verge of famine (or, in the case of parts of South Sudan, already experiencing it). North Korea is in fact undergoing the same “cradle crisis” that characterises advanced countries, from Japan to Germany.

However, the same statistics, viewed from the standpoint of overall death rates and infant mortality rates suggest the DPRK is right there with low-income countries. Its average death rate is as high as 11 per 1,000 people, and rates of infant mortality that have not yet fully recovered from the 1990s crisis.

This has a number of implications: North Korea doesn’t have the problems that South Korea has at the moment, with an increasingly aging population placing stress on the social welfare system. As a matter of fact, the DPRK welfare system has been simply downsized and slowed to a minimum since the 1990s. Today, North Koreans live on average six to eight years less than South Koreans and about nine years less than the Japanese.

In Malthusian terms, this means that the government has less to worry about in the short-term. Considering the chronic economic stagnation, most North Koreans alive today could well get old before they even have a chance to elevate their economic status.

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At the same time, with a slow but steady recovery from the famine and the crisis of the mid-1990s, the DPRK seems to have reached a level of relative social comfort at which most middle-to-high income countries stop having enough children for the maintenance of native population. At this stage, they will slowly begin to fade out unless they adopt open immigration policies – an option that is unpopular in South Korea and Japan, and next to impossible in the DPRK.

If the trend continues – and the figures from 2008 and 2014 suggest it will – North Korea may one day run out of people to maintain its workforce. That would be one more reason for the regime to push towards reunification. While its rival state south of the demilitarised zone is also growing older, it is still twice as populous, and immensely richer by comparison. Still, if nothing changes at the economic level, any effort of reunification will require the equivalent of a mini-Marshall Plan for the entire peninsula.

This is the real North Korean conundrum: The country has faced challenges it is hard to imagine any other regime surviving: famine, floods, droughts, economic collapse, energy shortages, sanctions, and leadership changes. This has left a North Korea that is a mass of contradictions.

Few consider that the country making headlines for its nuclear technology has a basket case economy, but also one of the highest literacy rates in the world. There is no other country with such low economic indicators that can at the same time build and at test nuclear devices and achieve universal literacy, while still being aid-dependent.

Is aid the answer?

To explain the North Korean anomaly, we have to look at the nature of aid itself with three key questions: What is aid? Why is aid provided? Is it accomplishing what it is supposed to?

From an economic perspective, we can think of aid as a measure of socioeconomic welfare, like the one used for families and individuals, but on a much bigger scale. Welfare policies are supposed to work as a safety net in times of emergency – fostering growth and preventing recession when families and individuals go through hardships. At any rate, welfare is conceived to be a temporary measure and aid doesn’t come for free.

Aid represents an extension of foreign policy from donor states to recipient nations. Donors and international organisations expect recipients to correct their course and adopt policies that move them towards a free market economy, and adherence to international treaties on human rights, environmental protection and sustainability.

North Korea has become chronically dependent on aid since the mid 1990s. Yet, it has remained impervious to outside pressure for change. When it shows any degree of compliance with international norms, it does so only in fields where its interests converge with those of international organisations. Education and environmental protection are two examples.

On the other hand, North Korea has no relationship with global economic bodies like the World Trade Organization and the International Monetary Fund. It makes no concessions on the issues of nuclear proliferation and allows no inspections from human rights organisations. But its population does require foreign assistance in order to survive.

The socioeconomic emergency that swept the country between 1995 and 1999 was rooted in a combination of political, climatic, structural, and geopolitical factors. By 2005, the government declared the food emergency to be over and asked a number of NGOs – but not UN agencies – to leave. Nevertheless, the country has continued to rely on foreign assistance, just as the UN agencies at work in the DPRK kept monitoring a situation that requires periodical emergency assistance, year in-year out, in combination with development programmes.

If North Korea were a family, or an individual who has been in need of aid for 22 consecutive years, would this be considered normal? It’s unlikely. Yet, aid needs to reach the people of the DPRK on a yearly basis or a new humanitarian emergency may break out, according to the UN.

There is a consensus among humanitarians that as the North Korean people have no say on their government policies, they should not be the ones suffering the consequences. Therefore, the international community has responded with aid. However, a look at what North Korea has become since 1995 reveals that aid has not made North Korea strong enough to stand on its own.

This is the most pressing problem with North Korea, aside from its periodically aggressive military posture. The country needs aid because what once was a functioning infrastructure for a command economy, in which the state plays the primary role, has ceased to exist. More than this, it needs important economic and political reforms. Currently however, North Korean politics withhold economic restructuring and growth. At the same time, aid agencies and donors tend to look at technical issues and do not tackle the lack of political decisions that could steer the country away from perpetually looming humanitarian disasters.

 A new approach?

Aid has been invaluable in pulling the country out of the humanitarian catastrophe of the mid-1990s, and it has helped North Korea maintain decent levels in development indicators such as health and education since then on. But aid cannot help the country provide a decent standard of living on its own for its people. That can only be done through political reform.

The real political story about North Korea today is that the “Stalinist fortress” – the impenetrable polity devoted to hardline communism – is no longer Stalinist, nor a fortress. North Korea scholars and South Korean government experts concur in saying that Kim Jong-un holds a fraction of the power that his father and grandfather wielded.

The elites that have emerged from two decades of black market activity are aware that there are only a few obstacles to a reunification that could see them prosper, while lifting millions of North Koreans out of poverty. These factors are their “political guilt” (for they contributed to keeping the country in a state of repression over decades), and the risk of losing whatever wealth they have accumulated.

If the United States and South Korea could agree to leave some of these families in power, providing them amnesty, they could ask in return for a soft removal of the Kim family, and open the door for a gradual economic rebuilding of the country. Financial incentive, or the lack thereof, in North Korea is the key issue. The average annual income in North Korea is a little below $1,000. In the South, it is over $30,000. No amount of foreign aid can ever bridge this difference.

Japanese companies need to open up or shut down


May 21, 2017

Japanese companies need to open up or shut down

by  Alicia Ogawa, Columbia University

http://www.eastasiaforum.org/2017/05/16/japanese-companies-need-to-open-up-or-shut-down/

 

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Corporate governance has long been a hot topic for investors worldwide, but it is still a new concept in Japan. The increasing number of Japanese corporate scandals points to the need for a new approach to management. Many once-prominent companies seem to be unable to adapt to the pace of global change. The domestic market no longer offers much growth potential, so Japanese firms need to actively engage with the world or perish.

There is strong global interest in Japanese corporate governance for two key reasons. First, from the point of view of investors, the fact that rates have been low or negative in virtually all major developed economies has encouraged a sharper focus on equity markets for real returns, and Japanese companies fall woefully behind their global competitors in terms of profitability.

Second, as the pace of global competition accelerates, management is under constant pressure to react quickly to changing opportunities, such as the development of new technologies or the consolidation of capacity in maturing industries. Dialogue with outsiders, from shareholders to independent directors, is a prerequisite to navigating this terrain safely.

Japanese companies are at a distinct disadvantage in this new world because of key features of their organisational structures that served them very well in the past, such as lifetime employment. Decision-making is slow and dominated by consensus-seeking groups of senior men who have never worked outside their own firms, who rarely have specialised expertise and whose loyalties are first and foremost to each other.

The first of the major traumas at Toshiba, which came to light in 2015, involved the 152 billion yen (US$1.33 billion) deliberate overstatement of earnings between 2008–2014. This scandal illuminated the unspoken trade-off inherent in a lifetime employment contract: staff must not question decisions made by top management.

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Japan is No Longer a Tiger Economy

An independent investigation into Toshiba’s overstatement of earnings revealed that no CEO during that period directly instructed anyone to falsify the accounts. Rather, there was a long-standing corporate culture which mandated that managers ‘couldn’t refuse’ the profit targets set by the CEOs, no matter how unrealistic. Nevertheless, after the first accounting scandal, Toshiba chose Shigenori Shiga as the new chairman after his predecessor resigned in disgrace. Not only was Shiga yet another lifetime company man, but a former head of Toshiba’s subsidiary Westinghouse — which is now in the process of Chapter 11 bankruptcy in the United States.

Many Japanese companies have raced to create better governance on paper — Toshiba was in fact a trailblazer in this respect, having chosen to replace a traditional Japanese system of governance with US-style executive committees, including independent directors on the board. But despite appearances, an inability to encourage and respect independent thinking has led to the collapse of the former world leader in high-tech products.

Failure by Japan’s corporations to embrace both the letter and the spirit of Prime Minster Abe’s new governance reforms will jeopardise Japan’s future prosperity. CEOs must encourage challenges by their subordinates and aggressive supervision by their independent directors.

Investors are the other key class of outsiders who need to be welcomed into the discussion. The traditional silence of friendly shareholders is yet another wall that insulates management from outside competition.

Much attention has been paid to the unwinding of friendly cross-shareholdings by banks. But most of these shares have been transferred from friendly banks to friendly corporations, who will likely never vote against management; to the Government Pension Investment Fund (GPIF), whose size makes it ill-equipped to exercise any positive influence; and to the Bank of Japan, who cannot be a force for better governance. The protection afforded by acquiescent shareholders does not seem to have changed very much.

A survey undertaken by GPIF indicated that 21 per cent of executives regarded investors’ increasing scrutiny of capital efficiency to be a positive development, while 32 per cent regarded this as a very negative trend. Clearly, Japanese managers are a long way away from being comfortable discussing fundamental strategies with investors who own shares in their firms, or with their junior staff. But they had better hurry up.

In the case of Toshiba, lawsuits have been brought by several foreign investors, the world’s largest public pension fund GPIF, and several of the largest domestic banks. Refusing dialogue with your outside stakeholders can carry a devastating price when mistakes are made. It’s better to choose an openness to new ideas and critiques from your independent board directors and your investors, and thereby reap the benefits of dynamism and sustainability.

Alicia Ogawa is Director of the Program on Corporate Governance and Stewardship at the Center on Japanese Economy and Business, Columbia Business School. 

 

A Bit of History: What Kind of Loyalty Does a President Need?


May 20, 2017

A Bit of History: What Kind of Loyalty Does a President Need?

http://www.newyorker.com

U.S. Presidents throughout history have long defined loyalty differently. Lyndon B. Johnson’s definition was extreme; Trump’s definition has so far proved disastrous.

U.S. Presidents throughout history have long defined loyalty differently. Lyndon B. Johnson’s definition was extreme; Trump’s definition has so far proved disastrous.PHOTOGRAPH BY WALLY MCNAMEE / CORBIS / GETTY

On April, 1965, the leaders of India and Pakistan, nations then on the brink of war, cancelled meetings with President Lyndon Johnson, and L.B.J. thought he knew why. While flying to Texas aboard Air Force One, he huddled with his speechwriter, Dick Goodwin. “Do you know there are some disloyal Kennedy people over at the State Department who are trying to get me; that’s why they stirred things up?” Johnson asked. “I didn’t know that,” Goodwin replied. “Well, there are,” Johnson said, “They didn’t get me this time, but they’ll keep trying.” Johnson’s obsession with his political rival, Robert Kennedy, had, by that time, become so overpowering—and his insistence on “all-out loyalty” so pronounced—that it was bogging down the Presidential-appointments process and driving good men out of government. “We cannot afford to lose them,” Harry McPherson, the White House counsel, warned Johnson in a bravely blunt memo. “Neither, in my opinion, can we afford to give them a polygraph-loyalty test. . . . If the word gets around that one has to put on horse-blinders to work for you, you will probably come out with a bunch of clipped yes-men who are afraid of their own shadows and terrified of yours.”

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Jared Kushner–35-year Old Advisor to President Donald Trump

That advice would apply in today’s White House, too, though it’s unlikely that President Trump would welcome it any more than L.B.J. did. (He nearly fired McPherson.) Trump’s chief complaint about his own yes-men seems to be that they don’t say yes energetically enough. The people who serve at the pleasure of the current President are, according to numerous sources, causing him displeasure. Trump, in fact, is said to be enraged by the lot of them—even his adviser-in-law, Jared Kushner—for their “incompetence,” and for “tooting their own horns.” Reports say that Trump is considering a big shakeup. He has already, of course, shaken up the F.B.I., firing its director, James Comey, last Tuesday, for a multitude of asserted sins—disloyalty not least among them. A detailed account in the Times described a one-on-one dinner at the White House in January, shortly after the Inauguration, in which Trump, three times, asked Comey to pledge his loyalty to him. Comey, according to the Times, dodged, and offered the President his honesty instead. (In light of the F.B.I.’s investigation of possible collusion between the Trump campaign and the Russian government, honesty must be what Trump didn’t want from Comey.) In recent days, Trump and his staff have been insisting that if the subject of loyalty came up at that dinner—and, mind you, they’re not saying it did—it would only have concerned Comey’s loyalty to the U.S.A. “I think loyalty to the country, loyalty to the United States, is important,” Trump said on Saturday, in an interview with Fox News. “You know, I mean, it depends on how you define loyalty.”

Putting aside (if one can) Trump and his purposes, every President needs his staff, his Cabinet, and—to a reasonable extent—his party to stand by and stick with him, for an obvious reason: without loyalty to the President and his agenda, an Administration lacks a center of gravity. But loyalty, as Trump suggests, means many things. How a President defines loyalty says a good deal about how he leads and who he is.

Image result for JFK and Bobby Kennedy

Bobby Kennedy and JFK

John F. Kennedy, for example, selected his unquestionably loyal brother, Robert, as Attorney General and installed members of the so-called Irish Mafia across the government. But as he filled out the rest of his Administration he showed little interest in whether someone had voted for him. He wanted to build, he said, “a ministry of talent”; also, given the narrowness of his victory over Richard Nixon, in 1960, he wanted a few Republicans on his team. This caused Bobby Kennedy some distress, especially when J.F.K. looked to appoint Douglas Dillon—who had served in the Eisenhower Administration—as his Secretary of the Treasury. As Arthur Schlesinger, Jr., recalled in “A Thousand Days,” his account of those times, R.F.K. “kept asking what would happen if Dillon resigned in a few months with a blast against the administration’s financial policies. He warned his brother that they were putting themselves in the hands of a Republican who had no reason for loyalty to them and might well betray them.” The President-elect shrugged. “Oh, I don’t care about those things,” he said. “All I want to know is: is he able? and will he go along with the program?” In the end, he allowed Bobby to extract from Dillon a pledge (unnecessary, it turned out) that if Dillon ever felt compelled to resign, he would go quietly. But J.F.K.’s nonchalance was not a pose. He expected (and for the most part received) the devotion of his Cabinet and staff. But he knew that he needed, above all, their candor; he needed them to tell him the truth, to give dispassionate and sometimes divergent advice, and then, of course, to back his decisions. Honest debate, in Kennedy’s view, was an act of loyalty; mindless affirmation was not

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Nixon and Kissinger

Both L.B.J. and Nixon, by contrast, were obsessed with loyalty. They brooded about it, demanded it, doubted it, and never seemed to find enough of it. After Kennedy’s assassination, in November, 1963, L.B.J. tried hard to retain the Kennedy men, even though many had treated him cruelly when he was Vice-President. Swallowing his pride, Johnson told them, “I need you more than President Kennedy needed you.” Nearly all agreed to stay on, for a while; some came to respect Johnson’s boundless energy and his success in breathing new life into Kennedy’s legislative program, which had been stalled on Capitol Hill. But he did not win their loyalty. This accrued—without reservation—to Bobby Kennedy. Insecure and increasingly bitter, L.B.J. saw sedition everywhere; aides like Goodwin and Bill Moyers began to wonder whether he was clinically paranoid. Johnson’s definition of loyalty grew extreme, absolute: “I don’t want loyalty,” he told an adviser about a potential appointee. “I want loyalty. I want him to kiss my ass in Macy’s window at high noon and tell me it smells like roses. I want his pecker in my pocket.” Nixon, for his part, was so suspicious of his own aides—who were, he believed, hurting his reputation, undercutting his aims, and, in the case of Henry Kissinger, taking credit for his best ideas—that he installed a taping system in the White House so that he could, someday, hold them to account. Nixon wrote in his memoirs that the tapes “were my best insurance against the unforeseeable future. I was prepared to believe that others, even people close to me, would turn against me.” After his reëlection, Nixon told his chief of staff, H. R. Haldeman, to clean house and hire some new aides—they didn’t have to be brilliant or even all that competent, Nixon said, just loyal.

Donald Trump is, “like, this great loyalty freak,” by his own telling. “I put the people who are loyal to me on a high pedestal and take care of them very well,” he wrote in “Think Big and Kick Ass in Business and Life,” a sort of self-help book for budding blowhards that Trump produced with a co-author, Bill Zanker, in 2007. He has long identified loyalty as the paramount quality he looks for in employees. An article in Politico last July, examining Trump’s approach to management, found that he earned the allegiance of some employees through a combination of “praise, pay, and fear,” and by promoting “trusted loyalists” who often lacked “obvious qualifications.”

But this model, which may or may not have worked as advertised in Trump’s businesses, has proved a disaster in the Presidency. Across the executive branch, a truly staggering number of offices—at Homeland Security, at the Treasury, at the State Department—remain unoccupied, in part because Trump’s team cannot find enough “reliable” loyalists to fill the positions. Trump and his team have also pushed people out of jobs when their loyalty has come into question: in February, Shermichael Singleton, a senior aide to Ben Carson, the Secretary of Housing and Urban Development, was fired and marched out of the building after a Trump adviser uncovered an op-ed, critical of Trump, that Singleton had written during the campaign. Aides who do pass the loyalty test know that their hold on Trump’s allegiance is and will remain tenuous. David Rennie of The Economist was one of four reporters who met with the President in the Oval Office on May 4th; the following week, Rennie described the atmosphere as “kind of like being in a royal palace several hundred years ago, with people coming in and out, trying to catch the ear of the king. . . . The role of some pretty senior figures, including Cabinet secretaries, was to chime in and agree with whatever the president had just said, rather than offering candid advice.”

On the continuum between with-the-program loyalty and pecker-in-my-pocket loyalty, Trump clearly wants the latter. The Comey dinner—a botched ring-kissing ceremony—is wholly consistent with Trump’s understanding of loyalty. Where it is not forthcoming, it must be coerced. What Trump demands is not, in fact, loyalty; it is fealty, servility, sycophancy. And he feels that this is owed him not only by his staff or Cabinet but by the director of the F.B.I., by Congress, by judges, even by journalists: in an interview with the Associated Press in April, Trump observed, “When I won, I said, ‘Well, the one thing good is now I’ll get good press.’ ” All are expected to fall into line. So far, the President’s aides are sticking with him—there have been no high-level defections from the Administration. Michael Flynn, who was dismissed from his job as national-security adviser earlier this year, is even defying a subpoena from the Senate Intelligence Committee, which has demanded documents concerning his interactions with Russian officials. Trump has encouraged him to “stand strong,” Flynn told a group of friends in April. But, with Republicans on the Hill growing restive in the face of every new day’s dramatic revelations, and with the Russia investigation now in the experienced hands of Robert Mueller, a former F.B.I. director, Trump may be about to find out how loyal his people are willing to be.