Archive for September, 2012

Opportunity for Consumers

September 27, 2012

Today is possibly my most rewarding day for 2012. Our monthly home telephone, internet and cable charges will fall by 45% per month for the next six months and 40% after that. The latter will be a saving of over $750 per year.

That’s the good news. More perplexing for shareholders and potential customers is that Bell has yet to advertise that its fiber service is available in many but not all parts of Ottawa. The actual savings to customers will depend on the features chosen by each subscriber for the home phone service and the cable channels selected. To learn what your savings might be, find out what the final cost per month including taxes will be for the first six months and then after that, as there are special discounts for the first months to attract new business. Beyond 12 months, rate changes will depend mainly on regulatory approval by the CRTC.

The CRTC appears to be moving towards a pick and pay process for customers to choose what channels they want, rather than the present regulatory requirement which forces suppliers to offer packages of channels, only some of which they watch. It is somewhat like grocery shopping where the store says that if you want bananas, biscuits and bangers you have to buy tea, turnips and toilet paper, and you throw away the latter three. It’s all done supposedly to protect Canadian content and other regulatory requirements, supported by politicians of all stripes, which has the Vision Channel showing Benny Hill and the Women’s Channel The House of Bunny.

So why has Bell not advertised (my understanding) the availability of fiber cable which removes the need for satellite dishes for its internet and cable services? When it was advertised in Toronto and Montreal, I gather there was a stampede by customers for the new service. Would that not happen in Ottawa? And why has the news media not informed the public of this service and the probable reduced costs? There seems to be management failure in both the telecom and newspaper industries, which is bad news for their shareholders as well as for the public.  If this letter is published and Bell attracts new customers, I will be sending my bill for services rendered.

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Governor Carney’s Advice – spend but reduce your debt

September 19, 2012

A view of the Ottawa skyline suggests that the housing boom is not over in this part of Canada. Fueled by continuing low interest rates, the Economist reports that in the last year house prices in Canada have increased 5.4% (-0.7% in the US) and 17.8% since 2007 (-7.8% in the US). In Canada houses are 77% overvalued relative to rental rates while in the US houses are 15% undervalued relative to current rental rates.
The average sale price of residential properties, including condominiums, sold in August 2012 in the Ottawa area was $346,949, an increase of 2.5 per cent over August 2011. The average sale price for a condominium-class property was $272,367, an increase of 7.6 per cent over August 2011. The average sale price of a residential-class property was $367,661, an increase of 1.7 per cent over the same period.
Condominium towers appear to be popular in Ottawa given the visible cranes. Some borrow and buy to live there, others to own and rent, and others to flip hoping to make a profit. While real estate prices are rising, rental rates are not, suggesting that the boom may be ending.
Bank of Canada Governor Mark Carney has warned consumers about carrying too much debt, but keeps interest rates low – he may not have much option. A rise in interest rates would harm those owning houses financed with low rates, and would depress housing values in general. What does he expect the consumer to do in the face of current policy?
Carney also chides companies for carrying too much cash, urging them to invest and create jobs, or pay larger dividends. But what happens with the latter? Consumers receive more cash and many may put it in their savings accounts, and not spend it or will pay down existing debt. While firms build up retained earnings as a form of insurance, individuals may do the same.
Economic policy is like a water mattress. If you sit on one side it bulges out somewhere else; if companies reduce their retained earnings and pay larger dividends, there will be effects elsewhere in the economy. No one is sure what those will be. Some outcomes may be welcomed, some not. It would be helpful if Carney and his advisors explain why their advice will lead to the desired outcomes.

Nazism – Some Saw it Coming – Larson and Nagorski

September 17, 2012

One question my generation, brought up in the 1930s, asks is why the Nazi regime was allowed to take root and acquire political control in Germany. Surely there were forces in and outside of Germany that would resist the rise of such a brutal regime. Some did see it coming. Two recent books, Erik Larson, In the Garden of Beasts (Crown Publishing, 2011) and Andrew Nagorski, Hitlerland, American Eyewitnesses to Nazi Rise to Power (Simon and Schuster 2012) detail what those on the ground, mainly Americans, reported on the rise of Hitler and the Nazis. Nagorski covers the period from the end of WW1 to 1939 and Larson 1933 to 1938.

The answer includes several factors, some contextual and some internal to the Nazi regime and how it operated. At the end of WW1, the allies had not occupied German territory and many Germans felt they should not have surrendered, and agreed to the terms of the armistice which included loss of territory and large reparation payments. As Keynes and others warned, the payments were excessive and would slow the recovery of both the German and neighbouring European economies. Others, especially the French, wanted to apply even more punitive conditions. As the Nazi party gradually gained political control from the 1920s to 1933, economic conditions in Germany improved in part due to German rearmament and the order imposed by Nazi economic policies.

In the depression of the thirties, there was admiration in both the UK and US for the German recovery and concern that the reparation payments might not be paid in full. In view of Germany’s economic success, many were loath to criticize Hitler’s repressive political actions. As well, anti-semitic views were held by some in the US State Department and others in the US. Another contextual factor was that communism was viewed to be the alternative to Naziism in Europe, rather than the flowering of liberal democratic values. Among the ruling elites in both the US and UK, communism was seen as an outcome worse than Nazism. The Nazis courted their supporters abroad, and some Germans even took up fox-hunting which allowed them to dress up and mingle with the upper classes in the UK.

But some did see what was happening and warned their colleagues back in the US, unfortunately with little effect and not until it was too late. If today’s communications technology and the 24 hour news cycle had been active in the 1930s, it is inconceivable that the Nazis could have got away with it. Contrast information flows then with instant reports of political actions and violence in North Africa and the Middle East today.

Larson focuses on one family, US ambassador to Germany William Dodd, his wife, son and daughter Martha; Nagorski on a range of US diplomats, State Department officials, newspaper and radio correspondents and others present in Germany. The story of Dodd is as much about Martha who used her various assets to court lovers among the diplomatic community and Nazi party wheeler-dealers. After returning to the US in 1938, she married Alfred Stern, a left leaning rich American. They ended up living in Prague. Martha eventually became disillusioned with both the Nazis and Communists, but not before sampling the males on their menus.

As both authors show, some in the US and UK supported the rise of Hitler, others like Dodd and Churchill fought it as best they could. In the US, support for Germany came from within the State Department, by those who were anxious to ensure that Germany paid their reparations bill, by those who saw Nazism as preferable to Communism, and by part of the German immigrant community.

Dodd, appointed ambassador by Roosevelt in 1933, after others had declined the offer, was often opposed by his department in part because he chose to live and entertain frugally in Germany, while his wealthier colleagues considered him to be of a lower social standing than previous ambassadors. The State Department promoted a cult of elitism among its recruits, some of whom held anti-semitic views. Many of the US diplomats and those from other liberal democratic countries mingled freely with Nazi officials who courted them diligently and often successfully.

Nagorski, covering a longer period and more observers, found among them both those who supported the Nazi rise to power, while others issued dire warnings, observing not only the harsh treatment of Jews but those with disabilities and others who criticized Nazi actions. Once the Nazis gained power, foreigners in Germany, correspondents and others critical of the party, would also experience pressure to have them removed from their appointments, at times making it dangerous if they stayed in Germany. For example, foreigners who refused to salute Nazi officials, were often beaten up by the “brown shirts.” and this became an issue that had to be dealt with by the foreign diplomatic representatives.

There were two types of governance procedures which prevailed during this period, the bureaucratic atmosphere in the US State Department and the poisonous atmosphere among the Nazi high officials. Erik Rohm, friend of Hitler and head of the SS, a paramilitary organization, was murdered by Hitler’s aides for his attempted power grab in July 1934, two weeks before I was born. Canada in the 1930’s had no direct representation in Germany, relying on the UK for diplomatic reports and interventions.

The answer is that some outside Germany did see it coming but for various reasons chose to ignore it or felt that Nazism was preferable to the alternative. Some within Germany also saw what was happening, but felt that Hitler could not possibly prevail in the long run, and eventually became too terrified to oppose him openly. Ambassador Dodd received wide applause from Germans for an historical lecture on the dangers of dictatorship without actually mentioning conditions in Germany. His audience knew what was happening but were too afraid to oppose it openly.

The Ambassador – filming diplomacy in failed states

September 15, 2012

 

 

Foreign Policy ranks 177 countries according to their degree of state failure. Based on thirteen criteria, the 2012 rankings list Somalia as the most and Finland as the least failed, (one and 177 respectively); Canada ranks at 169. The criteria determining failure include:

Social

  • Mounting demographic pressures.
  • Massive displacement of refugees, creating severe humanitarian emergencies.
  • Widespread vengeance-seeking group grievance.
  • Chronic and sustained human flight.
  • Slum creation in poor areas.

 

Economic

  • Uneven economic development along group lines.
  • Severe economic decline.

 

Political

  • Criminalization and/or delegitimization of the state.
  • Deterioration of public services.
  • Suspension or arbitrary application of law; widespread human rights abuses.
  • Security apparatus operating as a “state within a state”.
  • Rise of factionalized elites.
  • Intervention of external political agents.

 

While Foreign Policy uses a semi scientific approach, a visual and more entertaining one is The Ambassador, a film made and acted in by Danish journalist and documentary film producer Mads Brugger.  Posing as Cortzen, a white man, Brugger goes to the Central African Republic (CAR) and to Liberia with the aim of securing diplomatic credentials from Liberia to become one of its representatives in the CAR. His aim is to show how blood diamonds can be smuggled out of the CAR by diplomats in pouches and various body cavities, with the aid of corrupt officials and entrepreneurs, both European and African, who make money by linking persons with officials. Diplomats tend not to be searched when leaving a country.

(I am grateful to Gerry Schmitz for bringing this film to my attention).

The film, a black comedy produced as cinema verite, illustrates how the market for diplomatic credentials works. It is run by Europeans and others, who for a price put those desiring the credentials in touch with Liberian and CAR officials to provide the necessary papers, and to get them accepted in the CAR. Brugger films his meetings with the entrepreneurs, officials and politicians. He poses as a diplomat and in addition to money (cash in envelopes) offers to build a match factory in the CAR in order to create employment. As an added incentive he offers to employ pygmies who are a minority and somewhat oppressed group in the country. During the production, he hires two pygmies who appear with him throughout most of the film.

Surprisingly, while filming The Ambassador, none of those who met with Brugger bothered to ask who he was, and why a white man would be representing Liberia. He did little to disguise himself, and a background web search was never made. If  it had, it would have revealed that he had made films with similar themes including one in North Korea called The Red Chapel where

…The Danish filmmaker and two friends posed as a pro-socialist comedy troupe called The Red Chapel to gain entrance into North Korea. Under the guise of cultural exchange, Brügger filmed his two-week stay in the country, and the result is a rare glimpse into a closed society that is part satire and part political screed. The film is thoroughly fascinating, and just won the World Cinema grand jury prize at the Sundance Film Festival….
See: http://dailycaller.com/2010/02/02/the-red-chapel-documents-the-inhumanity-of-the-north-korean-regime/#ixzz264bHwDEo

In public discourse, the concept of failed states is widely discussed but seldom seen in such an open way. In The Ambassador, it’s as though criminals have agreed to have their actions filmed for public distribution.

 Those taking or teaching courses on developing countries, aid and the conduct of diplomacy should view this film, as should practicing diplomats and officials. It would be interesting to get the reaction of the aid and diplomatic communities. The film deals with a serious issue, is presented in a clear and amusing manner and reinforces the view that so-called sovereign states are vastly different from each other, although often there is a pretense that they are equal.

 

The Ambassador reminds us that while state failure is pervasive in certain places, it is present in all countries. Perhaps this type of failure is studied in law courses and by those who study criminal behavior, but it receives scant attention in economics. Economists study market failure, opportunistic and criminal behavior in connection with markets as well as transparency surrounding transactions, but the functioning of the underground economy, of which this film illustrates one part, is not a primary focus of the discipline.

Since 1999, Transparency International has published a Bribe Payers Index. The first report covered 14 emerging market economies and the 2011 report includes 183 countries and territories.

“The Corruption Perceptions Index ranks countries according to their perceived levels of public-sector corruption. The 2011 index draws on different assessments and business opinion surveys carried out by independent and reputable institutions. The surveys and assessments used to compile the index include questions relating to the bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public-sector anti-corruption efforts.”

 

In this index, a high ranking denotes high corruption and a low ranking low corruption.  Somalia leads the list at 183, the CAR 154 and Liberia 91; New Zealand ranks 1 (as least corrupt) and Canada 10. The Ambassador reflects more aspects of corruption than it does state failure although one is part of the other.

There is a risk of saying that signs of failure are not present in one’s own country. I think this is a mistake. Rather it could be argued that all countries show signs of failure which may include corruption and bribery. Like health where some are healthier than others, failure occurs in varying degrees, for example:

  1. He (Madoff) founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest. Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On March 12, 2009, Madoff pled guilty to 11 federal crimes and admitted to operating what has been the largest Ponzi scheme in history. On June 29, 2009, he was sentenced to 150 years in prison with restitution of $170 billion. According to the original federal charges, Madoff said that his firm had “liabilities of approximately US$50 billion”. Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in the accounts of Madoff’s 4,800 clients as of November 30, 2008. Ignoring opportunity costs and taxes paid on fictitious profits, half of Madoff’s direct investors lost no money.  In comparison the actions of Conrad Black are small potatoes (source Wikipedia).
  2. The Gomery inquiry in Canada addressed issues of failure in federal government contracting. Specifically requested of Gomery were the following: to prevent mismanagement of sponsorship or advertising programs in the future, taking into account legislation to protect “whistleblowers”; to recommend changes to legislation to change the governance of Crown corporations to ensure that audit committees are strengthened, that public access to information is increased, that there is a consistent application of the provisions for each organization, that compliance and enforcement be enhanced, and finally that respective responsibilities and accountabilities of Ministers and public servants as recommended by the Auditor General of Canada. A similar inquiry is underway re public sector contracting in Quebec.
  3. Riots took place recently in Greece concerning legislation addressing the current fiscal situation where successive governments have failed to enforce tax legislation and collection.
  4. Street riots, often involving students, have taken place in London, Paris and Montreal with police having difficulty in controlling them.
  5. China restricts the ability of persons to run in elections against the ruling party
  6. Malaysia limits the publication and distribution of newspapers – this is now largely bypassed by the Internet.
  7. Terrorism occurs to various degrees in parts of the Middle East, Eastern Europe, Peru, and Ireland for example, and was part of the 1970 FLQ crisis in Quebec.