Nicolas Véron

The Era of Corporate Split Personalities

This column was published by Bruegel and PIIE as well as Vox, the Globe and Mail (Canada), Financial Review (Australia), and translations in De Tijd (Belgium), La Tribune (France), Kathimerini (Greece), Nikkei Veritas (Japan), RBC Daily (Russia) and Radikal (Turkey).

The saga of securities exchanges consolidation is a vivid illustration of links between companies and nations in a state of flux. The likes of the New York Stock Exchange (NYSE) are national icons of capitalism. But they are also technology-enabled networks that connect market participants and seek a global reach to maximize economies of scale, just like Facebook or eBay. Thus, in the recent battle over NYSE Euronext Nasdaq envisaged moving one of its data centers from the UK to France to signal commitment to the place de Paris, but backed off under opposition from its London-based high-frequency-trading hedge-fund clients, illustrating the tension between symbol and business substance. New York Senator Charles Schumer said he would support Deutsche Börse’s bid only if the NYSE name came first in christening the merged entity. Canadian banks and Australian regulators thwarted bids on the Toronto and Sydney stock exchanges (by the London and Singapore Stock Exchanges respectively), seemingly on predominantly nationalist motives.

Debates on corporate nationality are nothing new. In 1967, George W. Ball, an American diplomat and financier, predicted that companies would increasingly escape their original home bias and acquire a stateless identity. In the early 1990s, a memorable controversy pitted Robert Reich, who argued that the US government’s attitudes to corporations should be nationality-blind, against Laura Tyson, who replied that "American ownership still matters" – both later became senior figures in the Clinton Administration.

The great globalization from the 1990s to 2007-08 gave credence to Ball’s vision. Most large European companies now have only a minority of their operations in their country of origin. Entire sectors, such as telecoms, utilities and banking, internationalized quickly following partial deregulation and privatization. After 2000, even R&D and headquarters functions, long seen as mostly tied to the home country, were gradually distributed around the world. Symbolic milestones included Wal-Mart’s relocation of its procurement function to Shenzhen in 2002, followed by IBM in 2006, the move of Halliburton’s CEO to Dubai in 2007, and that of HSBC’s CEO to Hong Kong in 2009. National labels were still routinely attached to companies, but by the late 2000s they looked increasingly like misnomers.

The past few years, however, have made things more complicated, for two main reasons. First is the breathtaking rise of large companies from emerging economies. These now feature as prominently as European ones in global league tables, compared with a ratio of one to ten a decade ago, and their share of the global total has surged from 10 to 25 per cent in the past five years (aggregate market values based on FT Global 500 rankings). They are often subject to hands-on state oversight, if not outright control, and generally carry a stronger sense of national identity than most Western peers, partly but not only because of their focus on high domestic growth at home. As there tends to be less geopolitical alignment with and among emerging countries than among advanced ones, their increased global presence also raises unprecedented national security concerns. Some analysts like Ian Bremmer from the Eurasia Group warn that emerging countries’ "state capitalism" threatens the core of the West’s business model and heralds an "end of the free market." Even with a less dramatic assessment, strong corporate national identities can no longer be seen as just a thing of the past.

The second factor is the recent financial crisis, and the unprecedented state intervention that resulted in the United States and Europe, confirming the dictum (diversely attributed to Charles Goodhart or Mervyn King) that "cross-border banks are international in life, but national in death." This at times extended to other industries, such as car companies in the United States or France. The internationalization of corporate identities suddenly looked like a mask that could easily fall. This apparent reversal chimes with uncertainties about the future of financial globalization, most acutely felt in the euro crisis but relayed by wider concerns about "financial repression" in massively indebted countries.

These conflicting trends are likely to result in policy volatility. On paper, most public policies do not discriminate according to corporate nationality, a principle on which the EU legal framework is particularly strict. But the attempt to impose "buy American" provisions in the 2009 US stimulus, or the recent debate in Italy on how to counter foreign takeovers, show that it cannot be taken for granted. More insidiously still, companies may find it increasingly difficult to give a clear vision of their national orientation, or lack thereof, to their own staff, clients, and other stakeholders. The personality split between national and global can easily lead to irresponsible behavior, as with those banks that practiced massive regulatory and tax arbitrage, and then hijacked home-country governments when the system came under threat. It has become received wisdom among foreign policy observers that the next decade will be one of divided sovereignties, unstable politics of interdependence, and conflicts between national constituencies and globalized elites. It would be naïve for companies to think they can easily escape these tensions.

The next Managing Director of the IMF

This post co-authored with Arvind Subramanian was published by the Peterson Institute for International Economics yesterday.

Update: on May 19th we published a follow-up post which is also pasted below.

A Quick Guide to the Upcoming Contest for the Next MD of the IMF

by Arvind Subramanian and Nicolas Véron | May 17th, 2011 | 04:24 pm

This note provides a quick guide—in the form of a table—to the likely candidates to succeed Dominique Strauss-Kahn as next Managing Director (MD) of the IMF, assuming that he resigns shortly. It also highlights some key points that must guide the process of selecting the next MD.

Need for urgent action. The IMF is at a critical juncture with lots of problems to solve, not least in Europe. A leadership vacuum and uncertainty must be avoided, which requires urgent initiatives by the larger players—the United States, Europe, China, Brazil, India, South Africa and others.

Europe can no longer claim the job of MD: Europe no longer has the divine right to this job, irrespective of the circumstances of the European incumbent’s (assumed) departure. The world has changed, and antiquated if unstated arrangements dating from 1945, in which a European heads the IMF and an American heads the World Bank, must keep pace with reality. The next MD must be selected on the basis of merit, which is not to be found only in Europe.

The thoughtful Wolfgang Münchau of the Financial Times made the case yesterday that the successor to Dominique Strauss-Kahn should be another European. "The eurozone’s contagious financial crisis constitutes the biggest threat to global financial stability today," he wrote. "The IMF is a partner in the multilateral loan programme for Greece, and a structural partner in the eurozone’s financial rescue mechanism. The size of these programmes dwarfs whatever else the IMF is doing at the moment."

We disagree. For a start, it elicits the obvious question: During the Asian financial crisis, would Mr. Munchau have extended his logic and asked for an Asian to be head of the IMF? And for most of the history of the IMF, given the identity of the borrowers, should the head have come from the developing world?

Dominique Strauss-Kahn has played a key role during the Euro crises, especially last year, in persuading eurozone leaders to partner with the IMF in addressing the Greek crisis. But the next challenges will be of a different nature. Last year, the IMF leadership’s sensitivity to European politics was key to ensuring acceptance in Europe of IMF-led conditionality for the countries receiving aid. Now, if and when Greece comes back for its second tranche of borrowing, the MD will have to play a different role: to convince Europe, in what promises to be a heated discussion, that Greece has a solvency problem and requires debt restructuring; or, if the IMF concludes that Greece merits international support and all other options are worse, to convince the rest of the world to extend further financial commitments. Either way, there is less need for a European and more for an objective outsider.

Key US role: The leadership of the IMF and World Bank are linked. So, a corollary to Europe forgoing its monopoly rights to the IMF leadership is that the US right to leadership of the World Bank (and for that matter, to the Number Two position at the IMF) is no longer a given either. Although the United States supported a weak G20 commitment in 2009 to a merit-based selection procedure for both institution, it has been more recently sitting on the fence on this issue. But its leadership is needed to avoid weakening the Bretton Woods institutions in a 21st-century world that arguably needs them more than ever. The United States has always argued that American leadership at the World Bank helps persuade Congress to put up the money for development assistance. But that argument has been rendered obsolete by the realities of modern global politics and economics. President Obama or Treasury Secretary Timothy Geithner should say clearly that Washington commits to the principle of fair, transparent, and merit-based selection for the leadership of both institutions.

Strong emerging market candidates: As the attached table shows, the list of potential contenders from emerging market countries is very strong. There is absolutely no excuse therefore for not casting the selection net wide to focus on these contenders. The attached table also shows what the possible doubts about some of these candidates might be. Given the importance of the process and the break from the past that it would represent, the search should not be confined to those who are well-known in IMF and World Bank circles. In other words, even among those on this list, there are "insiders" and "usual suspects" and the process should not be biased towards them.

On the other hand, since Asia is at present the location of the world’s strongest-growing economies, and the countries of Asia are clamoring for more of a role in all international institutions, the IMF would do well to look carefully at candidates from that continent. In that spirit, serious consideration should be given to the Finance Minister of Singapore, Tharman Shanmugaratnam, who ticks many of the key boxes: he is an Asian who might be acceptable to other Asians; he has the right senior policy experience, both as central banker and as finance minister; and most important, he is highly regarded intellectually and has a track record of strong and thoughtful leadership. As many commentators have already noted, Kemal Dervis of Turkey, a former director of the United Nations Development Program, is also strong in the list, as a highly respected emerging-market figure who is also culturally and politically very close to Europe. Trevor Manuel, the finance minister of South Africa, has no obvious disqualifications. Perhaps less predictably, we also suggest considering a senior IMF career staffer, Ajai Chopra, who has distinguished himself during the European crisis in his handling of the Irish IMF program, even if he lacks political heft and connections compared with others in the list.

This is certainly not to say that there is no matching talent in Europe, or the United States for that matter. Christine Lagarde, finance minister of France, is highly respected internationally, and a first-ever female MD would be welcome. But our point is that there are more credible candidates from emerging countries this time than arguably ever before.

Pitfalls to avoid: There are two major dangers. One is that jockeying between Europe and the United States will lead to protracted uncertainty, creating a rush to make a quick perpetuation of the status quo as a means out of the IMF’s leadership instability. This underscores the need for the United States to be clear about selection procedures for both Bretton Woods institutions. A similar possibility arises if emerging market countries squabble among themselves and cannot agree on a common candidate. Unlike EU member states, these countries do not have strong institutional mechanisms to coordinate their positions, but they too should resolve their differences and get their act together.

In short, after years of talk about change, the time is ripe for genuine reform in the governance of international institutions to reflect the changing economic realities. The list of emerging market candidates for the IMF job is very strong. The United States should not cast itself as a defender of an antiquated status quo; and the decision should be made quickly. Letting this key negotiation drift would threaten the legitimacy and effectiveness of what are vital structures of international cooperation.

	A Guide to the Potential Non-European, Non-American Successors to Dominique Strauss-Kahn
	Name	Current Position	Nationality	Qualifications	Questions
	Montek Singh Ahluwalia	Head, Planning Commission	India	Previous IMF experience; associated with successful Indian economic reforms	Will China agree to an Indian head of the IMF?
	Agustin Carstens	Governor, Central Bank	Mexico	Extensive IMF experience	Is Mexico seen as too close to the US?
	Ajai Chopra	Senior Staffer, IMF	India	Career IMF staffer; extensive Europe experience; handled recent Irish crisis	Is he viewed as having political heft?
	Kemal Dervis	Vice-President, Brookings Institution	Turkey	Close to US and European policy-making; implemented a successful adjustment program in Turkey as Finance Minister; has headed an international organization (UNDP)	Will he command the support of his own country?
	Mohamed El-Erian	Co-head PIMCO	Egypt	Combines IMF and private sector experience
	Arminio Fraga	Senior Position, Gavea/J.P. Morgan	Brazil	Successful stint as head of the Brazilian central bank	Are public sector credentials seen as strong compared to his private sector background?
	Trevor Manuel	Head, Planning Commission	South Africa	Successful national experience as Finance Minister during time of transition away from Apartheid; Led task force on reform of IMF governance
	Il Sakong	President, Korea International Trade Association	Korea	Varied experience, including as Korea chaired last year’s G-20 summit	Will some be concerned about close ties to the US? Can two Koreans head major international organizations (IMF and UN) at the same time?
	Tharman Shanmugarathnam	Minister of Finance	Singapore	Singapore seen as bridge within Asia	Is he as prominently known internationally as other candidates?
	Zhou Xiaochuan	Governor, Central bank	China	Would represent rising power	Will other Asians agree and will China accept this level of international responsibility?
	A Truly International Monetary Fund or a Continuing North-Atlantic Monetary Fund? by Arvind Subramanian and Nicolas Véron | May 19th, 2011 | 02:53 pm This post follows up on, updates, and responds to a number of comments we received on, our previous post on the succession to Dominique Strauss-Kahn as Managing Director of the IMF. Why not a meritorious European this time? Some have argued that the key principle to introduce is merit not nationality. And if that results in a European candidate—for example Christine Lagarde—that should be fine. We agree. But this time is special. The process must be, and must be believed to be, merit-based. If the process throws up a European candidate, doubts will linger: was the candidate truly meritorious or will the presumption be that the result was a stitch-up—once again—between the Europeans and Americans. Signaling a decisive change from the past requires an outcome that is different. This principle would apply also to the next change at the World Bank to which the United States must commit, difficult as it might be for the US administration to convince Congress that a non-American should head this institution. Once the process acquires legitimacy, one can move to a truly nationality-blind process that can then throw up Europeans to lead the IMF and Americans to head the World Bank. We think it highly desirable to have women as heads of international institutions. But at this stage, discrimination on the basis of nationality is an even bigger threat to the legitimacy of the Bretton Woods institutions than that based on gender, which of course must also be addressed. What are the most important selection criteria? Imagination and leadership, then experience and political heft. The world economy faces unprecedented challenges: the euro crisis of course, but also global imbalances and the US fiscal situation. Also, the risk of instability in emerging markets has not disappeared. These challenges call for a spirit of policy innovation, absence of doctrinal or cultural prejudices, and an ability to create consensus on new solutions. It is difficult to find this combination of talents, so it is crucial to enlarge the potential pool of candidates. Shouldn’t Europeans get the job just because the IMF has so much exposure in Europe? As our colleague Ted Truman has noted, the Fund has only about half its exposure in Europe at this point, and who knows what will happen in the emerging world over the next five years. In any case, why should the debtors be in charge of the bank? This is certainly not an argument we heard from Europe during the Asian Crisis in the late 1990s. From a European viewpoint, isn’t it in the European interest to have a European MD even if it is not in the global interest? Things are less clear-cut in practice. A year ago, the key challenge for the IMF was to convince the Europeans that the Fund’s involvement in the euro crisis was in their own interest. This is now done and accepted, not least thanks to Dominique Strauss-Kahn’s past leadership. The next challenges will be different: especially, if the Fund decides that further assistance is needed for Greece, the most difficult part will be to convince reluctant stakeholders in the rest of the world, especially Asians and the US Congress, to keep going along the Europeans on this path. All things equal, a European MD would find this task more difficult than a non-European. If this is the right way to look at it, then one could even argue that the special interest of Europe calls for a non-European MD. How can Europe be expected to voluntarily renounce a top position? Europeans head the World Trade Organization (Pascal Lamy), the Financial Stability Board (Mario Draghi), the Bank for International Settlements (Jaime Caruana), the Basel Committee on Banking Supervision (Nout Wellinck), the International Accounting Standards Board (Hans Hoogervorst), and many other international organizations with economic policy relevance. In a changing world, they simply cannot keep all these. Can a non-European understand and manage the intricacies of European politics? Certainly as much as a European could understand the intricacies of Asia in the late 1990s. There is a long track record of non-Europeans who have been very adept at managing the complexities of Europe. The European Department of the IMF itself is an example, with a string of officials, from Michael Deppler to today’s Ajai Chopra, who have commanded widespread respect in the Europe. Can the emerging countries defend a common candidate? This is probably the biggest reason why it remains likely that the next MD will be a European. For all their customary squabbling, the Europeans have a powerful coordination mechanism with the machinery of EU institutions and meetings. This does not exist in the emerging world, where the rhetoric can be common but common positions on substantial matters are not frequently achieved. If the BRICS were able to field a joint candidate, it would be a game-changer. But this remains less than likely.

Greece Not Ready to Return to the Market

Steve Weisman at the Peterson Institute conducted this interview, in which I analyze Greece increasingly unlikely ability to tap market investors for its sovereign funding in 2012.