Tag: Witold Henisz

Troubled Times Ahead for North Korea?

Posted on December 19, 2011

The death this weekend of North Korea’s Kim Jong-il, who ruled the country with an iron fist since his father’s death in 1994, had immediate repercussions throughout Asia and beyond.

The New York Times reports that South Korea — which has been at war with North Korea since the early 1950s — immediately put its military on alert, “boosting surveillance along the 155-mile border between the two countries, one of the world’s most heavily armed frontiers.” The tension between the two countries escalated during the past several years after North Korea demonstrated nuclear capability.

According to The Wall Street Journal, Asian stock markets took a dive in response to the news, “with South Korea’s stock market and the won tumbling to multiweek lows…. With markets already reeling from the European debt crisis and global growth concerns, Kim’s death has added a dangerous layer of instability to the Korean peninsula,” the Journal noted, adding that “many Asian neighbors [are] uneasy about the leadership transition phase in one of the world’s most reclusive regimes.”

That unease was further heightened by the announcement that Kim’s son, Kim Jong-un, has been named the country’s new leader, despite his youth (he is in his twenties), lack of experience and isolation from other governments.

Wharton faculty echoed the anxiety expressed in news reports. “Missiles have already been fired in the Sea of Japan” by North Korea, says Wharton management professor Witold Henisz. “This gesture demonstrates the internal uncertainty over succession, with Kim Jong-un or others trying to demonstrate their loyalty to the military or, perhaps, the military trying to demonstrate its independence. No one knows very much about the new potential ‘great successor.’ He will have to consolidate his power internally after having been raised in a two-generation cocoon [removed] from reality.”

The next days and weeks “are fraught with hazards such as Asia has not seen in years,” Henisz added. “Is China ready to step up and assume a position of international political authority? How will Japan, South Korea and others respond to provocations? Making the situation even worse, Europe is focused internally on the need to avoid the break-up of the euro, and the U.S. is increasingly turning inward as its election campaign heats up. In these circumstances, North Korea will have to act out even more to gain the international attention that it so craves. These are dangerous days.”

Wharton management professor Mauro Guillen points out that “leadership transitions in North Korea are a big deal because this is only the second one in half a century. The key issue is whether the youngest son has the support of the army or not, or whether the generals will use him as a puppet. His father alienated everyone, including China and the U.S., with his nuclear policy.”

Along with the country’s isolation is the fact that the North Korean people “are starving and are politically repressed,” Guillen adds. “Korean unification is still far away, and one can only hope that when it comes, it does not destabilize South Korea. Just think about how hard it was for West Germany to absorb East Germany. North Korea is much poorer and larger, and South Korea is not as resourceful as West Germany was. I think [U.S. President] Obama should go to the Demilitarized Zone separating the two Koreas and deliver a Reagan-style speech to [Chinese] President Hu, demanding that he ‘ cut off this barbed wire.’ China must seize the opportunity to put an end to this disaster.”

According to Howard Pack, Wharton professor of business and public policy, the death of Kim Jong-Il has been widely anticipated following rumors that he suffered from pancreatic cancer. Meanwhile, the succession issue “is very unclear – he favored his third son, but it is not [apparent] that [this son] is acceptable to the military. North Korea’s economy is very weak. While precise estimates of income per capita cannot be calculated, stories from emigrants both in China and in South Korea suggest a very low per capita income. [Yet] the country’s military capacity, especially in rocketry and atomic knowledge, is more than capable and has also been the only major source of foreign exchange.”

Pack adds that the “South Korean government has intensively explored the possibilities of an implosion of the North Korean economy and alternative policies to deal with it. South Korea is much larger, and its per capita income is probably 15 times greater. However, the government is well aware of the enormous costs to West Germany of absorbing East Germany. Except for the unlikely scenario that the new government would launch a war against the South, the death of Kim Jong-il has no obvious short-term implications for financial markets given its absence of exports, imports and financial interaction with the rest of the world.”

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Seven Years in Jail and a $190 Million Fine

Posted on October 12, 2011

When a Ukrainian court earlier this week sentenced former Ukrainian prime minster Yulia V. Tymoshenko to seven years in jail, fined her $190 million and excluded her from politics for 10 years — all because of a natural gas deal she negotiated with Russia two years ago — some government officials and legal experts in the West cried foul.

According to an account in The New York Times, European leaders “have condemned the case as politically motivated, and hinted that they are unlikely to ratify a free trade and association agreement with Ukraine” that has been in the works for four years. The court based its ruling on a natural gas deal that Tymoshenko — now an opposition politician after losing her bid for reelection in 2010 — negotiated with Russian prime minister Vladimir Putin in 2009 for what the court said was an excessively high price.

The Times also noted that Ukraine’s current president, Viktor Yanukovich, is likely to “soften Ms. Tymoshenko’s conviction swiftly.”

What is behind all the politicking, and who is really at fault? According to Wharton management professor Witold Henisz, “what is billed as a purely political attack is not without justification. Yulia is no saint. There were suspicious gas deals under her watch which she likely benefited from. Her allies certainly did.” The punishment, however, “does go beyond what you would expect and has a punitive political element [because it] takes her off the political stage. It also demonstrates the weakness of the court system.”

The “sad thing,” he adds, is “that all of the post-independence leaders, including Yulia, have themselves [harmed] Ukraine’s political and legal institutions by focusing personal attacks on each other and [amassing] power for themselves instead of finding ways to … build institutions and processes that could provide a better future for their country. Now one of them is paying a steep personal price for her misgovernance in the past. Is it too severe a punishment or too light for her role in Ukraine’s recent political history? The unfairness of Yanukovich sitting in the Presidency unscathed makes it seem so, but in absolute terms, Yulia, Yanukovich and [former Ukrainian president Viktor] Yushchenko all deserve some time behind bars. Even that unrealistic aim wouldn’t help the country, however, because they have left” behind them little capability or capacity for others “to rule in their absence or in a different manner.”

Wharton legal studies and business ethics professor Philip M. Nichols, who has done research on corruption in Europe as well as Asia, describes Yulia Tymoshenko as “a complicated person” who may “believe in democracy or in government that actually is accountable to the governed. Her past, however, lends some credibility to those who question her sincerity.”

According to Nichols, Tymoshenko made millions of dollars through her association with Pavlo Lazarenko, who eventually became the prime minister of Ukraine. During the Soviet era “Lazarenko held several high positions, and after the independence of Ukraine, he served as energy minister. During that time, he developed close relationships with leaders of various energy industries, including Yulia Tymoshenko, the president of United Energy Systems of Ukraine. All of these allies profited from their relationships with Lazarenko, who awarded Tymoshenko’s United Energy Systems a contract to supply one third of Ukraine’s natural gas needs.”

United Energy Systems benefited further from Lazarenko’s patronage when, “after he was appointed prime minister by [Leonid Danylovych] Kuchma, [president of Ukraine from 1994 to 2005], he partitioned Ukraine’s energy market into separate sectors, awarding single energy firms monopoly rights in specific regions,” Nichols says. ”Lazarenko facilitated the award to United Energy Systems of the most profitable contract rights, those of the industrial oblasts [territorial divisions]. The businesses associated with these monopolies accrued revenues equal to one fifth of the Ukrainian gross domestic product for that year. Lazarenko allegedly received payments from various energy companies in exchange for the award of monopolies. In the case of United Energy Systems, he also owned shares.”

International criticism rose to a level “that distracted even the venal Kuchma, who forced Lazarenko out of office,” Nichols says. “Lazarenko set out to destroy Kuchma politically, and recruited Tymoshenko as an ally. The campaigns on all sides were vicious and employed illegal tactics.”

Lazarenko’s story ends with him fleeing Ukraine, being denied asylum in Switzerland and facing trial in the United States, where he was convicted and is serving a seven-year sentence, according to Nichols. “It is almost impossible to calculate the damage that Lazarenko and his cronies have done to Ukraine. The damage is so extensive and goes so far beyond just money that it seems impossible. Lazarenko was listed by Transparency International as one of the eight most corrupt leaders in the world.”

Tymoshenko’s story did not end with Lazarenko’s flight, Nichols says. “She continued to fight Kuchma politically, and eventually found, and then left, a much better ally than Lazarenko: She became a star of Ukrainian and Eastern European media. But she got her start in an extensive scheme that bilked Ukraine of billions of dollars and gutted its nascent government. Her initial foray into politics was instigated by a fight to protect that scheme.  The fact that it took so long to convict her illustrates the fragility of Ukraine: That she has been convicted could be a sign of a much-needed change in how Ukraine deals with corruption.”

 

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Brazil Sets Up New Roadblocks for Agricultural Investments – Especially from China

Posted on March 9, 2011

Record-high food prices are driving new economic pressures — beyond the obvious surge in costs to consumers.

In Brazil, for example, officials look set to introduce new rules on foreign government-backed investments in farmland, a move that would extend sweeping foreign-ownership restrictions adopted last year.

While there is some talk that Brazil could scale back slightly some of the very strict new rules, officials there appear highly concerned about who controls the country’s natural resources, and it is understood that much of the worry centers on the Chinese.

Brazil’s growing concerns reflect a larger rethinking on ownership of commodity production underway globally. Resource-rich developing countries, which once saw foreign direct investment in natural resource development as an unquestionable good, now take a more nuanced view. They are beginning to question whose interests are best served by foreign investments in domestic natural resources and commodity production.

Last year, Brazil laid down rules that prevent companies that are more than half foreign owned from holding more than about 12,000 acres of farmland. Newly proposed rules, however, would restrict governments, state-owned companies and speculators from owning farmland, too. Specifically citing state-owned companies is widely understood as a not-so-subtle stab at Chinese companies, many of which include government funding and control.

Regarding those new rules, Brazil’s agriculture minister, Wagner Rossi, was quoted in the Financial Times as follows: “Some of these countries are great partners in other areas, but having them buying land in Brazil creates some sort of sovereign risk for us. This is not part of our plan and we are not going to allow that.”

At the same time, other recent remarks by Rossi suggest that rule tightening may not be entirely straightforward, notes Wharton management professor Felipe Monteiro. He points out that Rossi also will submit a technical paper shortly that will rationalize all farmland ownership restrictions. Monteiro’s reading of the latest proposals: More than taking any “concrete measure, Rossi only announced that Brazil is taking a close look at the situation and will keep updating its legislation on the matter to protect itself from speculation.” Basically, Brazil is tracking developments, which Monteiro says “is appropriate and shows how interconnected the world is today.” Until the future legislation is drafted, “no one can know for sure how it will distinguish property speculators and foreign funds from foreign investors with real productive projects for the sector.”

Still, are the new agricultural land rules ultimately a backlash against Chinese investment, as some suggest?

Brazil’s actions are part of a growing concern over the politics of natural resources worldwide, according to Wharton management professor Witold Henisz. These concerns are very different from those fueling the outsized protections that developed countries historically have heaped on their own agricultural sectors. Europe has a huge subsidy program, the Common Agricultural Policy (CAP); the U.S. offers substantial price support and other incentive programs; and Japan’s protection of rice farmers is legendary.

But there is a big difference between those programs and efforts by developing countries today. “U.S., E.U. and Japanese farm subsidies target job preservation and, in the Japanese case, ensure local production to meet local demand,” Henisz says. Brazil’s agricultural rules and Argentina’s export restrictions of the past few years, plus growing concern in Africa, “point to a different political incentive — not maintaining jobs or influencing the location of production but rather influencing the nationality of production and of consumption of domestically grown crops as well as keeping prices down domestically by ensuring exports abroad are regulated.”

While Brazil and African countries used to welcome Chinese investment “with open arms,” they now wonder “whether that investment serves their interests or those of their foreign owners,” Henisz says. “The lack of integration of many Chinese investors into local communities and markets only accentuates that suspicion. For the Chinese to truly benefit from their overseas investments in natural resources, they will have to develop a political and social strategy to demonstrate that the local population stands to gain.”

Just as U.S. and European Union oil and mining companies found that strategic corporate social responsibility was good policy, “the Brazilian policy announcement, together with recent protests against mining companies in Zambia, serve as a warning call to China that the era in which they faced few questions by virtue of the alternative they offered to Western investors is over. Now their nationality is at issue. Their strategic goals are being questioned.”

So, it’s a new world for Chinese and other large multinational corporations bent on acquisition – at least when it comes to farmland. As developing countries adopt a new attitude, large-scale foreign-direct investors must, too.

They need to work up a new a political strategy, Henisz says. “They are developing the natural resource sectors, including agriculture and the infrastructure to ship it home, but they need to demonstrate these investments and benefits are of broad interest to Brazil and Africa.”

The alternative: “a repetition of the colonial mistakes [within] in two decades instead of two centuries.” And while the Chinese government adapts quickly, “Brazilian and African politics are so foreign to them that I am skeptical about their ability to learn and implement responses rapidly enough to avoid a growing backlash.”

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