Financial Mirror 2016 01 06

FinancialMirror JEAN PISANI-FERRY

RICARDO HAUSMANN

Responding to Europe’s political polarisation PAGE

Stopping Venezuela’s harvest of sorrow PAGE 16

17

Issue No. 1167 €1.00 January 6 - 12, 2016

2016: Uniting to win the war on terror

By George Soros, Frank-Walter Steinmeier and Hernando de Soto JUNCKER: EUROPEAN SOLIDARITY IN A WORLD OF CRISES

Greece struggles to right economy as refugee influx adds to woes SEE PAGE 10

PAGES 10-11

January 6 - 12, 2016

2 | OPINION | financialmirror.com

FinancialMirror Embracing climate change ideas for sustainable future economy Published every Wednesday by Financial Mirror Ltd. www.financialmirror.com

Tel. 22 678 666 Fax. 22 678 664 P.O. Box 16077, CY2085 Nicosia

EDITORIAL

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As an island, Cyprus has no choice but to adopt, perhaps even lead the way, in climate change proposals agreed at the Paris summit, which some critics said fell short of drastic measures to counter the global environmental problems.

Our economy relies heavily on services, agriculture, tourism and shipping, with three out of these four directly affected by climate change. This is why this government, having proven very slow to implement reforms in the past three years, should at least embrace the proposals for an environmentally sustainable economy. Where the island has no major smoke-spewing industries, polluting the air, it can do more and smarter things because of its small scale.

Already, researchers at the Cyprus Institute have not only suggested, but proven that a 1-2C rise in temperature will have a serious impact on the tourism industry and all related services. By simply saying that we will extend the summer season is complacent, let alone naïve. If worldwide emissions force the weather to become warmer, then from midJuly to the end of August (by far, the best period in tourist arrivals) will soon become unbearable, hence no tourists and no revenue.

The situation seems better in the maritime sector, where Cyprus-based shipowners and ship-managers have a better grasp of global climatic fluctuations,

and have voluntarily adopted or are investing in ecofriendly measures and technology. This must be kept up to promote the Cyprus flag as the greenest of all.

Unfortunately, as regards farming and agriculture, past administrations have ignored this sector, simply because of the small contribution to the national output (less than 3.5% of GDP) and the few votes that matter during elections. The stupid decision to shut down the Forestry College, at a time when Cyprus has no state educational programme for a sustainable rural economy, goes to show how little this government cares about keeping the island green and encouraging research in the countryside, where other countries spend millions to boost this area. Finally, as the Green party has gradually become a grey one, focusing more on political issues, rather than the environment and the economy, there is no single voice or platform left to collect all the thinkers and contribute to a better, cleaner and greener future.

These problems are now on almost everyone’s minds, especially as ordinary folk, even taxi and truck drivers, have witnessed first-hand the wrath of the recent freak storms and unexpected cold front, causing havoc to farmers’ crops, which in turn impacts retailers and consumers alike. These are everyday concerns that our elected officials have remained out of touch with, as they suffer from the NIMBY syndrome (not in my back yard) and are only ‘serious’ when it comes to issues like catching or eating ambelopoulia, or smoking in the corridors of parliament.

THE FINANCIAL MIRROR THIS WEEK 10 YEARS AGO

Mama of all pizza wars, CSE gains 50% The arrival of a new pizza in the market is expected to lead to new consumer wars, triggered

by Pizza Hut operator PHC, while the CSE ended the previous year with a 50% gain and the market cap rising CYP 1.1 bln, according to the Financial Mirror issue 652, on January 4, 2006.

Pizza wars: The launch by PHC Group of a new brand, Mama’s Pizza, as a locally-developed serving, is expected to trigger a new franchise war, with Zorpas expanding aggressively in the bakery sector, and Carrefour-Marinopoulos has struck a deal

20 YEARS AGO

First repo auction, where to investin 1996 The central bank aimed for a full liberalisation of the markets with its first repurchase auction of Treasury Bills and the start of 13-week and 90-day T-bill sales every month, while brokers and analysts made recommendations for investments in Cyprus stocks as the bourse saw a staggering 58% return the previous year, according to the Cyprus Financial Mirror issue 143, on January 4, 1996.

Repo auction: The first repurchase programme of CYP 35 mln in T-Bills went without a hitch, with

with the Shacolas Group’s Ermes division to fend off competition from soon-to-arrive Lidl, budget stores Migro and Smart, retail giant Orphanides and premium retailers AlphaMega, Metro and Papantoniou.

CSE gain: The Cyprus Stock Exchange ended 2015 with a 51.63% gain, its first positive performance in four years, after the 1999 boom and 2004 bust. The market capitalisation totalled CYP 3.33 bln and the best

performing stock was Bank of Cyprus, up 75% in the year to CYP 2.63.

PrimeTel triple play: PrimeTel, the EAC’s strategic telco partner, aims to shake the market with its Triple Play service to herald the first real challenge to state-owned CyTA in the fixed telephony and ADSL-linked home entertainment market. The aim is to reach 170,000 households, claimed Marketing Manager Stephanos Stephanou.

EUR spinoff: The government plans to spin-off Eurocypria, the wholly-owned charter subsidiary of Cyprus Airways and convert it into a scheduled airline in the event that unions reject the government’s latest rescue plan. With the carrier valued at CYP 1520 mln, the deal will also help reduce CAIR’s debts by an equal CYP 15-20 mln. With a modern fleet of four Next Gen Boeing 737-800s, and a fifth delivery in May, the airline is headed for net profits similar to the CYP 2 mln recorded in 2004.

banks selling the paper to the Central Bank of Cyprus at 8.88% which they are obliged to repurchase in 13 days. Reports that banks had to make bids worth 1% of total assets were refuted.

Also, primary T-bill auctions will take place twice a month for 13-week and 90-day paper. As of January 1, banks are obliged to invest 20% of their average 1995 weekly deposit base in T-bills at a rate of 6%.

Where to invest: Last year was the best for the stock market with a staggering 58.1% return,

achieved on a wave of mergers and acquisitions, with volumes reaching CYP 135 mln and the market cap breaking the CYP 1 bln barrier. Brokers and fund managers recommended investing anything between 10% and 66% in the banking sector, followed by Trading and the Finance & Investment sectors. Most popular stocks to be grabbed included Bank of Cyprus (full and partly paid), Laiki warrants, Cytrustees, Universal Life, Interamerican, Vassiliko Cement and CTC. Insurance merger: Dealmaker Nicos Shacolas aimed for a greater consolidation in the insurance sector following the Paneuropean-Philiki merger, with a CYP 10.3 mln bid for a 60.3% stake in Interamerican offered to Demetris Kontominas.

Shacolas said that after takeovers, the Group premiums neared CYP 40 mln with reserves in excess of CYP 100 mln.

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January 6 - 12, 2016

financialmirror.com | CYPRUS | 3

Economic sentiment improves, says UCy Consumer confidence worse, household spending expected to drop The business climate improved in December with the Economic Sentiment Indicator (ESI) generated by the Economics Research Centre of the University of Cyprus rising by 1.3 points from the previous month to 107.6, equal to the number recorded in October and marginally shy of the year high of 107.7 recorded in April.

Year-on-year, the ESI rose by 2.1 points from 105.5 in December 2014.

The ERC said in its monthly report that in 2014 the ESI had been on a recovery course, while in 2015 the Indicator showed a strengthening of economic confidence, recording prices above the long term average throughout the year.

In December, businesses expected demand and employment over the next three months to remain at the marginally positive levels of November. The trend for prices to drop in the next three months appears to be strengthened, compared to November.

The improvement of the ESI is due to the improvement of the business climate in services and, to a smaller extent, to retail trade, the ERC said.

In the services sector, the business climate was better due to an improvement in the current situation and expectations.

Compared to November, the responses of the businesses regarding their economic situation and the number of employees during the last quarter were more positive.

Furthermore, in December a significant improvement was recorded in the expectations of businesses regarding their turnover for the next few months.

In retail trade, the business situation improved marginally due to better expectations. Compared to November, some businesses noticed a drop in sales from the last quarter, while

their responses on current stocks remained unchanged at the same levels for the season. In December, expected business activity and orders placed with suppliers for the next three months were more favourable compared to November. The expected employment for the next three months remained at the marginally negative levels of November, while the businesses’ expected selling prices for the next three months recorded a drop.

In construction, the climate worsened marginally due to the deterioration of the current situation and, to a lesser extent, expectations. In December, the assessment of businesses regarding their construction activity improved, while their responses regarding current overall order books and their expectations regarding employment over the next

three months were more pessimistic than November.

Furthermore, in December fewer businesses said they were planning to reduce selling prices over the next three months.

In manufacturing, the climate remained unchanged.

December assessments regarding production over the past three months and current export order books were more negative than November. On the other hand, the responses for current overall order books and expectations regarding employment for the next three months improved.

The Consumer Confidence Indicator worsened in December, compared to November. The assessments of the consumers regarding the economic situation of Cyprus and households in the past 12 months were worse than November. Furthermore, their responses regarding the expected financial situation of households in the next 12 months were more pessimistic, while their estimations regarding the economic situation of Cyprus remained at the same levels as November.

The ERC said that in December a larger percentage of persons asked expected an increase in unemployment over the next 12 months.

Compared to November, fewer consumers noticed stable or lower prices over the past 12 months, while, as in November, the majority expected prices to remain stable or drop over the next few months.

In December, more consumers considered the current period unsuitable for major purchases and fewer said they would make any such purchase over the next 12 months.

Even though consumer opinion regarding the suitability of the present for savings remained the same, in December it was less negative regarding savings over the next 12 months.

January 6 - 12, 2016

4 | CYPRUS | financialmirror.com

Property market on way to recovery as deals up 9% Sales to foreigners up 13% in 2015, says Land Registry December was the best month for property sales last year, with the Land Registry Office recording a total of 513 deals, up 13% from the year-earlier figure and raising the total for 2015 to 4,952, up 9% from 2014.

At the same time, sales to foreigners also saw an impressive 39% increase in December, rising from 97 deals in 2014 to 135 for the month in 2015. This pushed the total for the year to 1,349 deals, up 13.1% from the 2014 total of 1,193 transactions.

The best month was May with 157 property sales, up 2.6% from the year-earlier figure that, too, was the best month in 2014.

The district of choice for foreigners was once again Paphos with a total of 481 property sales in 2015, followed by Limassol with 394, Larnaca third with 292, while Nicosia and Famagusta Districts languished with poor interest from foreigners at 96 and 86 transaction, respectively.

NPLs up in October Non-performing loans (NPLs) in Cypriot banks rose in October by EUR 101 mln, the Central Bank of Cyprus said, but cited data that suggest a gradual reduction of NPLs through restructurings.

The total value of NPLs was EUR 27.4 bln in October, from 27.3 bln in September.

“Despite the increase observed in October, according to preliminary figures for the end of November 2015 a slight decrease is expected in non-performing loans,” the Central Bank said in a statement.

By the end of October restructured loans amounted to EUR 14.2 bln, of which 10.7 bln will count as non-performing loans for a period of at least 12 months even if the borrower repays according to the restructuring agreement.

The central bank said that there was an increase of EUR 287 mln in restructured loans.

“It appears that 72% of term loans which were restructured between January 1, 2014 and October 31, 2015 adhere to the new repayment schedule agreed under the

restructuring” the central bank said.

“These data create reasonable expectations for a gradual reduction of NPLs through restructuring,” it added.

€120 mln 13-week T-bills

auction yields 0.48% The Public Debt Management Office sold a total of EUR 120 mln in 13-week Treasury Bills at an auction on Monday.

The issue was oversubscribed, while the average yield was substantively lower than the yield at the previous auction in November, when a total of EUR 100 mln were sold.

A PDMO announcement said that “during today’s 13 Week Treasury Bills Auction, tenders for a total amount of approximately EUR 224.9 mln were submitted, out of which EUR 120 mn total nominal value have been accepted with a weighted average yield of 0.48%. The accepted yields ranged between 0.24% and 0.55%”.

The accepted yields ranged between 0.53% - 0.70%, it said.

Construction output sees growth for first time in 7 years The Index of Production in Construction has recorded a positive annual rate of growth for the first time in the seven years. According to the statistical service Cystat, the Index of Production in Construction for the third quarter of 2015 reached 39.4 units (base year 2010=100), up 6.8% over the third quarter of 2014.

By type of project, there was an increase of 20.9% for buildings and a decrease of 25.6% for civil engineering projects in the third quarter of 2015 compared to the same quarter of 2014. The Output Prices Index in Construction for the third quarter of 2015 reached 98.3 units (base year 2010=100), down 2.3% over the second quarter of 2015. Compared to the same quarter of the previous year, the index recorded a decrease of 1.9%.

According to Cystat, by type of project, a decrease of 0.6% was observed for buildings and of 4.6% for civil engineering projects in the third quarter of 2015, compared to the same quarter of 2014.

January 6 - 12, 2016

financialmirror.com | CYPRUS | 5

Eide sees signs of progress on many issues “Difficult” chapters of guarantees and security remain The UN Secretary General’s Special Adviser on Cyprus, Espen Barth Eide said during a visit to Athens on Tuesday that the solution of the Cyprus problem will be in line with the European principles and the Council of Europe jurisprudence, but at the same time will allow Greek Cypriots and the Turkish Cypriots to maintain some sense of continuity as communities.

Eide met Greek Foreign Minister Nikos Kotzias for two hours with whom, he said, he had “a very constructive, long, substantive conversation.”

The diplomat referred to the “difficult” chapters of guarantees and security, two “significant outstanding issues that have to be tackled,” he said.

“We need to create an outcome in Cyprus where both communities can feel safe and secure, not only in a physical sense, but also as their cultural survival as a unit, but in such a way that it does not infringe on the security of the other side,” Eide noted.

The UN Special Adviser said he didn’t want to say more explicitly on guarantees, but noted that “it’s an important issue” and that they need to see how the arrangement that was put in place in 1960 will be adapted to the needs and realities of today.

Eide told the Greek press that they are working very closely with the European Union. “As we know, acquis communautaire is not, in practice, in place for the northern part, the Turkish Cypriot part, of Cyprus. The ambition is that this will be a unified European country, fully in line with all European principles. And that’s why we have involved the European Union much more than previously in the work that we are doing. And that’s been a very positive development” Referring to the latest developments in the talks he said there has been “significant progress on some of the more

difficult issues over the last weeks and months”.

Eide underlined that there is real will among all interested parties to find solutions, be creative and to think outside the box to find a solution, create a well-functioning federal state that is bizonal, bicommunal and in line with European principles and practices.

“This is really the moment that has to be grasped to find the final solution to their problem, which is many decades old,” he added.

Asked if the UN peacekeeping force would remain on the island after a solution he said that “the Cypriots want us, the UN, to be there in an implementation phase, overseeing the transition from what was to what will become.”

Eide will travel to New York next week to brief the Security Council again, as he does on a regular basis.

The UN Special Adviser noted that the current round of negotiations has been going on uninterruptedly since May, without any serious crisis on the way, which is “quite unusual”. The leaders have met 19 times, officially and the negotiators 63 times.

The two negotiators, Andreas Mavroyiannis and Ozdil Nami, had their first meeting of the year on Tuesday.

The Cyprus News Agency reported that the negotiators prepared the meeting between President Nicos Anastasiades and Turkish Cypriot leader Mustafa Akinci that will take place on Thursday, January 7, and continued their discussions on various issues.

Sources noted that the meeting was “rather procedural”, in view of the meeting of the leaders who will mainly discuss the property issue and issues that have not yet been discussed.

Meanwhile, Resolution 70/235 on the Oceans and the Law of the Sea was approved by the UN General Assembly on December 23 that safeguards the sovereign rights of Cyprus

as an island state and makes Cyprus a policy maker as regards the rules on the law of the sea.

The resolution was adopted by 143 votes to 1 (Turkey) and four abstentions (Venezuela, El Salvador, Mali and the Central African Republic). It was formulated by Cyprus, Japan, Micronesia, Monaco, the Netherlands, New Zealand, South Africa and Trinidad and Tobago.

The 55-page resolution deals with all aspects on oceans and the law of the sea and calls for the UN Secretary General to present a report on these issues at the 71st General Assembly meeting.

“The convention safeguards our rights in our seas and we want to co-formulate the rules of the law of the sea,” a Foreign Ministry official said, adding that since 1993, Turkey has been the only country to vote against the resolutions, citing “exaggerated demands concerning the continental shelf. They do not acknowledge that islands can have complete coastal zones and these are issues that we want to secure our interests”.

“We want to have every right and claim both continental shelf and exclusive economic zones and exploit our underwater mineral resources which Turkey doubts”, the officer added.

The continental shelf, the EEZ and others are part of customary international law therefore Turkey has a responsibility to respect them, even if it has not signed the convention. And by following these rules, Turkey is continually exposed, the official said.

President Nicos Anastasiades had suspended his participation in the peace talks following a Navigational Telex or NAVTEX, issued by Turkey in October 2014, as the Turkish seismic research vessel “Barbaros” violated the Republic’s EEZ. The Turkish NAVTEX expired last April and Barbaros left Cyprus’ EEZ.

January 6 - 12, 2016

6 | COMMENT | financialmirror.com

The Year that Went The older you get the faster the years fly by… or so it seems, despite doing everything more slowly than one used to. It is our fourth since we returned to England after our two decades resident in Cyprus. Despite now being formally “retired”, we seemed too busy to make a trip to the Island of Sunshine, but we intend to remedy that in 2016.

So, in 2015, for one reason or another, we stayed in Britain. Apart from weekends visiting family and friends we took just the one holiday – two weeks in Wales and the West of England. As I reported during the summer, of 24 lunches and dinners consumed, 22 of them had been “Out of the Bag”, i.e. ready meals heated up by the “Chef”. It is a disappointing catering scene – even our local hotel-restaurant has succumbed, despite the owner being a good chef (in fact, he cooks for “special” occasions, such as a monthly “themed” lunch for around 25 regular customers – such as Italian, Swiss, Lebanese and so forth, but for the rest of the time he uses pre-cooked stuff).

FOOD, DRINK and OTHER MATTERS with Patrick Skinner

Ghost of New Years Past?

In 2005, when I had been writing a weekly page in the Cyprus press for over ten years, I penned the following at this time of year

RESOLUTIONS I am far too long in the tooth to make New Year Resolutions. My intentions for this year are the same as last: to try and bring you thoughts, reviews, recipes and items about enjoying eating and drinking, with the emphasis on getting the best out of Cyprus. (Amen to this in 2016! I followed this with a recipe adapted from a Claudia Roden book on Middle Eastern Cookery. It tastes just as good today)

SAUTEED CHICKEN with TOMATO PILAF Sautéed chicken kebabs are more tender and juicy than the grilled ones on skewers which are served in kebab houses. Accompany these with tomato pilaf and a yogurt and cucumber salad. The dark wine-red spice called sumac (*) lends a sharp lemony taste to the chicken.

Ingredients for four servings 4 boned and skinned, chicken thigh fillets l tablespoon sunflower oil 35g butter Salt and black pepper 2 tablespoons chopped flat-leaf parsley To garnish: l lemon, quartered, or sumac

FOR THE TOMATO PILAF One meal that was memorable – a home-cooked tableful of Cyprus-style food with six friends around us: tahinisalata; taramasalata; melitzanasalata (pictured above); yogurt with mint and cucumber; fried Halloumi; Greek salad; olives and pickled cucumbers; pitta bread; BBQ chicken; bulgar wheat pilaf; roast potatoes. For dessert, Mary made one of her favourites from our Cyprus years, orange and almond tart, which is really Spanish in origin. It is delicious, and with the oranges in season now, it is well worth doing.

Cyprus Orange and Almond Flan A recipe providing a good excuse for opening up a delicious Cyprus liqueur

Ingredients Rind and juice of 3 large or 4 medium oranges 4 eggs 125 g freshly ground almonds 175 g caster sugar 1 tbsp Cyprus orange liqueur

Method 1. Take a large, round, shallow pastry tin (around 30 cms diameter), and rub some butter over the inside.

2. Sprinkle flour on and shake until it is settled all over.

3. Wash and dry the oranges. With a fine grater, carefully grate the rind and set aside. Halve and squeeze them. Set the juice aside.

4. Separate the eggs and beat the yolks with 125 g of the sugar and the rind until creamy and yellowy.

5. Beat in the ground almonds slowly.

6. Beat the egg whites until stiff and fold gently into the mixture. Spoon out into the baking dish and put in the centre of the oven, heated to 220C. 7. After 15 minutes turn down oven to 170C and cook for about 15 minutes more. Remove from the oven and cool for 10 minutes, then remove from the tin.

8. Mix the remaining sugar with orange juice and liqueur or brandy and sprinkle over the flan.

The Year to Come At my age, one simply hopes for “another year, please”. One still plans, though.

In 2016 we intend to return to Cyprus for sunshine, food and wine – and our friends, of course. Encouraged by initial reactions to my bit of autobiography, I am tapping away at my laptop with part 2 – the years from 1950 to 1970. In that time, I was an unwilling member of His Majesty’s Royal Air Force for 18 months, then a cinema manager, a film publicity writer and then owner of my own public relations business. These years saw my first visits to Cyprus – in 1965 and 1968. It was a bit different then!

300g long-grain or basmati rice 500 g ripe tomatoes, peeled 1 chicken stock cube 2 teaspoons sugar salt and black pepper 75g butter

Method 1. Start by making the tomato pilaf. Wash the rice by pouring cold water over it in a bowl, stir well and leave to soak for a few minutes, then strain and rinse under cold water.

2. Quarter the tomatoes, remove the hard white bits near the stem end, then liquefy in a food processor. Measure the resulting tomato juice and add enough water to make it up to 650ml.

3. Pour it into a pan, add the crumbled stock cube, the sugar and a little salt and pepper and bring to the boil.

4. Add the rice and stir well. Simmer, covered, over a low heat, for 18-20 minutes until the rice is tender and the liquid absorbed. Do not stir during the cooking, but add a little extra water if it becomes too dry.

5. Fold in the butter, cut into small pieces.

6. Taste and add salt and pepper if necessary.

7. While the rice is cooking, cut the chicken into pieces of about 3.5cm.

8. Heat the oil and butter in a frying pan and sauté the chicken for 6-8 minutes until lightly browned, turning the pieces over once.

9. Sprinkle the chicken with parsley and serve with lemon quarters or with sumac to sprinkle over, accompanied by the rice. (*) Sumac is available in small jars in many supermarkets. The brand I have is ‘Ostman’, from the Limassol-based food firm that makes an excellent range of herbs and spices.

My Book gets its First Review…

From time to time I have featured in these pages what I would term “Notes from Limassol”, contributed by an old friend, whose pen name is Charalambous.

His latest thoughts in an email to me are kind ones, on the subject of my recently published Ebook, “One Kid’s War”. A dear friend indeed… he actually paid good money for it!

“I enjoyed your book which I loaded on my kindle.

It is quite an amazing saga, in parts very evocative to me (although my memories of those times are less exact than yours and limited by my comparative youth at the time). The detail is most impressive… It’s an extraordinary story and a different angle from all the other reminiscences of the war years that I’ve come across…”

A Happy New Year to you all – may it be peaceful, prosperous and progressive for all in Cyprus… and a special good wish to Charalambous!

Go to www.eastward-ho for recipes, food and wine news and notes.

January 6 - 12, 2016

PROPERTY | 7

Green development must be taken seriously µy Antonis Loizou Antonis Loizou F.R.I.C.S. is the Director of Antonis Loizou & Associates Ltd., Real Estate & Projects Development Managers

The issue of the environment and green development has not been taken seriously, neither by private individuals nor by the competent Authorities. Certainly, there has been a gradual improvement over the last 5-6 years and to this end, both the increased sensitivity of citizens, and the acquisition of expertise (transplanting trees, ready grass, old tree introduction from abroad, new irrigation systems, etc.) have helped. But more imagination and perseverance is needed to improve the environment and for this reason this whole package should be considered part of any building permit, by submitting a detailed planting maintenance programme of private and public green space, even for private homes (planting around the site, etc). I therefore submit the following proposals for joint reflection and discussion: • Part of the building permit should include planting trees subject to the relevant conditions (a thought suggested with some reservation, as it may cause further delays in the issuance of a permit). But there should be some safeguards to protect the frustrated citizen who has been burdened with mountains of permits needed.

• Apart from a list of trees and their location, to submit the age of trees (very important, especially in view of what happens with planting 30cm seedlings), the watering and maintenance system, and water source.

• The planting of trees to be consistent with the immediate environment (not to have palm trees dotted everywhere) and that the age of the trees be at least four years and a minimum height of 2 meters of clean trunk.

• The applicant must bear the responsibility for maintenance for a period of 4 years from the delivery of the project/residence and to that end submit a personal guarantee of EUR 100/tree to be used by the competent authority in case of insufficient maintenance by the initial owner.

• The competent authority should not undertake to pay for the planting and maintenance of trees in public and private green spaces coming from private projects, because from experience we know that they will be abandoned or destroyed due to the indifference of the authority itself. For this reason, the competent authority should collaborate with private service providers which will be contracted for the maintenance and responsibility.

• Where trees cannot be planted, to pay a subsidy into the public “tree planting fund” which, I hope, will be properly utilised and not lost in the state coffers, as happens with the funds collected from parking meters.

• As a rule of thumb, I suggest that one tree be planted per 100 sq.m. building or two trees per 100sq.m. of a sports ground (whichever is more), so a small block of flats should

Members of the Cyprus Sustainable Tourism Initiative planting and cleaning trees in the countryside. A commendable effort.

have around six trees. If there is no room to plant trees, then the subsidy of EUR 100 / tree to be paid to the fund.

• The cutting of trees for development purposes to be allowed (or else, the phenomenon of purpose-lit fires in Greece will soon arrive in Cyprus), but must be submitted in parallel with a plan to balance the natural environment, based on the previously mentioned formula and the financial guarantees.

• Authorities that are unable to sustain public and other green spaces can make them available to developers for a period of five years, with a “concession” of 50 sq.m. of building permit for 100 per sq.m. of green, in the form of transferrable building coefficient. Alternatively, the assumption of costs / management to be deductible from municipal taxes – the costs will be the same to the Authority because it will avoid expensive and haphazard maintenance, except that an individual will care much more than the Authority.

• Any citizen to be able to sue the competent authority for non maintenance or absence of green space, where the Authority itself set as a condition for the development.

Setting the level of fines to be simple to avoid lengthy procedures, such as EUR 100/sq.m. of garden and the amount to be paid to the State. This will alert the authorities because at present, most public green spaces have become

garbage sites, and used by drug addicts and other criminal elements. One example of indifference is what has happened in the last decade along the coastal walkway of Ayia Napa that clearly lacks any maintenance (unlike the one in Paralimni).

The aim of these proposals is: • To upgrade the environment by planting large trees rather tiny seedlings that in 80% of cases dry up until the age of 12 months.

• To alert the authorities by removing the collection of fees from citizens who will adopt a green area.

• To establish maintenance guarantee fees.

• The reflection by of each of us, regardless of quality and construction costs of a project or home, of a tree planting conscience.

• To regulate planting so that it is consistent with the environment and avoid the ugly ‘palm carnival’, as is the case of a grand house in Nisou with a 10,000 sq.m. sports court surrounded by 40 palm trees.

There is a need for imagination on the one hand, and fines of private individuals, developers and local authorities on the other, in order to properly embed in our minds a conscience that the environment is consistent with development. ala-HQ@aloizou.com.cy www.aloizou.com.cy

U.K. home building set to reach record, but are they the right kind of homes?

By Ray Clancy EDITOR - PROPERTY WIRE

It is all looking positive for the UK housing market for the new year with new home building set to reach a high and prices forecast to keep rising due to high demand and lack of supply and then interest rates continuing at a record low.

Home building is going to be the buzz for 2016 and the government has just announced a pilot scheme to build 13,000 new homes, of which 40% will be affordable starter homes on public owned land.

Prime Minister David Cameron seems determined to keep home building high on his political agenda and said that the new homes will be directly commissioned by the government from up and coming builders.

Indeed, five sites have been announced on former

Ministry of Defence land and old hospitals. These are the kind of brownfield sites that the government want to see used for new home building.

But it won’t all be plain sailing. Some of the main challenges for small developers will remain the complications and delays relating to planning consents.

Then there are issues that haven’t been fully discussed such as how environmentally friendly these new homes will be.

People buying a new home want it to be well insulated, many would probably also want the choice of having solar power, integrated technology throughout, fast broadband, space and access to an outdoor space.

Just building a load of rabbit hutches won’t work. These new homes need to be what people want. And while there has been a lot of talk of affordable homes for first time buyers, little thought seems to have gone into integrating retirement housing into new building schemes.

I fear that the planning system will continue to delay development as there are still a number of constraints. Many

of the provisions in the Housing and Planning Bill and the Autumn Statement would appear positive, but there remains so much uncertainty, particularly the confusion over whether or not small developments will continue being exempt from including affordable homes.

Indeed, small developers, whom the government wants to boost, point out that the main challenges remain the complications and delays relating to planning consents. So as well as making welcome announcements on new home building, the government also needs to fast track its promised planning improvements.

We must ensure the needs of the whole population, including older and disabled people who are often not mentioned in these announcements, are met through an increase in the number of new homes that are accessible The emphasis needs to be on creating good quality homes that not only meet housing need, but create beautiful communities offering people a decent quality of life. www.propertywire.com

January 6 - 12, 2016

8 | WORLD MARKETS | financialmirror.com

Asian investors, Obama and the Dollar rally

By Oren Laurent President, Banc De Binary

Now that 2016 has arrived, the US dollar is expected to strengthen while other currencies weaken. Presently, we are witnessing one of the longest rallies of the dollar in over 45 years. And now, following three years of strong gains for the USD, analysts are expecting that the US dollar will once again beat out other currencies in 2016. Some 70% of the G10 nations are likely to see declines of their currencies against the USD before the end of the year, according to Bloomberg.

And there is certainly substantiation of this projection by way of the Federal Reserve Bank’s desire to hike interest rates throughout the course of the year, while the central banks of many other countries will be looking to reduce interest rates. This is especially true in countries like New Zealand and Australia which have recently featured higher interest rates which have been driving their currencies stronger against the USD. In fact, such is the strength of the current dollar rally that it mirrors the prolonged period of strength enjoyed by the Clinton and Reagan presidencies. It is apparent, however, that the current rally during the Obama presidency is being driven by largely divergent policies between the Fed and other central banks around the world, notably the ECB.

70% of G10 Currencies to Decline Against Greenback This period in US economic history is one of the best ever for the dollar. It marks the third most profitable period in history. Based on analysts’ projections, the USD will likely surge against most of the world’s top currencies with the exception of the British pound (GBP), the Canadian dollar (CAD) and the Norwegian kroner (NOK). The USD is likely to stage its strongest gains against the Swiss franc (CHF), the New Zealand dollar (NZD) and the Australian dollar (AUD).

According to Bloomberg, the New Zealand dollar is expected to decline as much as 8% against the USD, the Swiss franc is expected to decline up to 6% against the USD, the Australian dollar at just over 5% and the Danish krona at 5%. Other currencies that will likely depreciate against the USD include the Euro (-3%), the Japanese yen (-3.5%) and the Swedish krona (-5%). The big gainers for the year will likely be the Canadian dollar at (+4%), the British pound (+ 3%) and the Norwegian krone (+1.5%). Besides the current rally, the only other notable dollar rallies took place in the 1980s under the Reagan administration and the 1990s under the Clinton administration.

The sharp spike in dollar gains in the 1980s has been unsurpassed under any other presidency. The current Obama dollar rally is significant in that it comes off one of the worst periods in recent history – the 2008/9 global economic crisis.

The US policy of quantitative easing was one of the most dramatic and significant monetary policy measures adopted

2016. In 2015, the USD made sharp gains against the euro, by advancing 10%. This year, however, the dollar will strengthen less than 4% against the Japanese yen, a market downturn from the 10% appreciation experienced between 2013, 2014 and 2015. There is also a caveat associated with the rate hike in the US: Gains for USD investments are unlikely to move according to givens such as a policy of gradual interest-rate hikes. The more likely scenario is that dollar purchases would be made by surprises in the financial markets.

Fed Rate Hikes under any presidency. According to the data, the Obama rally officially began back in 2013 after the Fed began cutting back on the QE policies it enacted. Economists, traders and analysts were hopeful that increasing interest rates would soon follow. The reason for a strengthening of the USD in this particular situation was the expectation that dollars would be more valuable relative to other currencies. With higher interest rates in the US, more dollars would be demanded and more foreign currency would be exchanged for greenbacks. On Wednesday, December 16, 2015, the Fed made good on its promise to hike interest rates when it raised the rate by 25-basis points. This resulted in a 0.50% interest rate in the US – the first rate hike in nine years.

Asian Reaction to US Dollar Projections in 2016 A contrarian perspective is held in Asia about the dollar’s prospects for the year. Since the USD has been rallying for three years, various high-level money managers are advising their clients to prepare for the dollar’s decline this year. UBS Group is of the opinion that the dollar will struggle to appreciate beyond its current levels in 2016. In other words, the upward trajectory of dollar growth is capped. Fund managers at the world’s premier private bank believe that the modest interest-rate increases implemented by the Fed will be insufficient to warrant further investment in the USD as their currency of choice. Economic analysts are anticipating that a gradual policy of quantitative tightening will allow the currency to appreciate by 5% to $1.05 against the euro by Q3

In Japan, there is a degree of uncertainty as to whether the Bank of Japan (BoJ) will approve an expansion of its quantitative easing policy in 2016. Europe already implemented one of the biggest QE programmes in history when it purchased assets valued at over EUR 1.1 trln with an additional 60 bln per month for a six month extension. The other policy measure adopted by the ECB was the 10-basis point decrease in the deposit rates to -0.30%. Since these measures were less than what was anticipated by analysts and traders, the euro rallied against the dollar.

However, Fed action will likely counteract the effects of the ECB policy to a degree and allow the USD to gain ground.

But there are many signs that the USD is losing ground against major Asian currencies, with the Singapore dollar gaining 1.1% in Q4 2015, and the Indonesian rupiah gaining 7.3%. There is a feeling that the Fed will be unable to tighten monetary policy several times without the global economy improving. For the most part however, the big gains are going to come from the USD vs Emerging Market currencies, but beyond that it’s uncertain.

Please note that this column does not constitute financial advice.

The Financial Markets Interest Rates Base Rates

LIBOR rates

CCY USD GBP EUR JPY CHF

0-0.25% 0.50% 0.05% 0-0.10% -0.75%

Swap Rates

CCY/Period

1mth

2mth

3mth

6mth

1yr

USD GBP EUR JPY CHF

0.42 0.51 -0.21 0.05 -0.80

0.51 0.54 -0.16 0.07 -0.79

0.61 0.59 -0.13 0.08 -0.76

0.84 0.75 -0.04 0.12 -0.69

1.17 1.07 0.06 0.23 -0.59

CCY/Period USD GBP EUR JPY CHF

2yr

3yr

4yr

5yr

7yr

10yr

1.14 1.03 -0.06 0.11 -0.70

1.37 1.23 0.02 0.11 -0.65

1.55 1.38 0.14 0.13 -0.51

1.69 1.51 0.28 0.16 -0.42

1.91 1.72 0.55 0.25 -0.13

2.15 1.92 0.92 0.41 0.16

Exchange Rates Major Cross Rates

CCY1\CCY2 USD EUR GBP CHF JPY

Opening Rates

1 USD 1 EUR 1 GBP 1 CHF 1.0762 0.9292

100 JPY

1.4668

0.9907

0.8403

1.3629

0.9205

0.7808

0.6754

0.5729

0.6818

0.7337

1.0094

1.0863

1.4806

119.00

128.07

174.55

0.8482 117.89

Weekly movement of USD

CCY\Date

08.12

15.12

22.12

28.12

05.01

CCY

Today

USD GBP JPY CHF

1.0801

1.0971

1.0860

1.0918

1.0778

0.7179

0.7232

0.7296

0.7316

0.7322

132.85

132.43

131.56

131.40

128.55

GBP EUR JPY

1.0786

1.0768

1.0773

1.0756

1.0776

CHF

1.4668 1.0762 119.00 1.0094

Last Week %Change 1.4923 1.0918 120.35 0.9852

+1.71 +1.43 -1.12 +2.46

January 6 - 12, 2016

financialmirror.com | WORLD MARKETS | 9

The Day One Carnage Marcuard’s Market update

by GaveKal Dragonomics “Well, that was an oddly timed report,” one of our longsuffering clients remarked on Monday, with justice. Right after we pressed send on our outlook for the year ahead, assuring readers that China fears and commodity prices would not play as big a role in markets in 2016 as they did last year, the Shanghai index collapsed by -7%, dragging down global stock markets; and oil prices had a volatile ride thanks to growing tensions between Iran and Saudi Arabia.

Have we been proved wrong already?

We don’t think so, but clearly it was not a great start to our year. So, let’s re-state the question. The main issue facing investors now is whether market leadership will remain as narrow in 2016 as it was last year. If the answer is yes, then it will be another miserable year for hedge funds, and money managers who still have a job should just buy the dollar and US growth stocks and go fishing.

One thing that most of us at Gavekal agree on is that this is not the most likely outcome: rather than being a carboncopy of last year, 2016 will probably be significantly worse or better. The bad scenario is that China’s growth continues to crumble, the US moves toward recession, and the financial impact of the commodity price collapse spreads as more and more energy and mining related companies default on their debt. In this case equity markets everywhere will do terribly and one should buy US long bonds, JGBs and gold. On Monday, the markets favoured this picture.

The better scenario is that China continues to muddle through with decent though declining growth and the renminbi stays fairly stable, robust construction and consumption activity keeps the US economy on a healthy track, and growth in Europe and Japan continues to accelerate. In this case, the strategy we suggested on Monday makes sense: buy value in the European and Japanese stock markets, and trim one’s US dollar exposure.

The risks are finely balanced between these two possibilities, but when we consider the year as a whole rather than just the first trading day, the case for the second scenario is solid and the risks to it emanate less from China than from the US. Two thirds of the world’s manufacturing PMIs rose in December (the exception was the US), with the eurozone posting its best reading in nearly two years, and all the east Asian economies outside China moving into expansionary territory. Japan’s corporate earnings remain robust, and construction and bank credit in the US are strong.

In China, meanwhile, the market plunge did not reflect any major new bad news about the economy. More likely, it reflected three factors: investor disappointment over the failure of an anticipated interest rate cut to appear, fear over the end later this week of a lockup on share sales by shareholders holding 5% or more of a listed company’s stock, and the malfunctioning of a new “circuit-breaker” system that was supposed to cut market volatility, but instead worsened the rout.

The Shanghai move, although containing little new economic information, highlighted some deep-seated problems with China’s policy management. Chinese A-shares remain overvalued because of the government’s intervention to stave off market collapse last summer, and until share prices are allowed to find their true level the market will be jittery. The circuit breaker was well-intended, and is part of a broader package of reforms (including new listing rules to speed up the pace of new listings and reduce first-day jumps in IPO prices) that aim to make China’s equity market behave less like a casino and more like a real market. But regulators ignored the fact that in China’s unusually volatile market, a sharp morning decline is often followed by an afternoon rebound. The circuit-breaker, which suspends trading for 15 minutes when the index falls by -5%, and stops it for the day when the index falls a total of -7%, makes an intraday bounce back less likely, since after their 15-minute break traders have an incentive to quickly dump their shares before trading closes for the day, rather than wait for a change in sentiment. So, in short, Chinese regulators are still very far from understanding how to manage modern financial markets properly. It’s understandable that global

investors would be spooked by yet another sign of Chinese policy incompetence.

All in all, though, we still believe that the underlying risks to our good scenario lie outside China. A lurch downward in US growth, led by industrial weakness and perhaps financial implosion in the energy sector, would have a deeper impact on global economies and markets than the grinding down of Chinese growth towards 6% that we expect.

Left to its own devices, the People’s Bank of China will do its best to keep the renminbi stable in trade-weighted terms, permit a bit more volatility in the RMB-USD rate, and avoid a big devaluation that would undermine its credibility and scare global markets. The risk is that the dollar spikes higher, leaving the PBOC with the unsavory choice of devaluing or sticking to an overvalued currency and damaging economic growth. The point is that to understand what is really going on, investors need to keep a closer eye on the balance of the US economy and the direction of the US dollar than on the gyrations of the Chinese stock market.

WORLD CURRENCIES PER US DOLLAR CURRENCY

CODE

RATE

EUROPEAN

Belarussian Ruble British Pound * Bulgarian Lev Czech Koruna Danish Krone Estonian Kroon Euro * Georgian Lari Hungarian Forint Latvian Lats Lithuanian Litas Maltese Pound * Moldavan Leu Norwegian Krone Polish Zloty Romanian Leu Russian Rouble Swedish Krona Swiss Franc Ukrainian Hryvnia

BYR GBP BGN CZK DKK EEK EUR GEL HUF LVL LTL MTL MDL NOK PLN RON RUB SEK CHF UAH

18631.5 1.4671 1.8183 25.122 6.9385 14.5506 1.0753 2.385 292.77 0.65358 3.2108 0.3992 19.94 8.9408 4.006 4.2077 73.4 8.5717 1.0098 23.95

AUD CAD HKD INR JPY KRW NZD SGD

0.7171 1.3924 7.7511 66.5925 118.95 1187.95 1.4897 1.4249

BHD EGP IRR ILS JOD KWD LBP OMR QAR SAR ZAR AED

0.3771 7.8094 30117.00 3.9266 0.7077 0.3037 1513.00 0.3849 3.6414 3.7526 15.6141 3.6729

AZN KZT TRY

1.5278 343.42 2.9783

AMERICAS & PACIFIC

Australian Dollar * Canadian Dollar Hong Kong Dollar Indian Rupee Japanese Yen Korean Won New Zeland Dollar * Singapore Dollar MIDDLE EAST & AFRICA

Bahrain Dinar Egyptian Pound Iranian Rial Israeli Shekel Jordanian Dinar Kuwait Dinar Lebanese Pound Omani Rial Qatar Rial Saudi Arabian Riyal South African Rand U.A.E. Dirham

www.marcuardheritage.com

Disclaimer: This information may not be construed as advice and in particular not as investment, legal or tax advice. Depending on your particular circumstances you must obtain advice from your respective professional advisors. Investment involves risk. The value of investments may go down as well as up. Past performance is no guarantee for future performance.

Investments in foreign currencies are subject to exchange rate fluctuations.

Marcuard Cyprus Ltd is regulated by the Cyprus Securities and Exchange Commission (CySec) under License no. 131/11.

ASIA

Azerbaijanian Manat Kazakhstan Tenge Turkish Lira

Note:

* USD per National Currency

January 6 - 12, 2016

10 | COMMENT | financialmirror.com

Greece struggles to right economy as refugee influx adds to woes

By By Constance Baroudos The two major achievements of European integration, the common currency and the free movement of people, are in danger — and Greece is on the front lines in both cases.

Even though the three international bailout loans accepted by Athens over the past six years have resulted in loss of economic control, tax hikes and high unemployment rates, Athens has made some recent progress to stimulate growth. Athens still must implement controversial reforms next year that may cause the government to lose its majority in the Greek Parliament.

Athens signed its first major deal to privatise 14 airports for EUR 1.2 bln ($1.3 bln) with Fraport, a German airport operator. The company will pay a fixed annual rental fee of EUR 23 mln, and invest EUR 330 mln to upgrade facilities over the next four years. In addition, China Cosco Holding Co., that already operates two container terminals there as a hub for Asian exports, is the sole bidder for a majority stake of the Piraeus port expected to generate about EUR 700 mln.

The second biggest Greek port in Thessaloniki is expected to be privatised this year, and binding bids are anticipated in April.

The Greek government will pay to possess 51% of Greece’s Independent Power Transmission Operator, which is owned by the Public Power Corporation (PPC/DEH); the remaining 20% will be sold to a private investor and 29% will float on the Athens stock exchange. Moreover, Greece’s banks suffer from non-performing loans including mortgages, consumer debt, and company borrowing — more than 48% are not being repaid on time, primarily due to lack of jobs and income. As a result, Greece developed a secondary market for nonperforming loans, debt receivables unpaid for a period of more than 90 days. NPLs are to be managed by loan asset companies to stabilise the banking sector by providing immediate liquidity to the relevant credit institutions while assisting borrowers with restructuring debts. These moves send a strong message that the Greek economy is aiming for growth.

Considering Prime Minister Alexis Tsipras has publicly stated he does not support the reforms, these are some impressive developments, but Greek citizens are not happy.

Some Greeks feel the privatisation of state assets undermines growth because it sells Athens’ advantages to foreign states.

Furthermore, over 60% of Greek citizens voted against austerity in a referendum earlier last year – the first time citizens were able to voice their opinion on the economic crisis.

Instead of keeping campaign promises, Syriza, the political party in control of the Greek parliament, agreed to more austerity or risk exiting the Eurozone. Unfortunately, Greece is likely to receive only EUR 2.5 bln from privatisation deals, less than the EUR 3.7 bln agreed to in the most recent bailout agreement. At this time, the government holds a fragile majority of three members of parliament, down from five after the September election. It will not be a surprise if the government’s majority collapses again and new elections are called in 2016.

In the beginning of next year, Athens will struggle to pass key reforms, including revamping the pension system.

Greece has one of the most expensive pension systems in Europe, consuming 17.5% of GDP, and about one in five Greeks are over 65 years old. While pension checques are not large (the average pension is about EUR 700, and 45% of pensions are below the poverty rate of EUR 665), the pension system is suffering a deficit due to decades of tax evasion and

“Some Greeks feel the privatisation of state assets undermines growth because it sells Athens’ advantages to foreign states... Instead of keeping campaign promises, Syriza agreed to more austerity or risk exiting the Eurozone” unemployed youth not able to make financial contributions.

While Greece’s creditors insist on cutting pension costs by EUR 1.8 bln, Syriza would rather increase employer and employee contributions as pensions have already been cut over ten times since the beginning of the financial crisis. This means there will be intense controversy over pensions in the beginning of 2016.

Fulfilling the first wave of policy changes agreed to in the latest bailout is necessary for the European Union, European Central Bank, and International Monetary Fund to conduct the first review of the Greek economy. After this review, discussions on how to restructure Greece’s EUR 320 bln debt will follow – recall the IMF determined Greece’s debt to be unsustainable in June. Restructuring the debt could include extending the repayment due date, delaying payments, capping interest and debt service costs, and tying repayment to GDP growth, giving Greece’s economy some time to grow.

Without restructuring the debt, Greece’s economy will likely shrink in 2016, and unemployment will remain high.

While the IMF and White House promote a haircut on Athens’ debt, Greece’s creditors say this is not an option. This is ironic given that Germany was the recipient of one of the largest restructuring programmes in history after World War II — Greece and about 20 other countries wrote off a large chunk of German loans and restructured the remaining debt by extending the repayment schedule, and granting a lower

interest rate. West Germany’s debt repayment schedule was linked to its ability to pay by tying repayment to its current and expected trade surpluses. Thus, Germany was free of difficult debt payments, trading partners were incentivised to buy German goods, and its economy was able to grow.

The European unification project has been called into question because it has currency integration without a corresponding political unity. Financial crises as seen in the Eurozone do not occur in the U.S. because it has a strong central government – the federal government provides automatic bailouts to states in trouble. After the savings and loan crisis in Texas in the 1980s, for example, taxpayers in other states paid to clean up the economic mess – these states did not ask for their money back as Eurozone members are currently asking of Greece. Hence, it is a political choice to have a debt crisis since the European Central Bank could guarantee Greece’s debt and interest rates would come down as a result.

Furthermore, Eurozone members are not able to devalue their currency to make exports more attractive and increase foreign investment. Austerity has only been shown to work if countries are able to devalue their currency, like when Canada slashed its debt in the 1990s – it was able to maintain growth and reduce unemployment by reducing interest rates and encouraging private spending while devaluing its currency to encourage exports.

The refugee crisis is also placing more financial obstacles in Athens’ path. In 2015 1 mln migrants entered Europe, 800,000 of them via Greece. The Hellenic Republic has spent about 1 bln euros coping with the influx. Greece is working with the EU to create a common immigration policy and improve cooperation with surrounding countries. The Greek government is also working with Turkey to eliminate human trafficking networks, share information, and cooperate with responsible authorities like the police and coast guard.

Greece has made some progress towards growth that will hopefully lead to an increase in jobs, more tax revenues for the government, and further foreign investment in the country. After restructuring the Hellenic Republic’s debt and the economy becomes stronger, Athens may then be able to reduce taxes to increase private sector spending, and Tsipras may be able to fulfill his aim to lift capital controls by March 2016.

Constance Baroudos is a Policy Analyst and Program Director at the Lexington Institute, U.S. http://lexingtoninstitute.org

January 6 - 12, 2016

financialmirror.com | MARKETS | 11

Markets punished after resumption of China concerns Markets Report by Forextime Ltd

By Lukman Otununga, Research Analyst at FXTM

Any expectations for markets to enter the new trading year calmly were completely ruined following further weak China data resulting in anxiety among investors and triggering an aggressive sell-off across global equities. Markets received a heavy lashing following the weak China Caixin December manufacturing PMI number, which continued the ongoing streak around slowing data from China and renewed concerns around the slowing pace of growth in this major economy.

The losses in the China markets were so extreme that trading was suspended for the rest of the session, which alarmed participants and set a theme of panic as traders returned to the office following their break. The alarm bells were ringing loud at traders with both European and American equities entering a free-fall and resulting in one of the worst trading days in years.

Overall, it is pretty clear that market participants are jittery and scattering away from riskier assets, meaning there is potential for global equities to continue these steep losses throughout the week.

One thing that looks certain is that China data are continuing to point towards the economy slowing even further in 2016, meaning that the local markets are still vulnerable to further declines. Sentiment towards the Chinese economy remains heavily bearish and concerns could elevate ahead of the China CPI report on Saturday.

WTI oil remains depressed WTI oil has reversed gains and is looking to resume its depressed state despite the growing tensions between Saudi Arabia and Iran. On Monday, I wrote that the gains in oil at the beginning of the week were spurred by hypothetical optimism that escalating tensions between Saudi and Iran could impact production and remove some of the extreme oversupply in the markets.

This has always been hypothetical optimism and there is no current indication that production levels of oil may change, meaning that the heavy aggressive oversupply combined with fears over the global economy is going to leave the commodity depressed. WTI concluded Monday’s trading session below $37 as concerns around the persistent oversupply and fears over the global economy returned to weigh on investor sentiment.

WTI oil is fundamentally bearish and investors’ attraction has been haunted by the intensifying concerns around the unrelenting oversupply, while growing anxieties about the pace of global growth have triggered fears that demand may be about to dip lower. In reality, oil concluded 2015 over 35% lower and with Iran also expected to unleash its own As commodity prices continue to slide, the global oil and gas industry will reduce capital spending and work toward leaner budgets in 2016, says Moody’s Investors Service.

“Excess supply will continue to drag on commodity prices in 2016 in the global oil markets and the US natural gas market,” said Steven Wood, a Moody’s Managing Director. “Furthermore, the potential lifting of sanctions against Iran could bring even more supply to the market in 2016, offsetting any expected declines in US production.”

Low commodity prices have led to a deterioration in cash flows and liquidity, straining the already limited financial flexibility of speculative-grade oil and gas companies. Even large, diversified investment-grade companies will struggle

production in 2016, this commodity may continue to face further milestone lows and more signs over weakness in the global economy could be a signal to invite bearish investors to send prices towards the December 2008 crisis lows of $32.40.

GBPUSD sinks below 1.47 The bearish sentiment towards the Sterling/Dollar declined to new depths on Monday with prices falling to a fresh eight-month low at 1.466. Losses in the GBPUSD accelerated after a slowing UK manufacturing PMI at 51.9 renewed concerns that even the UK economy is entering a period of weaker growth.

Sentiment towards the Sterling remains heavily pressured and recent reports around analysts suggesting that the UK pound may be the most overvalued currency in the world are probably leading investors’ attraction to fade even further.

For the most part of 2015, the pound was punished from the Bank of England’s resistance to raise UK interest rates, while the static inflation growth and growing expectations that the UK economic growth is slowing down have provided bearish investors with opportunities to attack the Sterling further.

Investors will be waiting for the latest construction PMI for the UK economy and if it follows the same declining pattern as Monday’s manufacturing PMI, then the GBPUSD may be left vulnerable and open to further losses.

Fundamentally, the GBPUSD is bearish and the BoE’s

hesitance to commit to raising UK rates may offer a shortterm interest rate differential between the Bank of England and the Federal Reserve, ultimately providing an opportunity for sellers to send prices much lower.

From a technical standpoint, the candlesticks are trading below both the daily 20 and 200 SMA, while the MACD also trades to the downside. Previous support around 1.4850 may become a dynamic resistance which should encourage sellers to send prices towards the lows of April 2015 at 1.4565.

USDCHF: The USDCHF trades in a very wide range on the daily timeframe and is currently flat. A heavy layer of resistance may be found around 1.008 while support can be found just above 0.9800. A breakout above 1.008 may encourage buyers to send prices towards 1.020.

AUDUSD:This pair currently trades in a choppy fashion meandering within the upwards trend channel. Prices are currently below the daily 20 SMA while the MACD trades to the upside. A decisive break below 0.7150 may encourage sellers to send prices to the next relevant support at 0.7050.

For information, disclaimer and risk warning note visit: www.ForexTime.com FXTM is an international forex broker regulated by the Cyprus Securities and Exchange Commission (CySEC), and FT Global Limited is regulated by the International Financial Services Commission (IFSC)

Oil and gas industry to cut spending in 2016 amid continued commodity price weakness with diminishing financial flexibility and increasing financial leverage.

Moody’s expects upstream capital spending to drop by at least 20%-25%, leaving the oilfield services and drilling industry the most stressed sector in 2016.

Integrated and national oil companies will cut capital spending and thus lower capital budgets in 2016, but oilfield services and drilling companies in particular will

emphasize cost reduction as they adjust to reduced demand.

Overall, the oil and gas sector will likely see a rise in distressed exchanges and defaults in 2016, according to the report.

“As a result of deteriorating cash flows and credit investors increasingly avoiding the struggling energy sector, Latin American national oil companies will face high refinancing risk,” added Nymia Almeida, a

Moody’s Senior Credit Officer. “On top of significant maturities due in 2016-17 for Mexico’s PEMEX, Brazil’s Petrobras and Venezuela’s PDVSA, currency devaluations will raise import costs, capital spending and interest payments.”

Credit metrics will also continue deteriorating for China’s three national oil companies — China National Petroleum Corporation (Aa3 stable), China Petrochemical Corporation (Aa3 stable) and China National Offshore Oil Corporation (Aa3 stable) — through at least 2017.

Furthermore, Russia’s weak rouble will help the country’s national oil companies withstand low oil prices, but economic sanctions limit access to long-term external financing from US and EU financial and capital markets for the Russian giant Rosneft (Ba1 stable).

January 6 - 12, 2016

12 | WORLD | financialmirror.com

How to fight jihadi terrorism

By George Soros Open societies are always endangered. This is especially true of America and Europe today, as a result of the terrorist attacks in Paris and elsewhere, and the way that America and Europe, particularly France, have reacted to them.

Jihadi terrorists, like the Islamic State (ISIS) and Al Qaeda, have discovered the Achilles heel of our Western societies: the fear of death. By stoking that fear through horrific attacks and macabre videos, the publicists of ISIS awaken and magnify it, leading otherwise sensible people in hitherto open societies to abandon their reason.

Brain scientists have discovered that emotion is an essential component of human reasoning. That discovery explains why jihadi terrorism poses such a potent threat to our societies: the fear of death leads us and our leaders to think – and then behave – irrationally.

Brain science merely confirms what experience has long shown: When we are afraid for our lives, emotions take hold of our thoughts and actions, and we find it difficult to make rational judgments. Fear activates an older, more primitive part of the brain than that which formulates and sustains the abstract values and principles of open society.

The open society is thus always at risk from the threat posed by our response to fear. A generation that has inherited an open society from its parents will not understand what is required to maintain it until it has been tested and learns to keep fear from corrupting reason. Jihadi terrorism is only the latest example. The fear of nuclear war tested the last generation, and the fear of communism and fascism tested my generation.

The jihadi terrorists’ ultimate goal is to convince Muslim youth worldwide that there is no alternative to terrorism. And terrorist attacks are the way to achieve that goal, because the fear of death will awaken and magnify the latent anti-Muslim sentiments in Europe and America, inducing the nonMuslim population to treat all Muslims as potential attackers.

And that is exactly what is happening. The hysterical antiMuslim reaction to terrorism is generating fear and resentment among Muslims living in Europe and America.

The older generation reacts with fear, the younger one with resentment; the result is a breeding ground for potential terrorists. This is a mutually self-reinforcing, reflexive process.

How can it be stopped and reversed? Abandoning the values and principles underlying open societies and giving in to an anti-Muslim impulse dictated by fear certainly is not the answer, though it may be difficult to resist the temptation. I experienced this personally when I watched the last Republican presidential debate; I could stop myself only by remembering that it must be irrational to follow the wishes of your enemies.

To remove the danger posed by jihadi terrorism, abstract arguments are not enough; we need a strategy for defeating it. The challenge is underscored by the fact that the jihadi phenomenon has been with us for more than a generation.

Indeed, gaining a proper understanding of it may be impossible. But the attempt must be made.

Consider the Syrian conflict, which is the root cause of the migration problem that is posing an existential threat to the European Union as we know it. If it was resolved, the world would be in better shape.

It is important to recognise that ISIS is operating from a position of weakness. While it is spreading fear in the world, its hold on its home ground is weakening. The United Nations Security Council has unanimously adopted a resolution against it, and the leaders of ISIS are aware that their days in Iraq and Syria are numbered.

Of course, the outlook for Syria remains highly uncertain, and the conflict there cannot be understood or tackled in isolation. But one idea shines through crystal clear: it is an egregious mistake to do what the terrorists want us to do.

That is why, as 2016 gets underway, we must reaffirm our commitment to the principles of open society and resist the siren song of the likes of Donald Trump and Ted Cruz, however hard that may be.

George Soros is Chairman of Soros Fund Management and of the Open Society Foundations. © Project Syndicate, 2015 - www.project-syndicate.org

Unifying the struggle against ISIS The November 13 terrorist attacks in Paris – which struck at the heart of France and of Europe as a whole – have brought the terrorist threat posed by the Islamic State (ISIS) to the forefront of the foreign-policy agenda. For me, the answer to such assaults cannot be to lock our doors and board up our windows. To surrender the way we live, to give up on our open societies, would be to play into the terrorists’ hands.

But our response needs to be, first and foremost, a political one: more vigilance at

summer to provide the Kurdish Peshmerga with arms and munitions was not without risk, but it was the right move. In November, also thanks to German support, the Peshmerga liberated the city of Sinjar, where ISIS carried out horrific massacres of Yazidis last summer. The advance by ISIS could not have been stopped without the Allies’ air strikes.

Second, we know from previous conflicts how important it is to restore public confidence in areas liberated from ISIS. That is why we are investing in stabilising these regions, rebuilding police forces, schools, electricity grids, and water supplies. Thanks to German help, more than 150,000 people were able to return to their homes after the city of Tikrit was liberated.

The strategy’s third component is the most difficult to realise and yet the most important. In the long term, the conflicts and chaos that enabled ISIS to spread in the first place can be overcome only if all population groups in Iraq and Syria have a shared political perspective.

In Iraq, Prime Minister Haider al-Abadi has launched a courageous reform programme to pave the way toward greater political participation by Sunnis. In Syria, such a political process is of course still a long way off; nonetheless, we must do all we can to work in this direction.

German foreign policy is at the forefront of these efforts. I have had countless (and often difficult) talks in Riyadh, Tehran, Ankara, Beirut, Amman, and Vienna in the last year to help bridge the divide between countries in the region – and thus rein in their proxy forces battling one another in Syria.

I am heartened by the fact that, for the first time after almost five years of civil war, we succeeded in bringing all key states to the negotiating table in Vienna and agreed on a road map for a ceasefire and a political transition process. It’s too early to celebrate, but there is finally a minimal consensus –

By Frank-Walter Steinmeier home and more intensive cooperation with our partners’ security authorities. We in the West must show resolve in battling the social exclusion that breeds alienation, which implies stepping up our efforts to integrate Muslim and other immigrants at all levels. At the same time, we must tackle the evil of ISIS in the places where it began: Iraq and Syria.

On the night of the Paris attacks, Germany promised France that we would stand at its side. We decided recently that our responsibility to keep this promise includes a military contribution to the fight against ISIS. We all know, of course, that terrorism cannot be defeated by bombs alone. But we also know that the threat posed by ISIS will not be overcome without military means, and that, unless ISIS is countered militarily, after a year there may well be nothing left on which to build a political solution for either Syria or Iraq.

I spent two days in Iraq recently. In the past year, ISIS has been successfully pushed out of a quarter of the territory it once controlled there. But the most difficult tasks in confronting ISIS lay ahead of us. Three components are crucial to the success of our political strategy.

The first component is support for those confronting ISIS. Germany’s decision last

shared not just by Russia and the United States, but also by Iran and Saudi Arabia – on a way forward to resolve the Syria conflict. The meeting of Syrian opposition groups in Riyadh in December was the first step on this path.

Achieving a political agreement will be a long and arduous journey, and the outcome is not entirely in our hands. Some of the partners who we need on board are pursuing interests very different from ours. Some are at loggerheads with one another.

But complaining about the complexity of the situation in Syria is no substitute for action. The fact that some political realities do not fit the friend-foe template cannot be an excuse to sit back and wait until the region’s antagonisms and conflicts in the resolve themselves – or until there is no Syrian state or institutions left to save.

The successful negotiations to contain Iran’s nuclear programme showed that persistent good-faith diplomacy can work. In Libya, too, with an experienced German

diplomat at the helm of talks being held under the auspices of the United Nations, we have the opportunity to find a political route back to an ordered state.

As foreign policymakers, we must face up to reality, with all of its uncertainties, and take responsibility for both our actions and our inaction – even when there are no guarantees of success either way. This makes it all the more important that we are certain of our bearings. We will not be able to counter ISIS and the threat posed by Islamist terrorism by pulling up the drawbridge; what we need is persistence and a political strategy that carefully integrates military, humanitarian, and diplomatic engagement.

Frank-Walter Steinmeier is Germany’s Foreign Minister. © Project Syndicate, 2015. www.project-syndicate.org

January 6 - 12, 2016

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European solidarity in a world of crises

By Jean-Claude Juncker The end of the year is always a time for taking stock. At the end of 2015, we can look back on a year when European solidarity – at the risk of sounding overly dramatic – withstood what may have been the greatest trials it has faced since the end of World War II. European solidarity was severely tested through much of the year by the Greek crisis – the economic and social impacts of which continue to be felt in the eurozone and throughout the European Union. Since the start of the year, the talks on Greece have tried the patience of us all. Much time and trust were lost. Bridges were burned. Words were spoken that cannot easily be taken back. We saw Europe’s democracies being played against one another.

Collectively, Europe looked into the abyss. And it was only when we were at the brink that we were able to step back. In the end, the EU’s member states stood by Greece, commitments were made, implemented and adhered to, and a new program is now in place. European solidarity prevailed, and trust has started to recover. The key now will be delivery on reforms, and the European Commission continues to support Greece’s side with a new Structural Reform Support Service, as well as by providing technical assistance at every step of what is still a long journey.

At the same time, European solidarity continues to be tested by the refugee crisis. Earlier in the year, the Commission put forward a comprehensive migration policy and took immediate steps to manage the crisis. We tripled our presence in the Mediterranean Sea, helping to save lives.

We fought back against the criminal networks of smugglers and traffickers. We showed solidarity by agreeing to relocate among our member states those people most in need of international protection.

We have now started resettling refugees from outside of Europe, and are working closely with Turkey, which plays a crucial role in the region. We have also launched a new

“It is time we had a little more faith in Europe’s ability to provide collective solutions to problems felt acutely and independently by each EU member state” partnership with Africa to address the root causes of migration. And our EU agencies continue to help the oftenoverburdened national authorities in the most affected member states identify, screen and fingerprint incoming migrants, speed up the processing of asylum-seekers, and coordinate the return of those who do not qualify.

If it seems as though the EU has all the solutions for its troubles the reason is that, in theory, we really do. The reality, however, is somewhere further afield. I may sound like a broken record, but I am still at a loss as to why following through on commitments taken at the highest political level has been so difficult.

For example, summit after summit, leaders say they will send border guards to help Greece protect our external borders, or financial aid to help our neighbours in Jordan, Lebanon and Turkey cope with the large number of refugees there. Each time, weeks go by with targets unreached and commitments unfulfilled. Instead, we get a tired blame game pitting EU states against one another; a race to the bottom in which national governments downgrade their asylum systems to make them less attractive than those of the country next door; and politicians from left to right nourishing a populism that brings only anger, not solutions.

It is time we had a little more faith in Europe’s ability to

provide collective solutions to problems felt acutely and independently by each EU member state. Doing away with EU asylum laws will not take away national obligations to abide by the humanitarian principle and requirement under international law to offer asylum to those in need. On the contrary, it is a common standard for the way EU countries treat asylum requests that creates a fair system and prevents people from flocking to one place.

Similarly, a European Border and Coast Guard that does not rely on individual states’ willingness or political opportunity to commit resources will enable us to restore order and effectively manage the EU’s external borders. Here, too, the solutions are necessarily European.

If I were to compare the timelines for the refugee crisis and the financial crisis, I would say we are now in February 2010, when European countries still thought that the tools they had at the national level were sufficient to address problems that we now know required a coordinated, European response.

European solidarity must prevail. The atrocious attacks in Paris in November were an attack on the European way of life. But we will not concede defeat. We will not give in to fear by rebuilding walls so recently torn down. We will not confuse the perpetrators of these heinous crimes with those fleeing in their wake.

Europe – the love of my life. This brave continent. This noble people. A place perceived worldwide as being safe and just. We will live up to that reputation. We will show our resilience.

European integration is a multifaceted and often complicated affair. We do not always get it right the first time. But if I could describe Europe with just one word, it would be “perseverance.” Collectively, we are stronger than the challenges that confront us. Together, we will unite in the face of that which seeks to divide us. We will persevere in 2016. And we will thrive.

Jean-Claude Juncker is President of the European Commission. © Project Syndicate, 2015 www.project-syndicate.org

How to win the war on terror

By Hernando de Soto It’s been 14 years since President George W. Bush declared a “global war on terror.”

Today, after spending $1.6 trln on that war and killing 101 terrorist chieftains, from Osama bin Laden to “Jihadi John,” the West remains just as vulnerable, if not more so, to extremists who can recruit fighters and strike any Western capital virtually at will. Now that another president – François Hollande of France – has also declared war on terror (as have other European leaders), are the prospects for victory really any better? I have my doubts.

It is time to consider that the strength of our opponents derives, at least to some degree, from sentiments similar to those that animated the American Revolutionary War and the French Revolution: frustration with and alienation from the prevailing system. In Britain’s American colonies before 1776, and throughout France in the years leading up to 1789, ordinary people became convinced that their lives, assets, and businesses had been subject for too long to the predations of arbitrary rulers. That same estrangement is felt nowadays in the Middle East and North Africa.

After all, the Arab Spring began when a poor Tunisian entrepreneur, Mohamed Bouazizi, set himself on fire in December 2010 to protest the merciless expropriation of his business. He committed suicide – as his brother Salem told me in an interview recorded for American public television – for “the right of the poor to buy and sell.”

Within 60 days of Bouazizi’s death, his message galvanised the Arab world. Sixtythree more small entrepreneurs across the greater Middle East replicated his selfimmolation, inciting hundreds of millions of Arabs to take to the streets and topple four governments. The force of their rage continues to destabilise the entire region.

The West didn’t grasp this message. As usual, it focused on macroeconomic adjustment and technical assistance, failing even to consider the property rights of the poor majority.

This is an old problem: instead of remembering that property rights are what emancipated their societies from sovereign bullies, left-leaning Westerners think that protecting property is rightist dogma, conservatives take legal property rights for granted, and economists associate them with real-estate deals and carpentry.

The West’s failure to encourage Arab governments to establish, protect, and enhance their citizens’ property rights (and provide them with the means) created a vacuum, into which stepped the region’s romantic nationalists and their terrorist

offshoots, which are now sending their foot soldiers to Europe. Of course, these fanatics will not be able to boost living standards for the poor – far from it, as the predatory rule of the so-called Islamic State in its selfproclaimed caliphate proves. But in an atmosphere of deprivation and frustration, those who make false promises easily attract adherents.

How long will it take the West to remember that democratic capitalism requires strong property rights to set clear boundaries beyond which the state may not go? Like the entropic universe and all open spaces, the global market is a turbulent place with little respect for life.

All living systems, whether natural or organised by man, originate and operate only in encapsulated spaces. Whether we are talking about cells, molecules, body organs, computers, or social groups, each and every one is contained and constrained within a boundary: a membrane, an epidermis, a wall, or a legal right.

Within the boundaries of our bodies, complex multi-cellular structures are sustained by the production of molecules that ensure cooperation and the exchange of information among cells – a process known as “signaling.” Impairments in this process can lead to the onset of disorders such as cancer. If detached from other cells or the surrounding matrix, cells usually die within a short time, a process called “anoikis,” Greek for homelessness.

Whoever ends “anoikis” in the greater Middle East will win the war on terror. That is why the West and its allies must help the 80% of the population whose survival depends on the boundaries needed to protect them and their assets (property rights and limited liability). They need the signaling mechanisms to detect danger (records and tracking systems that come from recording assets and firms). They need the adhesion molecules to connect with others and build increasingly complex and valuable combinations (legally enforceable contracts).

And they need the ability to use assets to guarantee credit and create capital (shares and stock to divide, extend, and collateralise property). Otherwise, the combined military forces of Europe and the United States – and now Russia – will win nothing.

If Hollande, the next US president, and their Arab allies are to stop terrorism, they must press (and help) Middle East governments to provide their people with the protections that will nurture their potential to prosper on equal terms in the global market. That is what the American and French revolutionaries did. And it is the surest way to deny extremists the attractiveness that sustains their existence.

Hernando de Soto is President of the Institute for Liberty and Democracy. © Project Syndicate, 2015. www.project-syndicate.org

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Exporting the Chinese model

By Francis Fukuyama As 2016 begins, an historic contest is underway over competing development models – that is, strategies to promote economic growth – between China, on the one hand, and the US and other Western countries on the other.

Although this contest has been largely hidden from public view, the outcome will determine the fate of much of Eurasia for decades to come.

Most Westerners are aware that growth has slowed substantially in China, from over 10% per year in recent decades to below 7% today (and possibly lower). The country’s leaders have not been sitting still in response, seeking to accelerate the shift from an export-oriented, environmentally damaging growth model based on heavy manufacturing to one based on domestic consumption and services.

But there is a large external dimension to China’s plans as well. In 2013, President Xi Jinping announced a massive initiative called “One Belt, One Road,” which would transform the economic core of Eurasia. The One Belt component consists of rail links from western China through Central Asia and thence to Europe, the Middle East, and South Asia. The strangely named One Road component consists of ports and facilities to increase seaborne traffic from East Asia and connect these countries to the One Belt, giving them a way to move their goods overland, rather than across two oceans, as they currently do.

The China-led Asian Infrastructure Investment Bank (AIIB), which the US earlier this year refused to join, is designed, in part, to finance One Belt, One Road. But the project’s investment requirements will dwarf the resources of the proposed new institution.

Indeed, One Belt, One Road represents a striking departure in Chinese policy. For the first time, China is seeking to export its development model to other countries.

Chinese companies, of course, have been hugely active throughout Latin America and Sub-Saharan Africa in the past decade, investing in commodities and extractive

industries and the infrastructure needed to move them to China. But One Belt, One Road is different: its purpose is to develop industrial capacity and consumer demand in countries outside of China. Rather than extracting raw materials, China is seeking to shift its heavy industry to less developed countries, making them richer and encouraging demand for Chinese products.

China’s development model is different from the one currently fashionable in the West. It is based on massive state-led investments in infrastructure – roads, ports, electricity, railways, and airports – that facilitate industrial development. American economists abjure this build-it-andthey-will-come path, owing to concerns about corruption and self-dealing when the state is so heavily involved. In recent years, by contrast, US and European development strategy has focused on large investments in public health, women’s empowerment, support for global civil society, and anti-corruption measures.

Laudable as these Western goals are, no country has ever gotten rich by investing in them alone. Public health is an important background condition for sustained growth; but if a clinic lacks reliable electricity and clean water, or there are no good roads leading to it, it won’t do much good. China’s infrastructure-based strategy has worked remarkably well in China itself, and was an important component of the strategies pursued by other East Asian countries, from Japan to South Korea to Singapore.

The big question for the future of global politics is straightforward: Whose model will prevail? If One Belt, One Road meets Chinese planners’ expectations, the whole of Eurasia, from Indonesia to Poland will be transformed in the coming generation. China’s model will blossom outside of China, raising incomes and thus demand for Chinese products to replace stagnating markets in other parts of the world. Polluting industries, too, will be offloaded to other parts of the world. Rather than being at the periphery of the global economy, Central Asia will be at its core. And China’s form of authoritarian government will gain immense prestige, implying a large negative effect on democracy worldwide.

But there are important reasons to question whether One Belt, One Road will succeed. Infrastructure-led growth has worked well in China up to now because the Chinese government could control the political environment. This will not be the case abroad, where instability, conflict, and

corruption will interfere with Chinese plans.

Indeed, China has already found itself confronting angry stakeholders, nationalistic legislators, and fickle friends in places like Ecuador and Venezuela, where it already has massive investments. China has dealt with restive Muslims in its own Xinjiang province largely through denial and repression; similar tactics won’t work in Pakistan or Kazakhstan.

This does not mean, however, that the US and other Western governments should sit by complacently and wait for China to fail. The strategy of massive infrastructure development may have reached a limit inside China, and it may not work in foreign countries, but it is still critical to global growth.

The US should have become a founding member of the AIIB; it could yet join and move China toward greater compliance with international environmental, safety, and labor standards. At the same time, the US and other Western countries need to ask themselves why infrastructure has become so difficult to build, not just in developing countries but at home as well. Unless we do, we risk ceding the future of Eurasia and other important parts of the world to China and its development model.

Francis Fukuyama is a senior fellow at Stanford University and Director of the Center on Democracy, Development and the Rule of Law. His most recent book is Political Order and Political Decay. © Project Syndicate, 2015 - www.project-syndicate.org

A Middle East health-care revolution

By Bryan Spielman On a recent visit to Jordan and Egypt, as part of a trade mission led by the United States Department of Commerce, I was struck by the potential for the surrounding region to become a major hub for cuttingedge medicine. With the right policy mix and enough political will, the Middle East could become an important part of the world for health-care research. In particular, it has a critical role to play regarding pharmaceutical clinical trials designed to investigate the influence of patients’ region of ancestry on the safety, efficacy, and effectiveness of treatments.

As our understanding of genetics expands, it is becoming clear that our ancestral origins play a key role in determining the efficacy of certain medicines. For example, studies have shown that patients of European ancestry respond better to beta blockers and ACE inhibitors than those of African descent. And continental origins are often considered when selecting optimal antihypertensive and cardiovascular drug therapy.

Another example is warfarin, an anticoagulant. Research has found that patients of African descent require higher doses than those of European origins; patients with Asian ancestry require lower doses. Studies of tacrolimus, a drug used to prevent organ rejection in transplant patients, indicate that African-American patients require higher doses than their white peers.

Genetic research has also expanded our understanding of diseases. For example, research by the US Agency for International Development (USAID) found that epidermolysis bullosa, a debilitating inherited skin disorder, has a different genetic signature in patients from the Middle East than in those from other parts of the world.

As our understanding of diseases grows, more research is needed to determine the effectiveness of sophisticated new medicines in specific patient populations around the world. Such investigations are already underway in some regions. In Asia, the Human Genome Organisation established the Pan-Asian Population Genomics Initiative to study genetic diversity and evaluate variations in drug response in the region. In Mexico, the Institute for Genomic Medicine is genotyping the country’s entire population.

Establishing a similar effort in the Middle

East will require collaboration among pharmaceutical companies, academic institutions, non-profit organisations, governments, and health-care providers.

Organisations like USAID and the US Naval Medical Research Center, which are already conducting clinical research in the region, could become valuable partners in coordinating and managing trials.

The first step that the Middle East can take is to align regulations across the region, with countries agreeing on the parameters for testing drugs’ safety and efficacy in the local population. Clinical activity is increasing across the Middle East, and the health-care ecosystem needed to support research is growing in size and sophistication. And yet, when it comes to new treatments, regulatory bodies in the region generally follow decisions made by the US Food and Drug Administration (FDA) and the European Medicines Agency (EMA), without extensively studying a drug’s safety and efficacy on local patients.

Approvals must take place on a national level, but regional leadership will be necessary. Jordan, for example, has a sophisticated health-care system and a thriving medical tourism sector. It is also the site of an increasing number of clinical trials.

As such, it is well placed to set the standard for research required to show a drug’s safety and efficacy in patients of Middle Eastern

ancestry.

It is important to move quickly. The incidence of chronic diseases is increasing rapidly across the Middle East. According to the International Diabetes Federation, rates of diabetes in the Middle East and North Africa will rise 96.2% by 2035, with the United Arab Emirates, Oman, and Qatar predicted to have the highest growth rates.

Likewise, the World Health Organisation estimates that more than a quarter of adults in Egypt have hypertension, while cardiovascular diseases account for 35% of all deaths in Jordan. Developing new, more effective treatments will be crucial to addressing these challenges before healthcare costs spiral out of control.

The Middle East is best known for its ancient historical sites, political instability, and abundant natural resources. But, by developing its ability to make medical advances, the region could become a world leader in deepening our understanding of the role of genetics in the safety and efficacy of medical treatments.

Bryan Spielman is Executive Vice President of Medidata, a global provider of cloud-based solutions for clinical research in life sciences. © Project Syndicate/Mohammed Bin Rashid Global Initiatives, 2015. www.project-syndicate.org

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India looks out

By Arun Jaitley Today more than ever, to paraphrase the poet John Donne, “no country is an island entire of itself.” India, too, has recognised this, becoming fully integrated into the world economy by way of trade in goods and services, as well as flows of capital, technology, and ideas. And, of course, India’s uniquely large and widespread diaspora is playing a unique role in strengthening its ties with the world.

It is a world in which India today occupies a special position. Whereas many countries – advanced and developing economies alike – are experiencing a growing sense of economic anxiety and even gloom, India is a beacon of hope, positive change, and economic dynamism.

Our economy has stabilized: inflation has fallen, the rupee’s exchange rate is steady, and our commitment to fiscal discipline is solid. Economic growth, now the fastest among the major economies, is poised to accelerate further.

Investors, not surprisingly, are flocking to our markets.

As proud as we are of our achievements, we also recognise our responsibilities. I am keenly aware that the Indian people have given the government in which I serve a mandate for decisive economic change and political reform. We will honor that mandate, which, in a globalized world, requires us to achieve inclusive growth domestically and engage constructively internationally.

One reason to focus on inclusive growth is that today’s Indians are different from those of the “Midnight’s Children” generation. Unlike that generation, the first to come of age

after independence, today’s Indians – even the poorest – overwhelmingly think of themselves as “middle class.” The twenty-first-century Indian is younger, on average, than almost anywhere in the world. He or she is also confident and, above all, aspirational. Having seen positive change, tasted a better life, and glimpsed or experienced broader opportunities, today’s Indians want more – and rightly so.

Our challenge is to meet those expectations.

That is why inclusive growth is not a mantra but an existential necessity. We are a large country of many differences: class, caste, language, and religion, in addition to age, gender, and opinions. Differences, if preserved and celebrated, are a source of cultural richness and new ideas.

But there is also a challenge. Economists have found that such heterogenous societies face greater challenges in fostering economic growth and development.

There is also greater scope for political conflict, which can challenge the pursuit of economic development. If people are different, they also tend to mistrust one another, making it more difficult to govern – and potentially leading to inferior policy choices.

Achieving inclusive growth will provide the basis for India to engage internationally. The year 2015 ends with two major efforts at international/multilateral cooperation: the COP21 climate change conference in Paris and the World Trade Organisation negotiations to conclude the Doha Development Agenda in Nairobi. India intends to be a constructive player in both efforts, not least because we have so much at stake.

The recent floods in the state of Tamil Nadu are a reminder that India is especially vulnerable to climate change. We have undertaken a major effort to increase the role of renewables, to price carbon directly and indirectly, and to boost green public investment. We call upon the advanced

economies to take action to price carbon, which has become especially important in the wake of the large decline in the price of oil and other fossil fuels. Only by boosting innovation in green technologies, including green coal, can we reconcile the pressing imperative to provide energy to hundreds of millions while ensuring good custodianship of our planet.

Likewise, India’s government and people recognize that trade is an engine of growth and a source of efficiency and dynamism. Multilateralism is the best way to ensure that global markets remain open to all, not just a few. Preserving and revitalizing the WTO requires successfully concluding the Doha Round. Our goal is to ensure that our development interests, especially the livelihood of millions of farmers, are protected, and then frame an agenda that ensures multilateralism’s critical role in preserving and opening markets in the future for all countries.

Mahatma Gandhi, the father of the nation, best described how India should engage with the world. He wished “the cultures of all the lands to be blown about my house as freely as possible. But I refuse to be blown off my feet.”

We don’t want India’s economy to be walled in on all sides, or our windows to be shuttered. We want the winds of external learning and experience, foreign capital, technology and entrepreneurship, to blow around the Indian house.

India will engage with the world with openness and receptivity, but also with the confidence in our values, rich history, and promising future that will keep us from being blown off our feet.

Arun Jaitley is India’s Minister for Finance, Corporate Affairs, Information, and Broadcasting. © Project Syndicate, 2015. www.project-syndicate.org

The AIIB is ready for business

By Jin Liqun The historic launch of the Asian Infrastructure Investment Bank in the coming weeks has been highly anticipated – and rightly so. With the start of operations, the AIIB will join the family of multilateral financial institutions in supporting broadbased economic and social development in Asia.

Sound and sustainable infrastructure investment will lead to better development outcomes, improve the lives and livelihoods of Asia’s citizens, and generate positive spillover effects in other parts of the world.

Over the past year, meeting with people from around the world and various walks of life, I have frequently been asked to explain why another multilateral development bank is needed, and how the how AIIB will be different from, say, the World Bank or the Asian Development Bank.

The answers are clear. The role and importance of Asia in the international arena have increased, yet the region faces severe infrastructure gaps and thorny bottlenecks.

Asia’s infrastructure investment needs have grown exponentially, and the AIIB’s resources, quite simply, will increase the pool of multilateral resources available to help meet them.

There is, moreover, ample space for the AIIB to help its members to modernise roads, rails, and ports; enhance access to electricity; expand telecommunications services; advance urban planning; and provide clean water and sanitation services. We will do it

well. We will do it right. And we will do it collaboratively, as a reliable and complementary development partner.

The AIIB’s founding members have a clear management vision: We will set a clear and high bar for organisational performance and governance, by upholding openness, transparency, accountability, and independence as its core institutional principles.

Our charter places direct accountability with the AIIB’s management to ensure that these principles become organic values, not simply slogans. I embrace this challenge, and I am firmly committed to fostering an institutional culture grounded in the highest principles and ethical standards.

How will we do this? In drafting the AIIB’s Articles of Agreement and policy framework, we have worked with a diverse group of international experts to draw lessons from the existing multilateral institutions and from successful private-sector companies.

We have held extensive rounds of technical discussions with our shareholders to ensure that the Bank reflects its owners’ goals and aspirations in both its lending activities and internal operations. I am confident that the Bank’s policy foundation meets world-class standards. We are now recruiting a topcalibre management team and expert staff to ensure their effective implementation.

In executing our mandate, our shareholders will see to it that the Bank learns from the past and recognises the possibilities of the future – to do things differently and to do different things. Several of the AIIB’s distinguishing features will facilitate this.

For starters, the AIIB’s unique ownership and shareholding structures reflect the institution’s regional character and provide members with a greater voice in policy

direction and decision-making. The rich dialogue among founding members during the development of the AIIB’s Articles of Agreement and policy framework attests to our shareholders’ strong ownership of, and commitment to, the Bank’s mandate and mission.

Moreover, the AIIB’s specialized geographic and sectoral mandate will enable it to offer niche skills, focused expertise, and concentrated market knowledge, and its organisational structure, staffing flexibility, and efficient decision-making processes will position it to respond with agility to client demand and emerging needs. Our approach to research will be selective and strategic, and our results-focused business model will allow us to deliver state-of-the-art knowledge and tailored financial services.

The AIIB will play a catalytic role. We will leverage and mobilise public and private financing, including from institutional investors, and help clients to enhance project “bankability” by promoting transparency, efficiency, and adherence to accepted standards – including environmental and social standards – thereby reducing risk.

The Bank’s integrated organisational design and governance will ensure efficient and effective operations in alignment with its strategic goals and organisational values. Its non-resident Board will promote accountability, efficiency, and cost effectiveness, while playing an enhanced role in setting strategy, establishing policy, and exercising oversight.

Ultimately, the AIIB’s reputation and credibility will depend on the calibre of its staff. We will recruit the best talent on the market through merit-based competitive processes, without regard to a candidate’s nationality. Likewise, there will be no nationality restriction on procurement of

goods and services for AIIB-financed operations.

Our operations will be lean, clean, and green. That means keeping a check on bureaucracy and maintaining a relatively flat organisational structure; managing costs and using modern technology effectively; and avoiding duplication and overlap of functions. The AIIB will build its professional staff gradually, supplementing in-house expertise with specialised consultant skills.

Staff positions will be carefully defined to avoid both underemployment and future redundancies.

It also means fostering an institutional culture based on professional integrity and exemplary governance, with no tolerance for corruption. The best policies on paper are meaningless unless they are implemented rigorously, impartially, and transparently.

Finally, it means concern for sustainability. The AIIB subscribes to the principles of sustainable development in the identification, preparation, and implementation of projects.

The management of environmental and social risks and impacts is central to successful development outcomes. We will support our clients in managing these risks appropriately through knowledge, experience, and resources.

The AIIB is an institution of great promise in a region with great needs. As it opens its doors for business in 2016, I am fully confident that it will realise its potential, meeting – and striving to exceed – the goals and standards set by its shareholders.

Jin Liqun is President-designate of the Asian Infrastructure Investment Bank. © Project Syndicate, 2015. www.project-syndicate.org

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Putin’s trump card

By Nina L. Khrushcheva At his annual year-end press conference, Russian President Vladimir Putin was as informal, audacious, and offensive as his favourite American presidential candidate, Donald Trump. He answered a question about the state of the country with a joke.

“How’s life?” one man asks another.

“My life is all stripes, black stripes followed by white ones,” the second man answers.

“Now I’m in the black one.”

Six months later, they meet again. ”How’s life?” the first man asks again. “I know it’s all stripes, but which one is it now?”

“It’s black now,” the second man replies.

“Looks like it was white last time.”

The rest of Putin’s press conference was as cynical as this revealing witticism. He repeatedly claimed that Russia and its rapidly collapsing economy are thriving – something not even his most ardent supporters believe.

After 15 years of performances like this one, I am used to Putin’s Orwellian doublespeak – war is peace, ignorance is strength, etc. But on this occasion, he took his bombast to another level.

Putin insisted that the drop in Russian GDP – some 3.7% in the last year – had been caused primarily by plummeting oil prices, offering only a brief mention of the Western sanctions imposed in response to his

annexation of Crimea. And while he boasted that Russia has $364 bln in foreign-currency reserves, he declined to note the country’s crippling 12.3% annual inflation rate or that much of those reserves have already been pledged.

Putin’s insistence on the health of the Russian economy calls to mind his own joke.

Contrary to his assurances, the current black stripe is likely to seem white in comparison to what is to come.

Indeed, earlier last month, a group of Russian economists described the government’s predictions of a rebound next year as sorely “out of touch.”

The annual press conference also provided Putin an opportunity to put Russia’s involvement in Syria in a positive light, and took pains to do so. After all, even with the secrecy that usually surrounds Russian military losses, it will be hard to temper public discontent once the coffins start coming home.

He assured the world that Russia would not be “more Syrian than Syrians themselves,” and he insisted that the United States should not dictate the country’s political process.

American policy in the Middle East has been so incoherent, he says, that it warranted Russian intervention. Putin also suggested – despite all the evidence to the contrary – that Russia’s presence in Syria would not extend beyond the resolution of the conflict. But Russia already has naval and air bases in Tartus and Latakia – assets that Putin is committed to defending.

Indeed, Russia’s annexation of Crimea and invasion of eastern Ukraine suggest that Putin gathers territories; he does not give them up – at least not without getting something in return. He once lauded Catherine the Great as his favourite Russian ruler: “She shed less blood, but amassed more land than Peter the Great.” In 1772, Catherine sent a warship to Syria to assist the locals in fending off the Ottoman Empire. Two years later, she chose to leave the region, satisfied with Ottoman concessions on Crimea. Putin appears to want a similar outcome.

Like Catherine, Putin, hopes to trade off his invasions. Ukraine clearly remains Russia’s top priority. By intervening in Syria – a conflict of primary concern to Europe and the US – the Kremlin feels it has acquired leverage over Ukraine’s Western partners. The consequences – including military casualties and the threat of retaliation by the Islamic State – pale in comparison to the possibility of a grand bargain that secures his gains closer to home.

Putin is so confident that he holds all the cards that he made a point of toning down his usual anti-American bluster. He said he supported US Secretary of State John Kerry’s efforts to address jointly issues “that can be resolved only together,” and that he was ready to “work with any president voted in by the American people.”

There is little question, however, about which US candidate Putin would like to see in the White House. In remarks following the

press conference, he praised Trump as “a very colorful, talented person” and the “absolute leader of the presidential race.”

The two men certainly deserve each other.

Both are consummate propagandists and performers. And both are prepared – even eager – to bully, harangue, and lie to get ahead. Compare Trump’s advice from his book How to Get Rich (“When somebody hurts you, just go after them as viciously and as violently as you can”) with Putin’s description of how to fight terrorists (“We will hunt them down and kill them, even in a toilet”).

Trump has built his campaign on ignorance dressed up as strength. His simplistic slogan – “Make America Great Again!” – could have been taken from Putin’s playbook on how to turn incompetence and weakness of character into the appearance of omnipotence and bold leadership.

Putin plans to remain in power for at least another decade. If the US elects Trump as President, it will have a friend in Russia, if almost nowhere else.

Nina L. Khrushcheva, the author of Imagining Nabokov: Russia Between Art and Politics and The Lost Khrushchev: A Journey into the Gulag of the Russian Mind, is Professor of International Affairs and Associate Dean for Academic Affairs at The New School and a senior fellow at the World Policy Institute. © Project Syndicate, 2015 www.project-syndicate.org

Stopping Venezuela’s harvest of sorrow

By Ricardo Hausmann Two years ago, public protests erupted in both Kyiv and Caracas. Whereas Ukraine’s Revolution of Dignity quickly took power, political change in Venezuela followed a much slower path. But Venezuela’s parliamentary election on December 6, which gave the opposition a two-thirds majority, is moving political developments into the fast lane.

Although President Nicolás Maduro accepted defeat on election night, his government has promised to disregard any laws that the National Assembly enacts, and has appointed an alternative Assembly of the Communes not envisaged in the constitution. Moreover, he used the National Assembly’s lame-duck session to pack the Supreme Court and has called on supporters to prevent the newly elected Assembly from being seated on January 5. Like Ukraine two years ago, Venezuela is heading toward a constitutional crisis.

But there is an older and more ominous parallel between Venezuela and Ukraine: the Soviet Union’s man-made famine of 1933. Stalin’s decision in 1932 to force independent farmers – the kulaks – into large collectivised farms caused 3.3 million Ukrainians and ethnic Poles to starve to death the following year.

The catastrophe was unleashed when Stalin, convinced that the kulaks were hiding grain from the Soviet state, requisitioned the seed grain, believing that this would force the kulaks to use the hidden grain as seed. But there was no hidden grain – and thus no seed to plant the 1933 crop.

Stalin blamed the ensuing collapse in food production on conspiracies by the dead and dying.

Instead of dealing with the unfolding catastrophe, Stalin increased grain requisitions, despite dismal production levels – a move that led to mass starvation. Information was hidden from the public, preventing remedial action. Even

offers of international humanitarian assistance, especially by Poland, were rejected. A famine in a country as fertile as Ukraine was hard to imagine before it happened. And it is hard to imagine a similar catastrophe in a country with the world’s largest oil reserves. But, heading into 2016, Venezuela faces precisely such a scenario.

There are four fundamental ingredients of such manmade disasters: repression of the market, suppression of information, systematic persecution of dissent, and attribution of blame for the disaster to the victims (which justifies radicalising the policies that led to the problem in the first place). Sadly, Ukraine is not the only example: The human toll in China of Mao Zedong’s Great Leap Forward of 1958-1961 was even greater, causing an estimated 15-45 million deaths.

As in Ukraine and China, Venezuela’s government has been trying to collectivise production. After Hugo Chávez was re-elected in 2006, he decided to accelerate the “revolution” and nationalised banks, telecoms, cement, steel, supermarkets, hundreds of other firms, and millions of hectares of land. And, as in Ukraine and China, the affected firms’ output quickly collapsed.

Beyond outright expropriation, the government implemented a system that attacked the market’s natural ability to self-organise the economy. The market is no panacea, and it can work only with a state that operates properly, but it is a powerful stabilising force. Market prices provide information about what is in short supply. Profits create incentives to respond to the information contained in prices. And capital markets allocate resources in pursuit of profits. Markets may fail, and policies can improve on outcomes; but Chávez and Maduro, like Stalin and Mao, attacked the market mechanism itself.

In Venezuela, a generalised system of price and foreignexchange controls is causing havoc. Foreign exchange is allocated administratively at a price that is about 130 times cheaper than the market rate. Not even drug trafficking is as profitable as this arbitrage opportunity, with obvious consequences.

A formula for “just” prices keeps all prices artificially low (setting higher prices buys violators a ticket to prison),

causing shortages, rationing, and queues that consume many hours of most Venezuelans’ days. Shortages of critical items have already cost many lives, not to mention the devastating effects on production. And, despite price controls, inflation is above 200%, because the central bank monetises a fiscal deficit of more than 20% of GDP. The rising oil prices that accompanied the adoption of these policies initially muted their impact, as imports could make up for the fall in output. In 1998, when Chávez was first elected, oil was languishing at $8 per barrel; in 2012, prices averaged $104. But, rather than using the windfall to build a financial cushion for a rainy day, Chávez chose to use high oil prices as collateral to borrow massively, quadrupling the public external debt. This allowed him to spend in 2012 as if the price of oil were $197 per barrel. But now, with Venezuelan crude below $30 dollars and the country cut off from international capital markets, imports are declining to a fraction of their 2012 level. The previous destruction of productive capacity has come home to roost.

The implications of this madness are ominous. To prevent a humanitarian catastrophe, swift action needs to be taken: restoration of the market mechanism; exchange-rate unification (as President Mauricio Macri just implemented in Argentina); an alternative system of social transfers to substitute for rationing; fiscal retrenchment; orderly foreign-debt restructuring; and massive financial support from the international community.

Maduro is not trying to do any of this; instead, he is devoting his energy and creativity to maintaining power, by fair means or foul. But time is running out. Unless Maduro changes, the new National Assembly – where the opposition’s two-thirds majority enables it to amend the constitution – will have to change him.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development. © Project Syndicate, 2015 - www.project-syndicate.org

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Responding to Europe’s political polarisation

By Jean Pisani-Ferry In Europe, 2015 began with the far-left Syriza party’s election victory in Greece. It ended with another three elections that attested to increasing political polarisation. In Portugal, the Socialist Party formed an alliance with its former archenemy, the Communists. In Poland, the nationalist Law and Justice (PiS) party won enough support to govern on its own. In Spain, the emergence of Podemos, another new left-wing party, has ended the traditional hegemony of the Spanish Socialist Workers’ Party on the centre left and the Partido Popular on the centre right. (In France, moreover, the far-right National Front, led by Marine Le Pen, showed its strength in the first round of December’s regional elections, though it eventually failed to win any).

The message is impossible to miss: increasingly, voters are deeply dissatisfied with mainstream parties and are willing to give a chance to those proposing radical alternatives. They are lending support to parties that, though very different from one another, all blame the European Union for the sorry state of their countries’ economies and labor markets.

To be sure, radicalisation is not limited to Europe nowadays. As I have argued elsewhere, American presidential candidate Donald Trump owes his rise to many of the same factors that are driving Le Pen’s growing popularity. What is particularly problematic in the EU is the clash between radical politics and mainstream governance.

For 30 years, centre-right or centre-left parties with a broadly shared vision of Europe have governed most EU countries. Despite their policy disagreements, they jointly embodied the ideological consensus – and formed the political coalition – that built the single market, the euro, and the enlarged EU. But many voters now feel that mainstream policies have failed. Governments have proved unable to protect unskilled

and semi-skilled employees from the consequences of globalisation and technological change. Mass education, progressive taxation, and social-welfare benefits have not prevented increasing inequality. And the euro has failed to engineer prosperity and stability. Those (like me) who think that specific policy errors and institutional flaws are more to blame than European integration itself are being drowned out.

Political realignments are to be expected in democracies; indeed, democratic institutions are designed to make them possible. Generally, the constitution does not change, or changes only slowly, whereas a new party or coalition redefines the policy agenda and reforms the legislation. This combination of rigidity and plasticity enables democratic regimes to adapt to shifts in citizens’ preferences.

The same does not apply to Europe. First, political change is not synchronised. At any given moment, some countries may have voted for radical parties, while others have not (or simply have not held elections). This clash of legitimacy is what the Greek government initially failed to understand last spring when it sought to ease austerity measures.

Second, unlike national democracies, the EU does not derive its legitimacy from the process through which political choices are made, but mainly from the output it can deliver.

This is not to say that there is no democratic process: the elected European Parliament is a serious legislative body, and its vetting of European commissioners is often more thorough than personnel selection at the national level. But it has no visibility, because major decisions are negotiated between national governments.

Third, the boundary between constitutional and legislative matters is peculiar in the EU. All treaty provisions have constitutional status; indeed, they can be changed only by unanimous agreement. Furthermore, because governments did not trust one another, they insisted on including in treaties what would normally belong in ordinary legislation.

The many rules that govern economic life in the EU are therefore much more difficult to amend than are similar domestic provisions.

What options does this leave the EU for responding to political polarisation and the concomitant demands for more policy leeway at the national level? Of course, the EU could

simply ignore these changes, and hope that radicalism will wane once its bearers are confronted with the responsibility of governing. But that would be foolish. Syriza was forced to accept tough choices because Greece depends on external financial assistance.

Another possibility would be to exploit, on an ad hoc basis, the existing flexibility in EU treaty provisions. Pragmatism can indeed be helpful, and the European Commission headed

by Jean-Claude Juncker is willing to embrace it. But it would be dangerous to turn the EU framework into a thicket of country-specific political bargains. Those for whom the rule of law and the enforcement of fundamental principles are serious matters – not just Germany – would soon object.

The last solution would be to make the EU more amenable to political change. This would require explicitly changing the balance between constitutional and legislative matters, so that principles are preserved, but policies can be responsive to politics. Moreover, the EU should be able to legislate on a wider array of policies, including, for example, taxation. This would end its awkward impotence on – and apparent indifference to – inequality.

At the same time, the European Parliament should be given a higher profile, as in a truly federal system, so that governments at the national and European level are perceived as equally legitimate.

This approach confronts formidable obstacles. An attempt to write an EU constitution was made in the early 2000s. It failed. Germany and other countries where mainstream policies still command wide support would vehemently oppose any perceived softening of the common rules and principles. It will be hard, to say the least, to agree on additional competences and a stronger European Parliament at a time when so many in Europe, starting with the radicals, consider the EU the main culprit for their current woes. Yet ultimately, the construction of a transnational democracy is the most viable response to political polarisation in Europe.

Jean Pisani-Ferry is a professor at the Hertie School of Governance in Berlin, and currently serves as CommissionerGeneral for Policy Planning for the French government. © Project Syndicate, 2015 - www.project-syndicate.org

Global economy confronts four geopolitical risks The end of the year is a good time to consider the risks that lie ahead of us. There are of course important economic risks, including the mispricing of assets caused by a decade of ultra-low interest rates, the shifts in demand caused by the Chinese economy’s changing structure, and European economies’ persistent weakness. But the main longer-term risks are geopolitical, stemming from four sources: Russia, China, the Middle East, and cyberspace.

importance. Russia also uses its gas exports to Western Europe and Turkey as an economic weapon, although Turkey’s recent decision to source gas from Israel shows the limits of this strategy. As Putin responds to this and other challenges, Russia will remain a source of substantial uncertainty for the rest of the world.

China is still a poor country, with per capita GDP at roughly a quarter of the US level (on the basis of purchasing power parity). But, because its population is four times larger, its total GDP is equal to America’s (in PPP terms).

And it is total GDP that determines a country’s ability to spend on military power, to provide a strategically significant market for other countries’ exports, and to offer aid to other parts of the world. China is doing all of these things on a scale commensurate with its GDP. Looking ahead, even with the more moderate growth rates projected for the future, China’s GDP will grow more rapidly than that of the US or Europe.

China is now expanding its strategic reach. It is asserting maritime claims in the East and South China Seas that conflict with claims by other countries in the region (including Japan, the Philippines, and Vietnam). In particular, China is relying on the so-called “nine-dash line” (originally created by Taiwan in 1947) to justify its claim to most of the South China Sea, where it has created artificial islands and asserted sovereignty over their surrounding waters.

The US characterises China’s policy as “antiaccess area denial”: an effort to keep the US

By Martin Feldstein

Although the Soviet Union no longer exists, Russia remains a formidable nuclear power, with the ability to project force anywhere in the world. Russia is also economically weak because of its dependence on oil revenue at a time when prices are down dramatically. President Vladimir Putin has already warned Russians that they face austerity, because the government will no longer be able to afford the transfer benefits that it provided in recent years.

The geopolitical danger arises from Putin’s growing reliance on military action abroad – in Ukraine and now in Syria – to maintain his popularity at home, using the domestic media (now almost entirely under Kremlin control) to extol Russia’s global

Navy far from the Chinese mainland and from the coasts of America’s allies in the region. China also is expanding its geopolitical influence through initiatives like the Asian Infrastructure Investment Bank, aid programmes in Africa, and its “One Belt, One Road” plan to establish maritime and territorial links through the Indian Ocean and Central Asia, extending all the way to Europe. The current Chinese political leadership wants a peaceful and cooperative relationship with the US and other Western countries. But, looking to the future, the challenge for the US and its allies will be to deter future generations of Chinese leaders from adopting policies that threaten the West.

In the Middle East, much of the world’s focus has been on the threat posed by ISIS to civilian populations everywhere – including Europe and the United States. But the bigger issue in the region is the conflict between Shia and Sunni Muslims, a divide that has persisted for more than a thousand years.

For most of that time, and in most places, the Shia have faced discrimination – and often lethal violence – at the hands of Sunnis.

Thus, Saudi Arabia and other Sunni-ruled Gulf states view Iran, the region’s Shia power, as their strategic nemesis. Saudi Arabia, in particular, fears that Iran wants to settle old scores and attempt to shift custodianship of Islam’s holy sites in Mecca and Medina to Shia control. A conflict between Saudi Arabia and Iran would also be a fight over the vast oil riches of the Arabia Peninsula and the enormous financial wealth of small Sunni states like Kuwait and Qatar.

The final source of risk, cyberspace, may soon overshadow all the rest, because borders and armies cannot limit it. The threats include denial-of-service attacks on banks and other institutions; unauthorised access to personal records from banks, insurance companies, and government agencies; and industrial espionage. Indeed, widespread theft of technology from US companies led to a recent agreement between China and the US that neither government will assist in stealing technology to benefit its country’s firms.

These are important issues, but not nearly as serious as the threat that malware poses to critical infrastructure – electricity grids, air traffic systems, oil pipelines, water supplies, financial platforms, and so on. Recent cases of malware use have been attributed to China, Iran, Russia, and North Korea. But states need not be involved at all: Individuals and non-state actors could deploy malware simply by hiring the needed talent in the international underground marketplace.

Cyber weapons are relatively cheap (and thus widely accessible) and capable of reaching anywhere in the world. They are the future weapons of choice for attacking or blackmailing an adversary. And we still lack the ability to block such attacks or to identify unambiguously their sources.

Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. © Project Syndicate, 2015. www.project-syndicate.org

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A year of sovereign defaults?

By Carmen Reinhart When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, nonpayment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).

If history is a guide, such conversations may be happening a lot in 2016.

Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.

The most recent default cycle includes the emergingmarket debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.

Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.

And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.

As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. We can already see the first white-capped waves.

For some sovereigns, the main problem stems from internal debt dynamics. Ukraine’s situation is certainly precarious, though, given its unique drivers, it is probably best not to draw broader conclusions from its trajectory.

Greece’s situation, by contrast, is all too familiar. The government continued to accumulate debt until the burden was no longer sustainable. When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts. Last July, in highly charged negotiations with its official creditors – the European Commission, the European Central Bank, and the IMF – Greece defaulted on its obligations to the IMF. That makes Greece the first – and, so far, the only – advanced economy ever to do so.

But, as is so often the case, what happened was not a complete default so much as a step toward a new deal.

Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts.

Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.

Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 bln in sovereign debt.

Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.

It should be noted, however, that while such a “credit event” would obviously be a big problem, creditors may be overstating its potential external impacts. They like to warn that although Puerto Rico is a commonwealth, not a state, its failure to service its debts would set a bad precedent for US states and municipalities.

Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.

But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt.

Lately, many emerging-market currencies have slid sharply, increasing the cost of servicing external dollar debts. Export and public-sector revenues have declined, giving way to widening current-account and fiscal deficits. Growth and investment have slowed almost across the board.

From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it.

Carmen Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government. © Project Syndicate, 2015 - www.project-syndicate.org

Feeding a flawed society

By Paul R. Ehrlich and John Hart Virtually everyone in the scientific community agrees that ensuring sufficient food supplies for a surging human population, which is set to grow by 2.4 bln by mid-century, will require serious work. Indeed, we have not even succeeded at providing enough food for today’s population of 7.3 bln: Nearly 800 mln people currently are starving or hungry, and another couple billion do not get enough micronutrients. But there is no such consensus about how to address the food-security problem.

The scientific community is split between two main approaches: “tinker with agricultural details” (TAD) and “mend societal fundamentals” (MSF). While the former approach has support from a clear majority, the latter is more convincing.

To be sure, the TAD camp has identified many important problems with current food production and distribution systems, and addressing them could indeed improve food security. Yields could be increased by developing better crop varieties. Water, fertiliser, and pesticides should be used more efficiently. Maintaining tropical forests and other relatively natural ecosystems would preserve critical ecosystem services, especially soil fertility, pollination, pest control, and climate amelioration. The trend toward rising meat consumption should be reversed. Stricter regulation of fisheries and ocean pollution would maintain the supply of marine protein essential to many people. Waste in food

production and distribution should be reduced. And people should be educated to choose more sustainable and nutritious foods.

Achieving these goals, TAD supporters recognise, would require policymakers to give food security high political and fiscal priority, in order to support the needed research and action. Responsibility for launching programmes to distribute food more equitably would also fall to governments.

But the TAD approach is incomplete. Not only would its short-term goals be extremely difficult to achieve without more fundamental societal changes; even if they were attained, they would probably prove inadequate in the medium term, and certainly in the long term.

To see why, let us suppose that, in 2050, the TAD goals have all been reached. More food is available, thanks to higher agricultural yields and waste-reducing improvements in storage and distribution. Improved environmental policies mean that most of today’s forests are still standing and nofishing zones are widely established and enforced.

Ecosystems are becoming stronger, with many corals and plankton evolving to survive in warmer, more acidic water.

Add an uptick in vegetarianism, and it appears that the global temperature rise could be limited to 3 degrees Celsius.

As a result, the world could avoid famines by mid-century.

But, in a human population of 9.7 bln, hunger and malnutrition would be proportionately the same as they are in today’s population of 7.3 bln. In other words, even with such an extraordinary and unlikely combination of accomplishments and good luck, our food-security predicament would still be with us.

The reason is simple: Our societies and economies are based on the flawed assumption that perpetual growth is possible on a finite planet. To ensure global food security –

not to mention other fundamental human rights – for all, we need to recognise our limitations, in terms of both social and biophysical factors, and do whatever it takes to ensure that we do not exceed them.

Based on this conviction, the MSF approach demands that governments take steps to empower women in all areas of society, and ensure that all sexually active people have access to modern birth control, with women free to have an abortion, if they so choose. At the same time, governments must address inequality of wealth, and thus of food, not least by curbing corporate dominance.

Short of bringing the global population down to sustainable levels, MSF reforms are the world’s only hope.

But, as it stands, implementing them seems unlikely. The United States, the country that consumes the most, is moving in the opposite direction: women are struggling to hold onto their reproductive rights, wealth distribution is becoming increasingly skewed, and corporations are becoming even more powerful.

Just as social and environmental problems can be mutually reinforcing, so can actions aimed at strengthening our social and environmental fundamentals. Only by focusing on these fundamentals, rather than merely tinkering with the details of food production, can intrinsic systemic linkages work to the advantage of future generations.

Paul R. Ehrlich is Professor of Population Studies, Department of Biological Sciences, Stanford University. John Harte holds a joint professorship in the Energy and Resources Group and the Ecosystem Sciences Division of the College of Natural Resources at the University of California, Berkeley. © Project Syndicate, 2015 - www.project-syndicate.org

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The Chan-Zuckerberg solution Laura Tyson and Lenny Mendonca When Facebook’s founder, Mark Zuckerberg, and his wife, Priscilla Chan, recently announced their plan to devote some $45 bln in Facebook shares toward making the world a better place, some critics wrote off the move as a public-relations ploy. They noted that Chan and Zuckerberg were not putting their shares in a charitable foundation, but rather into an investment company that can allocate funds however it chooses – and that it can choose for-profit investments.

Skeptics also noted that instead of making an irrevocable legal commitment, the couple had only pledged to donate “most of their wealth” to the fund.

According to one mean-spirited critic, Zuckerberg was simply moving his “money from one pocket to the other” with a substantial “PR return-on-investment [that] dwarfs that of his Facebook stock.”

The truth is quite different. The strategy adopted by Chan and Zuckerberg, a combination of traditional philanthropy and impact investing, is exactly in sync with the most promising trends in modern altruism.

The defining strength of traditional philanthropy is its ability to take risks. Philanthropies don’t have to answer to public officials or generate returns for private shareholders.

That allows them to finance bold, innovative ideas. And, in contrast to both the public and for-profit sectors, they can adopt a very long time horizon for problems that require decades to solve.

In many ways, traditional philanthropies operate like venture capitalists. They might know that many of their projects will not pay off, but they are betting that a few will turn out to be pioneering breakthroughs, and that their success will spark policy changes or attract larger flows of public and for-profit private funding.

But philanthropy is only one way to address social and environmental challenges. Impact investing – a term coined in 2007 at a conference sponsored by the Rockefeller Foundation, one of the oldest traditional philanthropies – is

another. Unlike philanthropic donors, impact investors seek both social and financial returns on their investments.

Impact investing not only broadens the pool of available wealth; it fosters projects that will produce self-sustaining returns.

In recent years, the money flowing into impact investing has expanded rapidly, and the range of assets available to impact investors has grown to match. Social venture capital firms, which seek a “double bottom line” (healthy financial returns, as well as broader social or environmental benefits) are one of the fastest-growing segments of the venturecapital industry.

In Northern California, for example, the Bay Area Equity Fund has invested $100 mln since 2004 in companies such as Revolution Foods, Pandora, SolarCity, and Tesla. All told, the fund estimates that those investments have created 15,000 jobs and generated an internal rate of return of 24.4%.

Big institutional players, meanwhile, are becoming significant impact investors by pouring money into Environmental, Social, and Governance (ESG) mutual funds.

By one estimate, investment in ESG funds has exploded, from $202 bln in 2007 to $4.3 trln in 2014. A growing number of ESG funds are now directly available to retail investors.

Even giant pension funds are eager to enter the arena, and the US Department of Labor recently made that easier. In October, Secretary of Labor Tom Perez revised existing rules to allow pension fund managers to consider the social impact of investments as long as doing so does not compromise the managers’ fiduciary obligations. A similar 1978 ruling, allowing pension funds to allocate some of their investments to non-traditional assets, helped fuel the growth of the venture capital industry.

Purely philanthropic foundations face major constraints.

They are, in theory, allowed to act as impact investors to make “programme-related investments” in projects consistent with their stated missions; in practice, however, they face strict fiduciary rules that make them reluctant to do so.

A growing number of foundations – such as the Bill & Melinda Gates Foundation, the Rockefeller Foundation, and the Kresge Foundation – are increasing their investment in activities that further their philanthropic goals.

Unfortunately, programme-related investments still

represent only 1% of the capital deployed by foundations, with just 0.05% of that going toward equity investments.

The Chan-Zuckerberg initiative is a high-profile example of the rapid growth of social-impact finance that complements and supports traditional philanthropy. Chan and Zuckerberg will receive no tax benefit from transferring their wealth to a limited liability corporation. But when they donate Facebook shares to a charitable organisation, the recipient won’t have to pay capital gains tax when it liquidates the shares and puts the money to work. And Chan and Zuckerberg will get a charitable deduction for the value of the shares at the time they are donated.

Meanwhile, they will be free to use part of their fortune as impact investors in for-profit social enterprises that promise both financial and social returns (and they will have to pay taxes on the profits they reap). They can also choose to invest in advocacy and even political activity to encourage change.

This is exactly the approach that many of this generation’s major tech-based philanthropists, from Pierre Omidyar to Laurene Powell Jobs, are using.

None of this is to say that the government should relinquish its own role in addressing major public challenges.

For all their money, not even billionaire philanthropists like Zuckerberg and Gates can implement solutions on a regional, national, or global scale. But they can assume the upfront risks of developing and testing new approaches to tackling long-term social and environmental problems. And then they can advocate for policy changes and public funding to scale those approaches that work.

In short, there is nothing wrong with public-spirited innovation capital. On the contrary, its soaring popularity suggests that it will be a crucial component of twenty-firstcentury problem-solving.

Laura D. Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, a senior adviser at the Rock Creek Group, and a member of the World Economic Forum Global Agenda Council on Gender Parity.

Lenny Mendonca, Senior Fellow at the Presidio Institute, is a former director of McKinsey & Company. © Project Syndicate, 2015 - www.project-syndicate.org

How much development data is enough?

By Keith D. Shepherd Rapid advances in technology have dramatically lowered the cost of gathering data. Sensors in space, the sky, the lab, and the field, along with newfound opportunities for crowdsourcing and widespread adoption of the Internet and mobile telephones, are making large amounts of information available to those for whom it was previously out of reach. A small-scale farmer in rural Africa, for example, can now access weather forecasts and market prices at the tap of a screen. This data revolution offers enormous potential for improving decision-making at every level – from the local farmer to worldspanning development organisations. But gathering data is not enough. The information must also be managed and evaluated – and doing this properly can be far more complicated and expensive than the effort to collect it. If the decisions to be improved are not first properly identified and analysed, there is a high risk that much of the collection effort could be wasted or misdirected.

This conclusion is itself based on empirical analysis. The evidence is weak, for example, that monitoring initiatives in agriculture or environmental management

have had a positive impact. Quantitative analysis of decisions across many domains, including environmental policy, business investments, and cyber security, has shown that people tend to overestimate the amount of data needed to make a good decision or misunderstand what type of data are needed.

Furthermore, grave errors can occur when large data sets are mined using machine algorithms without having first having properly examined the decision that needs to be made. There are many examples of cases in which data mining has led to the wrong conclusion – including in medical diagnoses or legal cases – because experts in the field were not consulted and critical information was left out of the analysis.

Decision science, which combines understanding of behaviour with universal principles of coherent decision-making, limits these risks by pairing empirical data with expert knowledge. If the data revolution is to be harnessed in the service of sustainable development, the best practices of this field must be incorporated into the effort.

The first step is to identify and frame frequently recurring decisions. In the field of development, these include large-scale decisions such as spending priorities – and thus budget allocations – by governments and international organisations. But it also includes choices made on a much smaller scale: farmers pondering which crops to plant, how much fertiliser to apply, and when and where to sell their produce.

The second step is to build a quantitative model of the uncertainties in such decisions, including the various triggers, consequences, controls, and mitigants, as well as the different costs, benefits, and risks involved. Incorporating – rather than ignoring – difficult-to-measure, highly uncertain factors leads to the best decisions.

When put in the service of sustainable development, such a model will often involve projecting the impact of interventions on livelihoods and the environment over several decades. This process is successful when stakeholders and experts identify the relevant variables and their relationships. Participants must be trained to provide quantitative estimates of their uncertainty for the different variables.

For example, experts might estimate with 90% confidence, based on available data and their own experience, that farmers’ average maize yields in a given region are 0.5-2 tons per hectare.

The third step is to compute the value of obtaining additional information – something that is possible only if the uncertainties in all of the variables have been quantified. The value of information is the amount a rational decision-maker would be willing to pay for it. So we need to know where additional data will have value for improving a decision and how much we should spend to get it. In some cases, no further information may be needed to make a sound decision; in others, acquiring further data could be worth millions of

dollars.

This process is repeated until there is no further value in acquiring data and a sound decision – a logical conclusion, based on the information, values, and preferences of the decision-makers or decision-making body – is reached. It provides decision-makers and stakeholders insights into how to improve policies to maximise positive outcomes and reduce risks, such as the possibility of low rates of adoption or limited institutional capacity for effective implementation.

It is not enough simply to assume that the data revolution will benefit sustainable development. Ensuring that it does will require recognising the importance of rigorous analysis in every data-collection effort and the formation of a new generation of decision scientists to work alongside policymakers.

Keith D. Shepherd leads the Science Domain on Land Health Decisions at the World Agroforestry Center and heads Decision Analysis and Information Systems in the Research Program on Water, Land, and Ecosystems at the Consultative Group for International Agricultural Research. He is also an adviser to the Thematic Network on Data for Sustainable Development of the Sustainable Development Solutions Network, a global initiative for the United Nations. © Project Syndicate, 2015 www.project-syndicate.org

January 6 - 12, 2016

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Beyond the revolving door

By Lucy P. Marcus “Honestly,” said Bill Gates during the COP21 meeting in Paris earlier this month, “I’ve been a bit surprised that the climate talks historically haven’t had R&D on the agenda in any way, shape, or form.” So am I, and the question Gates raises goes to the heart of the relationship between business and government in solving our societies’ toughest problems, from ensuring the planet’s continued habitability to fostering stable and inclusive economic growth.

To be sure, in some areas, government authorities simply don’t consider making business a part of the solution early on. The most striking recent example is the ongoing refugee crisis: Governments in Europe and around the world still don’t fully include business in early-stage thinking about how to manage the flow of asylum-seekers.

Granted, in many cases business leaders have chosen to remain on the sideline; but both they and governments need to adjust their thinking.

But in other areas, companies are more than eager to step up, be seen and heard, and exercise influence. When it comes to technology, R&D, trade talks, and the like, the benefit for companies’ bottom line is direct and clear, and here Gates’ surprise is understandable, because corporate leaders typically lobby to participate and change the way governments think and act.

And yet dangers arise when business gets too close to government. Sometimes the risk entails the proverbial “revolving door” between government and business, through which personnel glide from senior private-

sector jobs to top official posts and back again. It is a cycle that often resembles the fox guarding the henhouse, with those who regulate too close to those whom they regulate.

The most obvious example of this is finance and banking, where former employees of a single firm, Goldman Sachs, hold some of the most senior regulatory and monetary positions – and not just in the United States. Mario Draghi, the president of the European Central Bank was Vice Chairman and Managing Director of Goldman Sachs International, and Mark Carney, the governor of the Bank of England, worked for Goldman Sachs for 13 years.

But simply closing the revolving door in finance is not a solution. Research by the Federal Reserve Bank of New York has shown that regulation and legislation in this area must strike a balance, lest it undermine “the ability of regulatory agencies to seek and retain talent.”

In areas like defense, the revolving door moves swiftly. According to the Boston Globe, from 2004 through 2008, some fourfifths of retiring three- and four-star US generals went to work as consultants or defense executives. Likewise, the US-based group Citizens for Responsibility and Ethics has shown the extent to which careers lead from the US Department of Defense to the defense industry.

Corporate scandals often reveal where business and government are too close for comfort, as when senior members of Toshiba’s executive team and board, for example, sit on Japanese government panels and commissions. Likewise, Volkswagen’s close relationship with the German government has led to accusations that regulators went easy on the company, setting the stage for the emissions-testing scandal in which the carmaker is now

embroiled.

This complex dance between business and government is never-ending and always evolving. It is the stuff of gatherings like the World Economic Forum, where business leaders and governments talk tough on panels and make nice in back rooms. And the need to do both has become more obvious than ever in an era of slow economic growth and privatisation of services once provided by the public sector. The working relationship is important and should not be condemned, but it must be recognised openly.

This brings us back to Gates, who announced in Paris an initiative to spend a total of $20 bln on climate-related R&D over the next five years. Gates’ plan highlights a frequently noted component of the relationship between government and business: governments’ vital role in funding early experimental research, which business then often turns into commercially viable solutions. All of this is necessary to build stronger economies.

But, though Gates was right to ask why

climate-change negotiations have not included R&D, let’s not pretend that any of this is simple. The need for revolving doors, whether of personnel or ideas, between government and business cannot be a reason to allow companies to gain undue influence on public policy or for regulators to be kept weak. Nor can it be a reason to give failing businesses a safety net for their own bad behaviour or poor decisions.

This is especially true at a time when public trust is at a low ebb. Rather than pretending that this symbiotic relationship doesn’t exist or, worse, that it isn’t necessary, both business and government must err on the side of transparency. As Gates’ question made clear, in our fear of allowing the relationship to go too far, we risk not allowing it to go far enough.

Lucy P. Marcus is CEO of Marcus Venture Consulting. © Project Syndicate, 2015. www.project-syndicate.org

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