Vol. 28, No. 1 - Fall 2021

Xiaogang Wu, Ph.D.

The Long, Winding Road to Chinese Global Institutional Supremacy Justin Greenman Chi più ha giudizio, più ne adoperi: An Empirical Examination Growth within Italian Banking Foundations Aidan Levi-Minzi

of

Economic

journal of politics

From Bulldozer to Peacemaker: Reframing Ariel Sharon's 2005 Unilateral Disengagement from Gaza Sam Millner

Fall 2021

Covid-19, Partisan Politics, and the Change of American Attitudes Towards

1 China: Findings from a National Longitudinal Study in the US

& international affairs

Volume XXVIII, No. 1

Journal of Politics & International Affairs

Fall 2021

Fall 2021 • Volume XXVIII • No. 1 New York University

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Fall 2021 • Volume XXVIII • No. 1 Journal of Politics & International Affairs New York University

fall 2021 • VOLUME XXVIII • No. 1

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FALL 2021 • VOLUME XXVIII • NO. 1 Notes on the Contributors

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Covid-19, Partisan Politics, and the Change of American Attitudes Towards China: Findings from a National Longitudinal Study in the US Xiaogang Wu, Ph.D.

From Bulldozer to Peacemaker: Reframing Ariel Sharon's 2005 Unilateral Disengagement from Gaza Sam Millner

The Long, Winding Road to Chinese Global Institutional Supremacy Justin Greenman

Chi piu ha guidizio, piu ne adoperi: An Empirical Examination of Economic Growth Within Italian Banking Foundations Aidan Levi-Minzi

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This publication is published by New York University students. The university is not responsible for its contents.

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FALL 2021 • VOLUME XXVIII • NO. 1

STATEMENT OF PURPOSE The Journal of Politics & International Affairs at New York University is a student-run publication that provides a forum for outstanding student work on relevant, thought-provoking topics in the domestic and international landscape, including research in political science, economics, and regional studies.

We believe that the student theses published biannually in the Journal—chosen and edited rigorously by our editorial staff—are legitimate and valuable examples of the intellectual growth of politically-minded students and writers at New York University.

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Articles published in the Journal of Politics & International Affairs do not represent agreement of beliefs or methodology from NYU or the Editorial Board, and readers are not expected to concur with all the opinions and research expressed in these pages. Instead, the diversity of the pieces aim to inform and inspire dialogue in the NYU community by addressing a wide variety of topics and opinions.

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JPIANYU.ORG Fall 2021

EDITOR-IN-CHIEF Pragya Parthasarathy

CHIEF OPERATING OFFICER Rob Loeser

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EDITORS

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SPECIAL THANKS Annie Cassutt and Center for Student Life

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Editor's Note

his fall, NYU fully reopened its classrooms for its students after over a year spent in lockdown.

The hope that we could somehow seize what remains of our young adulthood withered as the pandemic progressed. Now that we are back, once again ambling through all the City's cherished spots with our peers, the present seems to be accelerating past us at an extraordinary speed.

With all that has occurred within mere months, as the ongoing pandemic looms in the background, some among us may crave an ever-elusive escape from this harsh reality in the wake of such utter devastation and loss of life. However, for countless disempowered people within and outside this country, escape is not an option. It has never been.

At such a critical juncture in political history and our lifetimes, I am grateful to feature so many incredible voices in this edition who are eager to challenge, analyze, and criticize our predecessors whose actions require a great reckoning. In a global crisis entangling the pandemic and politics, Professor Xiaogang Wu of NYU Shanghai studies the diplomatic wrestling between countries' worsening epidemic control and foreign relations. As the world reels from the 2021 Israel-Palestine crisis, Sam Millner explores in his timely piece former Israeli prime minister Ariel Sharon's disengagement from Gaza, examining the implications on the zeitgeist of the two-state solution. With the rise of Chinese global influence, Justin Greenman discusses the trajectory and significance of China's efforts to gain international institutional dominance, asserting its force over the international community and its isolation of Taiwan. Finally, Aidan Levi-Minzi weighs the externalities between financially lucrative regional banking and benevolent corporations through his study on stakeholder capitalism, positing channels for long-run economic growth.

While propounding incredibly vital solutions, these authors consistently remind us of an essential crux: at the forefront of our conscience, we know that to progress towards a better future and better inform our present, we must first reconcile the unresolved actions of our past.

I always tell people that the Journal is a special place on campus; our publication represents a rich array of opinions, experiences, and disciplines, and our collaborative process is uniquely effective at bringing these together. Ultimately, we at NYU dedicate ourselves to advancing intellectual thought, meaningful discourse, and incisive political inquiry. This mission is what pulsates through the Journal of Politics & International Affairs. With such profusion of domestic and global challenges, we are soberly reminded of how desperately we seek recovery.

There is more work to be done. And I affirm the work does not, and will not ever, end here.

Fall 2021

Pragya Parthasarathy Editor-in-Chief

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NOTES ON CONTRIBUTORS XIAOGANG WU, Ph.D.

Xiagoang Wu, Ph.D. is the Yufeng (御风) Global Professor of Social Science, Area Head of Social Sciences, and Director of the Center for Applied Social and Economic Research at NYU Shanghai. Prof. Wu also holds an appointment as Professor of Sociology in the Faculty of Arts and Science at NYU. Prof. Wu is currently the President of the International Chinese Sociological Association and the founding editor of the Chinese Sociological Review. He holds a Ph.D. in Sociology from the University of California, Los Angeles.

SAM MILLNER

Sam Millner is a policy analyst at the Jewish Institute for National Security of America and serves as an ACCESS Leadership Fellow with the American Jewish Committee, where he works to promote JewishMuslim relations. Sam is a graduate of Columbia University, where he majored in International Relations with a concentration in French and Francophone Studies, winning the French Department Senior French Prize. Sam has worked on various Democratic campaigns and interned in the Washington, D.C. office of Congresswoman Debbie Wasserman-Schultz. While at Columbia, Sam consulted for a venture capital firm and later founded and sold off a tech start-up before serving as a Kimmel Fellow with the American Jewish Committee during his senior year.

JUSTIN GREENMAN

Justin Greenman is pursuing a Master's in History at New York University, with a focus on 19th century Political History and U.S. elections. He graduated Summa Cum Laude from the University of Pennsylvania in 2021 with a Bachelor's degree in History, with honors, and Political Science. His undergraduate honors thesis compared New York City and Philadelphia politics during the Civil War and examined shared concepts of loyalty and disloyalty. Research for this publication was conducted in the Fall of 2020 as part of Amy Gadsen's "US-China Relations: From Open Door To Trade War."

AIDAN LEVI-MINZI

Aidan Levi-Minzi graduated from New York University in May of 2021 with degrees in Economics and Italian. Since graduating, he has been working as an analyst for the finance practice of economic consulting firm Compass Lexecon in New York. His work focuses on asset and derivative valuation, mergers and acquisitions, commodity pricing, and securities fraud. Aidan was also a four-year member of NYU's Men's Ice Hockey team and continues to play regularly in his free time.

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Covid-19, Partisan Politics, and the Change of American Attitudes Towards China: Findings from a National Longitudinal Study in the US Xiaogang Wu, Ph.D.

Center for Applied Social Economic Research, NYU Shanghai Department of Sociology, New York University This article presents some preliminary findings based on the data from "Life Experience and Community in Covid-19 in the United States (LECCUS)."1 The survey was designed as a two-wave panel study using the AmeriSpeak sample database at the National Opinion Research Center (NORC), University of Chicago. The baseline survey successfully interviewed 4,390 nationally representative adults over the age of 18 from October 8 to October 27, 2020, right before the U.S. presidential election voting. The follow-up survey was conducted from March 23 to April 5, 2021. 3,439 adults were successfully interviewed, with a response rate of 78.3%. In addition to the basic socio-economic and demographic characteristics, the survey collected the COVID infection status of the respondents, family members, and neighbors, COVID prevention measures, life, work, social interactions during the epidemic, voting behavior, political identity, and nationalist sentiment. Thanks to the participation of NYU Shanghai, the survey specifically included some questions about China, including the attitude towards China, the evaluation of the anti-epidemic performance of both China and the US, and the evaluation of the United States' recent policy toward China.

COVID-19 seems destined to change the course of human history. The outbreak took place first in Wuhan, China at the end of 2019. The Chinese government ordered the lockdown decisively and quickly contained the epidemic. However, the pandemic spread to many countries and eventually evolved into one of the largest pandemics in human history. As of August 8, 2021, a total of 203,241,874 confirmed cases and 4,304,867 have been reported worldwide. Domestic political changes and political wrestling internationally countries have made the epidemic prevention and control more complicated on the one hand, and the deteriorating pandemic has further affected the evolution of international relations and domestic politics on the other hand.

In this global crisis where the epidemic and the politics are entangled, China and the United States are undoubtedly the two protagonists that attract the most attention. Before the pandemic, the Trump administration of the United States had launched a trade war against China. The pandemic initially discovered in Wuhan, China at the end of 2019, was mysteriously reversed in March 2020 in the

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U.S, becoming a catalyst for the overall deterioration of US-China relations. As of date, the number of confirmed COVID-19 cases in the United States has exceeded 36.5 million, and the death toll is about 632,995. While the number of confirmed cases in mainland China is 93,701 and the death toll is more than 4,636. The exacerbation of the pandemic in the United States has greatly affected its domestic economy and people's daily lives. The polarization of domestic politics, especially the November 2020 presidential election, has made scientific measures of pandemic containment increasingly politicized. To cover up its incompetence in handling the pandemic containment, the Trump administration continued to shift the blame to China, leading US-China relations to an irreversible trajectory.

In this dazzling and intertwined plot of elections and the fight against the pandemic, how did the American people respond to the crisis? How has the pandemic affected people's lives and work? Is the change in American people's attitude towards China associated with the level of their suffering from the COVID or is it affected by deep-rooted party identification? While many Chinese scholars made comments on the changes in the US-China relations in recent years, few have based on the first-hand data and empirical analysis on the domestic politics, pandemic situation, and public sentiment in the United States.

The Pandemic Situation in the United States and Its Socioeconomic Impact

During the two surveys conducted from the end of October 2020 to the beginning of April 2021, the pandemic situation in the United States continued to deteriorate. In the first survey, about 2.92% of respondents reported a diagnosis of COVID-19, and 5 months later, this rate rose to 8.42%. This ratio is very close to the ratio of confirmed cases reported by the Coronavirus Resource Center at Johns Hopkins University.2 To be certain, the increase in the number of confirmed cases is also related to the increase in the detection rate. In the first survey, the detection rate of the coronavirus in the samples was only 32.13%, and in the second time it rose to 52.56%..

While the epidemic situation continues to worsen, the American people's pandemic prevention measures and awareness have not changed much. Scientific research shows that wearing masks in public places is an effective means of protecting against coronavirus infection. In October 2020, only 60% of people wore masks every time they went out, compared to 62% in April 2021, yet the rate of confirmed infections had tripled during the period. As Wuhan's experience has shown, "lockdown" when necessary is an effective means to stop the large-scale spread of the virus. However, only about half of the people considered the lock-down "very necessary" and "absolutely necessary" (50.47% and 48.9% respectively in the two surveys).

The lack of consensus on prevention measures and awareness of the pandemic reflects the deep political division in the United States. The outbreak of the epidemic in the United States coincides with the Presidential Election. The pandemic intertwined with the election, giving way to political manipulation of epidemic prevention science to win votes. The Republican presidential candidate Donald Trump, in order to avoid accusations of his administration's poor leadership in fighting the pandemic, has continuously politicized it, blaming China externally and downplaying its severity internally. As the result of the US presidential election, Biden and Trump received 51.3% and 46.8% of the votes respectively. Although Trump lost the election, he has a large group of followers whose political stances deeply influence their attitudes towards pandemic prevention and control. For instance, while 81.1% of Biden's supporters wear masks every time they go out, only 42.7% of Trump's supporters do so; while 72.9% of Biden's supporters believe that "lockdown" is absolutely necessary or very necessary, only 20.3% of Trump supporters think so.

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XIAOGANG WU, Ph.D.

How have the lives of Americans been affected by the epidemic? During the pandemic, unemployment rates have increased and people's work have been affected. Data from the two waves of surveys both show that slightly more than 14% of the respondents have lost their jobs due to the pandemic; among those who have jobs, 17.9% are worried that they may lose their jobs within a year in 2020, though this proportion dropped to 8.65% in 2021. Among the working population, 10.23% of their workplaces have been closed due to the pandemic; nearly one-third of the people can work at home due to COVID, while nearly half of them have to go out to work during the epidemic. The impact of the pandemic is varied among different groups. For families with underage children, nearly one-third of them need to do home schooling due to school closures, and such responsibility falls disproportionately on the shoulders of women.

The pandemic has brought about financial difficulties to many American families. At the time of the follow-up survey, about 20.16% of households were unable to make ends meet, and another 20.19% of the households could barely support themselves. 19.61% of the respondents said that their families have already experienced financial difficulties due to the pandemic; 10.75% of families may experience financial difficulties within one month; 6.16% of families expect to have financial difficulties within 6 months. In 2020, 23.82% of households have lowered their food standards due to economic difficulties caused by the epidemic, and in 2021, 18.65% of households have lowered their food standards due to economic reasons.

Therefore, the impact of the pandemic on people's lives in the United States is comprehensive. Perhaps because of the normalization of the pandemic, or perhaps because of the Biden administration's incoming inauguration into office, compared with 2020, Americans' sense of uncertainty about the future has eased.

Anti-epidemic Performance of China and the US and Attitudes Towards China

Although the deterioration of US-China relations did not begin with COVID-19, the pandemic has dramatically reversed between the two countries since March 2020. During the U.S. presidential election in November 2020, former U.S. President Trump initially praised China's anti-epidemic measures, though later shifted the blame to China for the exacerbation of the U.S. epidemic, further pushing the deterioration of bilateral relations to an irreversible trajectory and shaping the American people's attitudes towards China.

On October 27, 2020, the end of the first-wave survey, the US had more than 9.17 million confirmed cases and more than 230,000 deaths; China had controlled the epidemic, with fewer than 86,000 confirmed cases and 4634 deaths. Our survey asked respondents to evaluate the anti-pandemic performance of China and the United States separately. Surprisingly, the Americans do not seem to buy into China's success in fighting COVID-19. Only 42.91% of the respondents gave a positive evaluation of China's anti-COVID measures (9.6% thought it was "very good" and 33.31% thought it was "fairly good"). More interestingly, nearly 38.4% of the interviewees gave a positive evaluation of the US antipandemic work under Trump's leadership (11.3% thought it was "very good"; 27.1% thought it was "fairly good"). Similarly, bi-partisan identity affects the objectivity of people's evaluation of China and the US anti-pandemic performance. For example, 59.0% of Democrats gave positive comments on China's antipandemic performance (15.6% considered "very good" and 43.4% considered "fairly good"), whereas only 22.2% of Republicans gave China's anti-epidemic performance positive scores (2.4% think "very good" and 19.8% think "fairly good"). On the contrary, for the US anti-epidemic under Trump's leadership,

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only 12.2% of Democrats gave a positive opinion (2.6% thought it was "very good" and 9.6% thought it was "fairly good"), whereas 76.6% of Republicans praised the administration (23.8% thought it was "very good" and 46.8% thought it was "good"). The era of identity politics in the United States has arrived.

Should the United States impose sanctions against China because of the economic losses caused by the pandemic? On this issue, Americans seem to have no consensus: about 33.5% of the respondents opposed it, 35.6% of the respondents held a neutral attitude, and 30.9% of the respondents supported it.

Further analysis of the bi-partisan party identification found that 50.1% of the Democrats opposed (34.8% neutral, 15.1% supported), while only 16.3% of the Republicans opposed (31.3% neutral, 52.2%) support).

The politics of blame is also deeply imprinted with bi-partisanship.

Both surveys asked the interviewees about their overall attitude towards China. There are four choices: "very positive", "somewhat positive", "somewhat negative", and "very negative" (to prompt the interviewee to make a clear statement, there is no "neutral" choice). Consistent with the results of other public opinion surveys, such as the Pew G, our first phase data in the same period showed that only about 1/4 respondents (3.8% "very positive"; 21.7% "somewhat positive") hold a positive view of China, while nearly 75% hold a negative view (46.2% "somewhat negative" and 28.4% "very negative"). In terms of the overall view of China, the politically divided United States astonishingly has a rarely seen consensus. Data from the follow-up survey in 2021 showed that the overall attitude towards China remained basically unchanged (3.1% "very positive", 22.2% "somewhat positive", 45.8% "somewhat negative", 29.0% "very negative" (According to the Pew Global Research Center, 76% of them hold a negative view of China in 2021).3 There is a correlation between party identity and people's attitudes towards China (correlation coefficient is 0.271, p<0.001), showing that the Republicans are more likely than Democrats to hold negative attitude towards China. The proportion of supporters of both parties who hold a "very negative" attitude towards China is increasing between the time of two surveys. In the first survey, 16.26% of Democrats and 45.07% of Republicans had "very negative" attitudes towards China; in the second survey, this proportion both increased by about one percentage point (17.28% and 46.17% respectively).

How Has the Pandemic Shaped American People's Attitude Towards China?

The prevailing wisdom is that the coronavirus has seriously affected American people's health, work, and their social life. Those groups that are more adversely affected are more likely to vent their anger to China and thus could have a more negative attitude towards the country. Our data shows right the opposite. In the first-wave survey, the proportion of people infected with the coronavirus who had a positive attitude towards China was significantly higher than that of those who were not infected: 22.62% of the infected people had a "very positive" attitude towards China; among those who were not infected (including those who have undergone a nucleic acid test with negative result), this proportion is only 3.12%. Whether the respondent is unemployed due to COVID or may be unemployed is also correlated to his attitude towards China, but the pattern is also diametrically opposite to general expectations. In the two waves of panel surveys, the unemployed people have significantly more positive attitudes towards China than those who hold a job (p<0.001): 6.58% and 3.93% of people have "very positive" attitudes towards China in 2020 and 2021, respectively, while the figures for those employed were 3.96% and 3.19%, respectively. People who reported to be "very likely" to lose their jobs in the pandemic also have a more positive attitude towards China: 19.0% and 12.3% of them have "very positive" attitudes towards China in the two waves of surveys.

Similarly, respondents whose families have encountered or may encounter financial difficulties during the

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XIAOGANG WU, Ph.D.

pandemic have a slightly more positive attitude towards China than those who have been unaffected by the pandemic.

To be certain, the above-mentioned factors related to China's attitude may be affected by other factors. For example, who is more likely to be infected and more likely to be unemployed and encounter economic difficulties. The factors that affect these experiences may also affect attitudes toward China.

Therefore, we used multiple regression models (sequential logit model and fixed-effects sequential logit model), based on two waves of the panel data, to estimate the factors influencing Americans' attitudes towards China. Considering factors such as gender, age, race, and education, consistent with the previous findings, Republicans are more likely to have a negative attitude towards China than Democrats; people who are unemployed during the epidemic are more likely to have a positive attitude towards China than those who are employed. In addition, the groups infected with the coronavirus are more likely than the uninfected to have a positive attitude towards China in the first wave of the survey, but there is no significant difference between the two groups' attitudes towards China in the second wave of the survey. After further controlling the fixed effects at the individual level, the effect of employment status on attitude towards China remains, although further studies need to be conducted to understand the mechanism of this finding.

To sum up, about three-quarters of Americans hold a negative attitude towards China, but these negative attitudes do not blame China for personal health, work, or life being affected by COVID-19.

Finally, to examine the difference in anti-pandemic performance between China and the United States affects the American people's attitude towards China, in other words, whether the American people have a good impression of China because of China's successful control of the epidemic, we incorporated an experimental design in the follow-up survey, by randomly dividing the interviewees into three groups. One group was directly asked questions related to China, and the second group was presented the information as follows before they were asked questions related China: “The first case of COVID-19 was discovered in Wuhan, China in December 2019. Although the local governments of Hubei Province and Wuhan City were widely criticized for their slow response and concealing information at the beginning of the outbreak, China's central government subsequently took decisive measures to quickly control the epidemic. As of March 19, 2021, China has only 90,026 infected cases (68,151 of which are in Hubei) and 4,636 deaths. However, the coronavirus has spread to many countries, causing 29.7 million infections and more than 539,000 deaths in the United States.”

To investigate other possible factors that could also affect American public opinion on China, we use the case of Hong Kong by presenting the following sentence before asking respondents to provide their opinion: “The United Kingdom (England) ruled Hong Kong from 1898 until 1997. Then Hong Kong was handed back to China under a unique agreement -- a so-called "one country, two systems" arrangement.

In 2019, many people in Hong Kong marched in protests demanding more democracy in the Special Administrative Region. The Central Government of China subsequently passed the National Security Law, effective on July 1, 2020, and the National People’s Congress (China Legislature) changed the election system for Hong Kong on March 11, 2021. Many people in Hong Kong and around the world fear that the law will reduce freedom of expression in Hong Kong and exclude pro-democracy candidates from running in Hong Kong’s elections.”

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As previously mentioned, Americans have not shown greatly positive evaluation of China's antipandemic performance. Here we compare the differences in attitudes between the experimental group and the control groups on three issues. The first is about the overall view of China. There are four options: 1. "Very positive", 2. "Somewhat positive", 3. "Somewhat negative", 4. "Very negative"; The second is about the opinion on the trade war: "Should the United States stop the trade war against China?"; The third is about sanction Chinese hi-tech companies: "The United States should sanction Chinese high-tech companies and restrict their development in the US market.”The second and third questions use a 5-level attitude scale (1. strongly disagree, 5. strongly agree).

Figure 1. How China's Anti-Pandemic Performance and Hong Kong Policy Affect American People's Attitudes Towards China: Results of Survey Experiments

Table 1. Two-sample T-Tests on the Difference Between Two Experiment Groups and the Control Group Questions

Control groupControl groupExperiment group Experiment 1 group 2

1. Attitudes towards China

0.011

-0.098**

2. Attitude towards Trade War

0.047

0.016

3. Attitude towards sanction hi-tech Chinese firms

0.012

-0.019

* p<.05; ** p<.01; *** p<.001

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XIAOGANG WU, Ph.D.

To make it easier to compare, we averaged the attitude scale and compared the experimental groups (receiving positive news about China’s anti-pandemic performance or China and the negative information about China’s change in policy towards Hong Kong) and the control group. As shown in Figure 1 above, in the overall attitude towards China and the evaluation of the two specific policies, the difference between the experimental group and the control group is not only very small, but also statistically insignificant (see Table 1 for two sample t tests). The analysis results of these investigations and experiments show that the difference in anti-pandemic performance between China and the United States and China's outstanding excellence have not led the American people to a more positive view of China. Most of them still hold negative views. On the other hands, there is one exception with the second experiment. As show also in Table 1, the difference between the control group and the second experiment group is not only large (-0.098) but also statistically significant (p<.01), suggesting that China’s policy change toward Hong Kong has led more negative attitude towards China. Therefore, it seems that the divide between US and China is more value-based than interest-based. China has paid price in global image for the handling the Hong Kong’s protests and demands for more democracy.

Summary and Conclusion

During the outbreak and deterioration of the U.S. pandemic, we conduct two waves of panel surveys on life experience and community during COVID-19, before and after the 2020 U.S. presidential elections (October 2020 and April 2021). We have presented some preliminary findings on the epidemic situation, the attitude towards China, the evaluation of the anti-pandemic performance of China and the United States, and the evaluation of the recent U.S. policy toward China. Our major findings can be summarized as follows.

First, consistent with the public health statistics of confirmed cases, the pandemic situation in the United States continued to exacerbate during the four-month interval between the two waves of the panel survey. The lives and work of a considerable number of Americans have been affected. About 14% of the respondents lost their jobs due to the pandemic; more people were worried about losing their jobs in the next year. About 20% of households were already struggling to make ends meet, and another 20% could barely support it. These families have begun to lower their food standards due to the economic difficulties caused by the pandemic. To be certain, with the normalization of the COVID-19 crisis and the Biden administration in office, Americans' sense of uncertainty and anxiety brought about by the pandemic has eased to a certain extent.

Second, despite the deteriorating pandemic situations, the American people have no consensus on its prevention measures, such as wearing masks and the support the "lockdown". Pandemic prevention behavior and its awareness did not change much during the two waves. Approximately 40% of people do not always wear masks when they go out; only about 50% of people think that measures like lockdowns during the epidemic are "very necessary" or "absolutely necessary." Their attitudes towards the pandemic prevention measures are clearly influenced by their political stances, reflecting the deep political division in the United States. Politics overrides science, and the epidemic resonates with elections.

Third, while the American people lack a consensus on pandemic prevention and anti-epidemic measures and attitudes, there is a rarely seen consensus on the overall view of China in the partisan and divided United States. Our survey shows that about three-quarters of Americans have negative attitudes towards China, and the proportion of negative attitudes has not changed but slightly increased during the

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two waves of the survey. These negative attitudes are not attributable to the fact that their own work and life have been adversely affected by the epidemic.

Fourth, Americans do not seem to give high marks to China's success in containing the pandemic. 43% of the interviewees gave positive comments on China's anti-epidemic work, but there are also nearly 38.4% of the interviewees who gave positive comments on the US anti-epidemic work of Trump's administration. The results of the survey experiment show that China's successful anti-epidemic performance relative to the United States does not affect people's attitudes and policy evaluations towards China. However, China's shift in policy towards Hong Kong significantly increases American people's negative attitude towards China.

Finally, all issues we examined, regardless of whether it is about anti-epidemic measures taken by the United States, the evaluation of the anti-epidemic performance of China and the United States, or the overall attitude towards China, are all deeply influenced by American partisan politics. It is particularly worth noting that there is an unusually high consensus among American public opinion on China, although Democrats are still more friendly than Republicans. This may also partially explain why the expected revision of a series of policies towards China in the later period of Trump's administration was stonewalled after the Biden administration came into office.

The deterioration of US-China relations may be the most important international political event in the second decade of this century, and the exacerbation of the COVID-19 pandemic has further pushed it to a no-return path. It seems that there is a good wish from China's side to prevent the vertical decline of the relations, but the relevant response policies have been indeed counterproductive. Each country has its own domestic problems. The scientific research on American domestic society and politics by Chinese academia, even on some factual knowledge, is still very limited. The educational and cultural exchanges between China and the United States should not only encourage Americans to understand China, but also the Chinese to have an in-depth analysis and understanding of American society and politics.

Notes

1.

The survey on“Life Experience and Community during COVID-19 in the United States”(LECCUS) is jointly sponsored by the Center for Applied Social and Economic Research (CASER) at NYU Shanghai (PI, Xiaogang Wu) and the Center for Advanced Social Science Research at NYU Washington Square (PI, Mike Hout) with additional funding support from NYU Faculty of Arts and Science and NYU Shanghai Provost Office.

2.

On October 27 the cumulative number of confirmed cases in the United States was 8.77 million (https://coronavirus.jhu.edu/map.html), which corresponds to an infection rate of 2.65% in the whole U.S. population (according to the PBS News, the 2020 U.S. population is 331 million). Our weighted infection rate is slightly larger than in the population, as our population is American adults only (accounting for about 78% of the U.S. population).

3.

See results about survey in 2020 at https://www.pewresearch.org/global/2020/10/06/ unfavorable-views-of-china-reach-historic-highs-in-many-countries/ and results in 2021 at https://www. bloomberg.com/news/articles/2021-06-30/u-s-views-on-china-harden-amid-human-rights-disputes-pewfinds.

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From Bulldozer to Peacemaker: Reframing Ariel Sharon's 2005 Unilateral Disengagement from Gaza Sam Millner

On September 15, 2005, the last Israeli soldier exited the Gaza Strip ending 38 years of Israeli military occupation and signaling a turning point in the decades-long Israeli-Palestinian conflict. The controversial move was spearheaded by Prime Minister Ariel Sharon, an Israeli national war hero and longtime champion of the post-1967 Jewish settler movement. The dramatic and apparent about-face, which stoked the imagination of scholars and political partisans, was compounded by Sharon’s tragic incapacitation on January 4, 2006, by a hemorrhagic stroke. Sharon’s untimely death—which occurred before the Israeli government could complete a long-awaited, successive West Bank withdrawal—magnified the historical mystique of Sharon’s Gaza disengagement and left a plethora of questions as to Sharon’s true intent. Had he undergone a change of heart vis-à-vis the Palestinians, the settlements, and the peace process? Did Sharon really intend to end the occupation of the West Bank? Or was he simply implementing partial measures to buy time and political cover for Israeli settlers? Relevant scholarship tends to focus exclusively either on first-image explanations (individual actors) or secondand third-image explanations (domestic structures and foreign pressures) at the expense of a more complete and nuanced account. This paper seeks to provide a holistic account of Sharon’s political decision-making process during his premiership and the timing of his decision by employing both firstimage analysis (prospect theory and role theory) and second-/third-image analyses (democratic elites). The methodologies mentioned above are applied to a variety of biographical sources representing views from across the Israeli political spectrum. Accordingly, this paper’s findings are fourfold: (1) Sharon did not undergo a fundamental profile change; (2) Sharon’s uniquely flexible and non-ideological operational code allowed him to undergo a temporary profile shift, i.e. a conservative revision; (3) the disengagement was a pragmatic power-maximizing tactic that was consistent with Sharon’s core values of Israeli security and territorial sovereignty; and (4) the stage for Sharon’s historic disengagement was set by the necessary prerequisites of developments within the Israeli political and security elite in response to the Second Intifada, which demonstrated an emerging national will to rethink established security dogmas.

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"You mean that we should hand our security over to somebody other than Jews? Never! I emphasize, never! I say it again, never!"i —Ariel Sharon, in an interview with Time Magazine, 1989 "I love the hills of Samaria no less than you. Sometimes it’s hard to decide which hill is more beautiful. But a new reality has come into being…. We have made commitments, and I am determined to honor them. We must try this new path; perhaps it will lead us to security."ii

—Ariel Sharon speaking to settler leaders, June 17, 2003 "[The Palestinians] are also entitled to freedom and to a national, sovereign existence in a state of their own…. [Such a state] is the best solution for both us and the Palestinians. We should not continue to dominate another people. It’s bad for us and for the Palestinians."iii —Ariel Sharon, in his speech before the UN General Assembly, September 15, 2005

Introduction

On September 15, 2005, Israeli Prime Minister Ariel Sharon stood before the 60th Session of the United Nations General Assembly in New York and declared the necessity of making “painful concessions” for the sake of peace between Israelis and Palestinians. The war hero and longtime political maverick, reviled by the international press as the “Bulldozer” and the “Butcher of Beirut,” was met by a thunderous round of applause from the assembled heads of state, foreign ministers, and ambassadors who afterward clamored to shake his hand.iv Earlier that morning, almost two years after Sharon first announced his intention to disengage from Gaza and North Samaria, the last Israeli soldier left Gaza.

Over 8,000 Israeli settlers in 21 settlements had been uprooted, bringing an end to 38 years of Israeli military rule over the territory that had been conquered in the 1967 Six-Day War.v For the first time, the Israeli government had dismantled and evacuated government-recognized settlements in the Palestinian territories.

Not only did this historical policy reversal constitute a watershed moment in the IsraeliPalestinian conflict, but it imbued the elderly prime minister with a new level of historical significance.

As a young general, Sharon had conquered the Palestinian territories and later developed the land as the champion of the settlements in the 1990s. Withdrawing from these same territories imbued the hero of the Six-Day War once hailed by his troops as “Arik, King of Israel” with tremendous political and historical mystique due to his inexplicable change of heart.vi The mystery was compounded by Sharon’s untimely incapacitation by a hemorrhagic stroke in January 2006, before the full execution of the disengagement plan, leaving shocked world leaders and incensed settlers to speculate about Sharon’s true intent and decision-making calculus.

Scholarship on the disengagement has tried to account for questions such as: Did Sharon genuinely change his view of the Palestinians and the peace process? If not, what was his true motivation?

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And to what degree was the disengagement influenced by other factors? Relevant studies and historical work tend to focus exclusively on either first-image or second-image explanations of the disengagement, leading to narrow explanations that overemphasize the salience of a single factor at the expense of potential confounding variable.1

Competing explanations have also drawn on various methodological approaches such as ad hoc psychological/ideological profiling, leadership trait analysis (LTA), and principal interviews. This paper will synthesize several studies that utilize the aforementioned approaches and supplement them with additional analytical frameworks and biographical research to create a holistic account of the 2005 Gaza disengagement that clarifies Sharon’s operational profile and instrumentality throughout the process, as well as explaining the timing of its execution.2 Using this approach, this paper will substantiate the following hypotheses:

Hypotheses: 1)

Sharon’s cognitive and ideological profile did not fundamentally change.

2) Sharon’s uniquely flexible operational code allowed him to undergo a temporary profile shift in order to seize the historical moment.

3) Rather than a farewell to arms, the disengagement was a pragmatic power-maximizing maneuver intended to address the demographic security threat and maximize Israeli political latitude con-cerning other, more pressing territorial disputes, i.e. the West Bank settlements. It was not a sud-den ideological departure, but rather a conservative ideological reassessment of Greater Israel to preserve the core value of security.

4) Second/third-image developments among Israeli democratic elites in response to the Second Intifada were prerequisites to Israel’s 2005 withdrawal from Gaza and North Samaria. Reviewing these developments provides insight into the specific timing for Sharon’s escalating engagement with unilateral action and the eventual execution of the disengagement plan.3vii

Operational Code 1 Kesgin, 2019) and (Aronoff, 2014) focus predominantly on first image explanations. Conversely, (Rynhold and Waxman, 2008) focuses on a second image explanation, i.e. shifts within the Likud party.

2 My biographical research is intentionally centered on two contrasting biographies, Gilad Sharon’s Sharon: Life of a Leader and David Landau’s Arik: The Life of Ariel Sharon, in order to account for biases.

3 Former Deputy Israeli National Security Advisor Charles Freilich notes that the Israeli foreign policy is essentially an extension of security constraints, for Consequently, this paper conflates second-image political shifts with third-image security pressures for its purposes.

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Love of the Land and the People

In 1922, Ariel Sharon’s parents, Samuil and Vera Scheinermann, immigrated from the Russian Empire to British Mandatory Palestine to participate in the Labor Zionist vision of Jewish redemption through manual labor. They settled in Kfar Malal, a secular socialist agricultural moshav situated on the ancient Sharon plain. Growing up on an agricultural moshav, farm labor was central to Sharon’s upbringing: it represented the means of collective emancipation for European Jews who had long been disenfranchised from landholding rights in Europe. Samuil, an agronomist, impressed upon the young Arik that manual labor was virtuous in and of itself, and Sharon developed a sense of reverence toward the land he toiled as a boy. More than anything, Sharon’s parents inculcated in him a “concern for every Jew the world over and for Jews as a nation.”viii Israeli journalist Uri Avnery specifies that Sharon “possessed an absolute belief that he was historically destined to save the Jewish people.”4

As an adult, Sharon owned and operated Sycamore Ranch, a sheep ranch in the Negev. Sharon often maintained that he was nothing more than a simple farmer and, as Prime Minister, often insisted on sleeping at his ranch and commuting to Jerusalem in the morning. Chief Secretary in the Prime Minister’s Office, Marit Danon, recounts that Sharon’s mood was always better when he was at the ranch, and that he sometimes interrupted cabinet meetings to check in on his livestock. “I’ve never known anyone who loved the land so much. Loved the clods of earth.”ix Naturally, Sharon took up the mantle of the settler movement in 1971 after playing an instrumental role in conquering territories in the Six-Day War. Sharon ultimately invoked his love of land when framing the national dialogue around “painful concessions” leading up to the Gaza disengagement.

Anti-Arab Bias

When Ariel Sharon was one year old, Arab militants raided his village due to civil unrest over the Temple Mount in Jerusalem. The women and children, Sharon included, took cover in a barn while the men fended off the Arab raiders.x When Ariel Sharon turned 13 years old—the milestone of manhood in the Jewish tradition—his father gave him a dagger. Aside from toiling in the fields, one of Sharon’s main responsibilities from a young age was to help guard the fields against hostile Arabs.xi He joined the Haganah, the precursor to the Israeli Defense Forces (IDF), in 1942, at age 14, to fight against occupying British forces. Relevant research shows that leaders with early combat experience, especially as part of a rebellion, tend to possess more aggressive and risk-acceptant behavior as leaders once they take office.xii Sharon’s extensive experience in extremely violent and dangerous paramilitary situations at a young age makes this phenomenon particularly salient in his case. Sharon would go on to serve in each of Israel’s wars, beginning with the Israeli-Arab war of 1948.xiii In the years after the Holocaust, the citizens of the young state of Israel were subjected to repeated existential wars “of no choice” against the neighboring Arab states. Charles Freilich notes that the security conditions of the Yishuv and the early state years produced in the Israeli public a sense of shared destiny and “unity of purpose.” Psychologically speaking, these threats created a “nation in arms” effect of constant mass national mobilization in which the IDF became one of Israeli society’s most salient institutions.xiv This structure was the framework for Sharon’s 4 Avnery emphasizes the importance of Sharon’s mother in his development, criticizing other works for focusing disproportionately on his father.

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ascent.

In all these processes, the abstract menace of Arab violence served as Israel’s main antagonist, compounding the longstanding Jewish sense of insecurity that gave rise to modern Zionism in the 19th century. “The [19] centuries from Masada to Maidanek,” as Israeli political scientist Aharon Klieman puts it, weigh heavily on Israel’s leaders and its citizens.xv After the 1948 War, Sharon rapidly rose through the ranks of the IDF. Attributing to his centrality to the formative processes of the state of Israel from its birth, Sharon was acutely attuned to the national sense of insecurity and consequent mistrust of Arab leadership. Sharon had a powerful lifetime feud with Palestinian Leadership Organization (PLO) leader Yasser Arafat, from their showdown in the 1982 Siege of Beirut to the failed and secretive 1994 Oslo Accords, of which Sharon was one of the most vehement critics.xvi Especially in the wake of the Oslo process, Sharon concluded that the Palestinian Authority (PA) couldn’t be trusted in terms of security cooperation.xvii

High Emotioanl Quotient and Moderate Cognitive Flexibility

Unlike his robotic predecessor, Ehud Barak, Sharon possessed a remarkably high emotional quotient. An extreme extrovert, Sharon was noted by both political opponents and associates alike for his ability to sense if they were hungry or upset. Younger associates at times viewed him as a father or role model figure. Sharon’s cognitive flexibility manifested in his sense of humor, ability to challenge assumptions, and knack for forging relationships with politicians more dovish than he. Moreover, his gift for empathy and perceiving his teammates’ emotional cues allowed him to assimilate new information more easily. According to longtime Sharon lawyer and later chief-of-staff Dov Weissglass, “Not only did [Sharon’s] emotional quotient contribute to his exposure to a broader spectrum of views, but it also enabled him to more effectively implement his preferred policies.”xviii

Non-Dogmatic Risk-Acceptant, Iconoclastic

Despite living in a Labor Zionist moshav, Sharon’s individualistic parents clashed with the local authorities over party dogma and lived as outcasts on the periphery of the community. Avnery writes that “Sharon’s distinctive personality was shaped in his childhood, when he lived in the shadow of his tough mother amid hostile relations with all the neighbors in an outlying village.”xix Sharon’s father openly criticized rigidly ideological people and frequently lectured the young Arik against toeing any ideological line. These conditions produced in Ariel Sharon a distinctly non-ideological disposition and regard instead for authority that allowed him to vacillate between and incorporate elements from both left-wing Labor ideology and the right-wing Revisionist ideology throughout his life.

After attaining national hero status for his improvised victory during the Six Day War in 1967, Sharon founded the revisionist Likud—National Liberal Movement party with Prime Minister Menachem Begin in 1973. He later formed the breakout Shlomtzion faction in 1977 before rejoining and remaining in Likud for several decades. Sharon frequently attempted to seize Likud leadership while a member, for example, in the notorious 1990 “Night of the Microphones” in which Sharon had Prime Minister Yitzhak Shamir’s mic cut so he could exhort the Likud Central Committee to reject Shamir’s plan to negotiate with the Palestinians. These bold political performances are also indicative of Sharon’s high-risk acceptance, most famously displayed during his oversight of the 1982 Lebanon War when he frequently disobeyed cabinet orders and at one point ordered his troops to antagonize American, French, and Italian

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peacekeepers.xx As a result, Sharon’s personal ideology contains elements of both the Labor and Revisionist dogmas. The following is a classification of Sharon’s ideological profile as it stood on the eve of the Second Intifada within the Zionist Labor/Revisionist political dichotomy: Beliefxxi

Revisionist

Labor

Late 1990s Ariel Sharon Profilexxii

Security vs.

Eretz Yisrael

Aspires to a unified Greater Israel. Land maximization is the ultimate consideration.

Places security as the goal of govern-ment policy, even at the expense of land.

Ariel Sharon’s beliefs resembled the Labor view of prioritizing security. After the 1967 War, his engagement with settlement was primarily based on his concern for pro-moting strategic security. He viewed set-tlements to securing the State of Israel.

Is the World with Us or Against Us?

Maintains that Israel inevitably stands alone amongst a hostile world.5

Maintains that the world will stand with Israel given that Israel undertakes the proper policy actions.

Sharon shared the Revisionist view that viewed foreign relations through the lens of historical persecution. He often clashed with world leaders, and presidents George H.W. Bush and Bill Clinton openly feared Sharon’s influence on the Israeli government.

Time Horizon/ Orientation

Time is on our side. Emotionally attached to Jewish history of persecution and conflict. Viewed history as cyclical and repeating, from the Roman exile to the Holocaust.

There is an urgent need to bring an end to the conflict.

Focused on either present or future circumstances, mak-ing it easier to ac-climate to depar-tures in policy.

Sharon subscribed to the Revisionist view that Israel will ultimately prevail, but he possessed a limited present time orientation. His involvement with the influx of Russian immigrants in the 1990s impressed on him the idea that Israel would ultimately overcome demographic and security issues via Aliyah. Sharon also possessed a Labor present time orientation which al-lowed him to reassess the settlements for Israeli security, despite developing certain Revisionist views of history once in office as part of his messiah complex.

5 The Likud schema is in part explained by D.D.P. Johnson’s finding that adherents of conservative ideologies tend to exhibit heightened threat sensitivity and are more likely to subscribe to “dangerous world” beliefs.

However, this trend is uniquely heightened in the context of the unique Jewish history of persecution by outside groups.

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View of Peace & Territorial Compromise

Peace can be achieved through military force.

There is no need for ne-gotiation or concessions.

Peace can be achieved through negotiations and should be done in order to preserve security.

Sharon incorporated both ideologies.

He preferred maximalism but did not view Judea and Samaria as sacrosanct.

He thought that peace was possible in the long term, but that an interim phase of nonbelligerency could be achieved in the short term and lead to the necessary conditions for the creation of a Palestinian state in Jordan.xxiii

Prospect Theory Framing

As Foreign Minister under Netanyahu in 1998, Sharon covertly encouraged settlement leaders to expand their settlements in order to undermine official promises made in the Wye River Memorandum.xxiv After Netanyahu’s government collapsed in 1999 due to bipartisan disapproval of his handling of the Wye River negotiation, Sharon took over as Leader of the Opposition to Prime Minister Ehud Barak’s Labor government. He quickly found growing energy and strength from mounting public opposition to Barak’s efforts to negotiate a peace agreement with Yasser Arafat and American President Bill Clinton.

He subsequently mounted a campaign to undermine the Clinton Parameters and Barak’s proposed concessions (especially the partition of Jerusalem), which he viewed as an unacceptable capitulation of Jewish sovereignty. However, it is important to note that Sharon sincerely believed that Barak’s effort was unstoppable: up until the minute it collapsed, Sharon absolutely assumed that Barak would prevail in making a wide-sweeping deal based on large-scale Israeli territorial withdrawal. After the July 2000 Camp David Summit ended in disagreement over the inclusion of a small synagogue on the Temple Mount, Sharon made an inflammatory appearance on the Temple Mount in September 2000.xxv

In the following months, Israeli society experienced a momentous increase in Palestinian terror attacks, starting with the October 2000 riots in Arab towns. Sharon viewed this explosive slide into violence and breakdown of order (later the Second Intifada) in the same light as Yitzhak Rabin’s experience during the First Intifada, where Sharon had called for more extreme military measures.

Compounded by international criticism over his Temple Mount stunt and calls for Israeli concessions, Sharon naturally reverted to the analogical lens that he had employed while opposing earlier peace efforts: the Czechoslovakia analogy. This analogy, comparing the Clinton Parameters to the 1938 Nazi annexation of the Czech Sudetenland, depicts Israel as a helpless state being sacrificed to an aggressive neighbor by an apathetic international community. As Palestinian violence and international condemnation continued to mount after he took office in February 2001, Sharon became increasingly committed to this analogical understanding of the events around him.xxvi After growing concern that President Bush would pivot toward the Arab world as part of his post-9/11 War on Terror strategy, Sharon doubled down on this analogy in an inflammatory October 5, 2001 speech known as “the Munich Speech”: “I appeal to the Western democracies and first and foremost the leader of the free world, the United

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States: Do not repeat the terrible mistake of 1938. Then, the enlightened democracies of Europe decided to sacrifice Czechoslovakia in return for a temporary, comfortable solution. Do not try to appease the Arabs at our expense. We will not be able to accept that. Israel is not Czechoslovakia.

Israel will fight against terror…. We can only rely on ourselves. And from today forward, we will only rely on ourselves.”xxvii

Evaluation

The analytical framework of prospect theory helps to partially demystify Sharon’s decision to pursue the disengagement plan, specifically the timing of the decision. Prospect theory states that decisionmakers become increasingly risk-averse in a domain of gains and increasingly risk-acceptant in a domain of loss.xxviii Upon investigating the political climate around Sharon’s ascent to the premiership, it is evident that he was operating in a domain of stark loss during the lead-up to his 2001 election and throughout his first term. From 1996 to 1998, he had served as foreign minister under the First Netanyahu Government, where he made every attempt to undermine Clinton’s pressure for a diplomatic breakthrough. After the Likud Party fell from power, Sharon found himself sidelined, witnessing what he believed would be an inevitable surrender of the Jewish national cause. Sharon responded to these challenging developments by resorting to the analogies of the First Intifada and the Munich Crisis, evidencing a strong sense of impending doom and powerlessness on his part.

Sharon’s usage of analogical reasoning was a decision-making heuristic that allowed him to explain the crisis by providing both a normative assessment and a prescribed course of action for pursuing that normative assessment.xxix First, Sharon viewed the spiraling violence around him through the frame of the First Intifada and the failed Oslo Process, which he had strongly opposed. Once again, Sharon viewed the Israeli government as selling Israel out to foreign interests while mismanaging a surge of violence.

During the First Intifada, Sharon had passionately called for more extreme military intervention, and it was through this frame that he now interpreted new information about the Second Intifada as necessitating an extreme unilateral use of force. Secondly, Sharon’s resumed usage of his famous Czechoslovakia analogy during the beginning of the Second Intifada evidenced a conviction that the international community was sacrificing the innocent Jewish State in order to appease a jingoistic neighbor. While he had used this analogy in a rhetorical sense in the past to obstruct peace negotiations, it now reflected a genuine assessment of the situation. That Sharon continued to employ this analogical reasoning as late as his October 2001 “Munich Speech” demonstrates that even as Prime Minister, he continued to interpret new information through the lens that Israel is alone amongst a world of hostile nations and must save itself.

This framing heightened Sharon’s mistrust of others, specifically his longstanding bias against the Arab/ Palestinian leadership and his cynicism vis-à-vis the peace process.

As Sharon was operating in a clear domain of loss during his early premiership, his decisionmaking was also influenced by a negativity bias, i.e. an aversion to the acceptance of loss and a predilection for the alternative of gambling.xxx Even after seizing power from Barak in 2001, Sharon exhibited heightened threat sensitivity and risk-acceptance in the face of what he viewed as a near-unstoppable collusion between the Israeli Left and world powers to force territorial concessions upon Israel. Accordingly, the cost of non-action became intolerable, and the already risk-acceptant Sharon became convinced of the need for a bold use of force. Specifically, his employment of the First Intifada analogy convinced him of the necessity of a strong military response, which would ultimately come about in the 2002 Operation

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Defensive Shield and the later disengagement. Moreover, his employment of the Czechoslovakia analogy reinforced his Revisionist “dangerous world” schema, which intensified his longstanding mistrust of Palestinian leadership and peace negotiations as well as his conviction of the need for self-reliance and unilateral action.6 In sum, Sharon’s framing of the situation temporarily increased his risk-acceptance and heightened his proclivity toward unilateral use of force, crucial factors in his ultimate decision to execute the Gaza disengagement. Together with Professor Baris Kesgin’s account that Sharon underwent a temporary increase in conceptual complexity and mistrust of others, this finding contributes to the broader explanation that the Gaza disengagement was in part the result of a temporary, situation-induced shift in Prime Minister Sharon’s operational profile.xxxi

Role Theory

Building off of Sharon’s baseline operational code and his psychological perception of his prospects as prime minister, this section will apply the analytical framework of role theory, which states that an actor’s belief system changes to conform to the expectations of new roles of authority, to track Sharon’s belief system and identify the effective principals influencing his information intake across three critical periods: his initial prime ministerial campaign, his first term as prime minister, and his second term as prime minister. This will further substantiate the consistency of Sharon’s operational profile and corroborate the ancillary thesis that he viewed the disengagement as a pragmatic, power-maximizing security maneuver.

Candidate Sharon (December 9, 2000 – February 6, 2001)

Despite Sharon’s conviction that Barak would inevitably succeed in implementing the Clinton Parameters, as leader of the opposition, he had continued to engage in inflammatory obstruction tactics, viz. his September 2000 Temple Mount ascent, which arguably contributed to the development of the Second Intifada. However, upon Barak’s December 2000 resignation in the face of mounting violence and the collapse of the Camp David talks, Sharon abruptly pivoted toward a more peace-oriented message.

Sharon, who had been planning his political comeback since his dishonorable discharge ouster as Defense Minister in the 1982 Kahan Commission, saw the prime ministerial election as his chance to finally fulfill his historical mission.xxxii In transitioning from an obstructionist figurehead to a candidate vying for broad public support, Sharon now had to answer to the growing public desire for a political resolution to the conflict. Sharon and his closest advisors understood well that, in the framework of the newly implemented prime ministerial election, Sharon’s viability as a candidate was contingent on his ability to recast his appeal to the broader Israeli mainstream as a measured and reliable leader who could restore peace and quiet to the land. To pull off this utter public relations transformation, Sharon enlisted longtime friend and Israeli adman Reuven Adler to head his prime ministerial campaign.

The Sharon campaign sought to downplay the candidate’s controversial military history in favor of a message of peace and unity by saying as little as possible and spinning Sharon’s advanced age to portray him as a gentle, wise national patriarch figure. On the rare occasion when the outspoken Sharon was permitted by his handlers to speak, he appeared visibly strained to stick to scripted platitudes.

6 It is important to note that the Israeli Left, especially Ehud Barak, had already been calling for unilateral action. The influence of this precedent will be discussed in the next section.

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Campaign television broadcasts bombarded the Israeli public with clips of the stout “grandfather-farmer” figure striding through his fields flanked by his grandchildren; Sharon would pick up one of his grandsons as a choir of girls sang out the slogan devised by Adler: “Only Sharon will bring peace.”xxxiii In his accession speech, Sharon inaugurated the language of “painful concession on both sides,” and he set up a meeting with Arafat’s financial advisor, Muhammad Rashid, that very night to try to defuse the Intifada. Uri Shani, a longtime Sharon adviser who worked on the campaign, dismissed the idea that Sharon had really put aside his warlike ways and frankly characterized the campaign as a cynical and professional gambit to sell Sharon to the Israeli public. Indeed, two days after the election, the Prime Minister’s media adviser released a statement saying that the terms introduced during the Camp David process were not binding on the new government, demonstrating Sharon’s continued suspicion toward negotiations and insistence on operating on his own terms.xxxiv Nevertheless, the ideologically permeable Sharon was now seated in a national unity government with Labor elites and steeped in the rhetoric of peace and restraint.

First Term (February 2001 – January 2003)

Uri Shani became Sharon’s chief of staff and established a despotic rule over all bureau operations. Shani immediately instated a policy in which Sharon was never to meet “four eyes only” with any person no matter their importance: Shani or another aide would accompany Sharon with a tape recorder at every meeting. Within the Prime Minister’s Office itself, Sharon cultivated a family-like environment according to Chief Secretary Marit Danon, who emphasized that former Sharon staffers to this day still stay in touch—indicative of the high empathy that allowed Sharon to assimilate disparate information and overcome biases in his decision-making.xxxv

True to his reputation for bipartisanship, after his election, Sharon established a national unity government that included the leftwing Labor-Meimad coalition, now headed by Deputy Prime Minister and Minister of Foreign Affairs Shimon Peres. Though Sharon had tarred Peres, a longtime leftwing icon, as a mosser7 during the Oslo process, the two now developed a “special relationship” in which Peres was given an exclusive platform to make the case for reengaging with Arafat.xxxvi Sharon’s high emotional intelligence and deep experience allowed him to effectively monitor advisors and engage in multiple advocacy, which moderated his policy preferences regarding the use of force. Despite a growing sense of public helplessness, the reinvented Sharon operated for the time being under the newfound mantra of “Restraint is strength,” notably after the grisly Dolphinarium bombing in June 2001, by which point Sharon was personally visiting troops and spending hours reviewing maps of the territories with his generals. Behind closed doors, however, Sharon was experiencing increasingly violent emotional reactions to the news of terror attacks, often shouting, “Kill the dog (Arafat)!” and “Bomb Arafat!”xxxvii This account of a boiling, pent-up political rage toward Arafat and general cynicism toward a brokered resolution is consistent with Kesgin’s LTA finding that Sharon’s mistrust of the Palestinian leadership significantly increased after he assumed office.xxxviii

As a result of the cataclysmic 9/11 attacks, a sudden empathy toward Israel’s security situation descended on Europe and the United States, which had long pressured Israel to stick to diplomatic deescalation over unilateral use of force.xxxix As a result, Sharon now had heightened policy flexibility to 7 “Mosser” is a Hebrew term for a Jew who violates Jewish law, or Halakha, by informing on a coreligionist, thus marking the informant for death.

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respond to the emerging public consensus that the government needed to take decisive action to end the terror attacks. So when the March 27, 2002 Park hotel bombing, which targeted over 150 Jews attending a Passover seder, sparked massive public outrage, Sharon responded with a forceful state-level display of rage to signal the drawing of a red line.xl Two days later, on March 29, Sharon announced Operation Defensive Shield, a unilateral operation in which the IDF undertook sweeping counterinsurgency operations in Arab villages and towns throughout the West Bank. More portentously, Sharon shortly thereafter revived Ehud Barak’s previous effort to erect a fortified security barrier roughly along the 1967 West Bank armistice lines, which was approved by the Knesset in June 2002. This measure was Sharon’s first substantive break from the Revisionist dogma of a Greater Israel: he understood that the fence would become the basis for a future border and eventually constitute an independent Palestinian polity. Nevertheless, the barrier incorporated various Jewish settlements and adjacent Palestinian communities. Notably during this time, the overbearing Shani was replaced by Sharon’s easygoing lawyer and longtime friend, Dov Weissglass, who admitted that he was brought in to “read Sharon’s thoughts even when he hasn’t yet articulated them.xli

In return for supporting Israel’s new unilateral approach, Bush demanded Sharon’s cooperation in his Roadmap for peace initiative, an effort that sought to muster Arab support for the imminent invasion of Iraq by, amongst other things, recognizing a Palestinian state. Since the resignation of Peres’ LaborMeimad faction from the government in November 2002 over Operation Defensive Edge, Sharon had presided over a narrow, rightwing government contingent on consensus within the Likud faction. Sharon’s emerging public support for Bush’s proposal of a Palestinian state enraged Likud’s hardline faction and provoked a leadership challenge from Foreign Minister Benjamin Netanyahu. Now at odds with his own party and emboldened by overwhelming public support for his new unilateral approach to the Israeli-Palestinian conflict, Sharon decided to dissolve the government and call new elections in order to consolidate his power.xlii

Second Term (January 2003 – January 2006)

My project faces a significant identification problem because there is little exogenous variation in migraAfter trouncing Netanyahu in the November 2002 Likud primary, Sharon went on to achieve a landslide victory against Labor Party leader Amram Mitzna in the January 2003 election: the Likud Party doubled its seats to 38 while the rival Labor Party had its worst showing in history. Sharon viewed this as a personal mandate from the Israeli public to operate above party politics and restore calm via sweeping action. Kesgin’s LTA data confirm that, in his second term, Sharon’s belief in his ability to control events, self-confidence, and task focus all increased significantly. Notably, Sharon appointed as Deputy Prime Minister Ehud Olmert, a former Likud hardliner turned disengagement advocate. Sharon now resumed his Roadmap talks with Bush alongside the newly appointed PA Prime Minister Mahmoud Abbas, though the unrelenting Palestinian terror attacks confirmed his deep-seated mistrust of the Palestinian leadership and bias toward unilateral action, which compounded his heightened threat sensitivity and risk acceptance vis-à-vis the continuing violence.xliii

Though he had previously rejected the idea, by October 2003, Sharon was seriously discussing the prospect of a unilateral disengagement with Weissglass and was even enlisting his son, Gilad, to draft policy papers on the issue. Amidst Weissglass’ efforts to obfuscate Israeli compliance with the Roadmap’s settlement freezes, Weissglass also began to conduct talks with senior Bush administration officials

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including Secretary of State Condoleezza Rice in which it was stipulated that the Americans would not offer any rewards without the inclusion of four isolated settlements in the North Samaria. Once a general quid pro quo framework was established, Sharon began to signal to the public about his plan, hinting at the December 18th Herzliya Conference that he would implement a unilateral disengagement if the Palestinians continued to act in breach of the Roadmap guidelines.xliv

In a February 2004 interview with Haaretz, Sharon finally announced the geographic specifics of the withdrawal, stressing that “the relocation of the settlements will be made, first and foremost, to draw the most efficient security line possible,” i.e., the security barrier. Eschewing the dogma of Greater Israel in favor of security, Sharon now produced a powerful audience cost to signal his total resolve to opponents of the plan, viz. Likud hardliners. Sharon stated in the interview that, “I’ll have trouble in the Likud. If there’s no choice, I’ll change the composition of the government.”xlv In April 2004, he engaged in meticulous negotiations with Bush to eke out a joint American agreement enshrining three key points: a dismissal of the Palestinian right of return; a de facto recognition of the West Bank settlements; and a rejection of the 1949 Armistice lines. Sharon now had concrete security concessions to sell to the Israeli public and, on November 3, 2004, the Knesset passed the first phase of the Disengagement Plan. While world leaders praised the disengagement as a triumph for peace, Weissglass emphasized it as a strategic win for Israel, saying in a 2004 Haaretz interview that: “The disengagement is formaldehyde. It supplies the amount of formaldehyde that’s necessary so that there will not be a political process with the Palestinians.”xlvi In November 20005, facing a wave of Likud defections in response to his authoritarian handling of the final cabinet vote, Sharon split off and founded the centrist Kadima party alongside Shimon Peres, a frenzied power grab that Weissglass characterized as overly-risky and essentially unnecessary. This supports Kesgin’s finding that Sharon’s in-group bias and self-confidence were both at all-time highs during the months after the Gaza disengagement.xlvii

Democratic Elites

This section will reincorporate the critical and often-overlooked role of cues from political elites in democratic foreign policymaking.xlviii Using the democratic elites analytical framework, this section will trace several ideological developments among Israeli political elites which ran parallel to Sharon’s own developments: the intelligence/military elites, the Labor political opposition, and the Revisionist elite.

Accordingly, this analysis will contrast existing scholarship, which tends to compartmentalize first- and second-image explanations, by establishing elite influence as necessary prerequisites to disengagement which expanded Sharon’s policymaking latitude throughout his tenure of office.

The Intelligence Community/Military Leadership

Since the early 1990s, the Israeli intelligence and national security apparatus had come to view the issue of demography as an existential threat to Israel’s status as a Jewish and democratic state. This emerging view stressed that any perceived security benefit of the settlements was now outweighed by the outsized military burden of protecting the settlements, imbuing the two-state solution with existential importance. Despite quick adoption by the Left, the new separation-oriented security policy was initially rebuffed by the Israeli right, which remained rigidly tied to Greater Israel as an article of faith.xlix American political scientist Robert Jervis explains that policymakers often clash with their intelligence community due to gaps in trust arising from the inherent uncertainty of intelligence and the fact that intelligence

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assessments can run contrary to the policymaker’s need to sustain themselves politically and psychologically.l Sharon’s military background and mistrust of Palestinian leadership caused him to initially favor military force over separationist strategies like the security barrier and the disengagement.

As the violence of the Second Intifada progressed, Sharon’s ability to engage in multiple advocacy made him attuned to the growing consensus among the intelligence/military elites toward unilateralism and separationism. After commencing Operation Defensive Shield, there was a marked psychological shift among IDF leadership, which now understood that terror must be dealt with proactively, i.e. unilaterally.

This new approach was reflected shortly thereafter when Sharon recommenced construction of the security barrier. Still equivocating on the issue of disengagement, Sharon was finally pressured by an overwhelming wave of costly signals from within the intelligence/military elite in late 2003: on September, 27 air force pilots published a letter refusing to fly assassination missions in the territories; in November, four former chiefs of the Shin Bet security service warned that “If we don’t give up on the goal of ‘Greater Israel,’ then we’re on the way to the abyss; and on December, 13 members of the elite sayeret matkal commando force released a similar announcement.”li This foot-dragging by military elites imposed a heavy cost on Sharon by making it harder for him to carry out certain military functions, increasing pressure at a time when he was already beginning to accept unilateral withdrawal.

The Political Opposition (The Israeli Left)

As mentioned, the Israeli Left was historically more disposed toward two-state separationism and it readily assimilated new intelligence about the necessity of disengagement from the territories, albeit on a negotiated basis. During the Camp David negotiations, Ehud Barak was committed to a brokered withdrawal from the territories. After the failure of the Clinton Parameters, Barak began constructing a plan for a unilateral disengagement: he spent the last months of his term furiously campaigning to build public support for the plan. His parting words called for separation by any means, even unilateral if need be. By 2002, the idea was in common currency, with polls showing 58 percent public support. During the 2003 election, Amram Mitzna campaigned on a detailed platform of unilateral disengagement, which Sharon criticized as infeasible. Nevertheless, Sharon won handily. Haaretz notes that “Most of the public back Sharon to carry out Mitzna’s policy,” reminiscent of the counterintuitive Israeli adage that only the Right makes peace.lii So while Sharon took time to come to terms with the disengagement, his decision was primed by exposure to detailed proposals from the opposition and facilitated by outstanding public buy-in for the plan.

The Likud Party

Within the Likud party, a crucial shift was taking place during the early 2000s in which key revisionists relegated the ideal of Greater Israel to a secondary value in order to protect the core value of securing Israel as a democratic and Jewish state. Far from a radical embrace of dovish leftwing value, this was a conservative shift to protect preexisting rightwing values. This center-right bloc remained deeply skeptical of the desirability and possibility of resolving the conflict through negotiations. The emergence of this pro-disengagement center-right bloc was a prerequisite to Sharon’s pursuit of a unilateral disengagement, giving him the necessary political flexibility to overcome challenges from Likud hardliners.

Rynhold and Waxman note that, although this shift has been largely ignored by scholars, it is clearly

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evidenced in the fact that took more than a third of Likud MKs along with him when he split off to form Kadima in 2005.liii While this conservative shift gave Sharon more policy latitude in general, shifts among his Revisionist advisors particularly influenced Sharon’s framing. Most notably, Ehud Olmert, Sharon’s Deputy Prime Minister, was one of the first Likud Revisionist elites to assimilate intelligence about the emerging demographic risk and to endorse unilateral separationism, first the security barrier and later the unilateral withdrawal. Olmert himself was influenced by Labor MK Haim Ramon, later in Kadima, and by his own leftist family members.liv In this sense, Sharon’s own conservative shift in values (from territorial maximalism to security) dovetailed earlier shifts taking place among his colleagues.

Conclusion

This paper contributes to the growing literature on Israel’s 2005 Gaza disengagement—which tends to compartmentalize first- and second-order explanations—by offering a multimodal approach that addresses both Ariel Sharon’s personal role as well as prerequisite developments within Israeli society.

Using the operational code framework, this paper accounts for the qualities which facilitated Sharon’s decision and establishes a baseline to confirm that Sharon’s operational code in fact remained consistent, albeit amplified in some respects. The analytical framework of prospect theory demonstrates that Sharon assumed the premiership in a domain of loss, which exacerbated his already-high risk-acceptance and cynicism toward the prospect of a brokered peace; moreover, his analogical view of the Second Intifada inherently biased him toward the use of extreme force. The framework of role theory helps clarify how, despite Sharon’s initial dovish rebranding, his multiple advocacy and increasing self-confidence and belief in ability to control events pushed Sharon to undertake increasingly extreme unilateral measures.

Through the lens of democratic elites, it becomes clear that Sharon’s ostensible departure was enabled by an emerging unilateralist separationist consensus among the Israeli intelligence and military elites, which was subsequently assimilated by the Labor Party elites before being adopted by a sizable minority within Sharon’s own Likud faction. In sum, Sharon the right man for the moment—someone whose uniquely flexible and nonideological operational code allowed him to assimilate and act upon new ideas emerging in the face of the Second Intifada. And while some speculate what might have been had Sharon lived not suffered a stroke, it is also clear that his subversion of Greater Israel was fundamentally a conservative shift to secure Israel’s Jewish and democratic character, as opposed to a farewell to arms.

Though controversial, Sharon’s implementation of unilateral separationism did significantly mitigate terror attacks and buy Israel time in terms of demographic threat. Cordoning off Israel proper from the West Bank and the Gaza Strip represented a paradigm shift that stripped away the grand warfare that had marked the Israeli-Palestinian conflict in the 20th century, exposing the raw reality of two peoples intimately entangled by geopolitical proximity and a common destiny. Although Sharon’s successors have returned at various points (and in various measures of sincerity) to the negotiation table in search of a negotiated bilateral end-of-conflict resolution, the era of epic popular uprisings and waves of cross-border terror attacks is undoubtedly over. The newfound reduction in the conflict’s intensity gave rise instead to perennial urban counter-insurgency typical of post-9/11 war on terror in the West—lethargic, low-intensity escalations that continue to define life for Israelis and Palestinians alike. This paradigm of Qassam rockets and incendiary balloons has even seemingly outlasted the Netanyahu era, which fell amidst the backdrop of risings tensions with Gaza’s government in summer 2021. As the newly elected Lapid-Bennett coalition attempts to once again resuscitate end-of-conflict talks with Mahmoud Abbas’ Palestinian Authority, only

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time will tell if Israel’s disengagement from Gaza constituted a maximalist strategic windfall for Israel or an irreparable abdication of political responsibility ultimately dooming any hope of a two-state solution.

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Endnotes Murray J. Gart, "Never! Never! Never!," Time, April 17, 1989.

David Landau, Arik: The Life of Ariel Sharon (New York, NY: Vintage Books, 2014), 451. iii Uri Dan, Ariel Sharon: An Intimate Portrait (New York, NY: Palgrave, 2006), 221, 227. iv Gilad Sharon, Sharon: The Life of a Leader (New York, NY: Harper Collins, 2011), 600, 342. v Israel Ministry of Foreign Affairs, "Israel's Disengagement from Gaza and North Samaria (2005)," Israel Ministry of Foreign Affairs, last modified 2013, accessed March 20, 2021, https://mfa.gov.il/MFA/ AboutIsrael/Maps/Pages/Israels%20Disengagement%20Plan-%202005.aspx#:~:text=Israel's%20 plan%20of%20unilateral%20disengagement,out%20on%2015%20August%202005.&text=By%20 22%20September%202005%2C%20Israel's,settlements%20in%20Samaria%2C%20was%20completed. vi Sharon, Sharon: The Life of a Leader, 2. vii Freilich, Israeli National Security: A New Strategy for an Era of Change, 264. viii Sharon, Sharon: The Life of a Leader, 24, 27. ix Landau, Arik: The Life of Ariel Sharon, 404, 405. x Greg Myre, "A Feud That Lasted a Lifetime: Ariel Sharon Vs. Yasser Arafat," National Public Radio, last modified January 11, 2014, accessed April 4, 2021, https://www.npr.org/sections/ parallels/2014/01/11/261390545/a-feud-that-lasted-a-lifetime-ariel-sharon-vs-yasser-arafat. xi Sharon, Sharon: The Life of a Leader, 26, 27. xii Michael C. Horowitz and Allan C. Starn, "How Prior Military Experience Influences the Future Militarized Behavior of Leaders," International Organization 68, no. 3 (Summer 2014): 536. xiii Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 79. xiv Freilich, Israeli National Security: A New Strategy for an Era of Change, 25, 33. xv Ibid., 258. xvi Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 89, 90. xvii Landau, Arik: The Life of Ariel Sharon, 439. xviii Sharon, Sharon: The Life of a Leader, 356 and Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 86. xix Avnery, "To Understand Ariel Sharon, Look to His Mother.” xx Landau, Arik: The Life of Ariel Sharon, 195. xxi Aronoff, The Political Psychology of Israeli Prime Minister: When Hardliners Opt for Peace, 82, 83, 84, and Appendix A and Rynhold and Waxman, "Ideological Change and Israel’s Disengagement from Gaza," 14. xxii Ibid., 82 and Appendix A and Landau, Arik: The Life of Ariel Sharon, 369, 265, 296, 359. xxiii Landau, Arik: The Life of Ariel Sharon, 304, 306, 307. xxiv Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 90 and David Landau, Arik: The Life of Ariel Sharon, 306, 310. xxv Landau, Arik: The Life of Ariel Sharon, 321-352. xxvi Ibid., 347, 356 and Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 89. xxvii Landau, Arik: The Life of Ariel Sharon, 383. i

ii

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Rose McDermott, "Prospect Theory in International Relations: The Iranian Hostage Rescue Mission," Political Psychology 13, no. 2 (June 1992): 238. xxix Yuen Foong Khong, "Seduction by Analogy in Vietnam: The Malaya and Korea Analogies," in American Foreign Policy: Theoretical Essays, by G. John Ikenberry (New York, NY: Houghton Mifflin, 1989), 502. xxx D. D. P. Johnson, "Bad World: The Negativity Bias in International Politics," International Security 43, no.

3 (Winter 2019): 137. xxxi Baris Kesgin, "Uncharacteristic Foreign Policy Behavior: Sharon's Decision to Withdraw from Gaza," International Area Studies Review 22, no. 1 (2019): 80, PDF. xxxii Landau, Arik: The Life of Ariel Sharon, 358. xxxiii Matt Rees, "The Man Who Turned Sharon into a Softie," Time Magazine, May 15, 2015, accessed March 18, 2021, http://content.time.com/time/subscriber/article/0,33009,1061523,00.html. xxxiv Prime Minister's Media Adviser, "Barak to Bush — Sharon is Not Bound by Negotiating Ideas," Internet Archive, last modified February 8, 2001, accessed April 3, 2021, https://web.archive.org/ web/20050406204002/http://www.mfa.gov.il/MFA/MFAArchive/2000_2009/2001/2/Barak%20 to%20Bush-%20Sharon%20is%20not%20bound%20by%20negotiating. xxxv Marcus Holmes and Keren Yarhi-Milo, "The Psychological Logic of Peace Summits: How Empathy Shapes Outcomes of Diplomatic Negotiations," International Studies Quarterly 61 (2017): 107 and Landau, Arik: The Life of Ariel Sharon, 378 xxxvi Sharon, Sharon: The Life of a Leader, 422, 423 and Landau, Arik: The Life of Ariel Sharon, 287. xxxvii Elizabeth N. Saunders, "No Substitute for Experience: Presidents, Advisers, and Information in Group Decision Making," International Organization 71, no. Supplement (2017): 221 and Landau, Arik: The Life of Ariel Sharon, 371-7. xxxviii "Uncharacteristic Foreign Policy Behavior: Sharon's Decision to Withdraw from Gaza,” 80. xxxix Landau, Arik: The Life of Ariel Sharon, 417. xl Todd H. Hall, "We Will Not Swallow This Bitter Fruit: Theorizing a Diplomacy of Anger," Security Studies 20, no. 4 (November 29, 2011): 534. xli Landau, Arik: The Life of Ariel Sharon, 400, 402, 403, 456. xlii Sharon, Sharon: The Life of a Leader, 421 and Landau, Arik: The Life of Ariel Sharon, 382, 419. xliii Ibid. 509, 512, 515, 525, 527, 528, 530. xliv Ibid. 541-4, 549. xlv Landau, Arik: The Life of Ariel Sharon, 463 and Joshua D. Kertzer and Ryan Brutger, "Decomposing Audience Costs: Bringing the Audience Back into Audience Cost Theory," American Journal of Political Science 60, no. 1 (January 2016): 238. xlvi Jonathan Rynhold and Dov Waxman, "Ideological Change and Israel's Disengagement from Gaza," Political Science Quarterly 123, no. 1 (Spring 2008): 11. xlvii Landau, Arik: The Life of Ariel Sharon, 493 and Kesgin, "Uncharacteristic Foreign Policy Behavior: Sharon's Decision to Withdraw from Gaza. xlviii Elizabeth N. Saunders, "War and the Inner Circle: Democratic Elites and the Politics of Using Force," Security Studies 24, no. 3 (September 18, 2015): 466. xlix Freilich, Israeli National Security: A New Strategy for an Era of Change, 109-10 and Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 93-5. xxviii

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Robert Jervis, "Why Intelligence and Policymakers Clash," Political Science Quarterly 125, no. 2 (Summer 2010): 203. li Sharon, Sharon: The Life, 474 and Landau, Arik: The Life of Ariel Sharon, 457. lii Landau, Arik: The Life of Ariel Sharon, 314, 320, 353-5, 425. liii Jonathan Rynhold and Dov Waxman, "Ideological Change and Israel's Disengagement from Gaza," Political Science Quarterly 123, no. 1 (Spring 2008): 34-5. liv Aronoff, The Political Psychology of Israeli Prime Ministers: When Hardliners Opt for Peace, 93-5. l

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The Long, Winding Road to Chinese Global Institutional Supremacy Justin Greenman

The international influence afforded to China, also known as the People’s Republic of China, with the switch in United Nations recognition in 1971 has been growing year-by-year. There are many facets to China’s institutional power, but among the most notable examples are its status as a Security Council power and the impact that has on the running of the United Nations, and its power within other international bodies, most notably the World Health Organization. Thanks to its shrewd use of global institutional power, China has explicitly and implicitly manipulated global governance to serve its ideological purposes. As a result, the Republic of China, once a formidable global power, even with relative safe harbor in the island of Taiwan, has been forced out of virtually all forms of global governance and influence at the commandof China -and with the consent of countries who do its international bidding out of fear. China’s role within the United Nations has evolved over the past half century, as China has moved from an explicit critic of global governance and interfering in interstate affairs, whether they be ceasefires, humanitarian missions, peacekeeping forces, etc., to among the body’s primary financial and military backers. This evolution should not obscure the long, winding historical continuity of how easily and frequently other nations have chosen the will of China and what, in hindsight, is clearly not best for global governance over the will of Taiwan and the ideologies (democracy, openness, goodwill towards neighbors, etc.) that created such a forum for global governance as the United Nations.

This paper examines this sweeping and contentious historical trajectory that provides context for what is motivating China, and provides a blueprint to what the future will look like without an institutional redirection. China has been seeking to position itself as the “Middle Kingdom,” an ancient Chinese concept where mainland China would be central to global political, economic, and ideological affairs. After decades of trying, and mostly succeeding, at bending the United Nations to its own ideological desires,through efforts this paper examines from both perspectives China is closer to this Middle Kingdom than it has been for centuries, if not millennia. There are, however, current attempts within United States and global policy discussions to radically reori-

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ent international institutions to better check Chinese global influence ,some of which this paper deems more successful. In the end, this paper concludes that future policymakers within the United States and international institutions will face a stark choice. They can either follow the current trajectory, maintaining a continuum of increased Chinese influence and Taiwanese isolation, or they can depart from the historical narrative before it is too late for the institutions and their values, and too late for Taiwan.

Introduction

On November 15th, 1971, a sea change in global governance occurred. After over a decade of false starts, broken promises, and failed compromises, the People’s Republic of China formally replaced the Republic of China as the sole Chinese representative on the United Nations Security Council. The United Nations resolution allowing for this change, Resolution 2758, recognized the representatives of the People’s Republic of China as “the only lawful representatives of China to the United Nations,” and to many this was long overdue. By this point, the People’s Republic of China (written as “China” in this paper when referring to its post-1971 status) had for over 20 years controlled the Chinese mainland, and though its economy was still in the throes of chaos from numerous failed initiatives, its large population and economic potential convinced many in the West of the necessity of engaging China in global institutions like the United Nations. This desire for Chinese engagement in global governance even convinced many Western countries to “expel forthwith the representatives of Chiang Kai-shek (The Republic of China, referred to as Taiwan in this paper when referring to its post-1971 status) from the place which they unlawfully occupy at the United Nations and in all the organizations related to it.”1

68% of Americans use Facebook, a notable amount considering the websites relatively recent foundingWhile it would be too simple to link the power of China and Taiwan today to that fateful resolution from 1971, it is undeniable that the international prestige has aided in its cause for international influence and to ideologically evolve the institutions of global governance. Thanks to the shrewd use of its global institutional power, China has explicitly and implicitly manipulated global governance to serve its ideological purposes. As a direct result, the Republic of China, once a formidable global power, even once it retreated to the island of Taiwan, has been forced out of virtually all forms of global governance and influence at the behest of China and with the consent of those who, out of fear or naivety, do its international bidding. The events of 1971 are one example in a long, winding history of how easily and frequently other nations have chosen the will of China and what, in hindsight, is clearly not best for global governance over the will of Taiwan and the ideologies that created such governance.

That history is a sweeping and contentious trajectory that provides context for what is motivating China, while providing a blueprint to what the future will look like without an institutional redirection. There are current attempts within United States and global policy discussions to radically reorient international institutions to better check Chinese global influence, some of which have been more successful than others and, in the future, can succeed with a better understanding of the past. If the past is understood, it can reveal how Western nations and China have not always similarly viewed the 1 Restoration of the lawful rights of the People's Republic of China in the United Nations, United Nations General Assembly Session 26, Resolution 2758, (A/RES/2758(XXVI)), October 25, 1971.

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JUSTIN GREENMAN

growth of Chinese institutional power. In the end, policymakers within the United States and international institutions will face a stark choice. They can either follow the current trajectory, maintaining a continuum of increased Chinese influence and Taiwanese isolation, or they can depart from the historical narrative before it is too late for the institutions and their values, and too late for Taiwan.

The History of China’s Institutional Power Grab

International institutions such as the United Nations have long been co-opted for China to expand its global influence, first as the Republic of China and now as the People’s Republic of China. But China’s desire for global domination extends back long before the creation of the United Nations in 1945.

In fact, those who have ruled China proper have long seen their country as a dominant actor on the world change. The concept of zhongguo, which translates to “Middle Kingdom,” is not simply geographic. First appearing on the He Zun, an ancient Chinese vessel around 3000 years old, it implies that China is the cultural, political, and economic center of the world.2 Though the moniker is disputed by some Chinese scholars for its Sino-centrist worldview, and some only use it as an identity label, it has in many ways shaped China’s nationalism and outlook on global governance.3 For roughly the next 2000 years, beginning with the Qin dynasty (221–206 BCE), monarchs who ruled China invoked the concept to legitimize their own rule and rhetorically assert their own centrality to global order.4 Even at some of its lowest points, when China was far from being a global empire, this mindset remained. For instance, Sun Yat Sen, widely seen as the father of modern China, introduced his Three People’s Principles in 1924, which frequently cited supposed Chinese supremacy: “Compared to the other peoples of the world we have the greatest population and our civilization is four thousand years old…”5

Out of China’s invasion and occupation by Japan while fighting a civil war, arguably its lowest point as a nation, came its saving grace. After the United States entered World War II, President Franklin Roosevelt proposed that the Four Policeman-the United States, the United Kingdom, the Soviet Union, and the Republic of China-work to create an international order stronger than the failed League of Nations, and capable of rebuilding and protecting the world after the war. British Foreign Secretary Anthony Eden objected to Roosevelt's inclusion of China as one of the Big Four because he expressed skepticism that China could ever return to being a stable nation. Roosevelt, however, expressed great sympathy for China’s struggles against Japanese occupation, a sympathy that not only kept China as the fourth policeman, but extended posthumously when the Republic of China became the first signatory on the U.N. charter.6 Now included in the new internal order, the Republic of China played a key role in the doctrines that even today signify the philosophy of the U.N. Perhaps most notably, their own Peng Chun Chang was an integral drafter of the United Nations Declaration of Human Rights. As his son recounted years later: “Although Mrs. Roosevelt was the chair, in reality it was my father who managed the greater part of 2 L. Kwong, “What’s in a Name: Zhongguo (Or ‘Middle Kingdom’) Reconsidered,” The Historical Journal 58, no.

(2015): 781-804.

3 “China’s Approach to Global Governance,” Council on Foreign Relations.

4 Ibid 5 Sun Yat-sen, The Triple Demism of Sun Yat-Sen, trans. Pasquale d'Elia (New York: AMS Press, Inc., 1974).

6 1946–47 Yearbook of the United Nations, United Nations Department of Public Information, 33.

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the negotiations. That is to say, she handed over most of the work to my father and, at times, was so passive as to give the impression of not even being present.”7

The Republic of China had pushed especially hard for human rights to be integral to the United Nations, leading the Big Four in that regard and demonstrating their centrality to their global presence.8

For Chang, the Chinese Civil War turned out to be a blessing. He received less direct input from his superiors and thus was given greater latitude to impart his vision on human rights.9 Yet it also meant that the republican government had less direct input or communication with its representatives or the other nations as its war with the Communists was worsening. By 1949, the Republic of China had retreated to Taiwan and the Chinese Communist Party had established control over the mainland. Despite this change in control, the Republic of China remained the Chinese representative at the United Nations. Though it was not as involved in the years immediately after World War II as its fellow policemen, it would still impact global governance, working with the U.S. and Britain to counter increased Soviet aggression.

As for the People’s Republic of China, which had been cut out of most international institutions, its millennia old desire for global supremacy remained. Though its failed internal endeavors like the Great Leap Forward and the Cultural Revolution stymied them domestically, regionally, and internationally, the P.R.C. still had other means to project power. In 1953, Premier Zhou Enlai enunciated “The Five Principles of Peaceful Coexistence”—mutual respect for sovereignty and territorial integrity, mutual nonaggression, noninterference in each other’s internal affairs, equality and mutual benefit, and peaceful coexistence. Endorsed by leaders of many newly independent former colonies, these principles formed a basis for the nonaligned movement (NAM) of the 1960s and became a counterweight to Western-dominated global governance. Even while espousing these principles of non-intervention, China nonetheless used its influence as a leader of this movement to intervene in global affairs. Throughout the 1950s and 1960s, it militarily intervened in the Korean and Vietnam Wars, while also exporting revolution and violence to Africa and Latin America.10 This dichotomy between a desire for interference and noninterference would return throughout P.R.C. history.

Even as the P.R.C. led a movement in direct opposition to the United Nations, it still attempted to enter the global body, first by the U.S.S.R. and non-aligned countries entering the body already allied with them and later also by Western countries choosing to switch their diplomacy from the R.O.C. to the P.R.C. By 1971, the United Nations had reached a critical mass of nations who believed that the People’s Republic of China was the legitimate representative of the Chinese people and, in the words of those seventeen countries who introduced Resolution 2758, those facts could “not be changed to suit the myth of a so called Republic of China, fabricated out of a portion of Chinese territory” and propped up by the United States. It was in the fundamental interests, they added, of the United Nations to "restore" promptly to the People's Republic of China its seat, thus putting an end to a "grave injustice" and "dangerous 7 Hans Ingvar Roth, P.C. Chang and the Universal Declaration of Human Rights, (Philadelphia: University of Pennsylvania Press, 2018),115.

8 Ibid, 118.

9 Ibid, 119.

10 “China’s Approach to Global Governance,” Council on Foreign Relations.

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situation."11 Rather than allow both the R.O.C. and the P.R.C. to sit in the body, as even the U.S. was beginning to argue for at the time, the seventeen nations requested that the former be booted in favor of the latter.12 Though an attempt by the United States to insert an amendment to retain membership for the Republic of China failed, President Nixon and his advisor Henry Kissinger had privately accepted this reality too, with Kissinger accepting many of the concessions China sought on the question of Taiwan during secret discussions in China before the vote, including on military support for Taiwan.13 The P.R.C. was added that fall after the resolution passed, with Taiwan withdrawing from the body shortly thereafter.

Once back “in” the international consensus, China slowly but surely began exerting influence over transnational governance. With the death of Mao in 1976, China began joining U.N. bodies. By the next year, they were a part of 21, though they held few senior positions.14 Yet its early days of influence hewed closely to its non-aligned mindset. In its first decade, it only sparingly used its greatest power: its seat on the Security Council. Throughout the 1970s, rather than cast votes in the Security Council either to support intervention or isolate itself amongst UN members, China abstained or did not vote entirely.

Instead, they launched lengthy diatribes against the U.N. and Western nations and positioned themselves as the leader of the non-aligned nations against superpower abuse of the Third World.15 Slowly but surely though, China eased away from its blanket opposition to Security Council action. In the 1980s they not only were the only Security Council permanent member to not cast a veto, but they supported all Security Council peacekeeping resolutions.16

China was now seeking to position itself as an independent foreign policy force of peace, willing and able to work with other powers within international institutions. This effort was stalled with the massacre at Tiananmen Square in 1989. Starting in April, students occupied Tiananmen Square, demanding a response to the economic turmoil instituted by China’s new market economy and greater political participation in their one-party state. After six weeks, the Chinese Communist Party declared martial law and sent in the military to clear the square, killing anywhere between several hundred and several thousand protestors and bystanders. Suddenly, China, which had been gaining much sympathy and support throughout the world for its economic and political reforms, lost much of its international credibility. How could a supposedly reforming nation be so brutal towards its own peacefully protesting citizens? To rebuild credibility and ties with other countries, beginning in the early 1990s Beijing increasingly embraced multilateralism and integration within institutions. Beijing signed multilateral agreements it had previously been reluctant to join. It acceded to the Nuclear Nonproliferation Treaty in 1992, signed the Comprehensive Nuclear Test Ban Treaty in 1996, and signed the International Covenant on Civil and Political Rights in 1998.17 11 1971 Yearbook of the United Nations, United Nations Department of Public Information, 127–128 and 136.

12 Evan Luard, “China and the United Nations,” Journal of International Affairs 47, no. 4 (October 1971): 736.

13 James Mann, About Face: A History of America's Curious Relationship with China, From Nixon to Clinton, (New York: Alfred A. Knopf, 1998), 33.

14 “China’s Approach to Global Governance,” Council on Foreign Relations.

15 Courtney Fung, China and Intervention at the UN Security Council: Reconciling Status, (United Kingdom: Oxford University Press, 2019), 15.

16 Ibid, 16.

17 “China’s Approach to Global Governance.” Council on Foreign Relations.

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But peacekeeping, “preventive deployment” or “post-conflict peacebuilding” by armed UN forces, became its primary avenue to support intervention.18 In three cases, Somalia, Rwanda, and East Timor, China refused to veto the peacekeeping missions, though it refused to support intervention in Rwanda if all intrastate parties did not consent.19 China referred to it as a “unique situation,” the same justification used to support sanctioning Haiti despite previously opposing UN sanctions.20 By 2008, China paid 3% of its national budget to the United Nations and, based on that percentage and the UN funding system, it was poised shortly thereafter to become the second largest contributor to the UN peacekeeping budget, just behind the United States; and the third largest contributor to the overall UN budget, just behind the United States and Japan.21

Whether an attempt to blind the world to its true ideology or out a legitimate belief that moving closer to the international consensus was better for them long-term, at the time it appeared that China had turned the corner in its long history. Although by no means a democracy or Western nation, China had seemingly abandoned much of the antagonism towards international governance and norms that had defined its post-1949 history. Though its mindset as the Middle Kingdom remained, China appeared more and more willing to achieve that position within the values system it had so long stood athwart. Yet there were troubling signs that China was trying to bend international governance to its own views – most of its desires in the early years did not come to fruition, including adopting the Chinese narrative on key issues. This narrative proposed that foreign delegations should cancel their resolution condemning China and North Korea as the aggressors of the Korean War and instead condemn the U.S. as the aggressor, an obvious falsehood; creating a new charter voted on by all countries large and small; and saying “all imperialist puppets should be expelled,”22 though starting 1971, they have successfully isolated Taiwan.

This demand was clear when the switch in recognition occurred with one British delegate saying at the time that excluding Taiwan was the P.R.C.’s only consistent and public condition dating back to the 1950s that it wanted granted before it entered the body.23 Since then, certain U.N. agencies have periodically allowed observer status to Taiwan in certain U.N. agencies, though that already limited influence is often curtailed after pressure from China. For instance, the International Civil Aviation Organization blocked Taiwan in 2019 after six years of observer status, and today the agency’s chief of communications, a Canadian, has repeatedly refused when asked to state if Taiwan even exists.24 Later on, this paper will elaborate the frequency of these sorts of events in U.N.’s sub-agencies. Taiwan also played a role in the few objections to peacekeeping missions after the Tiananmen Square incident that China made. China vetoed aid to Guatemala and Macedonia explicitly because those two countries continued to have relations with Taiwan. If this hadn’t made their position clear enough, China ultimately withdrew its veto towards 18 Courtney Fung, China and Intervention at the UN Security Council: Reconciling Status, (United Kingdom: Oxford University Press, 2019), 19.

19 Ibid, 20-21.

20 Ibid, 22.

21 Ibid, 24-25.

22 Evan Luard, “China and the United Nations,” Journal of International Affairs 47, no. 4 (October 1971): 736.

23 Ibid.

24 Ralph Jennings, "UN Aviation Agency Rejects Taiwan: Here's Why It Matters,” Forbes, September 28, 2016.

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Guatemala after they began negotiating with China to switch recognition.25

Despite these efforts, Taiwan has still sought to engage with the U.N. Between their expulsion and 2006, they made 14 separate applications to be re-admitted as the “Republic of China,” hoping to create some dual representation system. All these efforts were rejected by the U.N. and denounced by China. Efforts to bring Taiwan back into the United Nations as a separate country have also come up short. In 2006, the United Nations rejected Taiwan's application to become a member of the body as an independent nation, citing the organization's adherence to the "one China" policy and its recognition of the Chinese government in Beijing.26 After the 2006 rejection, Taiwan’s Foreign Ministry spokesman David Wang condemned the UN's decision: "We regret that the UN stalled the Taiwan application…

The 1971 resolution should be reviewed, as it fails to address the question of the right of representation and participation by the Taiwanese people."27 That latest rejection did lead to one refutation of China’s narrative towards Taiwan, with various countries in the UN led by the United States demanding that the body drop its language referring to Taiwan as “a part of China,” yet two resolutions attempting to implement such a change failed due to low voter participation.28 Low participation is a clear marker of Chinese influence on the Taiwan question as declining to participate, versus voting one way or the other, insulates a nation from the wrath of China without having to explicitly reject the application of a democratic nation.

All in all, the long winding history of the role of China and Taiwan in and out of the United Nations reveals elements of historical continuity and discontinuity. The 1971 shift in representation was an important historical break and a marker for a shift in U.N. policy towards the People’s Republic of China and away from the Republic of China. But ever since 1945, the United Nations had been central to the prestige and legitimization of China, providing them the meansto become a central player after a century of humiliation. For the People’s Republic of China, their utilization of the United Nations may have evolved over the years from non-aligned crusader to ultimate insider, but its goal to regain its prestige as the Middle Kingdom has remained the same. For Taiwan, 1971 marked the beginning of a slow decline into virtual irrelevancy within global governance. Despite its central role in the creation of the U.N. and its best efforts to embody its very values, the consensus remains towards allying with an authoritarian alternative in China over Taiwan. Policy discussions continue and may even be shifting towards another inflection point. the world may receive another demonstration of a continued trajectory towards greater Chinese influence and Taiwanese insignificance.

China and Institutions Today

Today, policy discussions regarding the role of China in international institutions and global governance broadly center around two themes: how China explicitly and implicitly exports its ideology 25 Courtney Fung, China and Intervention at the UN Security Council: Reconciling Status, (United Kingdom: Oxford University Press, 2019), 21.

26 “UN rejects Taiwan application for entry,” New York Times, July 24, 2007.

27 Ibid.

28 Agenda item Request for the inclusion of a supplementary item in the agenda of the sixty-third session: Need to examine the fundamental rights of the 23 million people of the Republic of China (Taiwan) to participate meaningfully in the activities of the United Nations specialized agencies, United Nations General Assembly Session 63.

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and what rhetorical, tangible efforts are being made or should be made to counter China’s actions. As the Council of Foreign Relations summarized it, throughout the nascent twenty-first century China has boosted its power in four ways: it took on a bigger role in international institutions, advertised its increasing influence, laid the groundwork to create some of its own organizations, and sometimes subverted global governance rules.29 This last point is key, for what is so striking is that even though seeks greater control over international institutions, China still opposes most of their values. On the 60th anniversary of Premier Zhou’s announcement of the “The Five Principles of Peaceful Coexistence,” Chinese President Xi Jinping celebrated the anniversary with leaders from India and Myanmar, the countries that helped China develop those ideals.30 Xi now views the Five Principles as central to international governance. “It is of great significance,” he argued, “for carrying forward the Five Principles of Peaceful Coexistence, enhancing friendship and cooperation among peoples of various countries, and promoting world peace and development.”

Though Xi claimed that “The Five Principles of Peaceful Coexistence give concrete expression to the purposes and principles of the UN Charter and facilitate…the principle of international rule of law that give countries rights, obligations and responsibilities,” China in reality seeks to protect itself from external condemnation by those bodies it is gaining influence in because the Five Principles stand against interstate intervention. This desire is rooted in Chinese "peace is most precious," "harmony without uniformity," "peace among all nations," and "universal love and non-aggression,” If Xi is publicly condemning interstate intervention, arguing that countries should be cordial to their neighbors’ internal affairs (“These principles offer a powerful intellectual tool for developing countries to uphold their sovereignty and independence,”) then other countries should not be condemning China’s internal affairs, whether it be its treatment of the Muslim Uighurs, Hong Kong, or Taiwan. For Xi, “we Chinese believe that ‘no one should do to others what he does not want others to do to himself.’”31 Xi’s speech brought the Five Principles into the 21st century and reveals that even as it accrues institutional power, China’s vision for the world is not too different from its non-aligned days.

Of course, the truth is more complicated than that. Despite publicly continuing to preach the principles from its non-aligned days, China is pursuing an interventionist foreign policy antithetical to non-aligned principles, whether it be its Belt to Road Initiative or increased militarism in Asia. This is nothing new for China; it has already been established Third World in various wars and intrastate conflicts.

Yet is what is most striking is that China is not even hiding this double standard, with President Xi the primary driver of the push for international dominance. Xi openly revealed in a 2019 speech that his goal is to “lead the reform of the global governance system.” Xi referred to the current period as a period of unprecedented strategic opportunity for China and the current mission of the party.

To use Xi’s own language, this drive for global reform would be occurring “…in the best period of development since modern times, while the world is undergoing the most profound and unprecedented changes in a century.” To do this, Xi called for China to engage in an “in-depth analysis of the law of how the international situation changes as the world comes into this transitional period, as well as developing an accurate grasp of the basic characteristics of the external environment China is facing at this historical 29 “China’s Approach to Global Governance,” Council on Foreign Relations.

30 Ankit Panda, “Reflecting on China’s Five Principles, 60 Years Later,” The Diplomat, June 26, 2014.

31 Xi's speech at 'Five Principles of Peaceful Coexistence' anniversary, June 28, 2014.

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juncture in order to better plan and facilitate the country's work on foreign affairs.” The domestic apparatus of the Chinese Communist Party will be intricately involved in this international endeavor, exporting its ideology as it gains more and more control. The result will be the external transformation of institutions and norms in ways that will reflect Beijing’s internal values and priorities.32

However, this drive for institutional alteration has already begun. Examining those that China has put into power in international bodies and their subsequent policy goals and accomplishments demonstrates the lengths that China will go to put one of its citizens in a position of power. Sometimes the U.N. reflects China’s power even without China influencing the head of an agency. For example, the U.N. counterterrorism chief, a Russian, visited Xinjiang in June and made the dubious claim that China’s activities in Xinjiang are reeducation programs aimed at rooting out terrorism.33 Furthermore, a damning 2019 whistleblower report alleged that the U.N. Human Rights Council had handed over the names of dissidents against China’s treatment of Tibetans and Uighurs since 2013, a request rejected for other authoritarian countries like Turkey.34 Today, four of the fifteen U.N. sub-agencies are lead by Chinese nationals who gained control after easily beating U.S.-backed candidates. For instance, China’s nominee for Director-General of the Food and Agriculture Organization beat the U.S. backed Georgian national by a whopping 180 votes, even amidst allegations that China forgave tens of millions of dollars of debt to an African state in exchange for withdrawing their candidate from the race. Among those lines, China has also allegedly threatened economic retaliation against smaller developing countries in Africa if they opposed China’s nominee.35

China has also gained influence in some of these agencies by working behind-the-scenes to prop up non-Chinese candidates whose values align with theirs, and not the U.N.’s. In today’s policy discussions, the most well-known example is the World Health Organization. China’s relationship to the W.H.O. has been controversial for a while now. W.H.O. heavily criticized the reign of Margaret Chan as DirectorGeneral from 2006-2017, the first Chinese national to head a major United Nations organization, for conciliatory rhetoric and deference to China’s allies, such as North Korea and Syria,36 as well as for promoting unproven and untested traditional Chinese medicine over generic pharmaceuticals.37 China’s relationship to the agency has become even more controversial during the coronavirus pandemic. The current director, Tedros Adhanom, though not a Chinese national, was heavily favored by China and its African allies over a U.S. backed candidate, and has repeatedly deferred to China since the COVID-19 pandemic began. He refused to deem the pandemic an international emergency until March even though 32 Kevin Rudd, “Xi Jinping, China and the Global Order: The Significance of China’s 2018 Central Foreign Policy Work Conference,” Address to the Lee Kuan Yew School of Public Policy, National University of Singapore, June 26, 2018.

33 Ben Evansky, “UN Human Rights Office accused of helping China keep an eye on dissidents,” Fox News, December 14, 2019.

34 Robbie Gramer and Lynch, Colum, “Outfoxed and Outgunned: How China Routed the U.S. in a U.N. Agency,” Foreign Policy, October 23, 2019.

35 Ibid.

36 "Health Care Paradise," The Wall Street Journal, May 3, 2010.

37 Marwaan Macan-Markar, "WHO Chief's Stand on Generic Drugs Slammed," IPS, February 2, 2007.

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it had met the criteria, and he refused to recommend barring travel to and from mainland China.38 He has praised China for its containment measures, describing them as a "new standard for outbreak control," 39 while also allowing the W.H.O.’s inquiry to be staffed by Chinese doctors.40

Adhanom has repeatedly and directly attacked Taiwan, attributing death threats and racist smears against him to Taiwan’s Foreign Ministry, a charge Taiwan has profusely denied.41 The role Taiwan plays in the WHO reflects the fact that today, after decades of concerted effort by China, few countries still recognize Taiwan as the rightful representative of China in the United Nations. According to Taiwan’s Ministry of Foreign Affairs, only 15 countries currently have a formal diplomatic relationship with China.

Strikingly, none of those countries are in North America and only one (the Holy See) is in Europe, meaning that those countries that one would perceive as more ideologically aligned with Taiwan are not aligned in practice.42 Few are willing to fight for Taiwan to play a role in global governance. In the W.H.O. specifically, between 2009 and 2016 Taiwan was allowed to attend meetings and events as an observer but was forced to stop due to renewed pressure from China, pressure that has remained even as Taiwan has been extremely effective in internally managing the pandemic.43

Taiwan is connected to the broader United Nations in a very limited capacity. On the website of its Ministry of Foreign Affairs, it lists the U.N. agencies it is a full member of, but only a devoted scholar of the body is likely to recognize such entities as the African-Asian Rural Development Organization, the Egmont Group, and the Western and Central Pacific Fisheries Commission.44 The Taiwanese Ministry of Foreign Affairs keeps a running list of instances of Chinese interference with its international presence.

The list for 2018 alone cited 54 instances, ranging from demanding the U.S.-based Marriott International and other international companies stop listing Taiwan as a country on their official websites to pressuring Australia to refuse a free trade agreement with Taiwan.45

These more blatant instances of Chinese sway have begun to slowly shift how policy discussions view China’s institutional influence. Until recently, the belief within the international policy sphere that the more engaged China was in global governance and the more that countries engaged with China, the more that China would engage with them and their values. For its four years, the Trump administration piloted the shift away from that mindset. Secretary of State Mike Pompeo codified these concerns in a speech at the Richard Nixon Presidential Library. While lauding Nixon for traveling to China and promoting engagement, Pompeo sees Nixon’s central goal, “Our goal should be to induce change,” as unmet due to 38 Stephanie Nebehay, "WHO chief says widespread travel bans not needed to beat China virus,” Reuters, February 3, 2020.

39 Imogen Foulkes, "Tedros Adhanom Ghebreyesus: The Ethiopian at the heart of the coronavirus fight," BBC News, March 4, 2020.

40 National Review, November 30, 2020.

41 Imogen Foulkes, "Tedros Adhanom Ghebreyesus: The Ethiopian at the heart of the coronavirus fight," BBC News, March 4, 2020.

42 “Diplomatic Allies,” Ministry of Foreign Affairs, Republic of China (Taiwan).

43 James Griffiths, "Taiwan's coronavirus response is among the best globally," CNN, April 5, 2020.

44 “IGOs in which we participate,” Ministry of Foreign Affairs, Republic of China (Taiwan).

45 “Instances of China’s Interference with Taiwan’s International Presence,” Ministry of Foreign Affairs, Republic of China (Taiwan), December 12, 2018.

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China’s ideological desire for totalitarianism and global control. “It’s this ideology,” Pompeo claimed, “… that informs his {Xi’s} decades-long desire for global hegemony of Chinese communism. America can no longer ignore the fundamental political and ideological differences between our countries, just as the CCP has never ignored them.” Secretary Pompeo used that speech to chide the rest of the world for being naïve for decades. China had always been clear that it had differences with international institutions and that it would seek to bend them to their will, but historically other global powers had ignored such differences in the hope they would vanish with time. For Pompeo, the time for such vanishing has passed, and now the world must confront China.46

The four years of the Trump administration also highlighted the role the U.N. must play in such a confrontation. To Trump and his allies, the U.N. is nothing more than a forum for dictators to dictate to democracies. Senator Ted Cruz, no friend of the U.N., bluntly stated after the 2019 report on the UNHRC regarding giving information on dissidents to China: “If the reports about the U.N. jeopardizing the safety of Chinese dissidents by handing over information about them to the Chinese government are true, it would confirm criticisms that the U.N. is a den of villains who bow down before the world’s worst regimes while attacking democracies.”47

The Trump administration was by no means the first to criticize or attack the United Nations on account of the influence China wields over it. In fact, the U.S. Senate rejected the 1972 foreign aid bill, which contained $141 million for the United Nations, explicitly because of Taiwan’s ouster.48 Yet, they are taking their criticism one step further, demanding that in response the U.S. reorient away from global governance.

In their plan to counter China’s growing supremacy over global governance, the U.S. has instead been ceding more ground to China. For example, in the United Nations Human Rights Council, which the U.S. pulled out of over claims it catered to authoritarian countries, a Bahraini candidate backed by China and Russia may soon defeat Fiji’s U.N. ambassador, Nazhat Shameem Khan, the country’s first female High Court judge, a former prosecutor and a diplomat well regarded by Western nations.49 Likewise, in the battle over leadership in the Food and Agriculture Organization, the U.S. backed its Georgian candidate even as the EU united behind a French candidate; they then spent more time attacking each other than confronting the controversial tactics China used to support its candidate.50 The Trump administration, despite its necessary course correction away from pure accommodation, had no plan for using the very institutions it attacks to confront China. Clearly, while the Trump administration marked a break from and reorientation of the policy discussion, there is little evidence the conclusion of the administration left the 46 Michael Pomeo, “Communist China and the Free World’s Future,” Address at The Richard Nixon Presidential Library and Museum, July 2020.

47 Ben Evansky, “UN Human Rights Office accused of helping China keep an eye on dissidents,” Fox News.

December 14, 2019.

48 “Nixon’s China Game,” PBS. 49 Nick Cumming-Bruce, “Leadership of U.N. Human Rights Body Becomes Proxy Battle for World Powers,” New York Times, November 29. 2020.

50 Robbie Gramer and Lynch, Colum, “Outfoxed and Outgunned: How China Routed the U.S. in a U.N. Agency,” Foreign Policy, October 23, 2019.

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conflict better off in the long-term.

The Chinese Continuum Will Persist Without Our Intermittance

To be clear, China playing a role in the United Nations is not inherently bad for the body or for global governance in general. But the way China gains its control and what it does with it is cause for concern. As Kristine Lee, leader of the Center for a New American Security, a think tank focused on the emergence of Asia, put it recently: “Chinese leadership is not inherently bad—to an extent, the United States should be pleased that Beijing is seeking to take on more responsibility in international organizations. The problem lies in the fact that it’s abusing this responsibility… Chinese officials report back to Beijing and first and foremost serve the narrow interests of the [Chinese Communist Party], rather than truly advancing multilateralism and strengthening transparency and accountability at the U.N.”51

It appears that problem is broadly being recognized now in policy discussions, as the discourse slowly moves past the era of accommodation. We must also recognize that the Chinese drive for international supremacy is no recent phenomenon, but can be dated back to ancient times to China’s labeling of itself as the “Middle Kingdom.” Clearly, President Xi is paying attention to history; he suggested the C.C.P. not only observe the current international situation, but also review the past, summarize historical laws, and look towards the future to better understand the trend of history.52

Throughout the long arc of Chinese influence in the United Nations, first as the Republic of China and now as the People’s Republic of China, the U.N. has been central to its goals of retaining global influence. The way they have used the body has been a point of historical discontinuity though, with China evolving from a non-aligned fighter into an institutionalist and Taiwan from a central player to peripheral importance. The latter, of course, is only possible thanks to the former, as it has been a point of longstanding historical continuity for other countries in the U.N. to choose Chinese engagement and influence in the body over the recognition and influence of Taiwan. It was not inevitable that Taiwan be reduced to the institutional periphery it sits at today, capable of bullying countries who still recognize Taiwan’s U.N. legitimacy (as occurred with Lithuania recently).53 Nor was it preordained that United States foreign policy leadership would backtrack every time it suggests Taiwan is worthy of its defense assistance.54

The question then remains whether these continuities will persist over the coming decades.

While President Biden is pledging to re-engage with these allies and institutions, much to the relief of the 51 Robbie Gramer and Lynch, Colum, “Outfoxed and Outgunned: How China Routed the U.S. in a U.N. Agency,” Foreign Policy, October 23, 2019.

52 Kevin Rudd, “Xi Jinping, China and the Global Order: The Significance of China’s 2018 Central Foreign Policy Work Conference,” Address to the Lee Kuan Yew School of Public Policy, National University of Singapore, June 26, 2018.

53 Norihiko Shirouzu and Andrius Sytas, “China downgrades diplomatic ties with Lithuania over Taiwan,” Reuters, November 21, 2021.

54 “White House backtracks after Biden appears to say US would defend Taiwan against China,” Reuters, August 19.

2021.

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United Nations,55 he still may fall into the familiar historical trap of underestimating China’s desire for dominance over the United Nations, thus allowing China’s rise to the exclusion of Taiwan. Less than year into his administration, it is too early to tell the impact of Biden’s reign on the growing conflict. As a start to mending broken ties, the Biden administration has planned a “Summit for Democracy,” but one wonders if Taiwan will be included, or if the fear of China that has plagued the U.N. will prevail.56 Regardless, China clearly hopes for a continuity. Recent reports indicate that they are now even willing to go after its founding legacy, taking aim at PC Chang’s Declaration of Human Rights for being “overly concerned about checking power abuses by the government and not checking power abuses by citizens.”57 If there was any statement and any accompanying action that would indicate China’s drive for influence and the ideology that backs such a drive, it would be that.

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fight," BBC News, March 4, 2020.

55 Rock Gladstone, “Feeling Spurned by Trump, U.N. Sees Redemption in Biden and Team,” New York Times, December 3, 2020.

56 Nahal Toosi, “Are you on the list? Biden’s democracy summit spurs anxieties — and skepticism,” Politico, November 28, 2020.

57 Ho Lok-sang, “It is time to review the Universal Declaration of Human Rights,” China Daily, December 8, 2020.

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Fung, Courtney. China and Intervention at the UN Security Council: Reconciling Status. United

Kingdom: Oxford University Press, 2019.

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Griffiths, James. "Taiwan's coronavirus response is among the best globally." CNN, April 5, 2020.

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“Nixon’s China Game,” PBS. Panda, Ankit. “Reflecting on China’s Five Principles, 60 Years Later.” The Diplomat, June 26,

2014.

Pompeo, Michael. “Communist China and the Free World’s Future.” Address at The Richard

Nixon Presidential Library and Museum, July 2020.

Restoration of the lawful rights of the People's Republic of China in the United Nations, United Nations General

Assembly Session 26, Resolution 2758, (A/RES/2758(XXVI)), October 25, 1971.

Roth, Hans Ingvar. P.C. Chang and the Universal Declaration of Human Rights. Philadelphia:

University of Pennsylvania Press, 2018.

Rudd, Kevin. “Xi Jinping, China and the Global Order: The Significance of China’s 2018

Central Foreign Policy Work Conference.” Address to the Lee Kuan Yew School of Public Policy, National University of Singapore, June 26, 2018.

Sun Yat-sen. The Triple Demism of Sun Yat-Sen. Translated by Pasquale d'Elia. New York: AMS

Press, Inc., 1974.

Toosi, Nahal. “Are you on the list? Biden’s democracy summit spurs anxieties — and skepticism.” Politico, November 28, 2020.

“UN rejects Taiwan application for entry.” New York Times, July 24, 2007.

Xi's speech at 'Five Principles of Peaceful Coexistence' anniversary. June 28, 2014.

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Chi più ha giudizio, più ne adoperi: An Empirical Examination of Economic Growth within Italian Banking Foundations Aidan Levi-Minzi

In August of 2019, Business Roundtable — a nonprofit organization with a large sphere of influence over business practices within large public U.S. companies — decided to implement stakeholder capitalism, a system in which companies work towards improving their profits, while at the same time providing aid for the economic development of their local communities (Dimon, 2019). Although stakeholder capitalism was recently adopted within the U.S., it has existed since the early Renaissance period within two of Italy’s largest banks: Monte dei Paschi di Siena (MPS) and Intesa Sanpaolo (ISP) in the form of Banking Foundations (Bilotta, 2017). Following the banking reforms implemented by the Italian government in the 1990s, each bank chose a different strategy to change the structure of their Foundation (Carletti, Hakenes et al., 2005). The goal of this study is to examine and compare the economic impact of these reforms on each Foundation through the application of Solow’s Growth Model. In addition, the perspectives of economists Milton Friedman and Joseph Stiglitz are considered in order to answer the question of what is more important for society as a whole: a successful regional bank, or a local corporation willing to give back to the community.

Introduction

In August of 2019, Business Roundtable — a nonprofit organization run by various American CEOs — decided to take a new approach to making money. Instead of existing solely to make profits for its shareholders, corporations are now embracing a philosophy that calls for more social responsibility. J.P. Morgan Chase Chairman and CEO Jamie Dimon said, “The American Dream is alive, but fraying.”1 There have been a number of names associated with this new phenomenon, but the one that I believe fits best is stakeholder theory, as opposed to shareholder theory. And while stakeholder theory may be a novel idea to American firms, it has been a longstanding tradition with Italian banks. This paper will use two case studies of Italian banks to study the implications of stakeholder capitalism in the financial sector.

1 Business Roundtable ‘Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans,’ August 19, 2019.

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Renaissance Italy was the birthplace of banking as an industry. In the rolling hills of Tuscany lies Siena, which was once a major city-state during the Middle Ages. Siena is home to La Banca Monte dei Paschi di Siena (MPS): the oldest standing bank in the world. Founded in 1472, the bank has become a large financial institution that has played an integral role in the development of Siena both as a metropolitan area and a center of cultural significance.2 Everything from infrastructural development to educational investments had a portion of the money coming from Monte dei Paschi. Even the local soccer and basketball teams, which both competed in their respective Serie A (the top division), were largely supported by MPS. The institution's strong ties and rich historical background allowed it to rise in power both socially and financially.

A similar institution adopted the same social responsibility model in Torino. Italian bank Intesa Sanpaolo was created through the merger of Banca Intesa and Sanpaolo IMI, founded in 1894 and 1563, respectively. Like MPS, Intesa Sanpaolo has provided massive amounts of funding for the community of Torino and Italy as a whole. They provide scholarships and research grants for those looking to do research in academia, even solidifying an agreement between itself and other European universities in 2012.3

Both MPS and Intesa Sanpaolo were able to allocate a portion of their profits for the betterment of the society in which they are situated, being living examples of stakeholder theory. However, both of these banks have seen drastically different performances over the past few years. Intesa Sanpaolo has grown a network of over 9,000 branches in 17 different countries. Meanwhile, MPS has lost 99.98% of its stock price within the past 5 years.4 By taking a closer look at these two entities over the past quarter-century, we could learn about how stakeholder capitalism has affected both the private institutions and the surrounding areas they are based in.

Business Roundtable’s shift in its outlook on corporate responsibility is the most recent addition to a debate taking place since the Great Depression. A particularly defining piece of shareholder theory was written on September 13, 1970, when Milton Friedman wrote an essay in the New York Times op-ed section entitled, The Social Responsibility of Business is to Increase Profits.5 He noted that the sole purpose of any and all corporations was to make money for their shareholders. What followed was nearly 50 years of microeconomic strategy and fiscal policy based on Friedman’s Monetarist school of Economics. The reading was almost guaranteed to be found on any MBA syllabus, and was largely accepted as the overall strategy of businesses and firms around the world.

Fast forward to the second decade of the twenty-first century, and Business Roundtable announced that the new purpose of a corporation is to promote an economy that serves citizens of the world with five commitments: customers, employees, suppliers, communities, and shareholders. But the question is whether or not stakeholder capitalism can truly sustain a business and its operations.

As a science, economics does not share the same experimental luxuries as chemistry or biology.

There is no lab, no procedures, and no such thing as a controlled environment. Unfortunately, economic models and theories are built by studying past failures, and then performing comparative statics or regression analyses to predict what variables caused these unwanted outcomes. Germany in the 1920s and 1930s 2 BMPS Board of Directors, By-Laws BANCA MONTE DEI PASCHI DI SIENA S.p.A 3 UniCredit, Study and Research 4 Borsa Italiana, Monte dei Paschi di Siena Stock Quote, 2021 5 Friedman, A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS taught us that printing money is not a good way to pay off debt; the Global Financial Crisis in the 2000s was an example of why government agencies should play an active role in monitoring financial markets.

By taking a closer look at Italian Banking Foundations, we can come up with a clearer understanding of how these business models work and their impact on overall economic growth. There may be evidence to suggest that the funds and grant of these foundations can have a positive impact on long term economic growth in Italy, and that this business model can be applied to other nations (see The Effect of Italian Banking Foundations on Economic Growth: An Introduction of the Solow Growth Model).

First, we will define the differences between shareholder and stakeholder theory by taking a closer look at Milton Friedman’s pieces on microeconomic strategy and macroeconomic policy (both monetary and fiscal). This theory will be compared against works by Joseph Stiglitz and Paul Krugman, both left-leaning Keynesian economists that have argued for both governments and firms to implement shareholder capitalism.

The next step is to do an ex-post analysis of Monte dei Paschi and Intesa Sanpaolo, who were both at the mercy of new Italian Banking Laws throughout the 90s and early 2000s that worked to implement a policy more akin to Friedman’s philosophies. MPS and Intesa Sanpaolo had already built a strong foundation (literally called Fondazione) in their relationship with the cities and provinces that they called home. Intesa Sanpaolo was able to maintain that relationship while still growing its business. MPS was not.

In the final section, I will incorporate the Solow Growth Model, which won Robert Solow his Nobel Prize in 1987. In its purest form, the exogenous Solow Model explains how long-run economic growth is based on three factors: population growth, the savings rate, and technological progress. Years later, in 2010, Gregory Mankiw used Solow’s Model to argue that democracy would never allow an economy to reach its full potential, as no rational voter would give up their present rate of consumption for the benefit of later generations. We will take a closer look at this claim and implement the theory of stakeholder capitalism to see whether firms can help the society they are a part of to reach that potential while still turning the profit they need to in order to survive.

Competing Theories in Capitalism

Before diving into the case studies, it is best to define the theories for what they are from an experimental perspective. The recent literature on firm theory can be categorized into two contrasting analyses. Monetarist economists, such as Milton Friedman, argue that a corporation’s executives should be measured based on their firm’s returns to stockholders, otherwise known as shareholder theory.

Keynesian economists, more specifically Neo-Keynesian, have insisted that a more comprehensive business model would provide a sustainable long term growth effect for the firm itself. This has become known as progressive capitalism, or stakeholder theory. By simply looking at the difference between stakeholder and shareholder, we can see the different motives behind these ideologies. A shareholder is someone who has invested money into a company and therefore owns a portion of it. A stakeholder is anyone who has a vested interest in the performance of the firm, both financially and actively. This includes suppliers, whose profit is dependent on the purchasing firm’s demand; creditors, who will be paid back only if the firm does not default on its loans or credit; and even customers, whose overall economic benefit increases as the total output of the firm reaches maximum potential (and are therefore able to enjoy more of the product that they are demanding, thereby increasing overall economic welfare).

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To begin, we must look at both sides’ views on the role of government and fiscal policy. In Friedman’s Capitalism and Freedom, he argues that any political interference in the economy, namely stimulus spending, would lead to a recession. Because politicians are sensitive to their voters' approval ratings, they are more likely to jump in and incorporate stimulus for every hiccup they might see, no matter how minor, in order to avoid an economic downturn and, as a result, a defeat at the next election.6

Advocates of stakeholder capitalism argue just the opposite. In People, Power, and Profits, Joseph Stiglitz says that fiscal policy can stimulate the economy with well-timed investments into specific sectors of the economy, most notably infrastructure and research. Stiglitz also writes that these fiscal measures of stimulus should not be aimed at the supply-side of the economy (for example, corporate tax cuts or deregulation), but rather at increasing demand by giving aid to individual consumers and households.7 Similarly, Neo-Keynesian Paul Krugman equates fiscal stimulus as government spending when consumers refuse to. In his book Peddling Prosperity, Krugman backs this claim by using the Great Depression as an example. During the 1930s, Keynes and his supporters advocated for more government spending in order to lift America out of the depression, but to no avail. What ended the Great Depression was a political hiccup that demanded government spending: World War II. By forcing the US government into a situation in which they had no other choice but to purchase raw materials and other services for the war effort, World War II inadvertently created the exact stimulus the American (and world) economy needed in order to lift itself out of the Depression. I would like to note that, while Krugman’s argument does have some truth to it, saying that World War II ended the Great Depression is a gross simplification.

Perhaps one of the more important implications of monetary policy and government intervention in macroeconomics for the purpose of this paper is the recent literature on how technological progress has reduced the effectiveness of this policy.8 This theory has gained much traction in the past 10 years, specifically with the introduction of many tech firms to the prospect pool of future blue-chip companies.

This is a crucial concept for the purposes of this paper, and so I will dive into it a bit deeper.

First, we must observe the overall US investment rates in tangible vs. intangible assets, which can be seen in the graph on the following page.9 Tangible assets include anything that is used in the making of physical assets. This includes factories, sheet metal, corn, computers, textiles, or anything else that can be physically touched. Intangible assets are just the opposite and span a much broader spectrum. This can be anything from a patent, a trademark, brand recognition, or any form of intellectual property.

6 Friedman, Capitalism and Freedom, p. 76 7 Stiglit, People, Power, and Profits. P. 195 8 Döttling and Ratnovski, Monetary Policy and Intangible Investment 9 Corrado and Hulten, How Do You Measure a ‘Technological Revolution’?

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As shown in the graph, firms in the US have begun investing a lot more into intangible as opposed to tangible assets. This is a testament to the technological progress seen in the last 20 years. Instead of firms purchasing raw materials to make their goods, they are instead putting more money towards the patents or the programming behind the technology of their goods. This isn’t necessarily a bad thing; it just means that more companies are looking to become more tech-savvy by making these types of investments.

Now let’s take a look at interest rates — one of the more powerful tools of central banks. While the reader that isn’t familiar with central banking and macroeconomic policy may only be familiar with interest rates as they affect car loans and mortgage payments, their real impact on the overall economy can be found when considering the cost of money, specifically for firms looking to invest in future development and production. Let’s say, for example, General Motors wants to take out a loan from a bank in order to buy more metal to produce a new car. A bank would then give them this loan on the condition that, if General Motors can’t repay, the bank can seize one of their factories and sell off the parts in order to help pay off the loan. This is called debt financing, and the factory, in this case, is called collateral.

Now let’s say a startup company that sells phone applications is looking to grow its business. It doesn’t have any real (tangible) assets besides maybe the few laptops that its five programmers work on and a small office. All of its value comes from the coding of the app and the services it charges for users to download it. Using the logic of the General Motors example, banks would be much less willing to hand out loans given that such little collateral could be posted by this firm. What would they be able to seize in

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the case of a default? They can’t sell a hundred lines of code or continue running the app in the same way that it can sell the raw materials of a car manufacturing plant. Therefore, firms with more intangible assets have a more difficult time using debt financing.10

As a result, the effects of monetary policy on firms are no longer as substantial for these types of firms. This has been a topic of discussion amongst economists for the past couple of years and was first brought up in a paper by Crouzet and Eberle in 2019.11 Recently, this theory has been tested by looking at firms with financially constrained balance sheets, meaning they don’t use debt financing and most likely invest more in intangible rather than tangible assets, and their response both in stock price and profit performance after a change in interest rates. The data confirm that weaker credit channels, or not using debt financing, is a major reason causing these firms to not respond to monetary policy.

But what does all this mean for Italian Banking Foundations? If we consider the dwindling role of central banks in monetary policy, then the entire previous discussion of how government spending can improve economic development is irrelevant. During economic downturns, having the government lower interest rates or spend money may no longer be a viable option. They have no more control over the value of money. Even World War II era spending would be unable to lift the economy out of its downswings.

This is where Italian Banking Foundations come in. If they are able to donate their grants to the sectors that were hit the hardest or give resources to help support those in need and get them back to spending and creating economic value, then they can play a massive role during recessions. This will be discussed further in The Effect of Italian Banking Foundations on Economic Growth: An Introduction of the Solow Growth Model.

Backtracking a bit, let’s look at where this fiscal stimulus or foundation spending could be going.

One area that both Monetarists and Keynesians can agree on is the government’s role in education.

Friedman writes that “a stable and democratic society is impossible without a minimum degree of literacy and knowledge… and without widespread acceptance of some common set of values.”12 From an economist’s perspective, educating children contributes to general social welfare not only by allowing citizens to create better and more economically valuable products and services, but also by promoting and maintaining a stable democracy, otherwise known as the ‘neighborhood effect’, a phenomenon that can be applied to subjects beyond economics. When considering this tradeoff, it is clear that government subsidies are required when discussing educational funding. While the extent of what qualifies a student as ‘fit’ to be a citizen of democracy is beyond the scope of this paper, it can be said with certainty that additional schooling beyond this point will still incorporate the neighborhood effect by increasing the welfare of the state. There are massive payoffs to having a literate, well-educated population.

Much of stakeholder theory concerns itself with microeconomics. Digressing from public economics and looking at private firm theory and practice, the introduction of shareholder and stakeholder theory will complete the introduction of these philosophies. The main difference lies in the core values of what a firm should build its business model around. Looking back to Friedman’s original essay in The New York Times, the corporate executive of any firm is picked by the shareholders of that firm. The success of the shareholders is therefore its primary responsibility. And that success is easily measured through stock price. Any other endeavor that could be classified as a “social responsibility” would be a waste of resources.

10 Cecchetti and Schoenholtz, Financing Intangible Capital 11 Crouzet and Eberly, Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles 12 Friedman, Capitalism and Freedom, p. 86

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS If the corporate executive were to decide to set aside these resources for what she believed to be a social cause worth funding, then that would take away from the task at hand. The cost of this would fall onto other parties. If this were to make a dent in the stock price, then that would be the shareholders paying the difference. If the firm needs to raise prices in order to make up the losses, then the customers would bear the burden by having to either pay a higher price or by not being able to enjoy the same aggregate output of the product, henceforth a decrease in consumer surplus and economic welfare. If the firm decides to lower wages to continue their social responsibility, then it is with the employees’ money, who now no longer are able to maintain their wages and are unable to spend the same kind of money they would have been able to without the added social responsibility of the firm.13 In other words, the corporate executives have no right to play with resources that aren't theirs in order to achieve goals they weren’t meant to chase.

To Milton Friedman and his fellow advocates of shareholder theory, stakeholder theory showcases the “fundamental misconception of the character and nature of a free economy.”14 Businessmen have one role and one role only, and that is to use every resource at their disposal in order to make a profit insofar as they play by the law. Let’s say that these corporate leaders do have a social obligation. Who decides what those obligations are? Supporters of shareholder capitalism make an interesting point in saying that once this expectation is placed on a businessman, then they are essentially acting as a politician, not a private party. If this is the case, then the majority of C-suite executives will simply become elected officials, prone to the democratic technique of public appointment that would judge them far beyond the simple measurement of share price performance.15

As far as giving back to the community, that is what corporate taxes are for. Firms are given tax incentives when donating to charitable organizations. Under stakeholder theory, this eliminates mandating the firm to give back to the community by instead allowing them to pick where their donations end up, specifically by giving tax breaks to donations and other corporate gifts. However, this incentive works against the average shareholder, as giving away money to charitable organizations lowers the firm’s cash flow, whereas the owner of the stock — and therefore the company — should decide how his funds are disposed of. As a note, when mentioning charitable organizations, the main beneficiaries I am referring to are universities and other research organizations. Shareholder capitalists argue that their funding should come from individuals who are the owners of property within society.16 In other words, university funding should come from universities. Any money made by a firm should be given back to the shareholders through dividends and cash flows. Not doing so would be unethical.

On the flip side, stakeholder theory is a system where the corporation is tasked with serving all stakeholders. Among these stakeholders are customers, suppliers, employees, shareholders, and local communities. Stakeholder capitalists claim that Friedman’s ideas have led to markets that are obsessed with short-term goals. When Benjamin Graham was a professor at Columbia University in the 1950s, stocks were long-term decisions made by investors who saw potential in a company that needed cash in order to make it as a business. The stock market was where money met ideas, and those ideas became products that would increase the overall welfare of society until money met an even better idea that would give even 13 Friedman, A Friedman Doctrine — The Social Responsibility of Business Is to Increase Its Profits 14 Friedman. Capitalism and Freedom. p. 133 15 Friedman. Capitalism and Freedom. p. 134 16 Friedman. Capitalism and Freedom, p. 135

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more welfare, and then the process would repeat itself. But with the introduction of shareholder theory, stocks became a means to an end. Owning stock was an expendable asset that investors sought based on share price, not underlying fundamentals or long-term growth. Issuing stock as a company was no longer a stable mode of raising capital, especially if it was intended to be used on long term investments.

Stakeholder theorists argue that, by ensuring the growth of the overall community, firms would be able to sustain an environment that fosters their growth.

In practice, this would take the form of different corporate governance amendments. Paying fair wages, reducing the CEO-to-worker pay ratio, and ensuring safer work environments would increase employee welfare. Providing better customer service and engaging in more honest marketing techniques add to customer welfare. Investing in local communities and lobbying for higher corporate tax rates play into the ‘neighborhood effect’ in helping the greater community, a theory that spreads far beyond just the simple example of the school system. The mindset behind this is that, when the community surrounding a business is prospering, then that business will profit because of it.

An area of particular importance is how shareholder and stakeholder capitalism would affect overall economic growth. The shareholder capitalism that has played out over the past half century led to firms becoming more focused on short-term goals, such as quarterly profits or skyrocketing share prices.

And this mindset did work, given that people who managed these firms are measured by their stock price.

But the shareholder capitalists believe that this is unsustainable: the long-term effects (climate change, wealth gaps) would eventually lower their number of potential suppliers and buyers, and now private corporations in developed markets are now faced with decisions on where to turn next.

In answering Friedman’s question of where private enterprises should focus their resources should they ever feel the need to fulfill a social responsibility, shareholder capitalists suggest that this spending be focused on activities with a high-multiplier — that is, activities that will provide a higher net stimulus on the economy per dollar spent. Education is generally considered a high-multiplier sector. As stated before, the two areas that would greatly benefit the overall economy are infrastructure and research through the aforementioned neighborhood effect. Better infrastructure would allow businesses access to currently untapped potential in the form of both working and human capital. It will also increase private investment since firms will have better access to markets. Better transportation would give workers more productive time and less time sitting in traffic. Rather than spending money on gasoline and other transportation expenses, consumers would have more money to invest in the stock market, thereby meeting more money with more good ideas.

The impact of public research on overall economic growth is unfortunately understudied but is still a major aspect of this discussion. Italian-American economist and University College London professor Mariana Mazzucato devoted an entire chapter of her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths to prove how nearly every technology that makes up the iPhone was first introduced by a publicly-funded initiative: the internet, GPS, touch-screen, and even Siri.17 Stakeholder capitalists believe that the key to economic growth is the advancement of science and technology through education and research, along with being able to spread that technology to the entire population through more investment in infrastructure.

In the final part of this analysis, it must be determined how these forms of capitalism are to 17 Mazzucato. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Ch. 5

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS be implemented in practice. There are two options: they are either adopted as ideologies that are widely accepted amongst all citizens, essentially becoming a cultural norm, or they are a model enforced by law and regulation. In the case of shareholder capitalism, the works of Friedman and his colleagues were able to shape corporate governance through both methods. His 1970 New York Times article sparked a wave of ferocity amongst corporate America with the aim of making more money than anyone else.

This wave would go on to dominate American monetary and fiscal policy throughout the 70s and 80s, especially when Alan Greenspan, an avid Libertarian, took the reins as Chairman of the Federal Reserve.

On the other end of the spectrum, stakeholder capitalism has crept its way into consumer behavior, as independent research firm JUST Capital surveyed 4,000 Americans on what issues they believe large corporations should prioritize.18 This study, conducted in 2019, concluded that providing fair wages and equal opportunities topped the list. It can even be seen in recent Amazon commercials during the Covid-19 pandemic, in which the multinational technology company champions itself on how they have donated over 12 million meals to people in need.19

While American firms are transitioning from a system based on profits to a set of policies more concerned with the betterment of overall society, the Italian banking industry found themselves in a different situation. The social responsibility of firms has been a cultural expectation that dates back to the founding of these institutions in Renaissance Italy, signifying a relationship between firm and city that is much more solid. Instead, the government felt it needed to push for their privatization in order to continue the sector’s growth. A closer look at the policies that governed both Monte dei Paschi and Intesa Sanpaolo is a crucial step in applying shareholder and stakeholder capitalism to these cases.

Italian Banking Law

In congruence with the presentation of the theories, we will begin the case study by looking at the monetary and fiscal policies that defined the Italian banking sector over the past 25 years. To get a full image, it is best to start with the Italian Fascist regime’s 1936 Banking Law, which saw the first separation of banks from other corporations as private entities. The law included a clause stating that banks were forbidden to participate in private enterprises. This was the first true separation between finance and politics in unified Italy. While there was still a strong influence from outside parties (such as the Province of Siena for MPS or Torino for Intesa Sanpaolo), the banks were no longer dependent on the Kingdom of Italy.

The main objective of the Italian banking regulatory bodies was to foster local development and ensure financial stability. Mergers between savings banks were strictly regulated, and public banks were disqualified from participating in them altogether. This system assisted in the development of Italy’s industrial sector, which was made up of a number of small and medium-sized firms.

This banking reform survived the Second World War, fueled Italy’s ‘Economic Miracle’, and weathered stagflation of the 1970s, which struck a particularly heavy blow to Italy and its then-developing economy. Then, in 1990, the Italian government amended the 1936 Banking Law with the Amato Law, which would force nearly every Italian financial institution to undergo major restructuring.

The Amato Law was one of a number of new banking reforms designed to keep up with the rest 18 JUST Capital, A Roadmap for Stakeholder Capitalism: 2019 Survey Results 19 Amazon, Amazon TV Commercial, 'Helping Those in Need'

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of the world. The United States had recovered from the Second Oil Crisis of 1979 by controlling inflation and stabilizing interest rates. Other members of the European Union were piggybacking off of this success, and the Italian central bank did not want to miss the bus. Then, a marvelous opportunity presented itself.

In 1991, the Iron Curtain fell, and Europe all of a sudden found itself with over 290 million people they had not seen since before World War II. From a marketing perspective of businesses in nearly every sector, their potential client base had essentially doubled overnight. The Italian Financial Sector already fostered a working economic relationship with Russia when the Soviet government sought out the expertise of Italian automobile manufacturer Fiat to build and operate the Volga Automobile Factory in Tolyatti, Russia.20 What proceeded was a frenzy of European banks attempting to acquire enough leverage to take on as many clients as possible and rise the ranks. This is what led to the 1995 banking reform in Italy, and the main amendment was the privatization of savings banks.21

This privatization was widely considered to be a successful undertaking. For a quick comparison, the German government owned about 44% of its banks from 1992 to 2004, while the Italian government cut their share of 68% in 1992 down to 25% in 1997. While Return on Assets is not the sole measurement of a bank’s solidity, the 60% difference by 2000 in the graph below22 is telling.

20 Fava, Between Business Interests and Ideological Marketing: The USSR and the Cold War in Fiat Corporate Strategy, 1957–1972 21 Carletti, et al., The Privatization of Italian Savings Banks – A Role Model for Germany?

22 FRED, Bank's Return on Assets for Italy

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More specifically, the Amato Law called for the banking system to incorporate a joint-stock company as the basic organizational rule of thumb throughout the sector. This was an important first step in privatization, and essentially allowed for financial institutions to split themselves into two entities. On one side, there is the obvious enterprise that performs banking activities and provides financial services. On the other, there was the Fondazione, which would be responsible for pursuing activities for the general aid of several fields throughout the region. The Fondazione, or Foundation, is what makes these banks a living example of shareholder theory and is going to be a major focus in this paper. Importantly, the foundations had to maintain their majority stake in the bank under the Amato Law, meaning they maintained their ownership.23 In order to be exempt from this clause, the firm must prove to the Italian Council of Ministers a need to strengthen the banking system. In other words, they had to prove that holding onto the relationship between bank and foundation would be detrimental to the bank's performance. Moreover, these requests were denied unless the firm could prove that it would increase societal welfare. This is a direct correlation to the fiscal responsibilities presented by Stiglitz. If the Italian banking authorities allowed firms to separate from the foundations, then it would mean less investment into the surrounding region. Instead, they are sacrificing profitability and efficiency for the sake of public interest. This is the kind of government structure that would allow the private banking sector to become one that focuses on shareholder theory.

The Amato law held until 1994, when the transition towards privatization took another step with the Dini Law. The Dini Law repealed the obligation for the Foundation to keep control of the jointstock companies. The government further incentivized the gradual removal of the foundations with tax advantages for those willing to dispose of their banking shares within four years of its ratification. The goal was to integrate the limited regulation regarding the foundations.

The Dini Law played two key roles. First, it allowed the Foundations to operate as independent institutions that were privatized, with full statutory and managerial autonomy. Second, it made their entire cash flow completely dependent on how much control they had in the bank that they were affiliated with.

As a result, while they were operationally independent, they were still financially supported by the banking side.

Ultimately, this worked. As seen in Table One, most of the major Italian banks substantially lowered their foundations’ holdings. One important note, however, is that even with a share of less than 50%, most of these foundations still played a major role in the management of the finance division. In this paper’s two case studies, it will become clear how the underlying banks’ handling of their respective foundations, and the control that that foundation had over the overall firm, played a major role in the future performance of the bank.

Table 1 Shares of Foundations at Largest Italian Banks (%) as of 200324

23 Menasci, A bank’s crisis: the case of Monte dei Paschi di Siena p. 4 24 Carletti, et al., The Privatization of Italian Savings Banks – A Role Model for Germany?

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Share of Foundations

Banca Intesa

UniCredit

Sanpaolo IMI

CapItalia

Banca MPS

44.0

18.0

36.0

30.0

49.0

While these banking reforms were important, they were only a small part of a much broader overhaul taking place in the European Union during this time. The First Banking Directive in 197725 and the Second Banking Directive of 198926 continued the trend seen throughout the 1980s of monetary and fiscal policy easing up on political and economic restrictions on firms, as prescribed by Friedman at the time.

Banks were now allowed to spread beyond their designated regions, which meant a much broader client base—both financially and culturally—was available to them. There was also no longer a requirement for the banks to hold government bonds, which lowered their exposure to country risk. Additionally, there was no longer a restriction on credit available to the private sector. All of these changes allowed commercial banks and private savings banks to expand their activities and engage in other financial services that they otherwise would not have been equipped for.

While the scope of the EU’s banking regulations is beyond the scope of this paper, one law in particular, the Legislative Decree of 1992, played an important role in the development of shareholder theory in Italy. It allowed banks to choose one of three models to base their organizational structure and supervisory purposes around: a universal bank, a commercial bank, or a banking group. All of these subgroups were subject to the same supervisory requirements. In other words, financial institutions now had much more leeway in raising capital for the purpose of nearly everything listed under the Second Banking Directive of 1989, including regional expansion and increasing private credit. This allowed Italian banks to grow at their own discretion, without being subject to strict regulations from the Italian government.

Europe had fully immersed itself into Milton Friedman’s Monetarism.

In presenting these laws and reforms in chronological order, we can see that there are a few major differences between the development of banking law and monetary policy in Italy and the US. In fact, they are essentially happening in the opposite order. Firms in America have been following the Friedman model of shareholder theory for over 50 years and are just now seeing a shift in both consumer behavior and corporate governance towards an economy that incorporates more stakeholder theory. The private financial system in Italy has a cultural obligation to use its Foundation as a way to provide for the greater good of the region they are in. The Italian government felt the need to incentivize its financial sector to privatize in order to grow.

The separation of banks and their foundations provides a great case for the study of how this type of business model can impact long term economic growth. These foundations played crucial roles in developing their respective Italian provinces, but they also impacted their banks’ performance. The success of a bank is measured using the same guidelines across international borders. While shareholder and stakeholder capitalism may define success differently, these measures still hold, whether in the EU or 25 The Council of the European Communities, FIRST COUNCIL DIRECTIVE, 1977 26 The Council of the European Communities, FIRST COUNCIL DIRECTIVE, 1989

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS in the Americas. While the fiscal policy between the two nations may be different, the Italians follow the model laid out by Stiglitz and the shareholder capitalists. This is what allowed the Italian banks to practice shareholder capitalism in the first place and is therefore a crucial component of this case study. This paper hopes to study how stakeholder capitalism would affect the firm that incorporates it into its strategy, along with the surrounding area. These banks have an obligation to both its shareholders and its stakeholders, in which the stakeholders are the recipients of their funds. It does not intend to research the implications of more progressive fiscal policy within the US by studying the EU. Instead, the next sections will take a retrospective look at the impact of these Foundations on Italian banking by using two case studies that highlight the differences between maintaining a stake in a Foundation or not providing it with consistent funds.

Now that the differences between these two theories have been laid out, along with their histories in both European and American banking, it is time to look at the overall impact these policies had on the Italian banking sector.

Case Study I: Monte dei Paschi di Siena

Monte dei Paschi is hardly similar to the massive powerhouses that occupy the towering skyscrapers

of Wall Street and Paternoster Square. The Sienese institution was founded in 1472 as a humble monte di pietà, or mount of piety27, which was a small institution developed by the state, in this case the Republic of Siena, in order to provide loans to the lower class.28 While this technically means it was a bank, it didn’t perform the same tasks as modern banks until 1624 when Grand Duke Ferdinando II, the Grand Duke of Tuscany at the time, granted part of the State’s income back to depositors of the bank. Most of this income came from the state-owned pastures and farmland around the Maremma, which were then known as Paschi.29 This could be considered the Medieval version of a defensive stock, such as water or gas, that is a necessity and therefore less risky.

The loans that MPS offered were at a rate of 7.5%, which was not a bad deal back then and allowed many Sienese families an opportunity to become entrepreneurial farm owners.30 MPS was able to weather the storm of the usual fluctuations that come with doing business in a city-state during periods of violence. As the bank became stronger and more liquid throughout the 18th and 19th Centuries, they reached their pinnacle with the Unification of Italy in 1861, when their client base was no longer restricted to the region of Tuscany.

These catalysts led to the tight relationship between the Bank of Siena and the City of Siena.

Nowhere is this relationship more evident than in the bylaws, written as recently as 2017, that govern the goals and aims of MPS.

One particularly telling section can be found in Lo Statuto del Comune di Siena, which states, in Article 2, Section 4: 27 Monte dei Paschi di Siena, Storia Del Gruppo MPS 28 Lexico, Mount of Piety 29 Monte dei Paschi di Siena, Storia Del Gruppo MPS 30 Giacomo, et al., IN MERITO ALLA FONDAZIONE MONTE DEI PASCHI DI SIENA E ALLA BANCA MONTE DEI PASCHI DI SIENA. I RAPPORTI CON LA REGIONE TOSCANA

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Due to the historical and traditional relationship between the city and MPS, the council benefits a proportion of Fondazione del Monte dei Paschi di Siena’s profits. The council appoints half of Fondazione’s directors, who are people living in Siena or in its province.31

From the viewpoint of Americans or even other Europeans, this relationship becomes particularly unusual when looking at the specific undertakings of Monte dei Paschi. As a testament to how important these foundations are to the cultural identity of their city or province, MPS donated nearly €8 million to the Serie A soccer team in 2011, making up nearly 15% of the team’s revenues for the 2011-2012 season32, and over 80% of the €21 million the basketball team brought in came from the bank in the same year.33 They even have a fund for restorations of the Sienese opera house. In total, nearly €2 billion was invested into the modernization of the city, including social, cultural, and economic activities in and around the territory of Siena.34 This calls for quite a different analysis than what would be required for Bank of America or Wells Fargo, but that will be addressed later. First, we must look at recent Italian banking reforms passed into law within the last 25 years, particularly those concerning the privatization of these banks and their associated foundations.

The Amato Law of 1990 was the first step of these reforms.35 By 1995, Monte dei Paschi went through major restructuring. They wanted to maintain their charitable responsibilities to Siena and its people while continuing to grow into a world-renowned financial institution. Their first move was to split into two groups: Fondazione Monte dei Paschi di Siena, a non-profit entity that would own 51% of MPS’s shares, and La Banca Monte dei Paschi (BMPS), which would continue to operate as a bank. This allowed the bank to abide by the Amato Law by privatizing its financing sector while still having an organization that acts as a non-profit charitable organization. From the perspective of an economist, this means that the majority shareholder of MPS was neither a profit-maximizing institution nor a producer of cash flows. Put simply, they didn’t do what any business is supposed to do—make money. Setting its altruistic goals aside, it was a single line on the liabilities section of MPS’s balance sheet that would never be able to add to the other side as an asset.

Beginning with a more macroeconomic approach, the Italian government, with their new initiatives to garner economic growth, tried to foster a relatively nonrestrictive policy on both domestic and foreign mergers and acquisitions in its financial sector with the passing of the Amato and the Dini Law. Monte dei Paschi began to horizontally expand its business by acquiring other smaller banks within the region with relative success. In 1998, however, they acquired La Banca Antonveneta, an Italian bank with headquarters in Padua, Veneto. It was founded in 1871 as a cooperative bank, and by 2008 was Italy’s 8th largest banking group in terms of total assets. It was the biggest acquisition Monte dei Paschi had ever taken part in. It would later prove to be a disastrous transaction, and a major step towards inorganic growth for MPS. 31 Fondazione Monte dei Paschi di Siena, Fondazione Monte Dei Paschi Di Siena By-Laws, p. 23 32 Cadirini, MPS, Che Fine Farà Il Siena Calcio Senza La Sua Banca?

33 Bolognini, Mens Sana dalle stelle alle stalle, La Repubblica Firenze 34 Aloisi, Monte Dei Paschi - a Legacy of Power and History 35 Associazione di Fondazioni e di Casse de Risparmio Spa, Legislation

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With most European banks looking to take advantage of a busy acquisition market, the MPS/ Antonveneta deal was considered to be the last opportunity for MPS to jump into the increasingly competitive European Union. MPS was under strong pressure from both government officials in Rome as well as local leaders in Siena to go through with the merger. In doing so, it became Italy’s 3rd largest bank.

But this came with a hefty price, as MPS paid €9.3B on a company allegedly worth only €3.3B. The total euro value at the end of the transaction ended up surpassing €10B, which translated into a P/E Ratio of about 26.2, which was fairly above the mean at the time of around 16.36 Perhaps what best describes how grossly overpaid this acquisition was is the fact that Antonveneta was bought out a few months prior to the MPS/Antonveneta acquisition for a price of €6.6B, meaning that Antonveneta realized a capital gain of nearly €3B in 3 months.

While the reason for MPS’s massive spending is still debated today, there is no doubt that the pressure from both regional and national governments played a role. Milton Friedman predicted that if private entities were given the obligation to implement a stakeholder-style governance structure, then they would become no more than a private government, with CEOs and CFOs gaining power “by the public techniques of election and appointment.”37 He was right. MPS, rather than acting on its duty to shareholders of profit maximization, had to respond to the political pressures because its Foundation’s Board of Directors were appointed by vote. During the time of the Antonveneta deal, Fondazione Monte dei Paschi still held the title as majority shareholder of the bank, meaning it had full control over its actions.

This relationship only solidified and reinforced the political influence that had shaped MPS up until this point. At no other time was that political sphere more controlling than in 2007. The Foundation’s Deputation (or board members) were appointed by various leaders in the Sienese community, which was broken down as follows: 8 members by the Municipality of Siena, 5 by the Province of Siena, 1 by the University of Siena, 1 by the Region of Tuscany, and 1 by the Archdioceses of Siena. These members would then, in turn, be responsible for appointing the leadership of the bank.

This is why MPS felt so much pressure to go through with the deal —they weren’t answering to shareholders looking for profits, but instead to members of the community. Under pressure from people such as the President of the University of Siena, or leaders of the local Catholic Church (people not notable for their banking expertise), the idea was to make the bank as big as possible.

While the details of the acquisition aren’t extremely important for our purposes, the aftermath is.

Many of the figures analyzed below, specifically those of MPS, are extremely skewed and experience more heteroskedasticity during the post-crisis years. This is thanks to the creative accounting techniques used by MPS when filing the acquisition with Italian banking authorities. Within this filing, there were four main legs.

The first was a mandatory €5B recapitalization. In order to do this, the bank had to dig deeper into the fund of the foundation, estimated at about €2.8B. From this point on, the success of FMPS would be solely dependent on the performance of the bank, which would not go on to do very well.

The second was the issue of new shares, which ended up being worth around €950M. In particular, these were hybrid common and preferred stocks known as Floating Rate Equity-Linked Subordinated Hybrid Preferred Securities, or FRESH. JP Morgan, the subscriber of the new shares, was being paid coupons and 36 Biasia, Le Operazioni Di M&A Nel Settore Bancario Italiano. Il Caso Banca MPS - Antonveneta 37 Friedman, Capitalism and Freedom p. 134

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dividends by MPS, which represented their repayment of the FRESH shares. In essence, JP Morgan was just a middleman, with the real buyer being those who were subscribing to buy the bonds, which included money managers, retail investors, and nearly €490M by the Fondazione Monte dei Paschi. Put plainly, the foundation went into debt just to make sure that the bank was able to pay its way out of its own mistakes.38 This explains the massive fall in the foundation’s assets in 2011.

The third and fourth pillars are MPS’s issue of 10-year subordinated bonds totaling €2.16B, and bridge financing valued around €1.56B. Bridge financing is normally an interim financing loan issued by companies as a temporary short-term financing structure until a longer-term option can be found. The bridge financing issued for MPS was meant to be paid back through the sale of its non-strategic assets, particularly those of the Foundation.

Returning to the second pillar, this requirement exploited a major weakness in MPS’s model, one that was meant to be eliminated with the Ciampi and Amato Laws. We have established that banks saw it as their duty to provide for the local community, a philosophy that can be traced back to its historical origins.

There has been much debate about the effects this would have on the banking industry in the modern day, but what about the other way around? The banking reforms were meant to propel banks by untying their connection with their respective foundations, but these laws were inadvertently protecting the foundations from the performance of the bank. In the news, we hear a lot about firms putting a hold on hiring or of them letting people go, but decreasing the number of employees at a specific firm was much less painful than no longer giving donations to the local university, or having to shut down construction projects that were meant to implement new infrastructure.

Ultimately, the Foundation felt it couldn’t. As a result, its expenditures through donations and grants continued to stay consistent over the 2010s, even though they didn’t make a profit for nearly half of the decade. With the local economy as a whole dependent on it, there was little room for error.

The following section introduces the counterpart to this case study: Intesa Sanpaolo. It does not go into much detail over the history of the bank in Torino, as it is very similar to the history between MPS and Siena. However, the differences begin to arise after the passing of the Ciampi and Amato banking reforms, which is when the performance of the bank diverged to the benefit of Intesa Sanpaolo, and where we begin our analysis.

Case Study II: Intesa Sanpaolo

Born out of the Banca Intesa and Sanpaolo IMI merger in 2007, Intesa Sanpaolo has quickly grown into a major winner for the Italian banking industry. The former can trace its roots back to the Austrian Empire, while the latter had a similar founding to Monte dei Paschi as a small Pietà in 1563 Torino. As was tradition with these old Italian banks, there was a rich history of banks playing the role of providing tangible social contributions to the society in which they are a part of.

As with MPS’s Fondazione, Intesa Sanpaolo’s Compagnia di San Paolo (CSP) was born out of the Amato Law in 1991 and has undertaken numerous projects for the advancement of not just Torino, but for Italy as a whole. Some of the non-profit organizations started by CSP are the VOBIS association, which provides inclusive financial services to those who may not be able to afford it, the FITS! Foundation, 38 Bernabei, Mps-Antonveneta, La Storia Del Fresh Nei Carteggi Con Bankitalia

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS which aims to increase efficiency and economies of scale for local businesses, and PAN Infant Services Consortium that promotes funding for pediatric services throughout the country. There is also a portion of their endowment that is set for academic institutions and research, arts and culture, the environment, and even local sports clubs.

After the Amato Law, which called for the separation of banks and their foundations, was passed in 1991, Intesa Sanpaolo did the opposite of Monte dei Paschi and, for lack of a better phrase, followed the law. CSP gradually lowered its stake in Intesa Sanpaolo to 36% in 2004 and all the way down to 4.4% in 2019.39 This allowed them to take advantage of the Dini Law, which gave massive tax breaks for firms willing to lower their stake at their respective foundations.

While other factors played a part in the success of ISP, the lower stake of CSP on Intesa Sanpaolo certainly allowed the bank to emerge as a national winner. The group currently ranks number one in loans, deposits, pension funds, asset management, and factoring.40 In 2019, they had the highest revenue out of all Italian banks with €4.118 billion41 and currently hold the lowest cost-to-income ratio at 49.3%.42 They make up at least 5% of the total market share in 109 of the 110 provinces and more than 13% in 11 of the 20 regions it currently conducts operations in. This market share, which has steadily increased since its inception in 2007, has allowed the firm to take advantage of economies of scale in the financial sector.

Intesa Sanpaolo also has the advantage of attaining ample capital and liquidity, which provides them with financial stability. Their capital ratio, which measures a firm’s core capital in relation to its risk weighted assets, has risen from 14.7% in 2014 to 19.6% in December 2020.43 They also maintain a significant amount of customer deposits in the form of liquidity that is more than sufficient to cover the corresponding demand for corporate and retail loans as well as other investments. This strong capital position allows them to adequately smoothen normal business cyclicalities and maintain stability.

While Intesa Sanpaolo has performed relatively well in comparison to other Italian banks, they are by no means perfect and were especially vulnerable during the 2008 Global Financial Crisis, which saw their stock fall nearly 73% from March 2008 to February 2009. There is something to learn from both Intesa Sanpaolo and Monte dei Paschi. But real life rarely ever gives us a perfect picture in which we construct our scientific models, and the fact that Intesa Sanpaolo and MPS have had such different outcomes during the same timeframe and in the same region implies the current governance structure of Italian Banking Foundations. The next section will take a deeper look at their Foundations, specifically on who makes up the Board of Directors and how this has an impact on fund allocation.

A Comparison of Fondazione Monte dei Paschi and Compagnia di San Paolo

Up to this point, we have been introduced to the background of the debate between shareholder and stakeholder capitalism, along with the history behind Monte dei Paschi and Intesa Sanpaolo to build a broader story of these banks’ cultural significance and their role as local philanthropists. Now we look at 39 Reuters Staff, Intesa Shareholder Cariplo Says Would Support Cross-Border M&A 40 MarketLine Info, Intesa Sanpaolo SWOT Analysis 41 Intesa Sanpaolo, Ordinary Shareholders' Meeting of 27 April 2020 42 Statista, Cost-to-Income Ratio of Selected Leading Banks in Italy from 1st Half 2018 to 1st Half 2020 43 Intesa Sanpaolo, INTESA SANPAOLO MUST CONTINUE TO SATISFY THE CAPITAL REQUIREMENT SET BY THE ECB LAST YEAR, WHICH THE BANK COMFORTABLY MEETS

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the numbers over two major time frames: the first being 2000-2007, which can be considered the golden years of these foundations, and 2008-2010, which includes the Global Financial Crisis and how it picked apart these foundations’ performances and business models.

Quantitative Comparison: Investment Performance and Sustainability

The first measure we will look at is the investment performance of the foundations over the two aforementioned periods. Before diving into the details, it is important to note that the overall performance of not just Italian foundations, but the entire Italian banking sector (and Italian economy, for that matter) saw massive setbacks in the period following the 2008 global financial crisis. On an average basis, the foundations lost almost 75% of their gains from 2002-2007 in the three-year period of 2008-2010.44 In particular, FMPS saw the largest drop in its performance, averaging over 7% annually as one of the highest performers from 2002-2007 to being one of the lowest at an average 1% from 2009-2010. CSP saw a similar dip, but not nearly as volatile as FMPS, with an average difference of 1.7%.45

Since then, MPS has seen a massive dip in the size of its overall assets, particularly because of the banking arm’s poor acquisitions and troubles with the Italian authorities. The figure below shows the percentage-change in overall assets of each foundation. CSP, on the other hand, has been able to maintain a stable growth rate of its assets over the past decade, which provides it with ample liquidity to conduct its philanthropic duties, and allows it to make better assumptions on their future cash flows and make better (and larger) decisions on grant-making and lending in the long run. This is due, in part, to them letting go of their stake in Intesa Sanpaolo, something that MPS was unwilling to do under the Amato and Ciampi Laws.

44 Filtri, Guglielmi, Italian Banking Foundations p. 49 45 ACRI, Venticinquesimo Rapporto Sulle Fondazioni Di Origine Bancaria – Anno 2019

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This next measure looks at the sustainability of the funds. The main goal of the Foundations is to provide loans and grants to foster economic growth and development to the surrounding area. Therefore, to stay solvent, they must ensure that, on average, the value of their grants do not exceed their investing income. In this analysis, the ratio of grants to investment yield should average a little below 100%. While the actual threshold may vary from foundation to foundation, a sustainability ratio at or above 100% would require the foundations to reach into their pockets to produce some sort of distribution of its stock. This is considered unsustainable in the long run.

Until 2009, most foundations were able to cover the costs of their grants with their operating costs. It wasn’t until after this period that the ratio skyrocketed with total grants surpassing total income nearly ten-fold. Ever since then, FMPS and CSP have chosen different routes. Fondazione Monte dei Paschi continued to donate and make as many grants as they had during the pre-crisis period, even growing that total throughout the 2010s. On the other hand, Compagnia di San Paolosaw its grants/income ratio reach over 200% in 2008 and 2009, decided to decrease their donations by 96% in 2010 and then opted not to donate any money in 2011.

This provides an interesting analysis. Some of FMPS’s grant/income ratios are negative, implying that they had a net negative income for the year. Yet they still decided to not only continue providing for the community but to increase that amount to the point where the ratio reached almost 2,000%. In fact, the only year their total donations sunk below €60M was in 2013, when they could only hand out €35M after

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having to buy out their banking cousin’s FRESH stocks from JP Morgan. As a result, FMPS has found itself in massive debt, but none of the entities dependent on its donations have suffered. So, while the banking corner of MPS suffered heavy blows, they still shelled out as many donations as they did before, even increasing it at one point. This plays into the theory that these Foundations could potentially play a role in garnering economic growth during recessions, especially considering the recent literature on the lower impact of central banking stimulus in a more intangible asset business climate.

The next section looks to answer why these foundations chose such different paths when dealing with the 2008 Global Financial Crisis. Much of the answer stems from the make-up of these Foundation’s Board of Directors.

Quantitative Comparison: Investment Performance and Sustainability

The next part of this analysis takes a more qualitative approach to this empirical comparison and looks at the respective Board of Directors for each Foundation. Over the last twenty years, the Board of Directors for FMPS has been made up primarily of politicians. This group has the lowest diversity of professional backgrounds out of all the major Foundations, with 52% being appointed by local political leaders.46 CSP, on the other hand, has a heavy stake in the world of research, with the majority of its Board members coming from an academic institution. A comparison to other Italian Banking Foundations can be seen in the chart below.

46 Bilotta, Case Study: Banca Monte Dei Paschi Di Siena p.7

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Let’s start with politicians. Because most of these politicians are appointed by the mayors and governors of their respective regions and provinces, it comes as no surprise they are the most willing to donate as much money as possible in the form of grants with the hopes of winning over the people and therefore the parties that elected them to power. When we conduct a regression for the share of politicians on the Board of Directors to the number of grants made, the regression results in a correlation coefficient of 0.6507 which can be seen in the chart below. Given these findings, it is not surprising FMPS—that the Foundation with the highest share of politicians—has nearly twice the spending levels of its peers, while CSP—the Foundation with the lowest share of politicians—has the lowest incidence of average grants on the market value of its capital.47

The number of politicians also seems to influence the intended target of these grants. In congruence with the previous claim that politicians make decisions that would garner the most approval from the public, it would be safe to assume that politicians are more likely to make grants towards the expenditure of local development. To test this hypothesis, a regression was conducted to analyze of the share of politicians to expenditure in local development. The results of this regression can be seen in the 47 Filtri, Guglielmi, Italian Banking Foundations p. 62

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chart below, where the correlation coefficient is 0.7839.

Now let’s look at professors and researchers. As previously mentioned, CSP has the highest number of university employees as a percentage of its Board of Directors at 50%.48 As with politicians, professors may be more likely to give most of their funds to education. The following chart shows the results of a regression analysis of percentage of university employees to expenditure in education and research.

Even though there is still a positive relationship, the correlation coefficient is much lower at 0.4809.

48 Filtri, Guglielmi, Italian Banking Foundations p. 64

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While other variables most certainly play a role in what sector these grants are focused in, such as community needs and previous donations, there is enough evidence to suggest that the professional background of the Board of Directors plays a role in grant administration. There is a skew as to which sectors the foundations decide to invest in. Applying these findings to FMPS and CSP, we can make conclusions about what most of their foundation's money is going towards and its long-term goals for the community they are part of. This is an important aspect to understand because the goals of the foundation mirror the goals of the Board of Directors. As stated in the introduction of the competing theories of capitalism, studies found that investment in research and academic institutions plays an integral role in the development of overall society, especially when it comes to economic growth. The next section looks to describe how this development would play into the role of overall macroeconomic development, along with economic growth and welfare.

The Effect of Italian Banking Foundations on Economic Growth: An Introduction of the Solow Growth Model

The Solow Growth Model is an economic model of long-run economic growth. The basic tenet of this model is that economic growth over time is a result of capital accumulation, growth in the labor

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force, and some sort of exogenous growth variable, usually denoted as technological progress.49 Let’s break that down into simpler terms:

The only way for an economy to create long term growth is by increasing one of three variables: the labor force, total capital per worker, and technological change. The labor force grows with the population, as there are more people available to enter the workforce. The next two variables are more malleable through economic interaction. Total capital per worker, or MPK, is somewhat self-explanatory.

The more material resources available to any single worker, the more that worker is able to build, hence increasing overall output and economic welfare for society. Finally, technological innovation includes every inventor and entrepreneur who introduce a new finding that allows the human race to be more efficient in producing goods and services than it already was. These variables are what drive long term economic growth.

But what allows MPK and technological progress to move forward? This is explained by the savings rate. The savings rate is whatever portion of output is not used for consumption; whatever people don’t buy, they save. In equilibrium, known as the steady state, the savings rate offsets the depreciation of capital and labor. Therefore, to maintain the current level of production, there must be enough total savings to replace old machinery and plant equipment, train new workers, and learn of more modern technology, among other things. Equilibrium in the steady state can be seen in the graph below.

49 Solow, A Contribution to the Theory of Economic Growth

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The model uses the marginal product of capital (MPK), investment, and depreciation of capital.

MPK increases at a decreasing rate, as it takes more capital per worker to increase total output as output increases. For example, a nation like the Bahamas, with a relatively small GDP, would need less capital per worker to raise output than a nation like the United States.

The output function operates in Cobb-Douglas form, as shown below.

Y = F(A ,K ,L ) = A ∙ Kα ∙ Lβ where Y = GDP A ≡ Technological Progress K ≡ Capital L ≡ Labor α ≡ capital share of GDP β ≡ labor share of GDP

Let’s suppose that a nation wants to increase its overall output. To do so, it would need to increase the total capital per worker, which would enable them to become more efficient and therefore raise GDP. As a result of higher GDP, consumption would increase, along with the overall living standard. The savings rate must increase for all of this to happen. If each individual has more in savings today, then they would be able to invest more in the future, thereby making the economy more efficient and increasing overall output and consumption. The point at which consumption, not output (GDP could theoretically be infinite, but it wouldn’t mean much if we are only able to consume a small percentage of it), is maximized is known as the Golden Rule Steady State. This is shown in the graph on the following page.

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Where do Fondazione Monte dei Paschi and Compagnia di San Paolo fit into this? Note that this model is built around the long-run economy — the time period is around 50-100 years. To reach the golden steady state, the population must increase its savings to decrease consumption. This allows the population to provide enough capital for future generations to enjoy maximum consumption ability during the golden steady state. No matter how much your grandparents may say they love you, they would not be willing to sacrifice their overall consumption for their entire lives so that you and your children could reap the benefits. But with banking foundations picking up some of the slack through public investments in infrastructure, research, academia, and other sectors, it will be enough to continue moving the savings rate enough to maximize consumption more than it would without them.

Both the United States and Italy have a democratic electoral system in which political leaders who implement macroeconomic policy are voted into power by the general public. If a presidential or prime ministerial candidate were to campaign for more savings and less consumption for no reason other than higher economic prosperity 100 years from now, they would undoubtedly lose their election. Therefore, other methods must be used to incentivize an increase in the savings rate.

Banking Foundations can provide enough capital to make up for these incentives. We have seen how these institutions have affected the banks they are associated with, but they could also use their grants and donations to play a role in the Solow model and make up for the lost savings below the golden rule steady state, thereby increasing future GDP. The question then becomes: where do they draw the line?

I would like to point out how much larger the Italian system of banking foundations is than that of the United States. A statistic that illustrates this is their overall assets as a percentage of GDP. In the US, the

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ECONOMIC GROWTH WITHIN ITALIAN BANKING FOUNDATIONS total assets of every single foundation as a percentage of US GDP in 2019 was around 0.09%. In Italy, the total assets of only the top 100 banking foundations as a percentage of GDP has hovered around the 2% mark over the past decade.50 That is a lot of money, and the foundations can play a serious role in both monetary policy and local development.

A more impressive twist to this data is that, in 2015, while Italian GDP took a nearly 15% dip, the total number of donations handed out by banking foundations dropped by only 1.19%.51 The graph below shows that foundations actually hand out more donations during times of low economic growth.

This backs the claim made earlier in the introduction of the competing theories of capitalism in response to the idea that central banks are losing their effectiveness of monetary policy. These foundations can play a role in taking over for central banks during recessions and economic downturns and help the country back to its feet.

Conclusion

Italian Banking Foundations have played an integral role in the development of Italy, from its Medieval city-states and Unification till present day. Italian Banking Reforms throughout the 90s, specifically the Amato and Ciampi Laws, looked to separate the relationship between the Foundations and their respective banks with the hopes of making Italy a more competitive player within the European banking community. Intesa Sanpaolo followed these laws and was able to propel itself to the top of the 50 Foundation Center, Foundation Stats 51 ACRI, Venticinquesimo Rapporto Sulle Fondazioni Di Origine Bancaria – Anno 2014

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leaderboards in a plethora of categories. Monte dei Paschi di Siena, on the other hand, went into an enormous amount of debt just to maintain a majority stake in its Foundation. While there are several other reasons why Monte dei Paschi had such a fall from grace, the fact that their foundation continued to donate a consistent amount of grants despite the tough liquidity constraints they have found themselves in for the past fifteen to twenty years played a role in their failures. The other side of that coin shows how Compagnia di Sanpaolo was unable to give out the same amount of money year after year following the 2008 Global Financial Crisis.

Taking a look at the Foundations themselves, Milton Friedman seems to have been correct when assuming that, if private firms were given a role in public investment, their leaders would eventually become elected officials, as the number of stakeholders in said firm would spread to the overall society those investments are going towards. The Boards of Directors of these foundations are not only elected, but they are also extremely biased as to where their funds will end up. Politicians will go to public investment, academics to research, and so on.

So while this business model of stakeholder theory is a much more sustainable business environment in the long run, those who are put in charge of choosing where to put the money have a serious responsibility. While they are a part of a private entity, their role is a peculiar one in that it is somewhat of a political responsibility. Whether or not these figures are voted for by the populace or elected within the bank is not a decision to be made in this paper, but at the end of the day, it is their money.

This paper also asks the important question whether or not this type of business model can be applied in the United States. Milton Friedman’s monetarist view of shareholder theory has dominated corporate America for the past 50 years, but Business Roundtable is just one example of how some US firms are looking to change their mindset. While there is room for improvement in terms of sustainable business practices, there is also an argument to be made for how implementing a system in which a private business entity gives back to the community can help advance GDP growth while also providing a layer of protection during economic downturns and recessions.

Economists spend quite a lot of time studying unemployment, fiscal stimulus, inflation, trade deficits, and many other factors. This is all for the purpose of one goal: long-term economic growth. It is perhaps the most important determinant of a nation’s overall wellbeing, along with the livelihoods of all its citizens.

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