The Dufour Street Journal, Vol. 2

Volume 2 May 2015

Conflict 2–4 Negative 14–16 Serving over the border 26–28 An uneasy relationship 35–37 Sarita Sehgal, UNAIDS

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Foreword Islamic State was the spectre lingering in our minds as we set the theme for this issue in the early weeks of 2015. Although our Spring Edition eventually did not come to address the contributions of ISIS to our concept of conflict, the fruits of our labour remain as diverse in topic and thought. Purposely we have defined conflict as undefinable, intangible, multifaceted; we bring to you articles illuminating conflict in parts of the world you did not understand, we discuss conflict in intellectual thinking, we raise questions for conflict emerging in the future. We employ animal metaphors, legal procedures, economic theory, and international relations analogy.

Our view is that learning from the past is instrumental to developing the future. This issue thus marks the beginning of our history of economic thought series. We will endeavour to introduce you to an expert on a string of economic thought in each of our subsequent volumes. As our publication develops, it is our hope that we span outside the field of economics to incorporate more plurality in social science thought. Integration versus segregation. Harmony versus conflict.

Nikita Khandelwal

Piotr Lukaszuk

Impressum © Copyright 2015 The Dufour Street Journal The Dufour Street Journal is an accredited student organisation at the University of St. Gallen, and publishes a bi-annual English-language publication on economics and current affairs.

All opinions are the authors’ own, and are not the reflection of any political, economic or social opinions held by the University of St. Gallen or its affiliates.

Volume 2 Published May 2015, St. Gallen, Switzerland Co-Editors-in-Chief: Nikita Khandelwal, Piotr Lukaszuk Editorial Team: Akash Arasu, Alexander Bechtel, Guillaume Gabus, Benedikt Lennartz, Igor Posdeev, Vassilena Tcholakova, Vanessa Volland, Hannah Winterberg Layout, Design: Fanny Oppler Illustrations: Simone Hörler Supported by:

Content Economics & International Markets Negative 2 Stagnant Elephant, Roaring Lion 5 Long Term Capital Management 7 Why Bitcoin deserves another chance 9 The great divide over market efficiency 12

International Affairs Serving over the border In the name of democracy?

Proudly small, and Swiss Elitism in the 21st century Salutary if kept within bounds If it wasn’t already difficult enough

14 17 19 21 23 24

Research & Academia International Investment Law and Targeted Sanctions: An uneasy relationship On economic thought Keynes's Economics versus "Keynesian" Economics Turning economy into comedy Meet our Professors

26 29 31 33 34

Careers Sarita Sehgal, UNAIDS: perspectives from inside an international organisation

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Economics & International Markets

Negative Igor Posdeev

“…And your gravity fails And negativity don’t pull you through…”

Bob Dylan

Negative interest rates have been all over the news lately. The problem is not that they have never happened before. The Riksbank of Sweden once maintained a -0.25% weekly deposit rate for over a year; the Danmarks Nationalbank crossed zero in 2012, and at the same time some Danish banks started to charge depositors instead of paying them. In fact, German and French government bond yields went south in 2011 and 2012 respectively. But why are people allowed to borrow more than they will have to repay, and how on Earth can an economy be sustained under these conditions?

Let us first get our notions straight. There are many interest rates, and their level and dynamics, albeit strongly correlated, are driven by different factors.

One thing is for sure though: negative rates have “...why are people their roots in the low-rate environment of recent years, caused by the overextended quantitative allowed to borrow easing. Regularly exacerbated by credit issues and more than they will political tensions, the financial crisis has been have to repay, and eating away at the economy for just long enough to drive the rates to nil, and what we see now on how on Earth can the fixed income market should not come as a suran economy be prise. Still, it is important to discriminate between sustained under different rates around us because being negative has different consequences in each case. these conditions?”

A policy instrument rate is controlled by the monetary authorities and influences the general level of interest rates in the economy. It is set by the central bank (there are no market forces involved) in response to certain events. More precisely, we tend to see lower figures when the economy needs a boost, when de3

Economics & International Markets flation threatens or when the national currency needs to depreciate. Indeed, the first two can clearly be linked to interest rate movements as of late. The third case is more interest­ing, as exemplified by “Regularly exacer­ Denmark and Switzerland.

Strong economies of both of bated by credit these countries did not need issues and political added support, however, both tensions, the fi­ central banks decided to take the audacious step in order to nancial crisis has prevent the appreciation of been eating away at the franc and krone respecthe economy for tively and support the nationjust long enough to al exporters. This, of course, was largely prompted by condrive the rates to tagion amongst foreign invesnil, and what we tors, who, fearing the turbusee now on the fixed lence in the Eurozone, became over­active in Swiss and Danincome market ish markets. For these counshould not come as tries, one major peril of negative interest rates could be a surprise.” high inflation – but breathe out, not nowadays. In Denmark the CPI hasn’t been able to breach the 1% mark for two years in a row. Similarly, over the same interval, Switzerland much more frequently experienced bouts of deflation. A more serious danger is the freezing of the banking system, since deposit rates cannot help but move a little closer to zero too.

Now, a retail deposit rate is how fast money stored away in a savings account will grow. This is one tool banks use to compete for customers by offering a higher interest to the common folks. We virtually never see it cross zero because people would then keep their money under mattresses and earn zero interest. Or would they? Mattresses tend to burn up from time to time, are subject to random inspection by burglars and won’t provide a means of purchasing items on Amazon.

That’s why some Nordic banks think they could, in theory, pass negative central bank rates on to clients if the regulator continues to fight deflation. Fears are high though: banks are then bound to lose at least some of their clients, and should this “some” be large enough, a fire-sale of assets would be inevitable – accompanied by all of the usual consequences.

Finally, a bond yield is something you get from lending your money to governments or firms. It is set solely by the supply of and demand for this debt, and there is much more than you think that influences these two. Take German bonds, for example, which breached the zero yield barrier at the end of 2011. The reasons might have been among the usual suspects: say, demand from risk-averse constrained pension funds – but possibly also fears that Germany leaves the Euro­ 4

zone and redenominates its part of the euro debt in DM, as cited by John Cochrane, Professor of Finance at the University of Chicago Booth School of Business. Since German bonds are a good bet in case you want an asset that will pay off in a recognised currency, inevitably, demand for them goes up, price follows and yield falls, thus demonstrating that “there really is no limit to how low bond yields can go if you think bonds might be paid off in a better currency than the one you can stuff in your mattress.”

Another example took place 10 years earlier when Warren Buffet issued a first ever negative coupon bearing security for his company Berkshire Hathaway. Though not exactly a bond, it was a mix of a senior corporate note (a type of bond) and a warrant to purchase Berkshire common stock at a premium. If the warrants had never been exercised, Buffet would have borrowed at a negative rate. Still, Berkshire was such a solid performer back in 2002 that investors strongly believed in the outperformance of its stocks and easily agreed to the negative coupon.

In theory, there is nothing wrong with below-zero interest rates. Discounting still works, results from academic finance hold, common folks might not really be scared off by negative numbers in their certificates of deposit, and investors are perfectly alright with paying for holding bonds. In any case, real interest rates and their expectations, which are likely to matter much more for the economy, have been negative for quite some time now without. On the other hand, the negativity of the rates is terra incognita for policymakers and market players, and both should think twice before making their next move. Who knows, when the waterline cannot be seen anymore, maybe it’s a good idea to stop loading the ship?

“Mattresses tend to burn up from time to time, are subject to random inspection by burglars and won’t provide a means of purchasing items on Amazon.”

Economics & International Markets

Stagnant Elephant,

Roaring Lion Julius Betmann

India has long been described as an elephant. In recent years economists as well as chief executives around the world have extended this metaphor to the country’s economy: big and powerful, but also sluggish. At the same time, India’s northern neighbour, China, is often described as a ruthless and relentless dragon, frightening its competitors. Unfortunately for India, these metaphorical comparisons seem all too accurate. While China has shown itself to be the world’s fastest growing large economy, India’s growth has been lagging behind.

In the early 1980s, China opened its Soviet-style economy to private enterprise and foreign investment, controlled by an extraordinarily efficient and visionary government. Ten years later, in 1991, then Indian Prime Minister P.V. Narasimha Rao trailed the country’s northern rival and announced economic policies with the goal of making the economy more market-oriented. After these initial reforms, subsequent ones did not follow and India’s economic rise did not materialise. It was a fight between authoritarian efficiency and democratic bureaucracy, a fight that continues to this day.

As of May 2014, more than 31 million court cases, both civil and criminal, remain pending in Indian courts. Compared to an average of 142 in China, there are only 15 judges per million inhabitants in India. Given the high number of corruption scandals and government scams, it is of utmost importance for India to be able to rely on its judicial system. A recent case concerning the government’s mis-allocation of the nation’s coal deposits resulted in damages of nearly $30 billion.

India’s decelerating economic growth can be attributed not just to the ponderous judicial system, but also to its infa-

mous bureaucracy. An average of 13 different procedures are required to start a business in India, the entire process taking upto 30 days. By contrast, these numbers stand at an average of 4.8 procedures and 9.2 days for all OECD (Organisation of Economic Co-operation and Development) countries. To illustrate further, companies in India need to make 33 different payments to tax authorities, whereas only seven such payments are necessary in China.

As a result, the World Bank ranks India #142 in its annual Ease of Doing Business Index, behind economies such as Sierra Leone, Kosovo, and of course, China – a fact foreign investors do not seem to appreciate. According to multinational consulting firm Ernst & Young, only 17 percent of global CEOs consider India an attractive investment destination, whereas the same number stands at 44 percent in China. Consequently, foreign direct investment into China is more than four times higher than into India, according to data from the United Nations Conference on Trade and Development.

Despite these facts, recent economic analyses have provided a rather different impression. The World Bank expects India to overtake China in terms of annual GDP growth by 2016/17 to eventually become the world’s fastest growing large economy.

Explaining these developments solely based on China’s recent economic slump would be too short-sighted. Since the election of Narendra Modi as Prime Minister in May 2014, the new government has brought about a number of initiatives to profit from India’s potential.

“Digital India” aims at reducing bureaucracy by making government services electronically available. “Clean India Mis5

Economics & International Markets

Annual GDP Growth 8.5% 7.5% 6.5% 5.5% 4.5% 3.5%

2012

2013

2014

India

sion” or Swachh Bharat Abhiyan, the campaign’s Hindi name, hopes to accomplish the vision of a clean India by the 150th birthday of Mahatma Gandhi in 2019.

Modi’s favourite, however, is the global marketing campaign “Make in India”. As explained on its official website, “Make in India” is “designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property, and build best-in-class manufacturing infrastructure.” It is the government’s “‘The lions are a reaction to the realisation that India’s growth needs to symbol of a new be derived from more than India. They roar, just its outsourcing and IT inbut with a message dustry. Germany’s manufacturing sector, for example, of friendship and contributes 22 percent to the promise of part­ country’s GDP. In Korea, the nership, from number stands at 31 percent, and in China at 32 percent. In 1.25 billion people India it is a meagre 13 percent. of India’, Modi To underpin his determinasaid at the Inaugu­ tion in “Make in India”, Modi chose the lion as the camral Session of paign’s logo – perhaps a sign Hannover Messe to global investors that the 2015, the world’s sluggish elephant may soon largest industrial turn into a lion, as dynamic as China’s dragon. fair.”

“The lions are a symbol of a new India. They roar, but with a message of friendship and promise of partnership, from 1.25 billion people of India,” Modi said at the Inaugural Session of Hannover Messe 2015, the world’s largest industrial fair.

Initial successes are already visible. In 2014 alone, India’s equity markets have jumped up by more than 30 percent, and 6

2015

China

2016

2017

Source: IMF

foreign direct investments have increased by 27 percent compared to 2013.

Tracing back all this growth only to the number of inhabitants would be too simple. It is rather the share of young people and the size of India’s middle class that is driving growth. More than 70 percent of its 1.3 billion inhabitants are below the age of 30 and in total, around 860 million people fall within the working age bracket. As a result, India is not expected to suffer a lack of talent in the near future. Nor will it suffer a lack of customers. According to the McKinsey Global Institute, India’s middle class is expected to reach 583 million people by 2025, thus making it possible to drive growth not only through investments but also through consumption – a feat China is yet to achieve.

Though these numbers speak for themselves, one should not forget that the Indian opportunity is still characterised by high volatility and uncertainty. Be it poor infrastructure, the country’s limping judicial system, or its inefficient bureaucracy, India has its pitfalls. Nevertheless, the current state of global economic stagnation, contrasted by a fast-growing Indian economy, offers a lifetime opportunity for the country. If India’s path forward remains stable, the lion may well defeat the dragon.

“According to the McKinsey Global In­ stitute, India’s middle class is expected to reach 583 million people by 2025, thus making it possible to drive growth not only through investments but also through consumption – a feat China is yet to achieve.”

Economics & International Markets

Long Term

Capital Management Evgeny Avdeev

Is money management a science, rather than an art? Are high portfolio returns due to a combination of mathematical aptitude and cutting edge technology? Should funds seek superior returns by focusing on hiring individuals with a solid background in a STEM discipline? From its formation until its ultimate demise, hedge fund Long Term Capital Management (LTCM) provided a certain perspective on these questions and continues to serve as the textbook example of how an overreliance on numbers and models can lead to disastrous consequences.

Generally speaking, Wall Street had a history of hiring academics for research purposes, where they would be safely “out of harm’s way”. Nevertheless, in the early 1980s John Meriwether, a successful bond trader at Salomon Brothers, had a powerful revelation – why not hire professors that have a proven track record and decades-long experience in publishing quantitative and rigorously debated academic papers about the market, instead of unscientific “Neanderthals” who traded from their bellies? This idea came to be regarded as an astounding success, as quantitative money management and trading was praised for its high objectivity, replicability, controlled risk and low behavioural errors. Indeed, the quants slowly began to win the hearts and minds of those calling the shots on major trading floors, banks and hedge funds.

Sure enough, Meriwether went on to create LTCM based on exactly this philosophy. The core of the company consisted of John Meriwether himself and his former quant peers from Salomon. They were the best performing team in the bank, maybe even on all of Wall Street. Two brilliant minds and future Nobel Prize laureates – Robert Merton and Myles Scholes were also added to the mix. Finally, to completely remove doubts about the professionalism of the fund, David “Why not hire pro­ W. Mullins, then vice chairman fessors that have of the U.S. Federal Reserve and a proven track second in the Fed’s hierarchy record and deca­desto Alan Greenspan, joined the team. long experience Among the counterparties were several major investment banks: Goldman Sachs, Merrill Lynch, J.P. Morgan and Bear Sterns. The list of investors was also impressive and ranged from quasi-governmental corporations such as the Government of Singapore Investment Corporation and the Kuwaiti state-run pension fund, to pri-

in publishing quan­ titative and rigor­ ously debated aca­ demic papers about the market, instead of unscientific ‘Neanderthals’ who traded from their bellies?”

7

Economics & International Markets vate companies – LTCM signed up German Dresdner Bank, Julius Bär, and the Liechtenstein Global Trust among others.

Private money was also involved: Phil Knight, then CEO of Nike, as well as partners at the consulting firm McKinsey & Company opted to participate.

One would expect that such a combination of brilliant minds would result in astounding success. However, for those of you who are unfamiliar with the destiny of LTCM – it collapsed spectacularly in 1998 after almost 4 years of outstanding performance, falling prey to unprecedented market volatility and flight to quality. Indeed, the fund lost all of its 4.7 billion USD capital in a matter of just 4 months. Warren Buffet, who refused to invest in the fund, beautifully elaborated on the situation in one of his speeches: "…if you take John Meriwether, Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, and two Nobel Prize winners - Scholes and Merton. If you take the 16 of them, they probably have the highest average IQ of any 16 people working together in one business in the country, including Microsoft or whoever you want to name – so incredible is the amount of intellect in that room. Now if you combine that with the fact that those 16 have had extensive experience in the field in which they operate. I mean, this is not a bunch of guys who made their money selling men’s clothing and all of the sudden went to the security business or anything. They had, in aggregate, probably 350 or 400 years of experience doing exactly what they were doing.

And then you throw in the third factor: that most of them had virtually all of their very substantial net worth in the business. They had their own money tied up, hundreds and hundreds of millions of dollars of their own money tied up, a super high intellect, they were working in a field they knew, and they went broke. And that to me is absolutely fascinating. If I write a book, it’s going to be called “Why do smart people do dumb things? It’s like Henry Kauffman said the other day – the people going broke in these situations are just two types: the ones who know nothing, and the ones who know everything."

What lessons can be learned from this famous story, occurring more than 15 years ago? Black Swans, as trite as it may sound, do exist. From a statistical standpoint, under LTCM’s models, it would have taken a “And that to me is so-called ten-sigma event (an event occurring in every ten absolutely fas­ci­ to the twenty-fourth power nating. If I write times) for the firm to lose all a book, it’s going of its capital within one year.

And yet it happened. to be called ‘Why

do smart people do dumb things?’”

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Does this mean that some part of the banks’ and hedge funds’

budgets should be reallocated “Mathematical tools to the services of clairvoyants and each portfolio manager play an important must be supplied with deck of role in finance and Tarot cards? Probably not. will continue to Mathematical tools play an imdo so in the future. portant role in finance and will continue to do so in the future. Rather, the lesson Rather, the lesson is one of hu- is one of human man error and personal judgerror and personal ment – and frankly, we still have a long way to go in recon- judgment” ciling technology with our opinions. As Mark Twain once noted, “history rhymes, it does not repeat”. Even the most advanced technology, when based on the wrong assumptions and thoughtless past data analysis, may result in disastrous consequences. Market history cannot be studied as a set of numbers and figures, but also has to be viewed as a combination of conditions and premises that lead to certain events.

However, we shouldn’t argue that we face a conflict of qualitative vs. quantitative methods. Rather, we should consider ways in which we can make them work together. Indeed, as technology advances rapidly and continues to play an ever-increasing role in finance, practitioners will have to step up and overcome the challenge of reconciling the rapidly blurring line between the qualitative and quantitative approach to asset management.

Economics & International Markets

Why Bitcoin deserves another chance Vladimir Bakhirev

“What technology am I talking about? Personal computers in 1975, the internet in 1993 – I believe – Bitcoin in 2014” Marc Andreessen, Member of Board of Directors of Facebook, eBay and HP

Well, 2014 is over, and it was indeed the year of the Bitcoin, though probably the last and only one. Now that everyone is talking about how well the Bitcoin price chart resembles Rodrigue’s phases-of-a-bubble chart and the once big fans of Bitcoin are cashing out of crypto currencies, let’s remind ourselves what Bitcoin is still able to do to finance as we know – or think we know.

Of course, Bitcoin is not a thing in itself, but rather a wrap for the block chain technology behind it. Still, the wrap turned out to be catchy and managed to stay when many others ceased to exist. There are at the moment around 500 different crypto currencies in circulation, with Bitcoin in sheer dominance. Introduced in 2008 and launched in the beginning of 2009 by a person or group of people under the pseudoname Satoshi Nakamoto, Bitcoin was a combination of many technologies and a new idea – a decentralised block chain. All transactions are recorded based on the template: "User XY sends 10 units to user YZ" – just like in online banking – and are appended to the trade repository in blocks every ten minutes, continuing as a chain (hence "block chain").

The chain is duplicated on all participating computers, and a new puzzle is constructed with every block. The solution to the puzzle serves as the confirmation of the transaction; in order to receive a reward – Bitcoins, essentially – so-called "miners" use increasingly advanced hardware in order to come up with this solution. Hence one serious advantage of

this network is that there are incentives to support its stability. Network users get money for supporting the network and ensuring the correctness of recorded transactions; the sophisticated hardware needed to attack the network could be used for the mining of Bitcoins, earning money instead.

Much has been written on the future of Bitcoin as money, every study trying to answer how well it can serve the three purposes of a viable currency: storage of value to postpone consumption; measurement of the relative value of things; and a means of exchange of goods and services. Most studies agree that the inelastic supply of Bitcoin, the excessive volatility of its price and monetary authorities’ negative sentiment towards it are significant obstacles. However, this crypto currency is still capable of reshaping finance around us, even without competing with recognised currencies.

Maybe that is why venture investments into Bitcoin companies over the past two years have exceeded those into Internet companies in 1995, and continue to grow.

In order to start using Bitcoin one needs to have Internet access and wallet software. This simplicity brings advantages to the unbanked, people who cannot open an account and are cut off from financial services. According to the World Bank 2.5 billion people relate to the unbanked category; ¾ of the world’s poor. They cite lack of money, but also blame costs of opening an account and that banks are too far away.

In sub-Saharan Africa 80% of adults remain financially un9

Economics & International Markets derserved because traditional banking has been hampered by transportation and other infrastructural reasons.

This paves a leeway for digital finance. Tides are already starting to turn in Kenya where about half of the country’s GDP is now transferred through the mobile money system M-Pesa. It has many similarities with Bitcoin as a currency, but is based on the mobile operator Safaricom as a central authority. According to a McKinsey report, 68% of Kenyan people now use cell phones for monetary transactions. The same report predicts that Internet penetration in Africa will more than double by 2025 with the number of smartphones reaching 360 million. Provide services to all on old mobile devices or cheap Android phones, and mass adaption will follow.

Bitcoin also allows for making payments at close-to-zero costs. When compared to payment processing companies (PayPal, Visa and MasterCard) charging 2–4% on every payment, or players on the remittance market like Western Union with fees of up to 30–40% for small transfers, there is huge motivation to have the latter replaced. In the USA alone the amount of consumption goods purchased electronically is estimated to reach $1.7 trillion in 2017. The total amount of remittances across the globe are now estimated at approx. $550 billion, with their share in the GDP of several countries like Tajikistan close to 50%. Due to the nature of the settlement process and the incentive to support the network, Bitcoin can remove these fees and make transactions instantaneous. Money transfers, on the other hand, are completed whenever the funds are received and a required number of confirmations have arrived. If the receiving party decides to accept the payment without confirmation, the settlement happens almost immediately “According to the when the transaction is seen on the network. A common World Bank 2.5 practice is to wait for six conbillion people relate firmations, which on average to the unbanked takes one hour. Though longer periods happen occasionally category; ¾ of the (and are expected to happen world’s poor. They more frequently in the future), cite lack of money, they are still orders of magnitude shorter than waiting but also blame times in traditional finance. costs of opening

an account and that banks are too far away.”

Should Bitcoin survive the brawling of Paul Krugman and the likes, and make it through 2015, investors might gain a novel asset to put money into. Both Yahoo Finance and Bloomberg have already introduced a ticker for it. Nowadays the correlation of Bitcoin exchange rate dynamics with 39 major currencies, some popular capital market indices and

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gold is within +-10%. Hedge funds, suffering from the disappearance of volatility elsewhere, are starting to look at the leading crypto currency too: a year ago the launch of Bitcoin-focused hedge fund Coin Capital Partners was announced, and will buy and hold Bitcoin “in an institutional grade environment”.

Problems are there, of course. Bitcoin is blamed for lots of things including hidden costs of mining which make solving the puzzle not worth it, latent incentives to disrupt the block chain and to overinvest in hardware, and many more. The Bitcoin price does indeed resemble a bubble. But let’s be honest: we all wished for the new tech bubble to inflate, for a real technology to appear when the only thing we saw around us was Facebook and WhatsApp and Twitter. Well, here it is. It took 15 years for mass adaption of the Internet and 10 years for cell phones. Let’s wait a Bit.

“Should Bitcoin survive the brawling of Paul Krugman and the likes, and make it through 2015, investors might gain a novel asset to put money into.”

Economics & International Markets

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Economics & International Markets

The great divide over market efficiency Paolo Fedele

In 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient markets hypothesis”. Although the origins of EMH trace back to the end of the nineteenth century, it was Eugene Fama from the University of Chicago that defined its essence in a groundbreaking paper in 1970. According to Mr. Fama, capital markets are efficient in that the price of a financial asset incorporates and reflects all available information.

Powerful conclusions were drawn from this simple argument.

If capital markets were in fact efficient, financial assets would be priced correctly. If the price of an asset was too cheap (or expensive), well-informed and rational investors would buy (or short) it and make an easy profit. According to proponents of the EMH, this mechanism, called arbitrage, would guarantee that deviation from equilibrium could not last long in a similar way to how a clearly quicker checkout line cannot exist at a supermarket: rational shoppers would quickly jump into it. Moreover, as information is immediately reflected in asset prices, tomorrow’s price changes will reflect only tomorrow’s news. But news is by definition unpredictable, and, thus, the resulting price changes must be unpredictable too.

More practically, EMH implied that the performance of fund managers relative to the broad market is mostly driven by chance. In his personal finance book “A Random Walk Down Wall Street”, economist Burton Malkiel went as far as to state that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts”. In this sense, according to EMH proponents, the incredible performance of 12

investors like Warren Buffet can be explained as just very lucky runs. Although Buffet famously replied saying “I’d be a bum on the street with a tin cup if the markets were always efficient”, early evidence in support of the EMH was overwhelming. Mutual funds proved to be unable to beat the market on a consistent basis, and stock prices seemed to behave no differently than random walks (the process by which randomly-moving objects wander away from where they started).

Around the period in which Mr. Jensen was making his enthusiastic statement about the EMH, however, growth in the amount of data and computing power available to researchers as well as growing interest in the discipline created an explosion of findings that proceeded to raise questions about efficient capital markets. Canadian professor Dr. S. Basu noted that firms with high earnings-to-price ratios earn positive abnormal returns, consistent with a so-called premium for value. In a pioneering paper in 1981, Robert Shiller, from Yale University, found that the prices of stocks were much more volatile than their intrinsic value (the cash flows that shareholders will eventually receive) would suggest, something that is hard to square with the idea of efficient markets. Two American academics, Narasimhan Jegadeesh and Sheridan Titman, also found that recent past winners out-perform recent past losers, consistent with a “momentum” effect.

These findings challenged the idea that price movements are completely unpredictable and, in the second half of the 1980s, an alternative view on financial markets supported by the behavioural finance scholars was developed. This view was based on two pillars: bounded rationality and limited arbitrage. The work of psychologists such as Daniel Kahneman

Economics & International Markets

"Arbitrage would gua­ rantee that deviation from equilibrium could not last long in a similar way to how a clearly quicker checkout line cannot exist at a supermarket: rational shoppers would quickly jump into it"

and Amos Tversky shed light on the biases, shortcuts and cognitive illusions to which our species regularly succumbs.

Homo economicus - the rational model of human behaviour, beloved of supporters of the EMH – suddenly appeared to be an illusion. In 1984, then soon-to-be Nobel Prize laureate Robert Shiller wrote that the assertion that stock prices were rational was “one of the most remarkable errors in the history of economic thought.” Instead, he maintained, “Mass psychology may well be the dominant cause of movements in the price of the aggregate stock market.” Additionally, behaviouralists argued, arbitrage, like our brain, is limited.

Arbitrage strategies are in fact both costly and risky. As a result, prices eventually deviate from equilibrium, generating predictable patterns in stock returns.

Bubbles are one of the most tangible manifestations of the disagreement between the two schools of thought. According to behavioural finance, asset bubbles are a constant in human history and are caused by what Shiller, who famously predicted both the tech bubble in the late 1990s as well as the housing one in the 2000s, calls “irrational exuberance”: an excessive optimism towards the future. On the other hand, EMH leaves no room for investor confidence or significant departures from equilibrium prices. The view of Eugene Fama’s followers is effectively conveyed by the father of the theory itself: “I don’t even know what a bubble means”.

Fama and Shiller, leading proponents of opposing views about the way in which financial markets work, were joined in unlikely union as winners of the Nobel Prize in economic sciences in 2013. This ironic event encapsulates the state of modern economics. Although we have made significant steps in modelling the economy, fundamental questions remain still open and the answers will turn out to be more complicated than “markets are efficient” – or that markets are inefficient. If the feud over market efficiency can teaches us anything, it is that the road towards the successful comprehension of the economy is hindered by an arduous obstacle: the need to grasp the most complex structure of all – our brain.

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International Affairs

Serving

over the border Alexandre Lusenti

Of all the projectiles to ever be lobbed across the Algerian-Moroccan border, volleyballs may be the most harmless. In November 2014, activists from both sides organised a Facebook event in an attempt to foster goodwill between the two nations. Moroccan and Algerian citizens were called on to take part in a volleyball game across the disputed border, using the fence that separates the two countries as a net. But renewed tensions between the two states nipped any progress in the bud, after Rabat accused an Algerian soldier of firing on Moroccan civilians across the border. Simultaneously, officials in Morocco and Algeria commemorated the 20th anniversary of closing their common border by building separation walls.

The point of tension dates back to the Sand War of 1963, when Morocco and Algeria fought over the two Algerian provinces of Tindouf and Béchar. These events fuelled fear and distrust among the Algerian military over the seemingly expansionist ambitions of Morocco. Consequently, Algeria began to heavily support the Polisario Front – an armed separatist movement in Western Sahara – in its fight against Morocco. The Polisario Front claimed that Sahrawi people have a right to self-determination in Western Sahara, and self-proclaimed the region as the Sahrawi Arab Democratic Republic (SADR) in 1976. Morocco never recognised this declaration of independence, and declared war on the Polisario.

What followed is known as the Western Sahara War (1975-1991), a sixteen years fight to the death between the Algerian-backed Polisario and the Kingdom of Morocco. Just before the armistice was signed in 1991, major parts of Western Sahara were controlled by Morocco, and renamed “Southern Provinces” shortly after. Algeria heavily criticised the UN brokered deal, arguing that it said nothing about the future status of Western Sahara.

Since 1976, the Algerians have pressed with all their weight for international recognition of the territory. They won their first diplomatic battle in 1982 when the African Union recognised the SADR as an independent state. Morocco then formally withdrew from the African Union in 1984, and today remains the only African country outside the organisation. Not to be outdone, Morocco also spends millions of dollars yearly lobbying its cause to American Congressmen, in order to ensure a sympathetic stance towards the Western Sahara dispute. So 15

International Affairs far, the Moroccan strategy has been rather successful, with the present issue enjoying a pride of place among the least mediatised conflicts.

Western Sahara’s incorporation brought Morocco more than just territorial expansion. The region comprises one of the largest phosphate mines in the world. Phosphate, an inorganic chemical, is used to obtain phosphorous, an indispensable component of fertilisers used in agriculture and farm production. The three phosphate mines of Khouribga, Youssoufia and Bou-Craa have made Morocco the largest exporter of phosphate in the world.

“Since 1976, the A substantial share of phosAlgerians have phate revenues are then reinvested

by Morocco in Western pressed with all Sahara in the form of infratheir weight for structure projects, such as international reco­ hotels or highways. Diplomats gnition of the terri­ concede that the more Moroctory. Not to be out­ co invests in Western Sahara, the less it will give into SADR’s done, Morocco also demands of independence, making the dispute even more spends millions of intractable.

dollars yearly lobby­ ing its cause to American Congress­ men...”

Tensions between Algeria and Morocco are also fueled by internal politics. During the Algerian Civil War, Algeria accused the Moroccan government of hosting and training fighters of the Armed Islamic Group of Algeria (AIGA) in order to destabilise the country. Following a terrorist attack in 1994 on the Atlas Asni Hotel in Marrakech, which Morocco attributed to the Algerian intelligence services, Algeria closed its borders after Moroccan authorities imposed visas on Algerian citizens.

Despite the tension, the main concern of Algerians and Moroccans living along the border is about making enough money. For anyone running a business in the Maghreb region, the border closure is a pain in the neck. Businesses relying on trade and commerce between Oujda and Oran, an ancient commercial route, suffered a great deal after losing their primary source of income, representing around $2 billion a year for the Moroccan economy. That the Maghreb is one of the least economically integrated regions worldwide has a lot to do with Algeria and Morocco’s logjam. There is a reason why the Arab Maghreb Union (AMU), a trade organisation created in 1989 to encourage free trade between Algeria, Libya, Mauritania, Morocco and Tunisia, has failed to hold a single summit since 1994.

That the two economies are highly complementary only adds to the surreal situation: Algeria, an energy giant, could ben-

16

efit from Morocco’s savoir- “Despite the tension, faire regarding market the main concern economy reforms, while of Algerians and cheap Algerian gas would tremendously help the Mo- Moroccans living along roccan economy. Among the border is about all the Maghreb countries, making enough money.

Algeria and Morocco are the only two countries For anyone running where no bloody represa business in the sion took place in the wake of the Arab Spring, show- Maghreb region, the ing that stability in North border closure is a pain Africa is not beyond reach. in the neck.”

As the spectre of a transnational conflict within the African Sahel region – punctuated by France’s intervention in Mali – looms, greater cooperation between the two warring brothers would be more than welcome. Yet, the path to normalisation of bilateral relations remains a political minefield: Algeria, for instance, still fears that the Moroccans use the border issue as leverage to get Algeria back down over Western Sahara.

In 1971, two table tennis teams were behind the opening of a new chapter in the relations of China and the USA. Called “ping-pong diplomacy”, the event marked a turning point in Sino-American relations when US President Richard Nixon and Mao Zedong, Chairman of the People’s Republic of China met for the first time after 25 years of separation. While Algeria and Morocco certainly need more than a volleyball game across the border to thaw the status quo, the initiative can be credited for carrying the message that passing is easier with volleyballs than with bullets.

“Algeria, an energy giant, could benefit from Morocco’s savoir-faire regarding market economy reforms, while cheap Algerian gas would tremendously help the Moroccan eco­ nomy.”

International Affairs

In the name of democracy?

A Comment on Hong Kong's Pro-Democracy Movement Zhu Jun

The Hong Kong pro-democracy "Occupy Central" movement caught the world’s attention in September 2014. After the student leaders surrendered to the police in December, the movement ebbed away, but the anti-central government sentiment lingers on. Students vehemently demand that the Chief Executive of Hong Kong Special Administrative Region (HKSAR) be elected directly in 2017, without the nomination committee influenced by the central government. However, this call for more direct democracy may only be a partial answer to the wrong question, as it does not address the main challenges Hong Kong is facing. On the contrary, the request for more political independence has also fuelled sentiments for economic distancing from China, the main driver of Hong Kong’s economy. Nonetheless, students demand bottom-up legitimacy for Hong Kong while the central authority in Beijing still holds very firmly onto their top-down approach. The protests, therefore, may not be the best strategy to confront the increasing dissatisfaction with the diminishing economic competitiveness of Hong Kong and the increasing wealth disparity between the elite and the masses.

Hong Kong citizens have displayed an at times surprising amount of leniency towards their local government, particularly when new laws were passed to discriminate against mainland Chinese. For example, since March 2013 Hong Kong has banned the export of powdered formula milk above a quantity of 1.8kg, with penalties of HK $500,000 (approx.

58,000 € at the time of writing) and imprisonment for two

years. This completely disproportionate regulation mostly affects worried mainland Chinese parents relying on the milk substitute, and runs counter to Hong Kong’s renowned busi- “The protests may ness savvy. A second example not be the best concerns pregnant mainland Chinese women, who are al- strategy to confront most categorically refused en- the increasing dis­ try by Hong Kong authorities satisfaction with regardless of their travel inthe diminishing tentions. The practice reflects economic competi­ another aspect of social strain between Hong Kong and main- tiveness of Hong land China. It is well underKong” stood that giving birth in Hong Kong comes with the benefit of better medical care for the expectant mother, and the privilege of Hong Kong citizenship for the child. A resulting fear of a tide of pregnant mainland Chinese women making the journey to Hong Kong has caused an irrational de-facto immigration ban.

Globalisation is a double-edged sword. It may have brought Hong Kong to the height of a prosperous international metropolitan; it may also ruthlessly send Hong Kong into economic stagnation or decline. For thirty years now, the Hong Kong manufacturing industry has relocated up north to the 17

International Affairs mainland. Now Hong Kong is proudly the world's most services-oriented economy, with the service sector accounting for more than 90% of GDP. The question to ask here is: services for whom? The answer is “Globalisation is too obvious. Mainland China a double-edged is Hong Kong's number one trading, financial and busisword. It may have ness partner as well as the brought Hong Kong largest pillar of the tourist to the height of industry.

a prosperous inter­ national metro­ politan; it may also ruthlessly send Hong Kong into eco­nomic stagnation or decline. ”

Some say Hong Kong has a China-UK complex: "I like your money, mainland China, but I prefer your politics, UK". Hong Kong is indeed happy and lucky to benefit from the economic strength of mainland China. However, the ideology and identity that generations of present-Hong Kong society have cultivated is often placed at odds with mainland China's non-democratic political system. Nevertheless, there seems to be an unspoken and delicate consensus among Hong Kong people that they will accept more political influence from Beijing as long as there are economic benefits for Hong Kong. Supporting „the world’s freest economy - in true Hong Kong spirit, as Hong Kong government proudly claims.

This delicate consensus on striking the balance of economic and political trade-offs among Hong Kong people, however, seems to be broken for two reasons. First, the accumulated wealth and influence of the Hong Kong middle class has been eaten away by the financial crisis and high real estate prices.

There is a growing sense that super-rich Hong Kong business people are ganging up with the HKSAR government – and more importantly, with Beijing. This view goes hand in hand with the demands of the Hong Kong middle class for the right to directly select a Chief Executive in 2017 who can represent their interest for more equality and opportunity. They are worried that universal suffrage on the hand-picked candidates by the nomination committee is a halfway house, and will not ensure the new Chief Executive to contain the elite’s interests.

Second, there is an identity crisis among Hong Kongese, reflective of their weaker economic power. In 1997, Hong Kong's GDP was 17% of the mainland China’s. In 2013, it only accounted for 3%. Simultaneously, the lavish consumption behaviour as well as the vulgar behaviour of some mainland nouveau riche has deeply hurt Hong Kong's dignity. Sadly, there are a few cases of some Hong Kong residents participating in the humiliation and harassment of mainland Chinese. In the most recent and controversial incident, an ac18

tivist group surrounded a mainland Chinese mother and her young daughter, accusing them of smuggling goods and taking advantage of Hong Kong's public resources. The video circulated quickly on the Internet with hundreds of millions of views, generating anger and widening the rift between mainland China and Hong Kong. By a similar token, placing the blame on only external factors, such as Beijing's undemocratic influence, globalisation, or an incompetent Hong Kong government, will not help. What Hong Kong needs most to increase its competitiveness is education, innovation and an open-minded immigration policy to attract top talent, similar to the US. Egoistic and anti-mainland sentiment only aggravates the problem.

There are two paths Hong Kong can choose from. The first one is a more closed society, echoing the claim that Hong Kong belongs to Hong Kongese. The second one, bitter but rational, is to integrate further into the Mainland, trim back on its identity-seeking policies hurting its relations with Beijing and refocus on liberal capitalism. The first choice may be heroic, but is admittedly a dead-end option. Hong Kongese may win huge respect for themselves if they can sustain their economic success without the benefit and support of the mainland – if. No modern society can afford to be isolated from its largest economic partners. Hong Kong itself has reached its economic height mainly because of its status as a well-governed free port. The region served as the main link between isolationist mainland China and the rest of the world during the greater part of the 20th century, and plays an increasingly challenged, but still strong position. In retrospect, it is adaptability, pragmatic business thinking, and hard work that will make Hong Kong survive and thrive. The way ahead for Hong Kong is to return to its core values and sober business savvy, and not to bow to unrealistic idealism.

“No modern society can afford to be iso­ lated from its largest economic partners.

Hong Kong itself has reached its economic height mainly be­ cause of its status as a well-governed free port.”

International Affairs

Proudly small, and Swiss

Davos and St. Gallen have at least two common features: both are beautiful small towns in Switzerland, and both find themselves under exceptional circumstances for a few days every year. The World Economic Forum and the St. Gallen Symposium respectively dominate the otherwise rather sleepy little cities with swarming luxury cars, fully-booked hotels, high security measures, lavish parties, talks held under catchy mottos, world famous guests, and extremely restricted access. Both events celebrate their 45th anniversary this year, and in both cases the various gatherings and networking opportunities seem to be the actual purpose of the extravaganza. Even formally, the stated goals of both events seem to resemble each other; on both occasions, important individuals emerge to think and talk about designated, important topics.

This role in facilitating global dialogue has become a long-standing tradition in the Alpine republic. Ever since Geneva diplomat Charles Pictet de Rochemont convinced the European superpowers to recognize the Helvetian Republic’s neutrality and independence on 20 November 1815, Switzerland has managed to establish itself as an integral and stable part of Europe – all the while being located at the very heart of the world’s most contested continent. The country continues to serve as a global platform on neutral ground to settle political, economic and social disputes extending far beyond the Confederation’s borders.

The St. Gallen Symposium and the World Economic Forum both embody this essence. The latter is now primarily a foundation that works as a think tank, and publishes reports.

Founded as the ‘European Management Forum’ in the early 1970s, it was conceived by German-born professor and businessman Klaus Schwab as a stage for private sector dialogue, but has adopted a greater political, economic and social focus over the years. Its reputation for bringing elite leaders together continues to this date; only the biggest fish in the sea of the international economy and government may con-

vene, mostly to talk business but also to throw fancy parties and discuss global affairs with the aim to “improve the state of the world”. Despite the WEF’s success in bringing business together, their track record in the latter respect has remained meagre, although whether or not this is its purpose is a debate for another day.

Albeit also being propped by a foundation, the St. Gallen Symposium relies very much on students as either organisers or participants. The original design of the Symposium, a student response to the 1960s student protests, envisaged a platform for intergenerational dialogue to mitigate the conflict between old and new elite. Thus, in a student event organised for students, students have naturally and traditionally played a vital part. Half of the so-called ‘Leaders of Tomorrow’ are youth from around the globe, selected through an essay competition or based on their academic and professional achievements; for them, the incentives to participate are bolstered by the prospects of a cosy ambience in which to access, challenge and possibly even influence today’s leaders. Those that are invited as ‘Leaders of Today’ are also central to the Symposium’s agenda. Each year brings prominent speakers to the city, the list including heads of state, business leaders as well as those active in the international arena.

At the Symposium, those that are young shape the debates, this year under the topic “proudly small” whereby smallness is not seen as the root of weakness but as a source of strength.

One look at the country’s historic role in facilitating conversation, and this theme begins to sound appropriate. In true Swiss spirit, despite its small size, the Symposium’s strategic positioning within the international arena may serve to elevate its voice for years to come.

This piece was written by the editors of The Dufour Street Journal, in preparation for coverage of the 45th St. Gallen Symposium 19

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International Affairs

Elitism in the 21st century Akash Arasu

“The four orders of caste were created by Me, According to difference in one's quality and aptitude. Though I am its creator, know Me to be incapable of action or change�

Bhagavad Gita, Chapter 4, Verse 13

As far as ancient religious texts go, the Gita is among the oldest. Composed in the fifth century BCE, the Gita has served as fundament in the social stratification of India. It describes the division of mankind into four castes - priest, warrior, merchant, and labourer. Consequently, the warriors and priests comprised much of the ruling class, as is witnessed today in the concentration of wealth and power in India. It is important to note however that there has been a tradition of transition between the castes. Should one be born a labourer, it is within one's grasp to become a warrior; though is difficult, it is not impossible, nor is it unprecedented.

The notion of segmenting society was not exclusive to the Indian sub-continent.

Socrates of ancient Greece argued for a strikingly similar pattern of separation.

In the interest of ordering society, Socrates suggested propagating the following tale. God has created man with elemental properties, such that he who rules has gold mingled in his soul. Those that march and defend on the ruler's commands are composed of silver. All others such as traders, craftsmen, and agriculturalists shall be embodied with bronze and iron. Much in line with the Gita, Socrates proposes that there is no restriction to what you may be born with. Gold can birth Bronze, and Iron can birth Silver. It would appear that social mobility is God's will.

In present-era, one of the first to accentuate the separation of the classes was Vilfredo Pareto. Pareto argued that the "higher" classes have means of buttressing their position and of creating distance between themselves and the lower eco-political strata. Pareto's lesser-known principle is that no matter which Elite reigns, it will always remain a minority, society thus never achieving an ideal of equality. Pareto concludes that there will nevertheless remain a circulation des ĂŠlites, a means through which non-Elite can become Elite. His fellow 21

International Affairs Italian, Gaetona Mosca, another founder of Elite Theory, agreed with Pareto on the matter of circulation. However, Mosca was less pessimistic, noting that what we term the Elite are simply men and women with superior skills and characteristics that must be valued. Such character afforded them exceptional organisational skill, seeing them fit to rule.

An interim conclusion: Elite minorities developed over the past millennia on religious and philosophical grounds, as a means to establish social order. They are said to be capable, and endowed with the necessary tools for governance. What is of note is the changing nature of the Elite: The ability of the non-Elite, to become Elite.

Establishing The Establishment There has been a change in the concept. Institutionalisation of the Elites has decreased social mobility for the lower strata. There are three primary mechanisms through which this seems to have occurred.

“Elite minorities developed over the past millennia on religious and philo­ sophical grounds, as a means to estab­ lish social order.

They are said to be capable, and en­-dowed with the necessary tools for governance. What is of note is the changing nature of the Elite: The abi­l­ity of the non-Elite, to become Elite.”

Education for the Educated: 32% of university students in

the United Kingdom come from lower income backgrounds. The University of Cambridge and the University of Oxford, arguably the most elite universities, are composed of 12.6% and 11.5% from the lower classes.

There seems to be a tendency for the affluent being more likely to attend i) university, and more so, ii) top universities. It is not a stretch of the imagination to claim that a university degree allows you to greater access to opportunities in order to succeed. Let alone a degree from the famed Oxbridge. This phenomenon is not restricted to the U.K. 55% of undergraduates in the United States come from annual incomes above $95,000. Lower incomes, below $33,000, contribute to a mere 9%.

Education yes, but only if you can afford it.

Political Purchasing Power: “I don't care too much for money, 'cause money can't buy me love.”, sang John Lennon famously. Had he wanted political clout, perhaps the Beatle may have felt differently towards his finances. A recent experiment conducted at the University of Berkeley finds over22

whelmingly that monetary donations can buy face-time and access to policy makers. This finding is particularly worrying for the next presidential election since the infamous McCutcheon vs. FEC, a landmark Supreme Court ruling that removed limits on political campaign contributions. In January 2015, the Koch brothers (multi-billion republican-leaning family) announced their intention to spend close to $1 billion in the 2016 elections.

Money can buy you political influence, but an election? We may soon find out.

Capital-Labour Dissonance: ‘Capital in the 21st Century’ has become prime coffee table material among economists.

Piketty’s work highlighted a flaw in our system. One of his primary conclusions is that the return to wealth (interest or r) is increasing in excess of world growth (output or g), r>g.

This has allowed an overwhelming accumulation of capital within a select few individuals, ones who unsurprisingly possessed capital in the first place. The de-linking between wages and productivity exacerbated this effect of wealth increase. In the USA. between the years 1973 and 2006, median hourly compensation increased by 20.1%, while in contrast usable labor productivity increased by 47.9%. The Center for Economic Policy and Research attributes this disconnect to substantial upward redistribution of commercial earnings from typical wage earners to high-wage earners (e.g. CEOs) and profits (e.g. shareholder returns).

Labour is not being rewarded its fair share of return and that is unjust.

Justice as Fairness Capuchin monkeys are a remarkable breed. They are often used to simulate economic transactions. In one such experiment published in Nature, the monkeys give researchers a rock and in return are given a reward. The rock corresponds to payment. The experiment proceeds as follows: • • •

Monkey A gives researcher a rock, receives a cucumber.

Monkey B seated next to A, gives the same researcher a rock, receives a grape.

Monkey A, again gives researcher a rock. Receives a cucumber. Open inspecting it, the monkey tosses the cucumber back at the researcher, and begins to throw a tantrum.

Researchers identified that the monkeys were unhappy with what they perceived as unequal reward. The grape was clearly the superior reward, and both monkeys A and B were paying exactly the same; they both gave identical rocks to the researcher. Yet A was unable to understand why B received the better reward, and was understandably upset by the ordeal.

International Affairs Justice is not an inane human construct. On the contrary, it lies at the very heart of what sentient beings relate to happiness. The relation between a just society and a happy society is not simply a philosophical exercise. It is a necessary outcome.

Salutary if kept within bounds Prof. Dr. Christoph Frei is an associate professor in the Department of Po­ litical Science at the University of St. Gallen.

Christoph Frei

“‘I don't care too much for money, 'cause money can't buy me love.’, sang John Lennon famous­ ly. Had he wanted political clout, per­ haps the Beatle may have felt differently towards his finances”

From experience we know that conflict is a natural concomitant of social life. Wherever human beings live together, their needs and aspirations collide.

Research suggests that playing children get into a conflict about once every three minutes.

From experience we also know that conflict is not inherently bad. Unpleasant, costly and painful as it may be, good things come of it, from personal growth at the individual to real progress at the collective level. One remarkable feature of the great normative project of Western civilisation – the rule of law, fundamental rights, checks and balances – is that it provides a framework that allows for conflict while keeping it within socially tolerable bounds.

Beyond the boundaries of states, an equivalent framework takes time to emerge. Well into the 20th century, violent conflict was considered a legitimate, even a necessary component of international politics. Since 1945, states have approved an additional corpus of law to stigmatise violent aggression and create a robust norm against it. Call it progress, if you please. Today, those who violate or misinterpret these norms may be endowed with power, but not with legitimacy.

The above article was written for the St. Gallen Symposium’s Leader’s of Tomorrow Essay Competition.

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International Affairs

If it wasn’t already difficult enough Guillaume Gabus

“We hope this letter enriches your knowledge of our constitutional system and promotes mutual understanding and clarity as nuclear negotiations progress.” These were the closing words of the open letter to the leaders of the Islamic Republic of Iran, signed by 47 Republican Senators. “Utter disbelief ” were then John Kerry’s opening words when commenting on the letter. This had not been the first attempt to impair the nuclear negotiations between Iran and the 5P+1 (the five permanent powers making up the UN Security Council, plus Germany).

By inviting the Israeli president to address a joint session of Congress earlier this year, it seems the Republican-dominated House of Representatives had first and foremost intended to snub the US President. Netanyahu complacently advanced to the stage to voice his concerns, qualifying any agreement with the Iranians as a “bad deal”; perhaps rightfully so, from his point of view. A second attempt at undermining negotiations was the letter orchestrated by Republican Senator Tom Cotton, a war veteran, former farmer, and ex-advisor for McKinsey. The text points out that due to the missing legislative approval, any executive agreement would not have much durability and impact, since it could be revoked “with the stroke of a pen” by the next president. On top of it all – considering that the Republican representatives were addressing an autocratic regime led by the same Supreme Leader for 25 years – the letter reminded the Iranian leadership 24

that President Obama’s term would end in January 2017, while some Senators “will remain in office well beyond then – perhaps decades.”

By revealing the volatility and unpredictability of partisanship and its effect on international politics, this open letter weakens the American administration’s position. Allegations were not long in coming. Democratically aligned media outlets jumped at calling the stunt an unprecedented act of treason. Yet, critics forgot that in 2007 Nancy Pelosi, then Democratic U.S. House Speaker, met with the Syrian President Bashar al-Assad, undermining the efforts of the Bush Administration to isolate the Syrian regime.

In defence against allegations of backstabbing, Republicans claim that Obama uses executive agreements in an irresponsible manner, especially when trying to protect supposedly wrong American interests.

They do not, however, seem to remember that the president who made the most use of executive agreements came from their own ranks: in the 1980s, former US President Ronald

“The letter reminded the Iranian leader­ ship that President Obama’s term would end in January 2017, while some Senators ‘will remain in office well beyond then – perhaps decades.’”

International Affairs Reagan applied this device to strike a nuclear deal with China and a hostage deal with Iran.

So the question remains as to which way these internal interferences can alter the negotiations. Once the talks began, the Iranians had a favourable starting position, as the relative costs of a no-deal option were less for them than for the other side.

Imagine a decision diagram in which you have two possible outcomes: deal or no-deal. For the Iranians the starting situation translated into the following: “Either we find a deal that is suitable for us, or we can build a bomb and find out just how messy the Middle East can get.” The costs for the Iranians of a non-agreement would not be substantially higher compared to the situation before the negotiation in Lausanne. Sanctions would still be maintained; economic growth would continue to stagnate.

Iran Deal 5P+1

Deal NoDeal

NoDeal

:) / :) :( / :|

Faced with the same two choices, the response of the West to the no-deal outcome as well as the cost of this response differs. Important to consider are the following actions: Would further sanctions against Iran lead to cooperation or discord? Can nothing be done, letting everything remain as is? Would some of the 5P+1 parties contemplate an intervention? And finally, can the West – in the no-deal scenario – ac“The costs for the cept an escalation of the situIranians of a ation in the Middle East, tannon-agreement tamount to a worsening of the already greatly precarious would not be sub­ humanitarian conditions?

stantially higher compared to the situation before the negotiation in Lausanne.”

In the short or medium term, in a no-deal scenario, the West is also confronted with a loss of reputation abroad as well as domestically. This may push them towards actions that may be costlier than an agreement. Relative to a deal, the costs of a no-deal outcome are surely negative.

Now during the talks, the aforementioned Republican letter is published, further weakening an already suboptimal Western position by influencing the cost-calculus of the Americans. At home, a non-agreement would mean that the Senate is able to undermine a sitting president – a sign of blatant presidential impotence and a legacy that Obama most certainly wants to avoid. Any attempt to weaken the presidency

by undermining an agreement with Iran raises Obama’s political cost of a no-deal outcome. Hence, from the Administration’s point of view, every Republican endeavour to torpedo the talks from within makes any agreement look better than a no-deal. The West wants a deal. The Iranians, though preferring a deal, would not be perturbed by a no-deal.

The Iranian leadership did not need much time to react to the letter. Three points are noteworthy in this respect. In his answer, Foreign Minister Javad Zarif first highlighted that the U.S. has a commitment to uphold international agreements. Factually, he argued, it does not matter whether the administration will be replaced or if Congress just didn’t want an agreement. An international obligation is subject to international law. Second, American partisans tend to forget that the negotiations are not just bilateral. Tom Cotton and his colleagues would perhaps not have many regrets sabotaging a deal if they only hurt Russia or China. But going against NATO allies is a different story. Third, the Iranian statement makes a clear differentiation between the administration and the purveyors of the letter. By distinguishing between the persons in charge and the noisemakers, the Iranians reaffirmed that they are interested in an agreement, and displayed evidence of a certain foresight and awareness of Iran’s negotiating position.

Iran’s reaction was unexpectedly rational, given its reputation as risk-taker and confrontational when put in a vulnerable situation. In contrast, Tom Cotton and his fellow Republican Senators look more Iranian than the Iranians themselves.

“Tom Cotton and his colleagues would perhaps not have many regrets sabo­ taging a deal if they only hurt Russia or China. But going against NATO allies is a different story.”

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Photograph by Ieva ManiuĹĄyteË™

International Affairs

Research & Academia

International Investment Law and Targeted Sanctions: An uneasy relationship Prof. Dr. Anne van Aaken Since 2012 Prof. Dr. Anne van Aaken is Professor of Law and Economics, Legal Theory, Public International Law and Euro­ pean Law at the University of St. Gallen. Her main research focus is the application of (behavioural) economic methods to international law and legal theory. She is currently Vice President of the European Society of International Law. Fur­ thermore, Prof. van Aaken worked as an expert consultant for the World Bank, UNCTAD, OECD and GIZ.

Since March 2014, inter alia the US, the EU, Japan, Canada and Switzerland (partially mirroring the EU sanctions) have been implementing smart sanctions such as travel bans and asset freezes against Russian and Ukrainian individuals and organisations due to the Ukrainian crisis. In other cases, smart sanctions could be applied against other countries nationals, e.g. due to human rights violations of that country.

Smart sanctions are a classical system of decentralised retaliation. They are necessary for the effectuation of international law in case the centralised collective sanctioning system via the UN Security Council does not work (e.g. because one of the permanent veto powers objects). Whereas 30 years ago, general trade sanctions were in fashion, nowadays, sanctions tend to target only those who are responsible within the country in order to avoid harm to the general population.

Smart sanctions may conflict with other areas of international law – especially international investment law – rendering the decentralised system of sanctioning (even more)

ineffective. International Investment Agreements (IIAs) protect foreign investors inter alia against uncompensated expropriation of their assets (broadly defined) and against unfair and unequitable treatment which is understood to “Whereas 30 years include a due process guaranago, general trade tee such as fair procedures.

Most IIAs provide the direct sanctions were in right to sue the host state for fashion, nowadays, damages before an internasanctions tend to tional arbitral tribunal (mostly the International Center for target only those the Settlement of Investment who are responsible Disputes, part of the World within the country Bank Group), whose judgments are enforceable in over in order to avoid harm to the general 150 countries. IIAs are mostly concluded bilaterally, and population.” around 3250 currently exist worldwide. Switzerland has concluded over 125 IIAs; Germany even more. Some of the targeted individuals and firms will have assets in the sanctioning countries. For example, a 27

Research & Academia Russian citizen holding assets in Canada whose account is frozen could sue Canada for expropriation under the Canadian-Russian IIA. If successful, Canada would need to pay damages to the sanctioned individual, rendering the sanctions useless.

The probability that at some point these IIAs might be used by sanctioned individuals and firms against smart sanctions must be seriously considered. Can the sanctioning state raise a legal defence against the claim of the sanctioned person? In other words, can it argue that it is allowed to take countermeasures and thus escape responsibility? Such countermeasures are in principle illegal under international law but considered legal when taken as a response to an international wrongful act.

First, the tribunal needs to have jurisdiction and this is only the case if there is an “investment”. Although in some circumstances a sole bank account may not count as an investment, in most cases, especially if firms are targeted, the notion of investment (which is necessary for the jurisdiction of the tribunal) is unproblematic. Furthermore, under current case law there is not much doubt that asset freezing over a longer duration is an expropriation, and that this act without due process constitutes an internationally wrongful “...under current act under the IIAs.

case law there is not much doubt that asset freezing over a longer duration is an expropria­ tion...”

Turning to the defence possibilities of the sanctioning host states, modern US and Canadian IIAs contain socalled non-precluded measure clauses (NPM) excusing the state if national security is at stake. One may argue that national security is at stake even if the Ukrainian crisis is far away, but this is legally shaky.

Newer IIAs extend the NPM clause to the maintenance or restoration of international peace or security, clearly allowing for uncompensated targeted sanctions. Interestingly, current European, including Swiss IIAs do not contain NPM clauses. Furthermore, the Russian-Canadian IIA from 1991 does not have one. Thus, the only possibility for a host state to defend itself against a claim of a sanctioned individual or firm is via customary international law, namely the law of countermeasures as written down by the International Law Commission (ILC).

Two cases must be distinguished: those where an injured state takes measures in order to reciprocate the injury and those where non-injured third states take measures (such as sanctions). In the former case, measures (for example, targeted sanctions under an IIA) can – within certain limits – be illegal. The latter can make the international system (for 28

ius cogens or inter omnes violations) more effective. However, it is heavily disputed whether non-injured states can take illegal measures in the collective interest or only use unfriendly but legal means. The argument for this restriction is that otherwise any (powerful) state may have an excuse to take illegal measures outside of the collective system of the UN. Following the ILC, targeted sanctions by non-injured states against Russian nationals would be viewed as illegal and the states would need to pay damages. Were a tribunal to follow academic opinions endorsing countermeasures by non-injured states, limits would nevertheless need to be respected – such as the obligation to protect fundamental human rights.

If the legal obligations in IIAs were considered as an objective human rights regime, expropriation would not be accepted. If, in contrast, one views them as a mainly bilateral regime of international economic relations, then the sanction would probably be approved.

Another contentious issue is the nature of the investors’ rights. If their rights are just derived from the states and the rights in IIAs are viewed as purely within the realm of inter-state relations, sanctioning would be possible. But if IIAs were viewed as giving a direct right to the investor, the investor would be a third party who has not violated international law and therefore cannot be sanctioned. Most investment tribunals have so far followed the direct rights approach and thus have denied the possibility to sanction investors in order to punish their home state.

In short, unless states – including Switzerland – write explicitly in their IIAs that measures for the restoration of international peace and security are permissible, they risk being held liable for damages; targeted sanctions would then be rendered useless. This could endanger the decentralised effectuation of international law.

Infobox Non-precluded measure clauses (NPM) NPM Clauses allow states to take actions otherwise inconsistent with the IIA when, for example, the actions are

necessary for the protection of essential security, the maintenance of public order, or to respond to a public health emergency.

Research & Academia

On economic

thought Prof. Dr. Rainer Metz

Prof. Dr. Rainer Metz is Associate Professor of Economic History and Methods of Empirical Economic Research at the HSG (SEPS). He teaches economic theory and economic history over the 19th and 20th century.

A consideration of developments in economic history and economics is possible under very different perspectives, and for very different periods. We begin our presentation with classical economics, which can be considered as a side effect of the industrialisation in England. Then, following the neoclassical school, Marxism and neo-Marxism, Keynesianism as well as macroeconometrics, ordo-liberalism and monetarism are also examined. We try to shed some light on important economists and their theories, research methods and goals – as well as their policy implications. Within these considerations it should be noted that, on the one hand, the economic problems and objectives of society are the background for economic theories and, on the other hand, these theories are used to shape and influence reality. Therefore economic history and economics are mutually interdependent and can really be understood only as a synthesis.

During the historical process of industrialisation within the course of the 18th and 19th centuries, the agricultural society was replaced by industrial society, and feudalism by capitalism. These events are associated with the formation of classical economics. The classics justify economics as a systematic science: the metaphor of the "invisible hand", for instance, is an expression for the movement of an anonymous market price mechanism that coordinates all demand and supply schedules without the assistance of a central planning agency. Equilibria in the markets are achieved with

the means of price competition and the actor’s rational pursuance of their self-interests.

Related to this is the idea that there can never be too little demand in a free market economy. Each decision to supply a good is coupled with a complementary decision to demand another good. Goods are therefore only offered because the suppliers would like to demand other goods with the proceeds of the sale. This idea of the long-term balance of supply and demand found its way into the economic literature as Say’s law, and dominated economic thinking until the outbreak of the global economic crisis in 1929.

The marginal revolution (around 1870) – which introduced the concept of marginal utility to economics – replaced classical economics and led to the evolution of neoclassical economics, which can be divided into three schools: the Austrian, the Anglo-American and the Lausanne school. Contrary to the focus of classical economists on objective values, the starting point here is a subjective utility framework and marginal analysis. Nevertheless, proponents of neoclassical economics still hold on to the belief that competition on all markets will always lead to equilibrium of supply and demand.

The social and economic turmoil that emerged in the light of industrialisation, as well as the formation of class society 29

Research & Academia and ever more prevalent economic crises, triggered the development of countermovements against what was seen as previous dogmatic orthodoxy in economics. The historical schools and the economic system of Karl Marx remain the most important among these.

Dominated by Europe and its descendants, the world economic system at that time – based on the gold standard as a global exchange rate system – found an end with World War I. The collapse of public “The social and finance, unprecedented inflation and mass unemployment economic turmoil were direct consequences. that emerged in Moreover, the Russian Revoluthe light of indus­ tion and the foundation of the USSR established a polarity trialisation trig­ between capitalist and cengered the develop­ trally planned economies, and ment of counter­this dynamic eventually came movements, against to dominate the 20th century.

what was seen as previous dogmatic orthodoxy in eco­ nomics”

The short euphoric growth experienced by Western economies in the 1920s preceded the Great Depression during the following decade, and was accompanied with serious and enormous economic and social repercussions. Most economists at that time were left helpless. The Great Depression and the trauma of capitalism led to the replacement of classical and neoclassical economics with the Keynesian system. In contrary to the neoclassics, a key conviction underpinning Keynes’s “General Theory” is that market economies cannot justifiably adjust from the state of underemployment towards full capacity. Instead, it is additional government spending that propels the economy to equilibrium.

The Keynesian school of economic thought is linked to the emergence of theoretically-oriented macroeconometrics, which served to replace the previously dominant historical approach of empirical economic research, and contributed to the international development of the system of national accounts after World War II. At the same time, discussions surrounding the question of a humane and efficient economic order evolved in light of the experience with the Nazi war economy and with centrally planned economies. Also significant in this context are Euckens’s ordoliberalism and Hayek’s neoliberalism.

Unprecedented economic growth in many Western countries after World War II produced a Keynesian triumph. The macroeconomic employment problem caused by the global economic crisis was considered as solved, the classical business cycle of booms and busts appeared to have been overcome 30

and steady overall economic growth stemming from an economic policy based on government intervention seemed feasible. Then, in the 1970s, an economic slowdown, a rise in unemployment in conjunction with inflation and an increase in national debt began to raise doubts about the controllability of the economy. Challenges to the dominant Keynesian doctrine emerged, particularly from representatives of monetarism and most notably by Milton Friedman. Friedman’s core thesis ran that satisfactory long-term economic development can only be achieved if one refrains from monetary experiments; then is the real economy safeguarded against monetary disturbances. Thus, pre-determined, potential-oriented and continuous monetary growth had to be implemented. The central bank’s interest rate policies at that time – as well as the fiscal policies of the state, Friedman maintained – were not suitable for the control of stability and growth.

What do we learn from looking at the development of economic history and economics? Over the last two hundred years, industrialisation and the formation of capitalism have brought participating countries the largest increase of material wealth in history, but have simultaneously been associated with disasters, crises, global imbalances, pollution and more. Economists have analysed and explained these processes historically, theoretically and statistically, and have developed scientific doctrines that have further influenced economic policies. We now have a broad knowledge of the history of the economy. This knowledge provides us with valuable tools and experience to shape our present situation and develop solutions to economic problems today. Without history, or its analysis, rational, purposeful action would simply not be possible.

“Unprecedented economic growth in many Western coun­ tries after World War II produced a Keynesian triumph.

The macroeconomic employment problem caused by the global economic crisis was considered as solved”

Research & Academia

Keynes's Economics versus "Keynesian" Economics Professor Tony Aspromourgos

Tony Aspromourgos is Professor of Economics at the University of Sydney.

He has published widely on the history of economics and is the author of The Science of Wealth: Adam Smith and the Framing of Political Economy (Routledge, 2009).

The unorthodox economic theory that John Maynard Keynes (1883–1946) developed in the 1930s, and published in his General Theory of Employment, Interest and Money (1936), took its fundamental point of departure from orthodoxy in a rejection of the supply-side approach to explaining aggregate economic activity levels. Instead, Keynes proposed that aggregate demand (‘effective demand’) was the autonomous element in determining aggregate economic activity.

More particularly, elements of aggregate demand that are autonomous with respect to current (household and corporate) incomes are the drivers of aggregate demand – and thereby aggregate supply and aggregate incomes. The aggregate outcome occurs via the ‘multiplier’ mechanism, which generates induced demands (demands that are a function of current incomes) as production, outputs and incomes vary in response to autonomous demand changes. For Keynes, the key element of aggregate demand that plays this relatively autonomous role in macroeconomic dynamics is private investment demand, in turn driven by profit expectations. But in our time, private consumption demand is more capable of also playing this role in developed economies, because of higher levels of household income and the greater access of the household sector to external finance (credit), compared to eighty years ago.

The contrast between Keynes’s demand-side approach to explaining aggregate activity and the supply-side approach that was orthodox in the 1930s – and that has reasserted itself since the 1970s in the shape of neoclassical economics – can be summarised as follows.

In the supply-side approach, aggregate planned investment demand is brought into balance with the level of aggregate planned saving associated with the 31

Research & Academia full-employment level of aggregate income and GDP. This balances aggregate demand for output and aggregate supply of output with full employment of resources. At least, this outcome is supposed to occur in the long run and under competitive conditions. The primary equilibrating variable is the interest rate.

In the Keynesian demand-side approach, causation is in the opposite direction. Aggregate planned saving is brought into line with the level of aggregate planned investment via the multiplier mechanism, with the resulting levels of aggregate income and GDP only coinciding with full employment by chance. The primary equilibrating variable is the level of aggregate activity itself.

To see the Keynesian logic in the simplest form possible, consider the following characterization. In a closed economic system, so that GDP (Q) is identically equal to aggregate income (Y), suppose planned aggregate consumption demand (C) is a fixed proportion, (1–s), of aggregate income, where s is ‘the propensity to save’ (taking a value between zero and unity). Equilibrium requires that planned aggregate demand – planned consumption [(1–s)Y] plus planned investment (I) – is equal to GDP: C + I = Q = (1–s)Q + I Q = I/s GDP is a multiple, 1/s (greater than unity), of private invest-

ment. The dynamics of private investment, driven by profit expectations and by Keynes’s famous ‘animal spirits’ and so on, drive demand dynamics and aggregate activity levels via this multiplier mechanism. And planned saving adapts to planned investment: if I increases by $1.00, equilibrium GDP and aggregate income increase by 1/s times $1.00; and planned saving increases by s times 1/s times $1.00 – i.e., by $1.00 also.

It may be emphasised that the problem of unemployment that emerges in Keynes’s theoretical framework is not attributed by him to any inflexibility or ‘stickiness’ of prices or wages. This idea is, in fact, an “...the problem of entirely orthodox view, as unemployment that Keynes recognised – and explicitly rejected, in great deemerges in Keynes’s tail, in Chapter 19 of the Gentheoretical frame­ eral Theory. If, as in the orthodox supply-side view, work is not attri­ competition acting through buted by him to any wage, price and interest rate inflexibility or flexibility is supposed to austickiness of prices tomatically bring about full employment, then inflexibilior wages.” ty of those variables (limits to 32

competition) follows as the natural explanation for unemployed resources.

Hence the ‘neo-classical-synthesis’ Keynesianism of the decades after World War II, and the subsequently developed, so-called ‘New Keynesianism’, are in a real sense antithetical to Keynes’s intentions – relying, as they do, upon forms of stickiness in the market mechanism to explain unemployment. The ‘Post-Keynesian’ school of economics, broadly conceived, is truer to the spirit of Keynes’s theory.

But here is a question: If aggregate economic activity levels are determined by effective demand, along Keynes’s suggested lines, so that full employment of resources is a fluke, should we not, in general, most of the time, observe excess “The Post-Keynesian supply of resources or factors school of economics, of production?

broadly conceived, is truer to the spirit of Keynes’s theory.”

The resources used as inputs in modern production systems can be divided into three categories: labour services, capital goods and natural resources.

In a Keynesian world in which activity levels adapt to demand, in the long run the size of the economy’s capital stock and rates of depletion of natural resources will adapt to those demand dynamics. The one input, the supply of which cannot easily be adapted to the demand for it, is labour. It is labour unemployment that is the observable manifestation of the soundness of Keynes’s theory – even if this observable fact is mystified by orthodox appeal to the concept of ‘natural’ unemployment, attributed to supply-side causes.

In truth, however, the supply-side view was never based on empirical evidence; it was always a pure a priori deduction from supposed sound theoretical principles. But those principles were not entirely well founded.

“It is labour unem­ ployment that is the observable manifes­ tation of the sound­ ness of Keynes’s theory...”

Research & Academia

Turning economy

into comedy Hannah Winterberg

With the summer holidays drawing ever nearer, some relaxing time at the lake or pool is fast approaching too! If you are afraid that you will feel incomplete without an economics book by your side you should definitely consider the “Cartoon Introduction to Economics” by Yoram Bauman and his illustrator Grady Klein.

rather scientists than economists) that will take you through the concepts of “the optimising individual”, as well as “strategic and market interactions” without you even noticing it.

Even if you have already taken various classes on the topic, you almost certainly won’t be bored and gain a much better overview of how these sophisticated models originate.

Yoram Bauman, who claims to be “the world’s first and only stand-up economist”, earned his PhD from the University of Washington, and has teamed up with the award-winning illustrator Grady Klein in order to make “economy” more “comedy”. Two published volumes – one on microeconomics and one on macroeconomics – definitely live up to this expectation.

Bauman started his career in graduate school, where he was able to fill a whole auditorium with laughter by presenting a parody of the “ten principles of economics” from Mankiw’s textbook. His presentation of this parody is a Youtube classic, with more than one million views. After his first book proved to be a similar success, he added a second volume on macroeconomics, which picked up following the success of his debut feature.

The first volume on Microeconomics features three characters (whose lab coats and clipboards suggest that they are

PS: Both volumes are available at the library in paperback!

Printed with permission of the author

Research & Academia

Meet our The Dufour Street Journal is launching a new and exciting project that aims to present the personal side of HSG professors in the form of weekly video interviews. The first interviews have already been conducted and we can assure you that there are interesting things to learn. If you want to know which of your professors was a big fan of Maradona, who wanted to become a veterinarian, or who saw himself as a future goalkeeper, visit our blog and watch our first contributions.

What?

Casual and non-academic talks to HSG professors about their career path, hobbies, inspirations, and values packaged in 10–30 minute video-interviews.

When? From now onwards, each week one interview will be published on our Facebook page as well as on our blog at http://www.thedsj.ch.

Why? The videos provide a better understanding of the professors’ personality, they shorten the bridge between students and professors, and can serve as an inspiration for the students.

Who? The interviewers are Nina Karnaukh and Igor Posdeev, 4-year and 1-year HSG PhD students in Economics and Finance. The plan is to cover most of the full professors at the HSG.

Professors Our motivation: Just as football fans are interested in the life of Cristiano Ronaldo or Lionel Messi, we want to know more about our professors’ personalities. We believe that a better understanding of their motivation and values gives us inspiration for our studies and shortens the distance between them and their students.

Why you should watch these videos: 1. To know which professor better suits your values when applying for an assistantship or selecting a supervisor for your Bachelor/Master/PhD thesis 2. To help your decision on whether to pursue an academic career or not – listening to how and why your teachers decided to go into academia might reveal whether you have similar interests and inspirations 3. To allow yourself to be inspired by the professors’ intrinsic eagerness to understand this complex world better, as well as to contribute to the society by providing their research results and recommendations 4. Of course, if you are part of the faculty yourself, you might just as well learn a couple of interesting facts about your colleagues!

Nina Karnaukh with Professor Angelo Renaldo

Careers

Sarita Sehgal, UNAIDS:

perspectives from inside an international organisation Sarita Sehgal has been supporting the Joint United Nations Programme on HIV/AIDS (UNAIDS) agency in Windhoek, Na­ mibia from 2010 to 2014. In her position as Partnerships and Social Mobilisation Advisor, Ms Sehgal furthers the goals of UNAIDS, which encompass leading and inspiring the world to achieving universal access to HIV prevention, treatment, care and support.

Let’s start from the beginning. Can you tell us a bit about yourself?

I’m originally from the United States, but my parents are immigrants. I was raised in the US and was very focused on ballet dancing. I moved to Germany when I was 18 to focus on ballet, dancing professionally for a couple of years. However, I came back to the US to study at Berkeley, and that was where I started becoming more intrigued about the United Nations.

I then moved to Switzerland and did my Master studies at the Graduate School of International Studies in International Relations. I considered a few opportunities such as volunteering after my Master degree, but then veered off that path and did an MBA at INSEAD in France. I got a scholarship from L’Oreal, who thought I was creative - maybe because I was a ballet dancer. I went back to Geneva and worked for L’Oreal for a few years. However, I soon realised it didn’t give me the personal satisfaction that working in a public sector domain did, so at that stage my husband and I had both saved up some money and decided to take a year off and travel around the world.

During those travels it became quite clear to me that I didn’t want to work in the private sector any longer, but when I came back and was looking for work, like all graduates who find that even when you have good degrees it is not so easy - I ultimately ended up getting another job in the luxury goods sector for Richemont International. I worked in proj-

ect management and it was interesting, but I felt like a bit of an imposter - that I didn’t really belong, and I wasn't so keen on fancy watches. So I started looking at jobs in the UN - and trust me, it is difficult to get a job at the UN - and ultimately one job came through at UNAIDS. I was not an expert in aid but perhaps one of the reasons I got the job was because I had been working with the CEO and they wanted somebody who could be the right hand to the director. Sometimes it is not just the industry that you are in that matters, but the type of skills and positions you have had.

You mentioned you had experience in the private sector. Do you think that it gave you certain advantages now that you are at UNAIDS? I think that the private sector gives you confidence in decision making. In the UN, one problem is that it is very hierarchical. In the private sector, when I worked at L’Oreal, I was Product Manager and worked in Marketing. I had my own budget, my own responsibility, I could make my own decisions, and I was not even 30 years old. Of course, when you move into an organisation like the UN it is a bit frustrating when you see you don’t have that decision making power anymore. Also what is easily done in the private sector and less easily done in the public is understanding and focusing on the organisation’s value added. The UN sometimes tries to do everything, and that is hard.

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Careers Can you tell us a little bit about projects you are working on right now at UNAIDS? I moved to Namibia with UNAIDS, working there for four years - and only left there a few months ago. Now I am in Pretoria and work in the South Africa office.

We generate a lot of strategic information to try and understand what the status is of the epidemic, where are new infections happening geographically, and among which populations - and then we use that information to inform our policymaking and our programs. We also act as a convenor by holding consultations around specific issues. For instance, the government of Namibia was developing a plan for the elimination of mother-to-child transmission. We wanted to make sure was that the women who were living with HIV had their needs taken into account. So we held a consultation with the identified stakeholders. We brought the First Lady, the US Ambassador, government – so that then the recommendations that come out of the consultation with communities are actually taken on board.

In Namibia, gender-based violence is a huge issue. One in three women experience gender-based violence. What is being discovered is that gender-based violence is both a cause and consequence of HIV. We tried to raise awareness that preventative responses for gender-based violence need to be linked to health.

It is exciting, but it is also challenging. Of course, trying to change or influence the way things are done takes time. You need to build relationships and trust, and there needs to be money. Trying to adjust the way services are and have been delivered for a long time is not easy.

How important is it that the people involved in these kinds of projects are from different backgrounds? Did you have a lot of people working with you who were doctors, for in­ stance?

You have everybody. Usually, you work a lot with consultants, who help you to gather the strategic information. Obviously, in the Ministry of Health in Namibia there are a lot of medical professionals. In civil society, you have activists and advocates and the LGBTI community and the sex worker community, and you try and bring all these people together and forge an understanding of what is important.

In doing so, what really helps is that you base yourself on evidence. Evidence speaks for itself. When you do studies and you say “this is what was found”, this levels the playing field for everybody - then it is not opinions, it’s actual facts.

This I think is the best way about how the UN works, in the sense that it disseminates this information; it says, “these are the facts”.

Let’s take a couple of steps back now and talk about your per­ sonal experience in your working environment. Do you have an example of an interesting professional situation that you had to deal with - an ethical issue, or an emotional issue?

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I have a few. One situation “Evidence speaks for that I found here is dealing itself. When you do with tensions between socistudies and you say ety and government and managing your relationship ‘this is what was with the stakeholders. As found’, this levels the UN, we are close to the government; we are here on the playing field for the invitation of the govern- everybody... This ment and so it is important I think is the best for us to maintain that good relationship. Government is way about how the UN works” also ultimately responsible for the HIV response in the country. But we advocate that government has a multisectoral response to HIV, which includes civil society, development partners, et cetera.

Civil society, on the other hand, often criticises government - especially in South Africa. So then how do you maintain that relationship with civil society? Often you are stuck in between. Just recently we did a big HIV testing day, and we were not very well organised and did it very late, and the bottom line was that we needed civil society and government to collaborate and we had decided that we would engage with civil society to help in mobilising people to come to the event.

But then government had chosen the sites for testing, which civil society felt were not good sites. So there was this clash and we found ourselves in the middle - which makes it tricky, and you have to appease both sides without getting yourself into a difficult situation. These are the kinds of intricacies that you deal with when you’re working in the UN, because you have to maintain the peace without undermining your own objectives, and our objectives are ultimately to further development in the country using all stakeholders, not just one or the other. While it is difficult for us to accept criticism from the government, at the same time it may be warranted.

Namibia is a post-apartheid country and the skills level of the people and government, as well as their commitment is not very high. But these are your partners. In order to achieve your goals you cannot come in and say “you need to do this” - you approach each other humbly and appease them even if you think they are not making any sense or working too slow. That was a learning experience for me when I first came to Namibia. When I was in Geneva, we were all primarily Western European - well, that’s not entirely true, but we were all UNers, and it was very internally focused and you did not work with government. You worked with other UN organisations. But when you come to a country, your most important partners are the external partners and you have to adjust yourself to their speed, their culture, dressing accordingly.

Turning to advice you may have for students who want to break into this field. A lot of students of international affairs

Careers and social sciences have a very academic background, espe­ cially if they are fresh out of school. In your opinion, what do students who want to work at the UN later have to keep in mind as they study?

I had the same question when I was studying in Geneva, and had my very theoretical International Relations degree, which was just a lot of reading. What is really important especially during your Master degree is to try and get some work experience - whether it is volunteering or an internship on the side. That already gets you to understand what is important in the work environment.

My theoretical degree was part of the reason I did an MBA, too. After studying theory, an MBA can help with finance work and strategy. It gives you practical skills, organisational behaviour skills. An MBA can be applied to anything, not just business. But what is more important is that if you are interested in getting a career in the UN, you need to go out there and get experience. You need to volunteer with NGOs, and the UN, and I would advise more specifically for volunteering and doing internships in the field. Just going and doing an internship in Geneva is not nearly as interesting or as unique. There is a good website called idealist.org which has all sorts of volunteer opportunities around the world, and some of them are paid.

You should also start thinking about what field you want to look into. Is it the environment? Is it public health? Education? Economic development? Empowerment of women?

Gender equality? It helps to have a bit of focus. The UN expects expertise and specialisation quite early. I managed to get away without having it, but it is better if you do. When I’m looking at CVs of interns, if I see that they’ve worked on sexual reproductive health and HIV already, and have “But what is more done some stints out for six important is that if months in Kenya or someyou are interested where then I’m more interested in them because they’ll add in getting a career better value to me. When we in the UN, you need have interns, we give them to go out there and real work. Country offices will be more likely to give you real get experience” work.

What would you say to students who have already had a first experience at HQ in Geneva and have come away a little disil­ lusioned with the bureaucracy surrounding the work they did?

That’s part of the reason I say don’t work initially in Geneva.

There are a lot of good things about the UN and it very much depends on the organisation. UNAIDS is considered a very dynamic and committed organisation. It is flexible and evolving. It is in the media often. Some others have more heavy connotations. But the UN is heavy and bureaucratic and has a lot of rules and that is why I would say get initial

experience in smaller organisations so that when you are committed and enthusiastic and young and dynamic you can work long hours and do all of that.

The UN can become your golden handcuffs at some point. At seniority, many are well paid and have comfortable lives as expats and it is of course difficult to give these things up.

There are not very many organisations where you work in development and have the same kind of financial security.

This is obviously tricky. When you have people who stay in the UN only because it is paying their kid’s school fees then you have a motivation problem too.

Let’s end with a philosophical question. Where do you see the UN heading within the next 10-20 years? Do you think it will keep its reputation as a relevant organisation that maintains peace? Will it still be a coveted working environment for young people?

I think so. The Post-2015 “I think develop­ Agenda is being formulated ment is the founda­ now. The Secretary General just released the synthesis tion for peace. report called “The Road to If there is poverty Dignity by 2030: Ending Povand economic inse­ erty, Transforming all Lives, and Protecting the Planet”. curity, this causes That’s the future for the next challenges for coun­ 15 years. It’s looking at how tries” we safeguard what’s been achieved and continue, noting that we haven’t achieved everything. It’s about being more targeted on the countries’ actual contexts and what they need.

In terms of peace, I think development is the foundation for peace. If there is poverty and economic insecurity, this causes challenges for countries. So yes, I think the UN has an important role to play. On the other hand, funds are declining, member states are not necessarily keen on unlimited support for the UN. The two countries I have been with the UN in, Namibia and South Africa, are both upper middle income countries. We aren’t giving them money, we are only giving them technical support. The organisations themselves are also evolving. Perhaps at some point in the future we won’t need UNAIDS anymore. The whole partnership and position of the UN is changing and the UN therefore has to redefine its role within these countries. But I do think that if you are a young graduate and you are interested in working in a career at the UN, there is a future for that. To make sense in today’s world, the UN will need strategic innovation and thinking; and above all, it will need the ability to reinvent itself.

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