Autumn Semester

Autumn Semester

1.  Economics and Ecology

2.  European Union

3.  Getting a job – Internet sources, see http://samba.fsv.cuni.cz/~stankova or http://samba.fsv.cuni.cz/~poslusna

4.  Globalization

5.  Demography

6.  Immigration

7.  Cultural diversity

8.  Business ethics

9.  Takeovers and mergers

10.  Taxation

1. Economics and Ecology

Source: English for Business Studies, Ian MacKenzie (Cambridge University Press)

Turning filthy air into a highly tradable asset
Marc Tran

The day is not far off when investors can trade in smog bonds or smog futures in addition to pork bellies as the notion gains ground that financial markets have a positive role to play in reducing pollution. The Chicago Board of Trade is already working on plans to set up a market for sulphur dioxide, and the exchange is also interested in running a market in international carbon dioxide.

Pollution rights or emission rights, long advocated by economists, were endorsed in the 1990 Clean Air Act, which allowed polluters the right to meet government limits by buying and selling sulphur dioxide allowances or credits. Southern California last week became the first region to adopt this market approach on a large scale. The plan would set levels by which polluters would have to reduce their emissions each year, but would not tell them how to do it.

Businesses that developed techniques or technologies to reduce their emissions below the required levels would accumulate credits they could sell on the open market to other companies that were unable to meet the requirements or found it uneconomical to do so. Rather than being all stick, the approach dangles carrots as pollution control becomes a profit opportunity instead of simply a regulatory burden. A radical departure from the present regulatory methods, southern California's success or failure will have an important bearing on future anti-pollution efforts.

The market approach has even been adopted by the United Nations Conference on Trade and Development (UNCTAD) to combat global warming. Growing numbers of scientists believe that, within 50 years, the Earth's temperature will climb to dangerous levels, eventually leading to coastal flooding, severe storms and drought. Carbon dioxide pollution from factories, power generators and cars is the biggest single contributor to global warming.

UNCTAD's proposal would work like this: each polluting company is issued with a certain number of carbon dioxide credits a year. Each credit entitles a company to emit one tonne of carbon dioxide a year; and the credits are traded in bundles of 100. Companies would be able to buy additional credits as needed.

The number of credits would be tightly controlled by a global Environmental Protection Agency, and reduced over a number of years. Inefficient companies that release huge quantities of carbon dioxide would face increasingly steep payments for the credits they need, while cleaner companies could make a profit by selling their credits on the open market. The UN also recommends the creation of exchange-based and over-the-counter futures and options markets in the pollution rights.

In the case of southern California, a green group, the Natural Resources Defence Council, generally in favour of market incentives such as a lax on carbon dioxide emissions, urges caution. Veronica Kun, a staff scientist with NRDC in Los Angeles, suggests that the southern Californian programme be limited at first to sources of nitrogen oxide, such as oil refineries and utilities, which have the advantage of being easier to monitor. Limiting pollution rights to less damaging gases would also avoid the danger of building up pollution 'hot spots'. At a location where a company is buying pollution rights, it is possible in the short term for air quality to worsen. The EPA would have to monitor trading to avoid concentrating too much pollution in one place.

Monitoring poses a complicated problem. The number of credits owned by a company depends on how much it has reduced its emissions, which has to be certified by the EPA. In the late 1970s, when the EPA first experimented with trading in emission rights, much cheating occurred, such as selling rights based on a plant that closed years ago. That could happen again as companies that shut down plants claim credits without actually improving the environment. Even alter pollution credits are assigned and sold, the EPA must keep track of emissions from both buyers and sellers, a task that could increase the EPA's annual budget of about $5 billion.

Other environmental groups, such as Environmental Action and Greenpeace strongly oppose the notion of pollution as a property right or an asset rather than a social evil to be vanquished. and argue that the market-based approach becomes a way of legitimizing pollution rather than restricting it. Environmental groups in developing countries are particularly suspicious of the UNCTAD plan. They assert that industrialized countries have a responsibility to reduce their own carbon dioxide emissions and that responsibility should not be transferred abroad.

By investing cheaply in industries in developing countries, a company from an industrialized country reduces pollution at home, gains credibility but has found somewhere else to pollute. Developing countries could become international pollution 'hot spots'. This distributional problem comes on top of the organizational nightmare posed by trying to combine in a single system nations at varying stages of economic development with vastly different environmental laws.

2. European Union

Money-go-round

Jul 26th 2007
From The Economist print edition

Why the European Union is spending billions in rich countries

David Simonds

These days can be a trying time for hardline Eurosceptics). When they motor to picturesque corners of the continent after months of fretting about the powers of the European Union, they find themselves baited and enraged by countless billboards bearing the blue-and-gold European flag, announcing the EU's generosity in building some bridge, highway or waterworks.

These are the spoor of the EU's “cohesion policy”, a gigantic redistribution scheme that will eat up more than a third of the EU budget, about €350 billion ($480 billion) over seven years. Since its beginnings, the EU has sent money to far-flung, rural and poor parts, to help them catch up with the rest. The money goes mostly to regions rather than national governments, and there are rewards for cross-border schemes involving more than one country. All this has long bred suspicions among sceptics that regional funding is a Euro-wheeze to minimise (or erase) ancient national frontiers, in preparation for a federal Europe.

Those who inhabit the illiberal fringes of Euroscepticism are currently very cross about the tens of billions of euros being transferred annually from rich “old Europe” to the newest members. To quote Nigel Farage, a member of the European Parliament and leader of the (self-explanatory) United Kingdom Independence Party: “Why should our money go to new sewers in Budapest and a new underground in Warsaw when public services in London are crumbling?”

Not for the first time, however, the angry brigade is aiming at the wrong target. True, the European Commission has created a “client base of regional actors who swarm around Brussels, and don't trust national treasuries,” in the words of one EU diplomat. But nation states rule the roost. The EU always requires nations or regions to put up some (often quite hefty) matching funds. Any regional scheme too extravagant, or daft, to attract national matching funds usually withers and dies.

Rich countries have much to gain from an EU single market that strives for free movement of people, goods and capital. And there are sound economic and political arguments for investing in backward parts of such an open economic zone. EU projects in poor neighbourhoods are notoriously prone to corruption and waste, but the risks are matched by high rates of return. Invest the right funds in new members, and you can create new consumers and new markets, stabilise fragile democracies and limit the risk of massive, uncontrolled migration within the EU.

The scandal is not that the EU shifts money from rich countries to poorer newcomers, but that it recycles large sums straight back to wealthy countries. Some of the least needy countries in the EU recoup tens of billions of euros. This is usually because they have some relatively poor regions (eg, Germany's eastern states, or Italy's south).

In the prolonged negotiations over the current budget, the Netherlands, Sweden and Britain (all countries that get measly returns from the cohesion policy) took a cue from the influential 2003 Sapir report on EU finances and proposed that rich countries should pay for their own regional projects, with less meddling from Brussels. But they were defeated. More than that, the EU budget for 2007-13 includes a new scheme dreamt up by the European Commission to spread money (often small sums) to all EU regions, even the richest. Under the twin rubrics of “competitiveness and employment” and “transnational co-operation”, the commission will spend more than €50 billion over seven years in prosperous countries.

Ask commission officials to defend such spending policies, and they offer a variety of reasons. They say, for instance, that their funds are the only reason some nice things (like art galleries in England) have been built, arguing that national authorities were not that interested until Brussels got involved. Perhaps so. But is curing British philistinism a job for Brussels?

Eurocrats talk of the efficiency of spending money through regions. This is debatable: Brussels is a fearsome generator of paperwork and meetings, even when very modest funds are on offer. And the point is irrelevant, anyway. Britain, for example, promised that if allowed to fund its own projects, the money would still flow through regional and local institutions.

Most revealingly, Euro-officials talk of the need visibly to spread largesse to every corner of the EU. People in rich regions must also see the fruits of cohesion spending, the argument goes, or they may resent sending money to poorer neighbours and come to see the EU as nothing but a machine for emitting annoying rules and regulations. Danuta Hübner, the EU commissioner for regional policy, says her funds shore up a sense of European “solidarity” across the EU. “Frankly speaking, this is a policy that is sometimes the only proof that Brussels exists, if you go to the regions that are quite far from national capitals.”

Flying the flag

Brussels takes “visibility” seriously. The rules for regional funds include instructions on the design of those European billboards that so irritate Eurosceptic motorists: at least one-quarter of the sign must be taken up with the EU flag and the name of the EU fund involved, and preferably the slogan: “Investing in your future”. In addition, every regional or central government body that manages EU-funded projects must mark Europe Day (May 9th) by flying the European flag outside its premises for a week.

Such policies are worse than silly; they are defeatist. They assume voters in rich EU nations must be bribed with their own money before accepting the benefits of free trade and open borders. Cohesion funds have been greatly expanded as part of a grand bargain two decades ago to help poorer states adapt to the rigours of the single market. Such rational investment was the right way to create a large and liberal open market. Bribery of the rich is wrong—and no number of smart EU billboards advertising such bribery can change that.

3. Getting a job – Internet sources, see http://samba.fsv.cuni.cz/

4. Globalization

From The Economist print edition

Investment banks are scouring the globe for new business

MAKE the mistake of describing Goldman Sachs as “sort of a global bank” to Lloyd Blankfein, its boss, and you get a thundering response: “Sort of! What do you mean, sort of?”

Empire-building is as important to investment banks today as it was to their forebears more than a century ago, when Citibank had offices from Mexico City to Manila and Deutsche Bank financed railways from the Wild West to Baghdad. As in that earlier era, capital now moves effortlessly across time-zones, political systems and asset classes. Within the past decade Europe's single currency has taken root and China and India have grown flush with capital, as have oil exporters such as Russia and the Gulf states. Japan, too, has begun to emerge from a decade of stagnation. America, meanwhile, has wrapped up its own financial markets in red tape and may be losing its hegemony.

Huw van Steenis at Morgan Stanley in London estimates that securities markets outside America are expanding three times faster than those within, which they overtook in size in the first half of 2006. The pace of debt and share issuance in Europe since 2002 has easily outstripped that in America. Since 2005 volumes of mergers and acquisitions outside America have been larger than inside. And revenues of the biggest Wall Street banks' subsidiaries generated from trading in Europe have doubled since 2000 (see chart 8).

Yet there is room for further growth. McKinsey calculates that in 1995 the outstanding stock of debt and equity securities in the future euro-zone countries was 1.3 times the size of their collective GDP. By 2004 it had grown to 2.4 times. But it still fell short of America's, where the capital markets were more than triple the size of the economy. Investment banks' sales and trading revenues in Europe still represent only 50-60% of those in America.

Gregory Fleming, the ebullient head of markets and investment banking at Merrill Lynch in New York, predicts that in perhaps only seven years' time up to 75% of his firm's global markets and investment-banking revenues may come from outside America, compared with 50% now. “This is not because of a lack of growth in this country. It is more because of growth of economies around the world,” he says. “For the first time there is a broad-based global financial system.”

Next stop the N11

Having already occupied Europe, the top ten investment banks have set their sights on the rest of the world, too. Almost all of them are now increasingly involved in the so-called BRIC economies, Brazil, Russia, India and China. Next in line may be some of those Goldman has dubbed the N11 (for next 11); in alphabetical order, Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam.