Corporate Sovereignty: Profits before Citizens

Originally published in the Informanté newspaper on Thursday, March 26, 2015.

Investor-State Dispute Settlement. A clause in bilateral and multilateral trade agreements that sounds so uninteresting that everyone assumed that is was. Envisioned as a reasonable system for protecting companies investing in emerging nations with weak judicial systems, it established independent tribunals where these self-same companies can seek arbitration against governments. But it has turned into a tikoloshe that lets foreign companies place themselves above national laws.

The ISDS clause, or corporate sovereignty clause, as it has become known, represents a troubling trend towards equating multinational corporations to nation states. This allows these multinationals a level of financial sovereignty – demanding compensation from national governments if its FUTURE profits could in any way be affected by a country’s laws or judicial rulings. This is especially troubling when you consider that nations can be sued for laws specifically designed to protect the health of their citizens.

Take the case of Australia, who in 2011 introduced to world’s first ever plain-packaging laws, which removes the branding from cigarette boxes. Just a few months later, it found itself facing an ISDS claim from Philip Morris Asia Ltd, claiming that removing its trademarks from packaging would reduce its future profits by enabling fake brands into the market.

And in 2009, the Uruguayan government instituted new regulations surrounding tobacco packaging and sales – requiring that 80 percent be covered by graphic health warnings. Shortly later, it too found itself facing Philip Morris International as well – PMI claiming that the new packaging requirements infringes on trademark guarantees included in a trade agreement. 

If you are a Namibian, these regulations might sound familiar to you. In a similar manner, when the Namibian Parliament passed the Tobacco Control Act in 2010, government suddenly found itself bombarded with letters and warnings from tobacco companies.

“We have bundles and bundles of them,” reported former Health Minister Dr Richard Kamwi. The effect of this was that the implementation of the act languished for almost 4 years before being implemented in 2014. 

Defending against these companies is not easy. According to The Tobacco Atlas there are about 1 billion smokers in the world, and tobacco will be responsible for the premature deaths of 66% of them. 80% of these deaths occur in low to middle income countries. The top 6 tobacco companies recorded over half a trillion in US dollar revenues during 2013, with profits of USD 44.1 billion.

When you compare that to Namibia’s 2013 GDP of USD 13.11 billion, it becomes clear that we’re facing an uphill fight for our national sovereignty. Luckily, countries are not alone in this fight. The efforts of tobacco companies have not gone unnoticed. In part, this is because of entertainers like John Oliver bringing their actions to the public consciousness.  In a scathing attack on the tobacco industry (in which Namibia is name-checked as well) on 15 February, John also launched an anti-tobacco mascot, Jeff the Diseased Lung (a play on the Marlboro man.)

In part, because of actions such as those, on Wednesday, 18 March, noted philanthropist Bill Gates and businessman Michael Bloomberg announced the creation of an anti-tobacco trade litigation fund. Thought their charitable foundations, they said that countries with limited resources should not be bullied into making bad health policy choices. Bloomberg previously assisted Uruguay in paying some US$375 million in its defence against Philip Morris. The Uruguayan government has stated that if not for Bloomberg’s monetary assistance, it would have had to repeal its anti-smoking regulations.

In that, Namibia is lucky to have had a strong and determined Health Minister in Dr Kamwi. As he said when our regulations came into effect: “We have decided to put our foot down. If they want to go to court, we will see them there.” With a new cabinet starting, Namibians are hoping that the new Minister of Health, Dr Bernhard Haufiku, is just as committed to putting citizens above foreign profits. 

Strategic Reserves: Putin and the fallout

Originally published in the Informanté newspaper on Thursday, March 12, 2015.

2014 was a tumultuous year for Russia. Before, Russia was seen as a newly up-and-coming democratic and free market successor to the Cold War-era USSR. Since the start of Putin’s first Presidency, the Russian Federation’s GDP grew on average 7% per year. President Putin was on quite friendly terms with US President George W. Bush, as well as the leaders of Brazil, Venezuela, Germany and Italy.

Still, Russia opposed foreign overreaches by the United States. In 2003, for example, Putin opposed George W Bush's move to invade Iraq without the benefit of a United Nations Security Council resolution explicitly authorizing the use of military force. But its interventions were quite strategic and limited, though opposed as well, in the Abkhazia and South Ossetia regions of Georgia.

All this makes Russia Ukrainian moves seem… inconsistent. Its foreign policy decisions and military tactics are unusual to say the least – provoking but never quite reaching the level where NATO or the United States have a case for a military response. Could it be that Putin has another play he’s making? After all, with Russia’s ruthless political game, it takes a certain kind of person to remain in power for 15 years – someone who is long-term results-oriented, and quite pragmatic. 

Perhaps Putin is playing a different sort of game. Let us go back to July, 1944, in Bretton Woods, New Hampshire in the United States. 730 delegates from all 44 Allied Nations in attendance at the United Nations Monetary and Financial Conference. With World War II in full swing, the Allies were desperate to rebuild the international economic system – and the United States insisted the system be based on the US Dollar, backed by gold. 

Notably, the Soviet Union (the Russian Federation’s predecessor) declined to ratify the agreement, stating that the institutions created (the IMF and the World Bank) were ‘branches of Wall Street.’  Nevertheless, with the US Dollar now equivalent to gold, it started to be used as a foreign exchange reserve currency, alongside gold. But this system was not to last.

On 15 August 1971, US President Richard Nixon unilaterally suspended the conversion of US Dollar into gold. This termination signified that monetary policy was now subordinated to the foreign policy of the United States, and was the start of the American monetary hegemony. Furthermore, in order to prevent a run on the US Dollar, Nixon negotiated, first with Saudi Arabia, later the rest of OPEC, that all future oil sales would be denominated in US Dollars, in exchange for arms and military protection.

With oil being a prime commodity in our modern economy, the US Dollar thus became the world’s leading reserve currency – and in effect, a petrodollar, since if you needed petroleum, you needed the dollar.  This ‘world reserve currency’ status has never been popular with other nations – indeed, as early as the 1960’s, France called it the US’s ‘exorbitant privilege,’ as it resulted in an ‘asymmetric financial system’ where foreigners ‘see themselves supporting American living standards and subsidizing American multinationals.’ As the economist Barry Eichengreen so eloquently held: “It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one."

But the energy market today is quite different from that in the 1970’s. Putin’s Russia has become an energy behemoth – it supplies 30% of Europe’s gas, and 35% of its oil. And yet all energy purchases were still dollar denominated. And a post-Soviet Russia was in no position to demand that it be paid in anything else. As Rick Falkvinge noted: “Russia needed sanctions from the United States, so its energy supply to Europe couldn’t be denominated in US dollars anymore.”

Thus, the ‘invasion’ of Ukraine. And the United States obliged by providing Putin exactly what he needed to break the hegemony of the petrodollar. Sanctions against Russia, powered by the might of the US Dollar. And Putin was ready.

By May last year, Russia and China (the only nations still capable of manned space missions) signed a US$400 billion gas deal, non-dollar denominated. By August, it had signed a 500 000 barrel a day deal with Iran, also non-dollar denominated. And by January this year, Russia has divested itself of its US Dollar reserves, completely withdrawing from the petrodollar system. As a result, the petrodollar has had negative exports for the first time in 18 years.

And with the United States’ unilateralism over the past few years not making it many friends, and currently still struggling to recover from its financial-system led recession, it is in quite a precarious position. It could be that Putin has finally delivered the blow that the Soviet Union never could – and started the decline of the US Dollar as the world’s reserve currency. After all, no reserve currency status lasts forever.

How the Mighty Fall: The Innovator’s Dilemma

Originally published in the Informanté newspaper on Thursday, February 26, 2015.

 Too often in business we tend to revere success and demonize failure. We build up firms as ‘Titans of Industry’ while the ‘formerly successful’ are relegated to the provenance of jokes, and examples of what-not-to-do. Yet we neglect to mention that once upon a time, these Titans of today were nothing but upstarts in the realm of prior Titans. Seldom is the question asked as to why the mighty have fallen…

Namibia has since independence seen the rise of quite a few new firms. Up-and-coming companies that rival old incumbents, with successes spreading out into Africa. We have seen our share of new products, aimed at serving the lower end of the market, while the Old Guard companies move nary an inch. 

It is not comfortable to study failure – indeed, common sense suggests that you should rather study what drives success, if you wish to replicate it. But the dark spectre no one wants to acknowledge, is that all failing businesses, just like many others, are presumably staffed with clever, capable people – they were, after all, the incumbents new competitors measured themselves against.

In 1997, Clayton M Christenson published his book The Innovator’s Dilemma. The Economist called it one of the six most important books about business ever written. It examines how the good and proper management that leads companies to success, are paradoxically also why they lose their positions of leadership. The quintessential innovator’s dilemma.

The key to understanding the innovator’s dilemma lies in disruptive innovations. To quote Christensen:

"Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream."

Disruptive innovations often unseat successful, and well-managed companies even when they have a great customer focus, and invest heavily in research and development. Smaller, underserved markets are quite often neglected by these firms, due to small margins and an inability to provide adequate growth to a large firm. Hence, listening to your ‘high-end, high-margin’ customer, can be strategically counterproductive.

This also overlaps with the incumbent misidentifying its market, focusing on the product it provides, and not the customer need it serves. Thus, when a disruptive innovator serves the low end of the market, to a customer who was previously not served, and who is willing to pay for a ‘good-enough’ product, but not a premium for enhancements, they are dismissed quite easily. 

But in the smaller emerging market, the cost of failure is not as high as for the incumbent. With iteration on product improvements, improvements to the disruptor’s product are faster and more often, and soon the disruptor will have moved to a higher, more profitable segment. Since this segment is not as profitable for the incumbent, not much effort will be invested in maintaining market share, and it will move up-market. 

Thus an incumbent is pushed upwards and upwards, serving smaller and smaller markets, until the disruptive product meets the needs of the incumbents’ most profitable market segment, and drives them out. Witness the decline of film cameras as digital cameras went from ‘not very good, but cheap’ to ‘good enough for casual use, but keep film for quality’ to the situation today, where a film camera is a novelty.  

Africa, as a whole, has been quite underserved by traditional ‘First-world’ type companies. Namibia, with its smaller market but quite developed economy and abundance of underserved clients, seems like fertile ground for a disruptive innovator. For incumbents, it would be wise to remember that it is better to make yourself obsolete, before someone else does. 

There is a reason Christensen’s The Innovator’s Dilemma is regarded as a must read for any entrepreneur. He covers this subject much more deeply in his book than I could here.  But if I were a market leader in Namibia, or Africa, I’d be very worried.