The City Herald

Microsoft and Google scrutinized over dominant position

European regulators are mounting pressure on Microsoft and Google to ensure that both American giants do not abuse their dominant position to suffocate competition. From Monday March 1st, more than 100 millions users of Internet Explorer in Europe will be prompted with the option to keep Microsoft’s browser or dump it for a rival.

Microsoft has decided to offer Windows users with a ballot screen to settle claims by Brussels’ antitrust authorities that the binding of Internet Explorer with Windows dumps competition. Microsoft’s operating system has 92.5% of the global market share, followed by Apple’s MAC OS X with 5.27% according to Net Applications. Bill Gate’s company has a long-running antitrust dispute in Europe, with penalties totaling almost US$2 billion.

Google is also facing claims by a handful of competitors who accuse the search engine of abusing its dominant position. The European Commission wants to examine whether Google deliberately gives websites low rankings to hamper competition. The company denies, saying results produced by its algorithm – the magical formula considered to be the secret behind Google’s business – can only be changed by legal requirements, such as in the case of child pornography or viruses.

Google is considered to have revolutionized online search by mathematically analyzing more than 200 factors – including the content of websites and how many links it has on other web pages – to present users with the most relevant results. The advertisements are placed according to a bid system in which the company that pays more receives more prominence. But Google may interfere in this ranking by an assessment of the quality of the website being advertised. By doing it, the search engine maximizes the chances of offering exactly what users was looking for.

Although much has been said about Google’s algorithm system and its efficiency, subjectivity is considered to play a significant role thus raising questions about how manipulated results can affect the ranking of competitors’ websites. By pressuring Google, the European Union hopes to gain access to how these judgments play out in hindering competition. In the meanwhile, Google remains, as Microsoft does in the operating system market, the sole leader in web searches. According to comScore, Google accounts for 70% of the global market share for online searches.

While Bing (Microsoft’s new search mechanism) and Yahoo struggle to gain more traffic, Google improves its search algorithms and firm its position in a market forecast to continue growing rapidly in the next decades. The more users it has, the easier it is for Google to refine results and deliver more relevant links. The better its search system gets, the more the Californian company can improve its advertisement targeting. This exponential cycle will guarantee Google a dominant position for business in the online search and advertising market for years to come.

Managing Director of the IMF Dominique Strauss-Kahn has reasons to celebrate. But is it too soon?

The International Monetary Fund seems to be recovering from the existential crisis it suffered last decade. The fund has been increasingly busy in recent months as various countries such as Hungary, Ukraine, Pakistan and Iceland found themselves in need of financial aid. The economic downturn has called the international organization back into action after years of declining relevance and marginalization. It has lent more than $50 billion since the outbreak of the crisis and still has far more to offer in its kitty. But not more than five years ago the situation was very different: the IMF was agonizing for new borrowers and already looking into cutting back staff.

Despite its sudden bonanza, the IMF still caries a stigma aroused in the end of the 20^th century with the mismanagement of several rescue operations in emerging markets. From the countries that turned to the fund recently, few did it willingly. Even in the midst of the worst global recession since the crash of Wall Street in 1929, most governments considered recoursing to the IMF’s headquarters in Washington as the last alternative. While Iceland tried calling Moscow first, Pakistan took its chances with Beijing. But since beggars cannot be choosers, politicians saw no other alternative but to take new loans from the fund.

The fact is that many emerging economies regard the IMF as a dependable source of cash. During the Asian financial crisis of 1997-98, the medicine prescribed by the fund was a bittersweet pill to swallow. Instead of improving, the economic situation in Thailand, South Korea and Indonesia got progressively worse after the IMF intervened. Tightened to the bailouts was a set of structural reforms and demands for stringiest fiscal and monetary policies to help pull the troubled countries out the crisis. The aim was to restore the banking and financial systems and avoid capital outflows in the region. But the opposite happened. Money continued to flee from Asia and creditors kept losing confidence in a sustained recovery. In 1999, the catastrophic effects of the professed ‘structural adjustment package’ (SAP) led the IMF to admit errors in the handling of the crisis.

Similar situations occurred in Brazil and Argentina around the same period. Once more the International Monetary Fund evoked rage and criticism after the negative impacts of its anti-Keynesian impositions in those countries. The facts offered fertile ground for many to accuse the IMF to be an instrument for a new kind of colonization. A slump in legitimacy ushered most of the fund’s borrowers to steer clear their debts as soon as they could. In 2006, Brazil and Argentina paid the entire $25 billion of their outstanding loan ahead of schedule to prevent the institution from interfering in their economies again. Anticipated repayments and the lack of new credit lines shrank the fund’s loan book by 95 percent in the three years up to 2006. Its kitty went down from $60 billion to mere $3 billion.

Established in 1944 at the Bretton Woods Conference, the IMF was originally intended to promote international financial stability by avoiding a spiral of currency devaluations triggered in the last stages of the Second World War. It was also meant to facilitate the growth of world trade and serve as a “lender of last resort” to its members if they ever ran into financial trouble. In a world of fixed exchanged rates and relatively limited supply of private capital, this system seemed to make sense. But more than 60 years later, this notion has lost significance. Industrialized countries have not borrowed from the IMF since 1980 and many accuse the fund of neglecting its responsibility to watch over for exchange rates, especially in the case of the renminbi. Developing countries almost completely lost their trust in what they dub as an “unrepresentative” institution.

All these problems threw the IMF into an existential crisis and left many questioning its relevance and acting power in the global economy. Some of its meaning was revived by the financial crisis, but not all can be credited to it. The changes implemented by its current managing director, Dominique Strauss-Kahn, have also been contributing for the retrieval of the institution. His biggest sign of triumph was the increase of the IMF’s kitty to $750 billion, almost half of his ambitious goal of $2 trillion. A big chunk of the money came from America, Japan and Western Europe. But in a boost to the fund’s legitimacy, countries once victim of its mistaken interference – including Brazil – have agreed to invest in its first-ever bond issue. The fund has also abandoned its “one-solution-fits-all” approach to crisis-mitigation and has become more responsive to conditions in recipient countries. In the words of Strauss-Kahn, the IMF is now more centered on “fixing crises, not the world”.

Much of these initiatives were thought to redress the grievances of the past. With more money on its balance sheet, the IMF can persuade emerging countries more easily to rely on its resources in case of future crisis – instead of having them seat on vast amounts of foreign reserves. This money could then be unleashed for investments in health, education and other sectors vital to the development of poorer countries. If the IMF achieves success in branding itself as a “world sovereign-fund”, it would play a central role in reducing global imbalances. Yet this too is a difficult task, since the impacts of the fund’s policies is what led many countries to stockpile foreign currency in the first place.

The underlying problem of legitimacy can only be addressed with a reform of the funds quotas to give emerging economies more voting power. Like other institutions born on the aftermath of the Second World War, the IMF carries a cursed inheritance of misrepresentation in its decision-making processes. The United States alone holds 17 percent of the voting quotas, which gives it the right to veto any important decision that requires 85 percent of majority. With the increasing role of emerging counties in the political and economic decisions made in the global arena, it is unrealistic to think that an institution that provides inadequate representation of this group can be of any significance. China and Brazil, for instance, have smaller voting quotas – less than 2% each – than the Benelux countries. However, their share of global GDP is far more substantial. Moreover, a system of constituencies prevents large developing countries or the EU, for example, to vote collectively for a common cause.

One round of changes in the quota system has already been agreed, but not yet implemented. Currently more than three-quarters of the 184 members of the IMF are not directly represented on the Board of Executive Directors. Many not even have their own staff working in the organization. The G20 has asked the IMF to complete its next quota reviews by the beginning of 2011. But to please the majority – that means, emerging and least developed countries – rich nations would have to give up more power than they may be prepared to do. The prognosis is straightforward, though. Without some kind of balanced representation that grants legitimacy to its writ, the IMF will continue to be run by the interests of those who are – ironically – its smallest group of clients: the rich countries. As legitimacy and power go hand-in-hand, the fund needs revamped authority if it aims to become a powerful institution of financial cooperation in the decades to come.

All this process has to be underpinned by transparency. In a report issued by the Independent Evaluation Office of the IMF earlier this month concluded that the Fund governance structure is inadequate. The document also presented the results of a survey conducted with 32 civil society organizations. There was a general consensus among respondents that the current channels of communication between the organization and society are scarce and that formal consultation is practically nonexistent. Many also urged the organization to implement a formal process in which external stakeholders can confer with the IMF before any policies are put into effect. Another common complaint was directed to the lack of transparency in the Board processes, which makes it almost impossible for civil society organizations to judge whether their views are taken into account in deliberation processes.

Put it short, there are plenty of ways to go about changing the IMF, but not many when it comes to deeply transforming its constitution and making it truthfully powerful and legitimate. Much has already been done on the surface since Strauss-Kahn took office in 2007, and it has brought positive results. However there is a long way to go before the fund emerges as a respected multilateral institution by all nations (especially the poorest). Without an overhaul to the way it is governed, the same fundamental problems that pushed the fund to the boundaries in the last decade will most likely come back – and the consequence might be the relapse into another existential crisis.

BAE Systems said on Thursday it expects growth in 2010 despite a reported tumble in pretax profits and a net loss for 2009. The defence giant said the loss is due to exceptional charges and financing adjustments and its shares rose 4.3 per cent to 364p as news of a share buy-back and dividend-hike were announced the same day.

BAE said its net loss for 2009 was £67m, compared with a profit of £1.75b in 2008. Sales rose 21% to £22.42bn from £18.5bn, and earnings before amortisation and impairment of intangible assets, finance costs and tax in 2009 climbed 17% to £2.2bn from £1.9bn in 2008.

Ian King, BAE chief executive, said that the group faces challenges in its land and armaments business in the US. Its decline in profits is partly attributed to a £973m impairment charge at its Armor Holdings business after the loss of a US Department of Defense contract to supply trucks for the US Army.

BAE generates 58% of its sales in the US and agreed to pay a $400m fine to the US Department of Justice after it was charged with making false statements in regulatory filings. Profits were also hurt by £278m of exceptional charges relating to a deal struck in February to end corruption probes by the Serious Fraud Office in the UK and the US Department of Justice.

Mr King said the £500m share buy-back programme did not mean an end to growth at the group. He highlighted the company’s role in the growing areas of cyber security, combat aircraft and unmanned air vehicles, and warned against “a knee-jerk position”.

The group’s order book edged up slightly to £46.9bn from £46.5bn in 2008. In the same period, operating profit almost halved, falling from £1.72bn to £982m.

Dusting off trade barriers: talks that started in Doha remain stalled

In November 2001 dignitaries from 144 countries met in the arid city of Doha, Qatar, for an ambitious cause: lower trade barriers to help developing countries defeat poverty. The global talks led by the World Trade Organization (WTO) were dubbed as the ‘development round’, a chance to give the poorest nations a fairer opportunity to sell their goods around the world. More than eight years later, negotiations are stalled. The Doha Development Round has become like any other trade round – driven by mercantile principles set to benefit the rich and middle-income countries.

When thousands of officials and journalists gathered in the Arabian Peninsula in 2001 there seemed to be a great deal of enthusiasm. “We agree that special and differential treatment for developing countries shall be an integral part of all elements of the negotiations”, stated the final Declaration of the Ministerial summit.

But after years of giving and taking amongst developing and developed world, the mood has changed. Although negotiations might still be concluded, the process is fraught with frustration and uncertainty. Contrary to its declaration, the Doha Round has always had little to do with welfare gains to poor nations. Its success was always dependent on the willingness of economically distinct nations to compromise – an intimidating task given their conflicting goals.

The Doha Development Round was launched in special political circumstances. After the terrorist attacks of 9/11, American politicians drew a quick line between terrorism and poverty and felt the need to address future threats with multilateral cooperation. “By expanding trade, we spread hope and opportunity to the corners of the world, and we strike a blow against the terror”, said U.S President George W. Bush at that time.

The establishment of a new round of talks also appeared to be the right political answer following the failure of the 1999 Seattle Conference, in which emerging countries felt their priorities were not being taken into account. Since 1947, when the General Agreements on Tariffs and Trade (GATT) was set up, many attempts have been made to eliminate the disparities in world trade. The last significant one was the Uruguay Round (1986-1994), which resulted in the foundation of the WTO in 1995 and renewed hopes for continuing liberalization.

Even though the Uruguay Round produced several agreements on non-tariff barriers to trade, it was criticized by many international organizations (including Oxfam and Global Trade Watch) for only accommodating the desires of developed nations and succumbing to corporate lobbying. Many years later, Doha confronts similar challenges. It must cater to the needs of poor countries to succeed as a real ‘development round’ – and it has to do it within a completely new economic scenario.

Trade liberalization in a new economic scenario

Global trade and the economy have changed profoundly since the outset of the Doha round. WTO members such as Brazil, India and China have emerged as major trading and economic powers. Their share in world merchandise exports jumped from 4.1% in 1993 to 11.5 % in 2008, according to the WTO. Along with South Africa, they are members of the G-20 coalition, and have evolved into major players in international affairs.

The duopoly of the European Union and the United States under the GATT system has come to an end with the emerging new economies, which together dominates vital sectors of the global economy. So far, grievances exposed mainly by emerging nations were responsible for obstructing Doha’s subsequent ministerial meetings. In July 2008, talks collapsed after India and the US failed to reach and agreement on special safeguard mechanisms for agricultural goods.

With the emergence of an influential group of developing countries – which will, according to the World Bank, account for 45% of world trade by 2030 – it is tempting to think that negotiations in the WTO are ought to become more balanced and ‘fairer’ towards poor nations. However this assumption is misleading. Due to the governance structure of the WTO, all members have to reach consensus and agree unanimously before any resolution is passed. So challenging the interests of powerful nations is still a formidable task.

The nitty-gritty of Doha

Despite the economic downturn unleashed by 9/11, the Asian financial crisis of 2005 and the recent credit crunch, total world merchandise has been constantly increasing since Doha began. It almost trebled from $6.2 trillion in 2001 to more than $16 trillion in 2008. Globalization trends and increasingly interlocked global supply chains had help to knock down trade barriers. With so many hurdles already removed, many specialists forecast only modest gains for Doha.

According to an estimate by Sandra Polaski from the Carnegie Endowment, a plausible conclusion to the round would produce a one-time increase in world income of $60 billion to the utmost. This represents roughly 0.1% of global GDP, with least developed countries benefiting only slightly, if at all. Additionally, the complete elimination of all merchandise barriers (which is by no means an attainable target for Doha) would boost the income of developing countries by no more than 1%, predicts the World Bank.

The negotiations have been so far focused on ‘bound’ tariffs, the maximum rate permitted by global trade rules. But in recent years most countries have already slashed these tariffs unilaterally to levels below the highest allowed ones. Another study by the World Bank points out that in services, for instance, the level of actual barriers are on average 2.3 times lower than what is permitted by the policies adopted by the Uruguay Round. The best proposal submitted since the start of Doha, however, would decrease this ratio to only 1.9, meaning that countries could almost double their levels of restrictiveness in the service sector without violating any commitments.

Trade distortions are mainly concentrated in the agricultural sector, which has become the most pressing issue for this round. For a long time, rich countries have resisted international pressure to liberalize the farming sector, which would benefit net food-exporting countries especially in Latin America. Nonetheless, emerging countries are not willing to open up their markets if policies are not implemented with care. They also want to make sure that developed countries are banned from subsidizing farmers and agricultural exporters, and decrease their import taxes.

The current proposal put forward a reduction in the scope of domestic support by 70% in the EU and 60% in the US.  Also the average tariffs that food exporters face would fall to 12% from 14.5%. The demands of developed countries are primarily to gain access to emerging markets, where they could obtain a competitive edge in manufactured goods, services and intellectual property rights. But developing nations are reluctant to comply with ‘freer trade’ at the expense of having their national markets flooded by cheap imports.

Much of the debate over the ‘value’ of concluding the Doha Round has been centered on the possible economic results that further liberalization could bring.  Quantifying the outcome of trading rounds is a task subject to empirical models and considered by many as precise as fortune telling. Even so, according to recent predictions, only middle-income and rich countries would benefit substantially more from free trade, the latter reaping the largest profits. To Sandra Polaski, who ran conservative models, the economy of least developed countries could actually suffer.

So why conclude Doha?

As explained by Robert Gilpin in ‘The Challenge of Global Capitalism’, the paradox of international trade is that, “even though it greatly benefits societies…[it] is constantly being threatened by protectionism”. As history shows, though economic times have always sparked a sentiment to shield domestic economies. This time it was not different. Global support to the cotton industry, for instance, has doubled to $2.7 billion in 2007/08 and is estimated to reach $5.9 billion in 2008/09, half of which coming from the US.

While trade ministers and their delegations lean towards their countries interests, worries about market access and price stability wound, particularly for the farming sector. Until 2050 the world’s population will rise by a third, but demand for agricultural goods will increase by 70% and for meat will double. As pointed out by the report  ‘Conclude Doha, it Matters!’ by the World Bank, “in good times all this may not have seemed worth enough…but in bad times, the value of what is on the table increases”. Thus reinforcing food security and supply of agricultural goods is of paramount importance for generations to come. Laying down international rules that prevent countries from resorting to protectionism is one of the vital reasons to conclude Doha.

In an increasingly integrated world, multilateralism matters more than ever. To keep postponing the end of the first real global trade round is risky to all nations. While countries remain on the defensive and distrustful over a universal deal, the number of bilateral and regional agreements swells, poisoning even more the chances of a deal. It is time for politicians, above all those from rich and leading emerging countries, to leave mercantile principles aside and start thinking globally. If not for development, at least to avoid the danger of protectionism.