The 'get out of jail free' card

One typical component of constitutions is the immunity afforded to public officials.  Its purpose is to ensure stability in the act of government by removing the potential distraction of legal proceedings.

Such immunity varies widely from one country to another in terms of its coverage.  In some jurisdictions it applies very widely, for example to all Members of Parliament and Ministers in the Government.  In others it can be more limited, in the extreme applying just to the President.

Immunity can also vary in its scope.  In it's most limited form the public official is still legally responsible for acts committed during his/her term in office, but any court cases are delayed to the end of the term.  In the most expansive form officials are excused from responsibility for criminal acts committed while in office and from prosecution for previously committed acts.  In many jurisdictions there are provisions for immunity to be lifted by Parliament, however this usually requires a super-majority and is rarely applied.

Systems of immunity in Eastern Europe are usually broad in their scope and expansive in their coverage.  Such systems encourage those (allegedly!) guilty of serious crimes, such as Russia's Andrei Lugovoi, to seek refuge in Parliament rather than openly face accusations at trial.

Under a new constitution, Moldova has a chance to get immunity right.  My view is that it only needs to be afforded to a select group of people (basically the three highest office holders - President, Prime Minister & Speaker).  If a minister or a deputy goes to trial, it does not seriously undermine the act of government, and these officials need to be subject to the same laws as anyone else.  Furthermore, the immunity offered should just be in the nature of a deferral of the judicial process until the function is no longer occupied.  Crimes committed must be answered for at some stage, even if committed before or during a period of immunity.

This is important.  Communist deputies and ministers who committed crimes during their 2000 - 2008 rule must answer for them, and the current AIE authorities must be held to the same standards during their term in office.

Worse, if the immunity provisions are left as in the current constitution, then we'll end up with a parliament of crooks and a government of mafiosos, all seeking to avoid justice and waving their 'get out of jail free' cards at the long-suffering citizen.

Dodon on Unimedia

Many non-communist Moldovans have been horrified in recent days by the appearance of communist Igor Dodon's blog on the Unimedia web-site.  It seems plain wrong, that Unimedia, one of the stalwarts of the anti-communist journalism of 2009 should now give column inches to one of the leading lights of that undemocratic party.

I guess this decision by Unimedia is an attempt to define itself not as 'anti-communist' but as 'pluralist and democratic', which is perfectly reasonable.  Free speech means giving a platform to all sorts of nasties who may be incredibly manipulative and with which one may not agree, but that is part and parcel of democratic discourse.

I guess that the PCRM have allowed Dodon to write this blog in an attempt to sew doubt in the minds of liberal-democratic voters and hence weaken support for the AIE.  It's not surprising that they chose Dodon for this assignment - the pseudo-liberal, educated and seemingly intelligent economist has a chance of succeeding where hardline Russian nationalists like Petrenko & Misin would fail.

On the plus side, Unimedia's comments facility will give the rest of us a chance to directly attack the nonsense which will inevitably run from Dodon's pen, a chance denied to us by the still-totalitarian pro-communist portals omg.md & newsmoldova.md.

Europa по-русски

Make Russian an official language of the European Union!

Yes, I know that EU official languages are supposed to be official in at least one member state.  I know that the existing 23 original languages create a cacophony in Brussels which is befitting of biblical Babylon.  I know that adding another language will require the employment of legions of 'eurobabblers' to translate the existing acquis communitaire into Russian, not to mention the ongoing translation work.

But think of this:

1. Russian is a major European language and has around 280m native or near native speakers.
2. Even though it is not the state language in any EU country, it is spoken by significant minorities in the Baltics, Bulgaria and in aspirant countries such as Serbia, Moldova, Ukraine and Georgia.  Making Russian an official language of the Union will make those minorities feel more at home, without unduly threatening the position of the national language.
3. Having the aquis in Russian will facilitate its adoption (in part or in whole) by former Soviet States, improving the quality of their law, their ability to trade with the EU and their chances of later accession.
4. Having ongoing EU discussions translated into Russian will improve the quality of EU - Russia dialogue and the understanding between the two parties.
5. Making Russian official within the EU will make Russians feel good about themselves (without having to do something stupid like invading a small neighbouring country for no good reason.)

Я жду ответа от Брюсселя!

Conditional Neutrality

One of the points of discussion in the new constitution is whether the document should continue to require Moldova's neutrality.

In general terms, military neutrality is a valid option.  If a country is surrounded by peaceful neighbours and there are no immediate threats, the arguments for being part of a military alliance are nullified.  Another situation is where a country is jammed between opposing blocks and doesn't want to get caught in the crossfire (e.g. Austria & Finland during the Cold War).

In Moldova's case, neutrality has just made the country weak and defenceless in the face of very real aggressors who control a large chunk of the country's territory (the Russians and Transnistrians), so it would actually seem reasonable for Moldova to seek to enter a military alliance (NATO being the obvious one) for its own self-defence.

The problem is that, were the AIE to drop the neutrality provision from the constitution, the Communists would kick up such a fuss and misinform the electorate to the extent that the new constitution may not pass.  Indeed, Serafim Urechean indicated earlier today that the neutrality provision would not change.

Maybe we can be a bit cleverer, and use this issue to Moldova's benefit?  What if the neutrality clause were to read like this:

"Moldova will maintain its neutrality until the 31st of December 2010.  If, as at that date, military or paramilitary forces not under the control of the Moldovan state are operating on the territory of the Republic of Moldova, then Moldova will cease to be a neutral state and can enter into military alliances.  If, on the 31st of December 2010, the only military force operating on the territory of the Republic of Moldova is the Moldovan Army and the constitutional authorities have control over all of Moldova's territory, then Moldova will continue to be a neutral state, such status to be revoked immediately upon the unauthorised insertion of military force onto Moldova's territory."

Basically it would be a less-than-subtle message to Russians:  If you want Moldova to be neutral, take your soldiers home and withdraw your support from Transnistria.  Otherwise Moldova will introduce NATO forces to balance yours.

Furthermore, the Communists would find themselves arguing with an idea that is genuinely popular, i.e. the withdrawal of Russian forces.

One for the road

Minister of Transport, Anatol Salaru estimates that rehabilitating Moldova's road network would cost EUR 4bn, money which Moldova simply doesn't have.

Moldova's roads, with one or two notable exceptions (e.g. the Chisinau - Leuseni road) were in an appalling state even before the ravages of the recently ended winter.  Moreover, the cost of repairing even a two-lane highway is quite terrifying - the rehabilitation of the Sarateni - Soroca road (82.4km) is expected to cost $133m.  That's about $1.61m (EUR 1.17m) per kilometre.

So what can Salaru do?  Where can he start, given his tiny budget of 100m lei?  Here's some ideas:

1.  Call in the private sector.  Legislate / regulate to allow the construction and operation of tolled highways by private sector companies.  This should be sufficient to promote the development of new highways along arterial routes radiating out from Chisinau.

2.  Empower local authorities to collect taxes and use them to repair local roads.  All other things being equal, decisions taken at a local level on which roads to build / repair and how should be of a higher quality than those taken centrally.  Locals have a vested interest in good roads.

3.  Use some of your budget to aggressively 'splodge' pot-holes in national roads.  It's neither a perfect nor a permanent solution, but it does save lives and axles.  Use the rest of the budget on fluorescent paint to mark out road boundaries and make roads navigable at night.

Will the real capitalists please stand up?

It's obvious from the events of the last few years that something is wrong with our economic model. That said, it's a model has lifted millions out of poverty in recent decades, so we need to be careful when playing with it.

The left is of course claiming that the financial crisis and the recession which followed are to be blamed on the Reagan-Thatcher economic liberalism that has reigned supreme for quarter of a century.  They want more regulation, especially of the financial markets and the financial services sector.  They want a more 'social' approach to economics, with money being shared around (i.e. taken from one group of people and given to another).  They want governments to keep bailing out industry and make economic problems go away by borrowing more, taxing more and spending freely.

Those are great solutions if you like living in places like 1970s slowly-going-down-the-gurgler Britain or 2010 slowly-going-down-the-gurgler Greece.  If, on the other hand, you prefer living in a country with a bright economic future and plenty of opportunity, you will need to come up with some other ideas.  The bad news for my blog readers is that I have a few such ideas and I'm going to share them.

My basic view is that we need more and better capitalism accompanied by different forms of regulation.  I've already talked about one idea - moving the base of taxation from income to resource use.  Today I'm going to talk about another - empowering shareholders.

***

When you hear the word 'capitalist', what comes to mind?  Someone with a lot of money?  The manager of a Wall Street investment bank?  Donald Trump?  Those are all possible answers, but they are in fact only a small subset.

Actually most of the non-government capital investment around the world is performed by banks, pension funds, mutual funds, hedge funds and life insurers.  These organisations are all financial intermediaries, accepting deposits, contributions and premiums on a retail basis and then providing that money wholesale to consumers of capital (i.e. businesses)in the form of debt or equity.

Decisions of businesses are taken at a tactical level by management and at a strategic level by the board, whose duty is to represent the shareholders.  At the board meeting you will typically find representatives of the financial intermediaries listed above.  They appoint and sack management, set remuneration, determine risk appetite and set strategy for the business.  All well and good.

If things are so wonderful, however, why do I need to ask the following questions?

1. How come it is common practice for bosses to get big golden parachutes even when they fail?
2. How come top management is so grossly overpaid?
3. How come nobody spotted the risks that hit us all in the face in late 2008?
4. Why are most businesses run on a short-term perspective?

The answer comes from looking at the people sitting around the board table and understanding their interests. They are not the shareholders.  The real shareholders (or capitalists) are the people who entrusted small amounts of capital to their institutions - depositors, unit-holders, fund members and policyholders.  The bulk of a life insurance company's voting power on the board of another business comes not from its own shareholders, but from the assets built up by its policyholders.  Similarly the voting power of a mutual fund administrator come not from its own assets but from the contributions that other people have invested in the funds managed by the administrator.

The bottom line is that the representatives of financial intermediaries who sit on company boards are there as representatives of their companies' clients (or should be).  What happens in practice, however, is that the views of the real shareholders are largely overlooked.  Because the depositor base of a bank is so diffuse, and because the legal structure of the bank vests power in the bank's shareholders rather than its depositors, the bank can easily ignore the views of its customers about how their money should be invested.  Customers just have to trust the bank not to do anything too stupid with their money.

Even where financial intermediaries aren't involved, the views of small or minority shareholders in a business represent  little more than an embarrassing five minutes of question time at the annual general meeting.

What we have ended up with is a form of capitalism in which shareholders aren't able to execute their rightful authority over the businesses they own.  This is instead the preserve of a self-perpetuating top management elite.  They give themselves big bonuses, reward themselves for failure, appoint their sons, daughters and colleagues to key roles and run companies generally for short-term gain.

That is fundamentally why we got ourselves in such a mess in 2008 - the elite didn't care about risk management or the long-term health of the businesses they presided over.  That was the shareholder's problem, not management's.  Incredibly, we have a system in which management are handsomely rewarded if they succeed and a little less handsomely rewarded if they fail.  The worse that can happen to the management elite is that they could lose their jobs (in which case they just move on).  Shareholders, on the other hand, get to share some of the upside with managers but wear all of the downside by themselves.  Strangely enough, Marx appears to have partially achieved his dream;  Labour (admittedly of the highly paid variety) has triumphed over Capital.

***

Having mentioned Marx I now need to quote Lenin:  What is to be done?

Put simply, shareholders need to be given back control over the businesses they own.

One way of doing this would be to enhance the power of minority shareholders.  In a national democracy the majority is given the right to rule provided that they commit to respecting certain well-defined minority rights.  The economic democracy of corporate governance should be no different.  Minority shareholders should be able to veto certain decisions of the majority shareholders where these would be to the long-term detriment of the company.  Where majorities take decisions that benefit them but are to the detriment of minorities, them some compensation should be provided. Minorities, no matter how small, should have board representation.

Another idea would be to look through the balance sheets of financial intermediaries to the real capitalists (depositors, unit-holders, policyholders etc).  Financial intermediary management should exercise voting rights on the boards of other companies in line with the wishes of their customers and in proportion to the amount of capital furnished by each.

Let me give a simple example.  Suppose mutual fund A has shares in company B of 80, and that company C (which administers fund A) has shares in B of 20.  Suppose further that fund A only has two unitholders, D & E. and that D owns 75% of the units in A while E owns 25%.

Under our current form of capitalism, C gets to vote all 100 of the capital, even though 80 actually belongs to someone else.  What's worse, they don't have to consult the people who actually own the 80.

What should happen is that C's position on any particular issue where it is voting on behalf of the mutual fund should be an appropriate mix of its views and those of the unit holders.  In the example above, D's views would have a weight of 60 (75% * 80), while the views of C and E would both have a weighting of 20.

Obviously in practice company C can't go running off to seek the advice of unit-holders every time it needs to vote the shares held by the fund, however it could ask unit-holders to submit a detailed annual survey containing their views on executive remuneration, risk management, strategy etc..  These views would then be merged into a policy statement which the administration company C would be compulsorily guided by when voting the shares.  For example, using such a mechanism, the underlying shareholders could impose maximum limits on derivate investments, or insist that the bulk of top executive remuneration is earned out over the medium to long term.

Why is this all so important?  Because I believe that empowered shareholders would have curbed some of the excesses (in remuneration, risk appetite) that we saw in the lead-up to September 2008, and will in the future improve the quality of company management.  At the very least, if something goes wrong, they will have the 'satisfaction' of knowing that it was due to their decision making, not that of the (largely unelected) management elite.

Filat should sue

At a press conference this morning, Communist Party leader Vladimir Voronin made the following accusations:

1. That the PLDM's 2009 election campaigns were funded by Romanian 'petro-liberal' Dinu Patriciu
2. That Filat has been involved in cigarette-smuggling in the past
3. That Filat has recently arranged the smuggling of ten truckloads of cigarettes to pay back the money borrowed from Patriciu

Not a shred of evidence was offered by the former President.  Indeed, in respect of the second allegation, Filat was in the 1990s acquitted at trial on cigarette-smuggling charges.  The case was investigated and he was found to be innocent.

Voronin needs to produce evidence.  If not, it is high time that Vlad Filat shut him up permanently via a defamation suit seeking moral damages.