Index:  Journal, Winter 2003





"He either fears his fate too much, or his deserts are small,
that puts it not unto the touch, to win or lose it all."
James Graham, First Marquis of Montrose (1612-1650)



There's nothing new about the key feature of the new globalisation. A sudden discovery somewhere in the world breaks down the barriers of distance and customs. It happened in the 16th century when gold from the New World flooded through Spain. It happened at the beginning of the 19th century when machine-made cotton from Britain swept all before it. It happened again in the middle 19th century as the Great Plains of North America became the wheat fields of the world with the help of the steamship.

So great changes brought about by the world coming together are not new. But there is something new about the globalisation which we are seeing now. For this time the Great Discovery is not a mineral or a machine or
a source of food. It is people. And people make it different.

Until the end of the 1980's, the world's two biggest nations played only a minor part in the economic system of the western industrial world. Accounting between them for about 38% of the world's total population, China and India had few of the attributes of the countries which dominate the trade in industrial goods. Key sectors of the modern economy, such as automobile production, were almost entirely missing. The countries were not party to any of the specially open trading arrangements between industrial countries which grew up within GATT (now the WTO.) They had little heritage of industrial production or exporting modern goods to the old industrial nations. In China, the economic system remained stuck within the framework of state-owned, centrally-planned communism. In India, industry relied on protectionism for survival producing goods some of which had changed little since the days of the British Raj.

These two countries were not the only parts of the world excluded (or excluding themselves) from the advanced industrial system. Eastern Europe and the Soviet Union were autarchies, cut off from western technology, capital and markets.

All that has changed. A key break came at the end of the 1990's with the collapse of communism. That brought Eastern Europe back into the orbit of the west and opened up to (mainly) German producers a labour supply prepared to work at far lower wages and with far fewer restrictions than those in the West were used to. It was partly seeing the collapse of the Soviet Union and partly developments in its own country which led China to make a great change in its economy. It moved from trying to build 1930's style communism to a complex mixture of state and private ownership geared to getting fast growth and a more open economy where local producers have to compete. India's change has been later and less obviously dramatic. India was never a communist economy in the first place. But it was an economy which rested on the assumption that Indian producers were less competitive than foreign producers and needed to be protected to survive. That is gradually being dismantled as the country finds more and more things where it can match the world.

How does the entry of these two giants into the world economy change things? After all, the post-war era saw rapid industrialisation in many Asian economies, starting with Japan but spreading rapidly to Korea and happening pretty much at the same time in Singapore, Taiwan and some other countries. The answer is that the population
of these countries adds up to less than the population of the US. China alone is 4 times the size. And although there has been a flood of people to the Eastern seaboard of China, where something just under 300 million people live, the available labour pool of low-cost workers remains huge, with its consequent downward pressure on wages. In all the rapidly industrialising countries of the first wave of post-war industrialisation, wages rose quite rapidly. Long before the Japanese car industry established itself as unrivalled master of production, wages in Japan had reached levels above those of declining competitors like Britain. It was superior production technology that made Japanese cars cheaper, not low wage costs.

So far, we have not seen a similar rise in wages in China. Basic production workers earn far more than their rural counterparts in the fields, but there are so many more seeking work, either from country areas or from old industries which are dying, that wages are held down. For more skilled or more qualified workers the dramatic improvements in educational standards are producing more people qualified for the jobs available. So we are not likely to see wages rise enough in the near future to make a big difference. People sometimes talk of China as being under threat from even lower-wage areas, such as Vietnam. Those countries might make their own great leaps forward, but the gap in production costs between China and the old industrial world is so great that it is unlikely they will lose much edge soon.
Low costs are one thing; being able to turn them into something economically viable is another. Houses are cheaper in central Patagonia than on Central Park West because not many people want to live in Patagonia and housing is one good which has to be consumed where it is produced.

Transportation costs have fallen dramatically over the years because of more efficient ships and sea transport being far cheaper than using land, so the extra distance from Asian producers to old industrial markets gives a misleading picture. When Japan started selling cars in the US it sold only in California. That was because sea transportation was so cheap that it cost a Japanese producer only one third as much to get a car from Tokyo to Los Angeles by sea as it cost a US manufacturer to get it from Detroit to Los Angeles by rail. The big US firms consoled themselves at the time that this meant Japanese manufacturers would leave the east coast alone.

But it is shops as well as ships that have made transport cheaper. The availability of sources of cheap production has shifted power from producer to retailer. And retailers such as Wal-Mart have used the opportunity this gives them to produce transport and distribution systems of great efficiency and complexity. Like most things in the economy, there is an element of accident in all this.

Back at a time when US brands like RCA and Zenith dominated the television market there, Sears decided to sell an own-brand television and asked US manufacturers to produce it. They all refused and Sears was forced to turn to Japan, which used the American 525 line system and whose manufacturers had been trying unsuccessfully to break into the US. The success of this order led to a flood of others and started the process by which Japanese brands themselves became established. By the early 1970's a leading British retailer realised that attitudes had changed so much that it changed its own brand label from Prinz (designed to make it sound like a high-quality German camera) to a name aimed at making it sound Japanese.

There is a difference between this early phase of Asian gains in US and European markets and what is going on now. Japanese (and Korean) producers focused on goods with a declining marginal cost curve. That is to say, goods where once a dominating position had produced really big volumes of sales, the costs of producing one extra car or TV were so low that it was difficult for new entrants to break in to the market. That justified exceptionally low start up costs and long periods in which exports produced little or no profit.

China can produce pretty much any simple thing, where labour cost dominates transport, cheaper than any US or European plant - and cheaper than almost all of the newly industrialised countries as well. The rule that if it costs less than $5 it will have "Made in China" stamped on it is not quite true but it is close. The result is that China has a huge surplus on its trade with the USA, which it ploughs back into US government assets. Note that overall China's trade is much closer to balance because it imports huge amounts of goods for both producers and consumers. Capital equipment still flows from Japan, while the products which that equipment produces often sell on world markets with Japanese brand names.

'This time the Great Discovery is people. And people make it different.'

No one should underestimate how much of the rise in living standards in the west has benefited from cheaper goods imported from the newly industrialised countries. In total, western economies are massive net beneficiaries from access to cheaper goods. The rise in living standards in the countries being drawn into the world system makes increasingly important markets as well. But the winners and losers in the advanced countries are not all the same, just as in the 19th century town dwellers in Britain welcomed the cheaper food from America which caused desolation to the agricultural economy.

There has been much focus of late on some of the macro-economic causes and consequences of China's large trade surplus with the old industrial countries. Is it caused by having too weak an exchange rate? Does the fact that the Renminbi is pegged to the dollar remove the Chinese authorities ability to control domestic monetary policy in China? Is the long-term build up of currency reserves as a side-effect of maintaining a stable currency either sustainable or desirable ?
My own view is that a greater degree of flexibility for the Chinese currency would make sense for both China and the rest of the world. But there's no getting away from the fact that any plausible move in exchange rates would barely dent China's huge competitive advantage in the fields where it is strong. So macro policy, especially exchange rate policy, can only do so much.

And in any case it fails to understand that we are dealing here with a much bigger phenomenon. As is shown by the latest arrival on the scene. India.

In the western world, the emergence of China, like the rise of Japan before it, has often been seen in terms of its sectoral impact on the economy. Cars and TV's can be packed onto a ship and moved across the ocean; services can't. And so those who worked in services have had the benefits of cheaper goods, while those who work in manufacturing have seen their wages cut and their industries contract - or even close down altogether. We used to say that the US and Europe made up most of the "industrialised countries." But "industrialised" no longer properly defines economies where more than three in four now work in services.

According to the so-called Gini quotient, which measures income distribution and disparity in countries, the World Bank now indicates that China and the United States have reached about the same level, which is about 40. On the scale, a 1 is about where everyone in a country is economically equal, and 100 is where one person has all the money. Other countries, like Brazil, Guatemala, and South Africa are up at around 60. Most European countries are down in the 20-30 range. That is an interesting indicator of the growing income disparity in China. There is also data that urban disposable income grew in 2002 at about 14 percent, whereas rural disposable income only grew in 2002 at about four percent. The Chinese leadership understands that they are going to have to work on this income distribution problem in a way that avoids social instability.
Source: The Gini quotient

To understand what is happening now it is perhaps instructive to go back to the Alpine valleys of Switzerland nearly 150 years ago. Isolated and with bad transport links to everywhere, the inhabitants had already learned to seek high value per kilo in what they produced, building the Swiss watch industry to use the long winter. But that was only a solution for some of the people. Lush pasture fed the cows whose bells tinkled across the valley; and they produced copious quantities of lush milk. But Switzerland is a small country, milk is plentiful everywhere within a reasonable distance and it goes off quickly. One solution was to condense it and put it in tins as a Mr. Nestlé did, but that required the product to be cheap enough to compete with fresh milk produced nearer the markets. So after much research they came up with a breakthrough and Presto! milk chocolate was invented.
That's not the only example of finding a way to export something in the guise of something else. Norway has enormous capacity for hydro power but little use for it in its remote areas. And so we have aluminium, the production of which eats up enormous amounts of electricity. So we come to the unexpected consequence of the electronic revolution of the past decade. For this has given India a way to export labour as services without any physical transportation of goods at all.  

Hartford Connecticut used to call itself the insurance capital of the world and 50 years ago enormous amounts of paper used to make their way there to be processed as premium payments or as claims. Computerisation took its toll of many of the jobs there quite early, but for many there remained much work dealing with the outside world. This required a capacity to speak English well above that of any computer, a reliable postal system to communicate quickly and reasonably priced phone and data connections. All of these effectively limited sourcing to the US for US insurance companies.

Now along comes India, with a very large population with extremely high proficiency in English, an education system producing graduates of exceptionally high attainment levels in subjects which employers want and, the final piece in the jigsaw, access to an international phone system where costs of international calls have collapsed to levels little above those for a short distance call in the US.

Any service which can be delivered over the phone or internet can now operate in India as easily as Indiana for a US or UK consumer. The most often quoted example is the rise of call centres, themselves a new phenomenon which were hailed as the source of jobs for the future to replace those lost in manufacturing.

Like the production line jobs which have gone, these are not traditionally the sort of jobs which graduates would expect to take. But people in India with a degree will do them for far less than those they replace in the market they serve. They will even learn an American regional accent and avidly follow the fortunes of a baseball team to give a sense of familiarity to the clients.

As a growing number of large organisations are beginning to realise, there is no reason why this should only work for low-end jobs. India is the world's second software giant after the US. Many organisations have tried moving a part of their software work out of the UK, for example. In most cases the quality available in India is so much higher that they very soon want to move all of it.

So the old demarcation line between manufacturing exposed to newly-industrialising countries, and service sectors de facto protected, is breaking down. What new lines might be drawn?

An obvious one, and one which will hold is that if something MUST be done in a particular place then it WILL be done there. You can buy a computer on the internet, but someone has to deliver it physically to your home. You can only sweep the streets of Birmingham if you are in Birmingham.

But invention can change more of this than we think. Ten years ago, if you wanted new software for your computer you had to buy disks which were delivered by post or sold in a shop. Now you just download from the web.

Another demarcation line is what is provided by government. Most governments are more open to political pressure to keep jobs than most private companies are. But here is where the market comes into play. If governments do not use the much cheaper sourcing available to them, the relative price of the services they provide will rise. Voters will want to switch to cheaper private alternatives. And so the scope of things which are provided by the government will narrow.

Because all of this change is really about something very simple. Price. Over the past 15 years the supply of labour has increased dramatically in a huge step; the amount of capital available grows steadily but has not had that leap. Thus the relative prices at which these goods trade and the relative prices within the labour market have changed. It is not new that a change in the ratio of capital and labour changes the relative prices they can command. The Black Death killed people but left capital intact. And so for a long period after real wages were higher. For those who survived.

'Because all of this change is really about something very simple. Price.'

Consider a company with two employees, one a production line worker and one a manager making decisions about products, marketing and future action of all kinds. The company can sack the production worker and buy its product from overseas; but it can't sack the manager without ceasing to exist as an entity. Thus the relative power of the two is changed. Over time, either the company will move production to China or the manager will succeed in getting the production worker to take lower pay per unit of output.
But both of them have to reckon with the fact that the investors who put capital into the company can switch their capital out of it altogether to a company somewhere else in the world which takes advantage of the lower costs there. So the rate of return has to be higher.

Much of modern politics in the west is about how the political process interacts with this set of decisions. And we are only just beginning to see how big a set of changes we face.

David Blake is an executive director of Goldman Sachs and a former economics editor of The Times of London. He is writing in a personal capacity.



Writing memoirs stimulates the brain.  Looking back over an array of diaries, letters and government papers I have been forced to weigh up comparisons between then and now which would otherwise not come into my mind.  One of the most striking changes over these last fifty years has been in the relationship between taking decisions and communicating them.  This is true of diplomacy and politics; I suspect it is true for business and finance and indeed any profession practiced by a reader of this essay.

When I joined the Foreign Office in 1952 Anthony Eden was Foreign Secretary.  He was well known as a sophisticated communicator in the idiom of his day.  His chosen medium was the House of Commons, of which he was a master - not in terms of eloquence but in skilful reasoned exposition of a case.  His own immediate audience was more important then than it is today, but his speeches in the Commons were also fully reported in the serious press.  He would supplement them by occasional major speeches in the country, which would also be fully reported.  From time to time he would no doubt have private conversations with the Editor of The Times and other significant papers.  And that was that.

In the same exercise I found myself looking briefly at an even earlier generation.  My grandfather was the Member of Parliament for Frome in Somerset from 1918 to 1923.  I have two large albums of local press cuttings of his constituency activities during this time.  I have similar but much thinner records of my father's meetings in the Newbury constituency during the 1950's and 60's and my own in Oxfordshire in the 70's and 80's.  The striking difference is that my grandfather's meetings and those of his opponents were reported in a detail which seems fantastic today.  Nor was this simply a matter of taking down a speech in shorthand.  The exchanges with hecklers are scrupulously recorded, so that the report builds up in the reader's mind the atmosphere eighty years ago of those crowded village and town halls where democracy was at work.  In the absence of radio and television these local press reports provided entertainment and political education at the same time.

We have moved into a different and more frantic age.  When I was Home Secretary I discovered that my private office and senior officials were catching trains home about an hour later than their predecessors had under Willie Whitelaw a few years before. I asked them when they had an hour or two to spare to research why this was.  They returned saying that there was no particular increase in the quantity of policy or administrative work in the Home Office.  The increase was overwhelmingly in the hours which they had to devote to equipping the Home Secretary and others to explain government decisions and policy to the outside world.  But there is a limit to the hours which even politicians and their advisers can be expected to work.  One piece of machinery which has not noticeably developed in the last century is the human body, which still requires hours for sleep and even recreation.  Inevitably if more time is inexorably devoted to public communication there is less time for private interchange and thought.  Is it politically correct to argue that greater transparency and openness leads automatically to better decision taking? I doubt it.  Openness has to be argued in terms of democracy, not efficiency.  The irresistible pressures nowadays for immediate comment and reaction can easily crowd out the time which should be spent in considered reflection.  Democracy comes at a price.

'Openness has to be argued in terms of democracy, not efficiency.'

It used to be said that in the British Government the Home Secretary was the Minister to whom sudden news was always bad news - an inner city riot, a prison escape, a disaster on a football ground.  Now that the world is so much more dangerous I suspect that the Foreign Secretary runs him close in this respect.  Suppose for example that two truck loads of British soldiers are blown up one afternoon in Basra.  This would not be a new type of disaster.  Indeed, the British Army suffered serious reverses in Southern Iraq in the Great War.  In that era it would be days before British Ministers would be required to confirm or comment on what had happened.  Now, within hours, the Foreign and Defence Secretaries and perhaps the Prime Minister would be compelled not just to give an account of what had happened but to update British policy as a result.  Yet there is truth in a lesson which Ted Heath taught me long ago, that the first account you get of a sudden incident is almost always wrong.  This is not because your advisers wish to deceive you; they are not in possession of the facts, yet know that you need to hear immediately from them.  Within one or two days the picture will be clearer - and different.  Yet the Minister does not have those days at his disposal before he explains himself.  Moreover, he has to explain himself not once but over and over again, each interlocutor trying to probe into the most sensitive areas.   Following one statement which I made as Home Secretary I recorded thirteen separate interviews on the trot covering exactly the same ground - and that was fifteen years ago before the latest multiplication of radio and television.

Is this rush to communicate necessary and irreversible?  Ministers, Chairmen of companies, Vice Chancellors of Universities, Chairmen of Hospital Trusts - they are all in thrall to public relations advisers who answer a resounding yes to that question.  For such advisers public appearances are a virtue, silence a failure.  They are powerfully influenced by the rules of the celebrity culture which dictate that the more often you appear the more successful you are.  Celebrity is often a matter of fame without talent.  It is like the flame in a fire of wet logs which has to be constantly encouraged by the bellows.

I have to admit that there are good reasons why an actor or a film star should appear as often as possible in public.  In these professions appearance is indeed everything - it is what they are about.   But the evaluation for other professions is far from clear.   For a Chancellor of the Exchequer or a company Chairman, public communication is not an end in itself.  Their main purpose is to enable the nation or their own company to thrive.  Public communication is a technique which can help, but not their main objective.  

Consider for example the choice facing the Leader of the Opposition, Michael Howard.  His immediate opponent is the Prime Minister who believes in constant communication.  Hardly a day goes by without Tony Blair appearing before the people.  If Michael Howard fails to take up every opportunity for appearance which presents itself he will certainly be criticised for hanging back. Yet there is another option.  He will look at the performance of Gordon Brown, arguably the politician who has grown fastest in power during the last year.  Gordon Brown uses silence as a technique.  He sits in his Treasury fortress day after day, exerting through Whitehall the formidable power which he has created for the Treasury but not feeling the need to proclaim that power hour by hour.  Every now and then he emerges from his fortress to make a significant speech and then retires again.  These periods of glowering silence suit the Chancellor's own personality and serve him well.  Now that Michael Howard has created a small but effective team of lieutenants, he might too well find it better to cultivate a certain reserve, so that when he speaks there is an element of rarity about it which compels attention.

The choice is harshest and most cruel for the Royal Family.  For them the lessons of history are mixed.  The republican cause in this country was strong when Queen Victoria retired into silent widowhood.  Her popularity revived when Disraeli coaxed her back into public appearances, and her reign culminated in the triumphs of the two Jubilees.  Since then the world of communication has totally changed.  The Royal Family is deprived by convention and character of some of the modern means by which others bring their faces and their arguments before the public.  The Royal Family cannot argue and debate in the same way as the rest of us.  Disraeli and Queen Victoria relied on pageantry, and that magic has not entirely evaporated as each Coronation and Jubilee show.  But pageantry is now associated with expense and therefore with envy in a less deferential age.  There are some public relations advisers who urge the Royal Family to minimise their difference from other celebrities and to engage wholeheartedly in the different excitements which the modern media provide.  When one adviser recently criticised the Royal Family for being out of touch with the real world he was clearly thinking, not of the real world in which most of us live, but of the virtual world of shows and media driven appearances in which he has made his own reputation.  The Queen has established her own path through this thicket of advice; on the whole it serves her well and she will not now change it.  The Prince of Wales, and now his sons, have a wider and more difficult choice.  They need all the time to look for a way in which they can reach ordinary people direct rather than through the exaggerations and distortions of the media.  The opportunity presented, for example by the huge range of The Prince's Trust and the support it gives to so many individual lives is not yet fully used for this purpose.

As ever, it is a question of striking the right balance.  We cannot uninvent or ignore the modern media or the culture of celebrity; silence is not really an option for those in positions of authority; but they should not ignore the advantages of well-judged reticence.

Lord Hurd of Westwell was British Foreign Secretary 1989-1995 and Home Secretary 1985-89. His Memoirs have just been published by Little Brown and are available in good bookshops.

Professional Respectability

Ten most respected professions

Ten least respected professions
Doctor 1
MP (Least Respected)
Estate Agent
Government Minister
Advertising Executive
Ambulance Driver
Car Dealer
Police Officer 9
Company Director
Care Assistant

Source: BBC Radio 4 Today Programme

Do Women Rule The World?
Current female political leaders
Governor-General Dame Ivy Dumont
Prime Minister Khaleda Zia
1991-1996, 2001-present
Premier Jennifer Smith
Governor-General Adrienne Clarkson
Queen Margrethe II
President Tarja Halonen
Great Britain
Queen Elizabeth II
President Megawati Sukarnoputri
President Vaira Vike-Freiberga 1999-present
Queen Beatrix
Netherlands Antilles
Prime Minister Mirna Louisa-Godett
New Zealand
Governor-General Dame Silvia Cartwright
New Zealand
Prime Minister Helen Clark
New Zealand (Maori)
Queen Te Ata-i Rangi-Kahu Koroki Te Rata Mahuta Tawhiao Potatau Te Wherowhero 1966-present
President Mireya Moscoso
Prime Minister Beatriz Merino
President Gloria Macapagal-Arroyo
St. Lucia
Governor-General Dame Pearlette Louisy
Sao Tome and Principe
Prime Minister Maria das Neves
Sri Lanka
President Chandrika Kurmaratunga

Source: Worldwide Guide to Women in Leadership/Prospect magazine

Only five countries have never had a single female member of government: Lebanon, Monaco, Saudi Arabia, Tonga and The Vatican.



The recent arrest in Moscow of Mikhail Khodorkovsky, one of the most successful businessmen in Russia and head of the Yukos oil firm, sent shock waves through Russia's fragile political system and its stock markets.It has also acquired significant political resonance in the West, raising a number of questions for both Western businesses and observers of Russian politics.  President Putin's victory in the Duma elections in December only served to make these questions more acute.

Does the treatment of Khodorkovsky mark the beginning of a state campaign to bring an end to the power of the oligarchs and redistribute the property and assets they accumulated through crooked privatisation deals in the 1990s?   To what extent is Khodorkovsky's arrest intended as a powerful message to political, rather than business elites in Russia and the West? And does the manner of his apprehension - with excessive use of force and gross violation of Russian, let alone Western legal standards - represent a significant power shift within the Kremlin from the reformist clans towards the former KGB officials known as siloviki?  Does the arrest and subsequent freezing of 40% of Yukos assets indicate the state's wish to regain control over key assets - such as licences for lucrative oil fields - to prevent them falling into foreign hands?

Khodorkovsky's active participation in Russian politics, at a time when Vladimir Putin had declared an end to the Yeltsin-style oligarchic system of power, was viewed as a direct challenge to the President's authority. It was also a violation of the unspoken rules of the game - subliminal conventions well understood among Russian elites that 'your assets are safe as long as you stay out of politics'.  But the arrest marks the start of yet another worrying trend in Russia - political repression and the rise of authoritarian rule, tolerating pluralism neither in the Duma nor among entrepreneurs seeking to manipulate the political system. For many in Russia and abroad, pictures of Khodorkovsky in prison revived chilling memories, of repression and a return to the police state, that have been almost forgotten since the collapse of the Soviet Union.

For proponents of a better business environment and transparent democratic political systems, each of the above perspectives represents a significant basis for concern.  In the end, however, they do not add up to a radical shift in Putin's policy, or for that matter, to a major change in the environment in which foreign business operates in Russia.  The Yukos affair has had the effect of completing the transition from Yeltsin's Russia to that of Putin, even though formally the new President had taken over as long as four years ago.  Recent developments herald the final arrival of the Putin era.  Having devoted his first term in office to the consolidation of autonomous political power, the President will now focus in his second term on paving the way for his own successor before he is constitutionally required to relinquish power in 2008. This shift will inform both the prospects for domestic reform and determine strategic choices in Russia's foreign policy over the next half decade.

Putin's vision for Russia has been both progressive and authoritarian. This apparent contradiction is a foreign concept for Western Europe but is deeply rooted in Russian history and has been successfully implemented in other parts of the world such as in South Korea, Chile and China. Putin has combined elements of each. On the one hand, his policy choices demonstrate a commitment to the consolidation of Russian domestic economic growth before resorting to 'great power' ambitions, to achieving integration into the community of the most economically developed nations and to promoting development of those sectors of the economy which could most benefit the Russian people. He has tried to diversify a dependency on oil and supported more investment in small and medium size business. And over the past four years the Russian economy has been growing steadily and average real income has increased by 25%.  

At the same time, however, Putin believes above all that Russia's modernisation is a responsibility of the state and must be conducted 'from the top'. Hence we have seen the President's concerted effort to reinforce the so-called 'vertical' power structure and to establish further controlling bodies - such as super governors - to assure that state decisions are implemented throughout Russia's vast territory.

Clearly this provides little room for democratic change, at least not in the short to medium term until the main objective of the modernisation programme - the emergence of a viable middle class in Russia - becomes a reality. And authoritarian modernisation faces many obstacles and contradictions, not least the growth in Russian civil society and the peculiarity of the country's geography: development priorities for the Kaliningrad region are hardly comparable to those of Sakhalin or Tatarstan.
Furthermore, such autocratic rule is encouraging large numbers of the new and wealthy elites either to leave Russia or remove their money - as indicated by the recent surge in volume of capital flight after the Yukos affair. Khodorkovsky embodies many of these challenges. His belief in the power and independence of big business, and commitment to promoting grass-roots change in Russian society and political system contradicted Putin's top down vision: the oligarch not merely threatened the President's personal power and that of his close associates, but also Putin's modernisation programme as a whole.

For many Western investors, however, Putin's vision does not represent such a challenge. If anything both leverage and profile within Russia are likely to increase as a result, particularly in the case of large scale foreign investment. The President views the goal of attracting foreign investment into Russia not simply as an economic objective but rather a symbol of the efficacy of his domestic modernisation programme, indeed it brings him closer to achieving his chief foreign policy objective: the integration of Russia into the international economic system. In the post-Yukos period many Russian companies therefore will actively seek foreign investors for their companies, as a sort of insurance against domestic political risk.

'Putin's vision for Russia has been both progressive and authoritarian.'

The second important factor which defines the Putin era is his team. Russian domestic politics, revolving around the changing balance of power between different clans surrounding the President, rather than between political parties in parliament, resemble more a Byzantine court than a modern Western democracy. The Yukos affair and subsequent resignation of Alexander Voloshin, the Presidential Chief of Staff, signified the end for one very powerful clan - the Yeltsin 'family' - which presided over the privatisation deals of the 1990s and brought Putin to power in 2000 to replace Boris Yeltsin.

It is well known that this transfer of power was undertaken on the basis of an explicit promise of immunity and security guarantees for Yeltsin's immediate family and a pledge not to re-open privatisation deals already secured for Yeltin's wider 'family' clan.  These assurances notwithstanding, the very first day of Putin's arrival in the Kremlin signified the beginning of the end for Yeltsin's clan. The cautious and politically inexperienced Putin took an entire first term to complete this process and to feel mature enough as a leader to preside over his own power base, represented by the so-called 'St Petersburg clan'.

This includes the President's colleagues and friends who go back to his 'previous' life - as a law student at Leningrad (now St.Petersburg) University, later as a KGB officer and finally as a middle ranking official in the administration of Anatoly Sobchak, the former mayor of St Petersburg. The clan, however, is much less homogeneous than the one which it has now replaced: the group unites people bonded to Putin by personal trust and loyalty rather than ideology.

In fact the new clan has two distinct factions.  The first comprises moderates promoted to senior positions after Voloshin's resignation and includes Dmitri Medvedev as new head of the Presidential Administration, Dmitri Kozak as his deputy and Igor Shuvalov as a new economic strategist. Vladislav Surkov, a reformer with a business background who represents the last remnants of Voloshin's team, remains in the Administration in charge of the crucial areas of elections and domestic politics. But both Surkov and the Mikhail Kasyanov, the Prime Minister, are likely to be replaced by 'St Petersburg' people, perhaps once Parliamentary and Presidential elections are over by mid May 2004.

Moderates in the St Petersburg clan believe in the continuation of reform and in the need to reinforce the rule of law. Kozak, who has taken a lead on legal reforms in Russia and promoted a radical curtailing of the prosecutors' power, is now in charge of overseeing the activity of the Prosecutor General's office, widely viewed as having gone too far in its aggressive pursuit of Khodorkovsky. The new team of moderates in the Kremlin has already established and maintained links with both Russian and foreign businesses and is likely to be as responsive to their concerns as in the previous administration led by Voloshin.

On the other side of Putin's clan, are the so-called siloviki, or former KGB (security and military) officials, such as Viktor Ivanov and Igor Sechin, widely believed to have initiated the Yukos affair and executed it with unprecedented vigour. Siloviki enjoy the President's trust and have preserved roles in the Administration despite signs that Putin was unhappy with the heavy-handed way in which the Yukos affair was conducted. Nonetheless, it is significant that no siloviki were promoted in the reshuffled Presidential Administration, a sign perhaps that Putin is unwilling to rely  excessively on siloviki and prefers the reformists within his team.

However, it is important to note that Putin's continuing reliance on siloviki is based not merely on personal trust but because former KGB officials always saw themselves as the guardians of the state. They thus eagerly support the President's efforts to strengthen state power across all spheres of Russian political, economic and social life. Like Putin, the siloviki see any independent power of the oligarchs, backed by money and foreign business, as a threat to strong state authority: in their view, and certainly his, the Yeltsin years were an aberration, allowing capitalists to think they really were in control and encouraging a feeling of anarchy that was not in the Russian tradition. Putin was determined to end this. On the other hand, Putin has not been as ready as some of the siloviki to crack down on big business more generally, as this would be bound to undermine any prospect of internal modernisation.  

In any case, the power of the former KGB lobby should not be exaggerated despite its clear devotion to a stronger government ideology. Many in the former security apparatus now work for big business in Russia and thus do not represent a united and powerful group able to shift the balance of power by challenging the moderates within Putin's new administration. At a regional level, however, they are much more united, conservative and powerful. If the presence of siloviki in the Kremlin represents less of a threat, both foreign and Russian investors should be much more concerned about mid-level siloviki in the regions, further empowered by the Yukos affair. In the near future, we may see them trying to enact similar Yukos-style coup attempts against major provincial business interests. But in the long run, as the middle classes develop beyond Moscow and other major cities, and generational change occurs in regional administrations, even the power of siloviki in the provinces must be marginalised.

The Yukos affair has demonstrated what everyone in Russia and the West already knew all too well: namely that public sector reform and the rule of law are the two key factors determining the ultimate success of Russian domestic change. These remain the two areas where progress has been at its slowest, despite the passing of numerous government laws and reform programmes. Beyond anything else in coming years, they represent the most difficult challenge to Putin's second term and should be seen as the two biggest areas for EU and other foreign assistance to Russia.  

Yukos certainly represents an historic development for Russia but should not be seen as paving the way for a new trend in Russia's history. The Russian people and elites must draw the right lessons from this experience about the importance of democratic reforms and transparent political systems. The demise of Yukos should sound a note of caution for foreign investors - particularly for business deals at a regional level - but should not be seen as a deterrent for engaging with Russia. Indeed, as we look forward to 2004, the affair should empower foreign business to take this opportunity to invest in major Russian companies and bring them deeper into the multinational corporate fold. In contrast to its political upheavals, Russia's economic fundamentals remain strong.

Oksana Antonenko is Senior Fellow (Russia and Eurasia) at the International Institute for Strategic Studies in London.

Russia's poor: Forty million below the poverty line

Population with money income below the minimum subsistency level

min. persons
percentage of total size of population
Source: State Committee of the Russian Federation on Statistics.

The world's Richest Oil Men in $billion
Davis, Marvin H.
United States
Bass, Lee Marshall
United States
Bass, Sid Richardson
United States
Koch, Charles De Ganahi
United States
Koch, David Hamilton
United States
Rockerfeller, David Sr.
United States
Khodorkovsky, Mikhail
Getty, Gordon Peter
United States
Hunt, Ray Lee
United States
Kaiser, George B.
United States
Bass, Perry Richardson
United States
Bogdanov, Vladimir
Mitchell, George Phydias
United States
Kinder, Richard D.
United States
Rockerfeller, Laurance Spelman
United States
Viakhirev, Rem
Abramovich, Roman
Alekperov, Vagit
Marshall, E. Pierce
United States
Fridman, Mikhail
Rockerfeller, Winthrop Paul
United States
Chernomyrdin, Viktor
Source: Forbes Magazine



There is hardly a boardroom in Britain, or indeed of any significant international company, which is not wrestling with the question of Corporate Social Responsibility (CSR), both in terms of its obligations and its boundaries.

We live in a mistrustful world - with an instant web of communication which has accelerated the velocity of embarrassing information, making double standards
impossible, putting corporations on the defensive and providing their critics with ammunition. Francis Fukuyama's 'End of History' may have left capitalism as the only available economic system still standing but, if so, it is under closer critical scrutiny than ever before. This is not merely from un-reconciled Marxists and the sea-green incorruptibles of the environmental movement - who often seem to dislike trade and industry per se - but also from a much wider spectrum of critics who balk at markets and liberalisation as the universal answer to every problem.

So business leaders find themselves mistrusted, along with politicians and journalists. And unsurprisingly since business, as Fukuyama also pointed out, depends on trust and mutual consent they are concerned to improve their reputations and relationships.

Maybe what we are seeing is capitalism trying to accommodate itself to the inevitable social pressures of being the monopoly economic system and therefore subtly adapting itself or, more prosaically, being forced to give a better account of itself. And this at a time when the age of deference is over and there is a widespread mood of cynicism, fuelled to a great extent by the media.

Either way, companies feel the pressure of external expectations, whether from their consumers, customers and investors, or from media, regulators and government. Among the responses to these external pressures to perform more responsibly are: a desire to build and secure corporate and brand reputation, of which social and environmental performance is an increasingly significant component; an acknowledgement of the need to work with governments who in turn are subject to electoral pressure; and an awareness of the need to respond to the significant shift in the demands of investment institutions on these issues, the trend towards 'ethical' or 'socially responsible' investment.

Yet the real crux in moving CSR from the public relations department to the management team as a whole is the extent to which these and other pressures are internalised so that a business case, based in a competitive world on comparative advantage, can be made. Can companies 'do well by doing good?'

Something which assists the business case for CSR are internal drivers as well as external pressures: for instance attracting and retaining better employees; managing risk better; securing product advantage; or becoming a preferred supplier, contractor or developer.

If CSR is to represent a substantive change of approach rather than a PR gloss, it will invariably be because of the combination of board leadership and management ownership. If CSR is to be integrated into the way every manager does his or her job, and is trained and motivated to do it, it will only be because the company as a whole has decided that this is how it does its business. And that in turn is because the company and its leadership has become convinced that this is the best way of creating long-term value. In this, compliance with various external codes seems less important than the company working out for itself where it stands and what should be expected of it.

It is worth noting here a significant difference in approach between US and European companies. The US, with its continuing record of outstanding business success, albeit marred by periodic excesses, has a simple model: the invisible hand moving in its mysterious way, constrained when absolutely essential but not otherwise by the law, and softened by an impressive record of philanthropy. Compliance with the law is secured by an army of lawyers but the working assumption is that which is not forbidden is allowed. The orthodoxy of neo-classical liberal economists has been transformed into a system of faith so that the response to an Enron-type scandal is not a crisis of faith but a change in the law such as Sarbanes-Oxley.

Yet it is equally noteworthy that those US corporations most engaged on a long-term basis with the wider world, companies such as General Motors, P & G, Dow or Du Pont, have been willing to adopt a more heterodox approach, moving more readily to compliance-plus models of CSR, being noticeably more engaged than their peers with the social context of what they do, and being more ready to sign up for such commitments as Kofi Annan's Global Compact and/or The Sullivan Principles.

Of course whether in the US or Europe, CSR has been evolving, from health and safety, to the environment, and in the past decade to complex social issues. Models of performance such as the Triple Bottom Line approach are helpful insofar as they focus managers on the real world trade-offs between economic, environmental and social 'goods'. But they are potentially misleading if they suggest some choice-free world where all three goods can be simultaneously maximised. Sustainable development, as governments find, let alone companies, is all about choice and priorities.

So is CSR simply the latest management fad enjoying its brief moment in the sun, or a real paradigm shift in corporate policy and practice?

Some 60% of FTSE 250 companies now report on their environmental performance and, something which is a great deal more difficult to define, 40% report on their social performance. Transparency and accountability, reflected in well-audited performance, are clearly both evidence of and a competitive driver towards commitment.

It is noteworthy, however, how few companies report well on the third leg of the sustainable development tripod, which is after all their main raison d'etre: their economic performance. It may well be that some of the mistrust felt by society as a whole towards its business component lies precisely in a tendency by companies to articulate their core function almost solely in financial terms rather than in human economic terms: jobs created, innovation and invention, taxes paid, training and development undertaken etc.

The question which presents most difficulties in discussing the future of CSR is the definition of the boundaries between the corporate and governmental spheres. In Russia for instance, following Fouquet, the state has almost said "enrichissez-vous" to the oligarchs, on the condition that they pick up the paternalistic social obligations of the old Russian state-owned enterprise.

In the knowledge that low-tax parties are more likely to win elections in middle class societies even Western governments have been tempted towards the same Faustian pact with business - a pact that business would be wise to resist. Yet in Third World countries where funds are limited and state provision negligible, it is almost inconceivable that corporate responsibility to employees, families and neighbours should not extend to cover some benefits traditionally within the sphere of government.

Human rights and security issues pose similar problems of definition for the responsible company operating in countries where governance is weak, and where the divisions between civil and military power is completely porous.

We can therefore forget any notion that the adoption of clear policies on these issues of CSR is the end of the matter for the responsible company. It is precisely in the general adoption of the policies by the entire management at all levels, and then in their application to tricky real world situations, in bad times as well as good, that the robustness of the policies, and the firmness of the intentions behind them, are going to be judged.

Lord Holme of Cheltenham is Special Advisor to the Chairman of Rio Tinto and Chairman of the International Chamber of Commerce Environment and Energy Commission

Innovativeness: TOP TEN
Procter & Gamble
Robert Bosch
Berkshire Hathaway
Quality of management
Employee talent
Financial soundness
Use of corporate assets
Longterm investment value
Social responsibility
Quality of products/services

Source: Fortune Magazine

According to Heinrich von Pierer, Chairman of Siemens, the four brands with the widest geographical spread in the world are as follows:

The Catholic Church

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