Wednesday, January 28, 2009

State Owned Enterprises and Sovereign Investment in Foreign Economic Entities

Much attention has recently been devoted to the rise of sovereign wealth funds. These entities present great difficulties in the application of current legal frameworks because they straddle the traditional divide between public and private law, between states as market regulators and market participants. Those who oppose their growth tend to privilege their public aspects--principally that they are owned by states--adopting a formalist approach to their analysis. Others tend to privilege their private aspects--that they operate like and are subject to regulation outside their home jurisdictions by public regulators--adopting a functionalist approach to regulation. See Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law. Tulane Law Review, Vol. 82, No. 1, 2008.

The usual definitions of such funds reflect the conservative inertia of this conceptual framework. The Americans have sought to define these entities by emphasizing their public nature of these investment instruments. An SWF has been understood to include "a government investment vehicle which is funded by foreign exchange assets, and which manages those assets separately from official reserves." U.S. Department of the Treasury, Press Room, Remarks by Acting Under Secretary for International Affairs Clay Lowery on Sovereign Wealth Funds and the International Financial System, (hp-471, June 21, 2007). The IMF also focuses on the public character of the ultimate owner of the fund. Thus IMF studies would define sovereign wealth funds to include "government-owned investment funds, set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term, overseas." International Monetary Fund, Sovereign Wealth Funds--A Work Agenda (February 29, 2008 (prepared by the Monetary and Capital Markets and Policy Development and Review Departments and approved by Mark Allen and Jaime Caruana), at 4. Annex II to this document provides short definitions provided by other stakeholders in the financial system, from Deutsche Bank ("financial vehicles owned by states which hold, manage, or administer public funds and invest them in a wide range of assets") to Morgan Stanley ("An SWF needs to have five ingredients: sovereign; high foreign currency exposure; no explicit liabilities; high-risk tolerance; and long-term investment horizon"). Id., at Annex II, pp. 37-38.

It is that public ownership that serves as the gateway through which further analysis is grounded. Thus, for example, the IMF would distinguish among these funds on the basis of their objectives:
Five types of SWFs can be distinguished based on their main objective: (i) stabilization funds, where the primary objective is to insulate the budget and the economy against commodity (usually oil) price swings; (ii) savings funds for future generations, which aim to convert nonrenewable assets into a more diversified portfolio of assets and mitigate the effects of Dutch disease; (iii) reserve investment corporations, whose assets are often still counted as reserve assets, and are established to increase the return on reserves; (iv) development funds, which typically helpfund socio-economic projects or promote industrial policies that might raise a country’s potential output growth; and (v) contingent pension reserve funds, which provide (from sources other than individual pension contributions) for contingent unspecified pension liabilities on the government’s balance sheet.
IMF, Sovereign Wealth Funds, supra, at 5. This is a framework used in other studies as well. See, e.g., Edward F. Greene & Brian A. Yeager, Sovereign Wealth Funds--A Measured Assessment, 3(3) Capital Markets Law Journal 247-274 (Advance Access publication 10 June 2008) (distinguishing among central banks, stabilization funds, public pension funds, government investment companies and state owned enterprises). American officials have distinguished between two large categories of SWFs, commodity and non-commodity funds. U.S. Department of the Treasury, Press Room, Remarks by Acting Under Secretary for International Affairs Clay Lowery on Sovereign Wealth Funds and the International Financial System, (hp-471, June 21, 2007).

As a consequence, much effort has been expended on measures to control the investment strategies of sovereign wealth funds (understood as another arm of national policy and a possible source of indirect protections of national power abroad), without affecting the level of such inbound investment to states desperately hungry for the funds. See, e.g., Larry Catá Backer, Sovereign Wealth Funds And Hungry States: Adjusting the Borders of Public and Sovereign Activity Across Borders, Law at the End of the Day, June 6, 2008. The result has been a drift to something like a "reasonable investor policy." This approach has been criticized for its over and under inclusion of restraint and its stubborn ignorance of the nature and scope of investment. See, e.g., See Larry Catá Backer, State Subsidies and the Character of the Market Transactions of Sovereigns: The Case of EADS, Law at the End of the Day, May 29, 2008. See, e.g., Larry Catá Backer, Brazil Builds a Sovereign Wealth Fund and Norway Flexes Its Muscles: Private Participation in the Market or Regulation by Other Means, Law at the End of the Day, May 24, 2008; Larry Catá Backer, Extraterritoriality and Corporate Social Responsibility: Governing Corporations, Governing Developing States, Law at the End of the Day, March 27, 2008.

Much of this control has been accomplished informally and on a state to state basis. The recent joint statement among the United States, Singapore and Abu Dhabi provides a recent case in point.

We support the processes underway in the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) to develop voluntary best practices for SWFs and inward investment regimes for government-controlled investment in recipient countries, respectively. International agreement on a set of voluntary best practices will create a strong incentive among SWFs and investment-recipient countries to hold themselves to high standards. We hope that the IMF and OECD's work can build upon these basic principles:

Policy Principles for Sovereign Wealth Funds (SWFs)

1. SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government. SWFs should make this statement formally as part of their basic investment management policies.

2. Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information – particularly asset allocation, benchmarks, and rates of return over appropriate historical periods – can help reduce uncertainty in financial markets and build trust in recipient countries.

3. SWFs should have in place strong governance structures, internal controls, and operational and risk management systems.

4. SWFs and the private sector should compete fairly.

5. SWFs should respect host-country rules by complying with all applicable regulatory and disclosure requirements of the countries in which they invest.

Policy Principles for Countries Receiving SWF Investment

1. Countries receiving SWF investment should not erect protectionist barriers to portfolio or foreign direct investment.

2. Recipient countries should ensure predictable investment frameworks. Inward investment rules should be publicly available, clearly articulated, predictable, and supported by strong and consistent rule of law.

3. Recipient countries should not discriminate among investors. Inward investment policies should treat like-situated investors equally.

4. Recipient countries should respect investor decisions by being as unintrusive as possible, rather than seeking to direct SWF investment. Any restrictions imposed on investments for national security reasons should be proportional to genuine national security risks raised by the transaction.

U.S. Department of the Treasury, Press Room, Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi 30 (hp-881, March 20, 2008). And, indeed, the recently embraced so-called "Santiago Principles" embrace this notion of some kind of reasonable investor model for judging the activities of SWF abroad.

My principal interest in this essay, however, is not to explore the principal vehicles through which states are now seeking to invest in the economic activities of others. Rather, I will focus on a potentially confounding vehicle for both economic activity in its own right and activities abroad that might broadly include investment activities usually associated with sovereign wealth funds--state owned enterprises operating as separate legal persons. Greene and Yeager, supra, suggest that these vehicles "may be the most problematic from an investee-country's perspective, particularly when the acquirer and the target are infrastructure companies, because the investments may be seen as a means for gaining political leverage." Id., at 253. For examples, they point to the investment activities of Dubai Ports World and the China National Offshore Oil Company. Id., at 253-254. See, Larry Catá Backer, Missing the Point of the Ports Problem—Getting Foreign Governments Out of U.S. Security Related Business, Law at the End of the Day, March 26, 2006.

But let us consider the problem more closely. The issue of the investment consequences of state owned enterprises whose business is not investment presents issues similar to those of the typical SWF, but with significant differences. From a functional perspective, centered on the state as ultimate owner, there may be little difference between a state owned hotel corporation purchasing a large hotel corporation with principle offices in Chicago and incorporated in Delaware, and a SWF purchasing a controlling interest in the same firm. In both cases the target company is controlled by an enterprise whose ultimate owner is a state. In both cases, the state, as ultimate shareholder, can assert a power of control over the entity that may or may not reflect the sort of values a private shareholder might be expected to assert. Thus, states might be tempted to use their ownership for political purposes--that is to maximize their national interests through their ownership of foreign entities--even if those entities suffer financially as a result. Thus, of example, if the state owned hotel corporation of State A wanted to ruin the competing hotel business of State B, it might cause State A Hotel Corp to purchase State B Hotel Corp for the purpose of either shutting it down or causing State B to make concessions that would preserve the business of the hotels in State A. But this scenario is not necessarily logical, realistic, or peculiar to public entities. First, unless the target entity is wholly owned, the public shareholder would be subject to suit for breaches of duty or abuse of power by the minority shareholders in many jurisdictions (but not all to be sure). Second, all shareholders seek to maximize their personal interest in their investments. It stands to reason that a public shareholder would measure its interests (and its maximization) on a scale distinct from that of an individual or legal person that is not a state. Third, the sort of predatory behavior suggested by the example is usually actionable under the domestic law of the state where it occurs. The evil or disruptive potential of such behavior is only troublesome to the extent that states, as owners of entities that invest in foreign jurisdictions, may evade local law or may avoid treatment as a shareholder like any other.

Yet, under the current system of global economic ordering, a functional analysis does raise some of those concerns. Principal among them is that a large corporation may effectively order its operations so that it effectively regulates itself. See Larry Catá Backer, The Autonomous Global Enterprise: On the Role of Organizational Law Beyond Asset Partitioning and Legal Personality, Tulsa Law Journal, Vol 41, 2006.

We have seen how the territorial principle and the principle of regulatory hierarchy can open the possibility of enterprise self-regulation. Any enterprise that can disperse its assets among a large enough number of regulatory units will transform the relationship between regulator and enterprise. For the traditional relationship that is both singular and hierarchical, globalization permits the enterprise to treat regulation as another factor in the production of wealth. The enterprise, now in a position to shop for regulatory regimes, or even bargain for domestication within the territory of a regulatory territory, can take advantage of the limitations of the territorial principle to minimize the effects of regulation to inhibit enterprise activity. The principle of regulatory hierarchy can then be turned on its head. The ability to commodify regulation makes it at least theoretically possible to construct an economic entity which, through careful planning can take advantage of asset partitioning, cross holdings, and global dispersion of assets to avoid effective regulation by any one political community.
Id. It is in this context that a state owned enterprise, one bent on aggressive investment in other entities abroad, might pose a regulatory danger. It is not just that such entities are owned and perhaps managed in the ultimate interests of a state, but it is that such enterprises, is managed well enough, might also be able to evade local control.

For all that, state owned enterprises are not sovereign wealth funds from a formal perspective. Their functions are quite distinct. State owned enterprises are meant to operate the way their privately owned counterparts do. Their principal objects are consonant with those of private actors. Yet like private actors, they might seek to aggressively insert themselves in the economic life of other states where that has the effect of enhancing their own financial condition, increasing its market share or reducing competitive pressures, among the usual "reasonable actor" objectives. But that very conduct can produce the sorts of interventions that might make states quite nervous where the entity is owned by a state. And indeed, because state owned enterprises are not funds, their investment activities might not fall within the limitations of the Santiago Principles and similar mechanisms.

Thus, the state owned enterprise presents a unique variant on the SWF. Though it is neither a fund, nor was it created for the purpose of investing in other entities, a state owned enterprise might naturally engage in such activities. But it does so in the context of maximizing its own business operations rather than as an end in itself. Yet those business operations, as classically understood, are themselves undertaken to maximize the interests of the entity (and its shareholders). If there is a unity between shareholder and corporate interests (for example where the entity's shares are wholly owned by the state, then it would be logical to assume that the maximization of state value in such enterprises includes the political value of that enterprise's operations. On the other hand, even if that is the case, at least with respect to its global operations, such an entity (and its state owner) would be liable in host jurisdictions, for breaches of duty, abuse of power, looting and the like in its relationships with its foreign owned subsidiaries. Consequently, the similarities in result mask significant differences between state's as owners of SWFs and states as sole shareholders of operating entities that may also inverts in foreign undertakings.

State owned enterprises also presents its own set of unique regulatory problems. As suggested above, the regulatory approaches of the Santiago Principles and other efforts designed to control enterprises in the business of investing have little relevance to enterprises that constitute operating units in other industries but which (like their privately owned counterparts) also engage in investment activities or in the development of a global network of operations grounded in ownership of enterprises in a variety of host states. Indeed, the problem of control is different, and the ability to distinguish between behaviors of state owned enterprises and others much more difficult. The regulatory tools are also cruder--resort to foreign direct investment regimes, and the construction of baroque exemptions for state owned enterprises from free movement provisions available to others. But these probabl do more harm than good. And a state owned enterprise version of the the Santiago Principles--a reasonable private company investment model" would be difficult to articulate and harder to apply with any degree of consistency. Indeed, in the case of state owned enterprises investing abroad, even more so than with SWF, the host states might be tempted to use the difference in ownership for its own purposes. Thus, and perversely, state owned enterprises investing abroad for legitimate purposes , might be subject to regulatory hurdles as a method by host states to manipulate the competitive environment internally in ways that would be irregular if the regulating state had sought to distinguish among privately owned forms.

As a consequence, states as market participants acting outside their territories, especially when operating through wholly owned or controlled state owned enterprises present a unique problem. This presents a class that is formally not SWF but functionally can be as powerful agents of projections of state power abroad as any SWF. The regulatory approaches to such enterprises are unlikely to be found in the control mechanics being developed for SWFs. And indeed, the principles of regulation ought to be based on a different framework. On the one hand, such regulations ought to be strengthened to permit minority shareholders of foreign subsidiaries to protect their interests against actions of state owned enterprises and their owners--including actions against the state owners of the stated owned enterprise, and national laws that ensure that state owned enterprises, acting as shareholders of subsidiaries, must act solely in the interests of the company they control (at least when they act as corporate directors, or when they exercise shareholder power in self dealing transactions). On the other, the host state might take for itself additional power to intervene in the actions of enterprises over which it has regulatory control. Many corporate statutes confer a power on the state to bring an action to dissolve a corporation that exceeds or abuses the authority conferred on it by law. (Revised Model Business Corporation Act, Section 14.30). Moreover, the state is usually granted a right to administratively dissolve a corporation (id., at Section 14.20). Both of those concepts could be used, broadened to fit the context of subsidiaries of foreign state owned corporations, to give a state the power to intervene in such subsidiaries where it might be clear that those who own or control a domestically chartered enterprise are using that enterprise for purposes other than those for which the enterprise was chartered (for example "to engage in any lawful business." Revised ModelBusiness Corporation Act Section 3.01(a)).

But this approach also suggests the smallness of the problem. In a sense the problem of sovereign wealth funds, like that of state owned enterprises engaging in investment activities abroad, can be reduced to issues of abuse. These include the abuse of power, abuse of corporate form, abuse of the corporate franchise, abuse of the market. Much of what is required, then, are rules that ensure that, like their private or individual counterparts, that abuse if controlled and the integrity of markets are preserved., This is both a tall order and a manageable task. But to that end, it requires a reconception of states when they engage in market participatory activities.

Tuesday, January 27, 2009

Smart Power and Soft War: Egypt Versus Syria and Qatar in Gaza

I have written of the great change in American approaches to the management of the its role in the world on the ascendancy of the administration of President Obama. I have suggested how the many aspects of liberal internationalism touched on in that speech suggest great possibilities for advancing an American agenda. Larry Catá Backer, Democracy Part XIV: “For Now We See Through A Glass, Darkly; But Then Face to Face”; On President Obama's Inauguration Speech, Law at the End of the Day, January 21, 2009. I have also suggested the power of the global community trope that appears to be a signature of political line of the new administration. That idea is grounded in the sense that the values of the United States are the most legitimate because the United States can serve as a proxy for the global community because is the only nation that incorporates within it representatives of virtually the entire global community. As such, American values can serve as proxies for legitimate global values.

This is a powerful mechanics of soft engagement, where the object is the control of the principles on the basis of which politics and economics are ordered within the global community. It seeks control of the language of power and the framework within it is deployed. The stakes are high, and the Americans are not the only powerful player seeking to use one or another version of this approach in the global battle for influence and the protection of communal interests. Larry Catá Backer, Global Economic Collapse and the Search for Sources of Values in Economic Theory: The Role of Religion, a Catholic Perspective, Law at the End of the Day, January 7, 2009. That notion of legitimate representativeness is then to be advanced, not by bullying, but by what the oncoming Secretary of State, Hillary Rodham Clinton calls, smart power—the deployment of social, cultural, and economic tools among networks of shifting alliances for the purpose of containing enemies and creating a basis for the naturalization of American (global) vales as the standard for world conduct. Larry Catá Backer, Embracing Networked Managerialism in the Service of a Global (American) Power, Law at the End of the Day, January 26, 2009. It was thus was a great deal of interest that I considered the way in which Egypt has become a devotee of the use of smart power for the preservation of its own regional interests and the preservation of its government. The focus of that consideration is the recent role of Egypt in the recent violence between Israel and the government of Hamas in the Gaza.

Gaza presents not just one but several wars, only one of which has been privileged within the spheres of reality created through media reportage. While the West and much of the rest of the world has been fixated on the by now mandatory recitation of the traditional morality play narrative of the principal conflict, in which Israel plays the villain and the Palestinians play the victims with weapons and a propensity to violence, another war is being waged. Egypt is at war with the Palestinians. Better put, Egypt is at war with the democratically elected government of Hamas in Gaza. The reasons are simple enough. Egypt has a strong stake in the other government of the nascent Palestinian state (Fatah). Hamas has constituted itself a government dedicated to the use of hard military power to achieve its internal objectives (the constitution of an Islamic state) and external objectives (the use of the tactics of irregular war, including the deliberate primary targeting of civilian populations within the State of Israel, for the purpose of destroying that entity and forcibly displacing its people). Hamas has strong links to Islamist elements within Egypt, the goals of which are not dissimilar to those of Hamas but whose objectives include the forcible replacement of the current Egyptian government. Hamas is the proxy military of the Syrian and Iranian states, through which both states project power within the Middle East—increasing their influence in the region on the basis of body counts harvested in the battlefields of Israel and Palestine. Egypt supports the other Palestinian government and has relations with the other principal direct combatant—Israel—from and through which it has also increased its own influence not only within the Middle East but within the European Union and the United States. It is, after all, vital to Egyptian interests to continue to serve as the great host of global meetings about the crisis. Hosting the Israelis and then Palestinians, the various combinations of Muslim majority states, the Quartet and others, enhances Egypt and shores up its state apparatus.

All of this is well known in the region, but hardly worth considering. It is the baseline from out of which media combat is engaged. The reason, of course, is that reality tends to be the first victim of regional conflicts. Soft power targets the control of media and the privileging of certain approaches to understanding events that favor one or another party in a conflict through the production of seemingly neutral reporting the objective of which is to manipulate values in the service of a particular pre judgment. Thus, while Egypt and Syria wage a war using surrogates in Gaza, the wider conflict is ignored and the identity and purposes of the real players is lost.

Interestingly, it is to an Egyptian paper that some credit must be given for a clearer vision of the way in which the Egyptian soft war against it regional rivals. See Dina Ezzat, Same Tactics Apply: Egypt is not Ready to Shift its Policies With Regard to the Palestinian Israeli File, Al-Ahram (22-28 January 2009). The article starts with the usual—the grand goals for the region—a truce, reconstruction of Gaza (in preparation for the next round of violence perhaps), and reconciliation of the Palestinian factions for the purpose of reaching some sort of an accord with Israel. But more interesting still is the admission that Egypt, like the United States, the Saudis, the Europeans and all of the rest, despite the sanctimonious repetition of each of these players to the contrary, has a particular interest in the contest.

In pursuing these objectives, Egyptian officials argue, Egypt will "take note" of the growing sensitivity that Hamas has towards Cairo in view of what the resistance movement claims to be a clear Egyptian bias against it -- "not just in favour of Fatah and Mahmoud Abbas", as one Hamas source said, "but even in favour of the enemy".

Obviously, Egyptian officials deny such bias outright. However, they add that Cairo is willing to "accommodate to a certain extent" Hamas's concerns while refraining from invitations to prove its "unbiased stance". In short, Hamas might encounter more in the way of Egyptian "understanding".
Id. While Egypt is willing to concede certain small points to Hamas, there are others with respect to which its interests and those of Israel converge to some extent. “There are, however, areas where Hamas envoys might confront Egyptian reticence. An obvious issue on which Egypt is willing to offer no compromise is its condition to operate its side of the Rafah crossing only in the presence of representatives of the PA along with a third party (possibly observers from the European Union, Turkey, or other countries) on the Palestinian side.” Id. In the absence of agreement, Egypt is perfectly content to continue to aid in the choking of Gaza—especially since Israel will receive virtually all of the blame by a media apparatus blinkered to its own agenda in the great battles between combatants in this part of the world.

According to this diplomat, General Intelligence Chief Omar Suleiman, who is administering Egyptian management of the Palestinian-Israeli file, and who is personally set to attend the separate talks that Egypt is planning to host, has made it crystal clear to Khaled Mashaal, the Damascus-based Hamas leader, that short of this condition being fulfilled Egypt will not allow the crossing to be regularly open. "If no agreement is reached, we will continue to do what we have been doing since Hamas took control of Gaza in June 2007: operate the crossing for clear humanitarian purposes only, and that is it," the diplomat said.
Id. The base reason is simple—Egypt, like every other Muslim power in the area, does not want to “get stuck” with the Palestinians—better, it seems under Israeli than Muslim control. “‘Egypt is not making any compromises there. None whatsoever. We are not going to get stuck with Gaza. We defied that during the aggression and we will continue to defy it after the aggression. This is a red line,’ commented an Egyptian diplomat on condition of anonymity.’” Id. Now this is smart power!

And, indeed, the Egyptians have to have a care about the war, since it can easily become hot on its side of the border. The insistence on respect for hyper-sovereignty provides a litmus test of sort for internal political battles. The key is the tunnels built by Hamas (as well as ordinary smugglers) between Egypt and Gaza. Egypt might be indifferent to the tunnels but for its utility to the Muslim Brotherhood as a means of escape from Egyptian authorities, as a corridor to training camps, and storage facilities within Gaza. For that reason alone the tunnels are a danger to Egypt. As long as the Israelis served Egypt by destroying them—and also took the brunt of media condemnation for its peripheral effects on “humanitarian” aid--increasingly a code for matters others than the basic necessities in a combat zone among the friends of Hamas (and brilliantly presented by the global press as its own idea of neutral reporting)—all was well enough. The difficulty comes when Egypt is left to do its own dirty work. The solution lies in sovereignty.
The maximum that Israel will get from Egypt on this issue, according to Egyptian officials, is extensive cooperation with "technical teams" that the US and some other European states are offering to send to detect the location of suspected tunnels. Egypt, officials add, would insist that only its authorities would decide how to close such tunnels if the job was to be done from the Egyptian side. "We cannot accept anything that would constitute a direct violation of our sovereignty on our territories. This is a very serious issue for us, and it's a very sensitive matter for the public," the same diplomat stressed.
Id. Now the Israelis, Germans and Americans will be tainted in the world press, and in the service of Egyptian interests in the stability of its current regime. Patsy power is the old fashioned term. And effective, as well.

But that leaves the intra-Muslim battle over Hamas, a battle in which Egypt cannot rely on the cover of the Israelis. That battle pits Egypt, for the moment, against Qatar and Syria. Egypt, it appears, will not permit any but an official role for Hamas, and that only as a concession to get movement on efforts to legitimate the de-facto arrangements between Israel and the dar al Islam.
Egyptian officials say that the prospect of Hamas leaders sitting in a conference hall alongside Abbas -- as Qatar had planned during the Doha summit that it hosted for Arab states last Friday, and that Egypt refused to attend -- is simply "out of the question". "Hamas leaders could be received in Cairo as they have been, but we are not letting them attend any Arab League meetings or consultative summits. This area remains strictly reserved for the legitimate Palestinian Authority. This is not just our position, but also that of the secretariat of the Arab League," the diplomat argued.
Id. It seems that Egypt’s interests within the political battlefield that is the Arab League is tied, to some extent, to the fate of Hamas. “Egypt seems set to cooperate with Saudi Arabia on promoting Palestinian reconciliation. However, it is still not willing to work with either Syria or Qatar, Hamas's direct and indirect allies, on this front. "If the Saudis want to do it they can, but we are not," commented one official who asked for his name to be withheld.” Id.

That battlefield has not been confined to the diplomatic front. It seems that now masters of the use of the media as the great field of combat for Arab and global opinion (and thus as a means of pressure through the representative or ruling state apparatus). And in this battle, Egypt names names. And one name in particular is prominently suggested as a great political player through its use of media power in the service of one of the parties about which it purports to report: al-Jezeera, and incidentally Al-Ahram’s media rival. The irony, of course, is that Al-Jazeera publishes from the relative safety of the West. “Aljazeera Publishing is an independent media organisation established in 1992 in London.”, About Us.

The stakes are high: “For Egypt, this position is not just a reaction to what Cairo qualifies as "an aggressive war that Syria and Qatar led against Egypt through the satellite TV channel Al-Jazeera" during the war on Gaza. It is rather more strategic: "Syria and Qatar are working in tandem with the Iranian regional scheme that aims to fortify the Islamic political movement, and for Egypt this is simply a red line," the official said.” Dina Ezzat, supra.

Thus, the December Gaza conflict provides a window on the use of smart power in the context of a hot conflict. It reminds us that the simpleminded analysis of the press is at times no more than the bullets of an important front in the battle and that the combatants are rarely merely those on whom the press lavishes attention. The war being fought around and through the hot contest in Gaza suggests the framework within which smart policy and soft power will operate. Both the United States and Israel might do well to learn from Egypt in the appropriate manner of deploying power smartly in a world in which military victory does not appear to follow the arrangements of power relationships.

Monday, January 26, 2009

Embracing Networked Managerialism in the Service of a Global (American) Power

The American periodical Foreign Affairs recently congratulated itself for its role in serving as midwife to what appears to be the political line to be taken by the incoming Secretary of State, Mrs. H.R. Clinton. The Origins of Clinton's Soft Power, Foreign Affairs Newsletter, Jan. 21, 2009 ("In a Senate confirmation hearing last week, Hillary Clinton used the term "smart power" more than ten times to argue that in the Obama administration, diplomacy would be at the "vanguard" of how the United States engages allies and adversaries alike. The phrase was first coined in a 2004 essay in Foreign Affairs by Suzanne Nossel, now the Chief Operating Officer for Human Rights Watch."). It seems that "liberal internationalism" (id.) is very much in the air in Washington--"as Senator Jim Webb remarked at the end of last week's hearing, 'I guess the phrase of the week is 'smart power.''" (Id.). Foreign Affairs has a point. And it is worth taking a moment to remind ourselves what this might mean for American outlooks in the coming months. For that purpose I will take a brief look at both the original article in which the notion of "smart power" was birthed and its appropriate by Mrs. Clinton years later.

Suzanne Nossel, smarting from an overabundance of ire at the foreign policy ways of the apparatchniks of the last Bush administration, penned an elegy to her recollection of a different way of approaching issues of America's role in the world. Suzanne Nossel, Smart Power, Foreign Affairs, March/April 2004. She argues that "Progressives now have a historic opportunity to reorient U.S. foreign policy around an ambitious agenda of their own. The unparalleled strength of the United States, the absence of great-power conflict, the fears aroused by September 11, and growing public skepticism of the Bush administration's militarism have created a political opening for a cogent, visionary alternative to the president's foreign policy." Nossel, supra. For that purpose, Nossel draws on what she calls liberal internationalism:
which posits that a global system of stable liberal democracies would be less prone to war. Washington, the theory goes, should thus offer assertive leadership -- diplomatic, economic, and not least, military -- to advance a broad array of goals: self-determination, human rights, free trade, the rule of law, economic development, and the quarantine and elimination of dictators and weapons of mass destruction (WMD). Unlike conservatives, who rely on military power as the main tool of statecraft, liberal internationalists see trade, diplomacy, foreign aid, and the spread of American values as equally important.
Nossel, supra. Liberal internationalism posits a set of goals roughly similar to those of its conservative colleagues, but to be obtained partially, slowly and through the use of a very different set of tools. But that is bad news--the corruption of a set of tools for bad ends. "Conservative appropriation of liberal internationalist tenets might sound like good news for progressives. It is not. By invoking the rhetoric of human rights and democracy to further the aggressive projection of unilateral military power, conservatives have tainted liberal internationalist ideals and the United States' role in promoting them." Nossel, supra. And, indeed, the rhetoric of corruption is not far beneath the analysis of liberal internationalism, as self-affirming critique: "There is a second problem with conservatives' brand of democratization. Having initially rejected nation-building on principle and then ignored the advice of planners and experts on what to expect in postwar Iraq, the Bush administration has proven woefully ill equipped to implement in practice the ideals it purports to champion. The result has been a chaotic and deadly occupation that has deepened doubts about U.S. motives abroad." Id.

In effect, Nossel posits that the ultimate assumptions of conservatives are flawed--there is no possibility of total victory (the underlying assumption of military action), there is only the possibility of managing problems--and outliving them. For that purpose, containment and the tools of soft warfare are most suited. And the ideal of complete victory secondary, at best to the true objects of internationalism--containment, management, and eventually outliving either the conflict or the enemy. See, e.g., Larry Catá Backer, Democracy Part IV, Managing Popular Expression and Democratic Impulse in Sudan, Law at the End of the Day, Nov. 25, 2007; Larry Catá Backer, ETA and the Management of Revolution in a Bureaucratic World, Law at the End of the Day, May 14, 2008; Larry Catá Backer, The Devil’s Advocate: The West, the Invincible Guerrilla, the Value of Violence and the Rise of a Management Model of War, Law at the End of the Day, August 7, 2006. In Nossel's words: "focusing on the smart use of power to promote U.S. interests through a stable grid of allies, institutions, and norms. They must define an agenda that marshals all available sources of power and then apply it in bold yet practical ways to counter threats and capture opportunities." Nossel, supra.

The great model model of liberal internationalism, perversely enough, is that course of conduct that ultimately resulted in the exhaustion and disappearance of the Soviet Union and its empire--a course of conduct best known by its most skillful devotee, Ronald Reagan. "As fascism and communism once did, terrorism and nuclear proliferation today make the liberal internationalist agenda as urgent as ever. Liberal societies are not only less prone to war but also less likely to breed or knowingly harbor terrorists. It is no coincidence that many countries on the Justice Department's terrorist watch list also appear in the Freedom House inventory of the world's most repressive regimes. Progressives, therefore, must refrain U.S. foreign policy according to their abiding belief that an ambitious agenda to advance freedom, trade, and human rights is the best long-term guarantee of the United States' security against terrorism and other threats." Nossel, supra. Though Ronald Reagan lurks in the background of smart power, it is to John Kennedy, that other proxy figure of American values, whom Nossel invokes: "A smart definition of U.S. interest would recast the fight against terror and nuclear proliferation just as Kennedy recast containment, transforming it from a dark, draining struggle into a hopeful, progressive cause aimed at securing an international system of liberal societies and defeating challenges to it." Id.

Networks, institutions and rules now serve as a means of management, and through management the protection of the privileged place of the United States. . . or its survival. "The global order created by Roosevelt and Harry Truman was like an electrical grid that maintains equilibrium across different power sources and users. The nature of today's threats -- rogues and terrorists, not other great powers -- attests to the enduring success of this strategy. The international system they built became so broad and cohesive that outliers became few in number and easily recognized." Id. The bureaucratization and juridification of political intercourse is an essential element of this framework for action. Americans can have it all through a liberal agenda--dominance, power, privilege, and the embrace of its values as a universal grounding for global governance. Thus,
liberal internationalism enfolds the fight against terrorism and rogues into an ideology and set of interests that many U.S. allies already share. By linking today's struggles to long-standing European visions of collective security, liberal internationalism can take advantage of Europe's commitment to humanitarian aid, postconflict resolution, policing, and development. Similarly, by incorporating into the agenda a genuine commitment to free trade and economic development, liberal internationalism can impress Latin American, Asian, and African countries that otherwise view the U.S. antiterrorist agenda as neglectful of their priorities. Moreover, building a broad-based liberal internationalist movement will not force the United States to give up the driver's seat. On the contrary, liberal internationalism has flourished during periods of U.S. preeminence. The key is that other nations must welcome rather than resent U.S. leadership. A new liberal internationalist approach would persuade much of the world once again to contribute its resources and energy to U.S. causes.
Nossel, supra. The object, then, is to revitalize the grid of network and ideological power in the service of American interests as a more effective way to domination than the more crude and ultimately offensive direct approach. But all in the service of the good--that is, the good for everybody.

Hillary Rodham Clinton has morphed Nossel's notions into a platform in a more recent essay, penned during the course of her campaign against President Obama. Hillary Rodham Clinton, Security and Opportunity for the Twenty first Century, Foreign Affairs, Nov./Dec. 2007. Clinton echoes Nossel's points--American militarism has served American interests badly. If the object is the maintenance of domination and the superiority of those values that serve the United States, then methods other than direct military intervention might serve Americans better.
The tragedy of the last six years is that the Bush administration has squandered the respect, trust, and confidence of even our closest allies and friends. At the dawn of the twenty-first century, the United States enjoyed a unique position. Our world leadership was widely accepted and respected, as we strengthened old alliances and built new ones, worked for peace across the globe, advanced nonproliferation, and modernized our military. After 9/11, the world rallied behind the United States as never before, supporting our efforts to remove the Taliban in Afghanistan and go after the al Qaeda leadership. We had a historic opportunity to build a broad global coalition to combat terror, increase the impact of our diplomacy, and create a world with more partners and fewer adversaries.
Clinton, supra. She would invoke that "tradition of global leadership rooted in a preference for cooperating over acting unilaterally, for exhausting diplomacy before making war, and for converting old adversaries into allies rather than making new enemies." Id. She too, would invoke smart power. "To reclaim our proper place in the world, the United States must be stronger, and our policies must be smarter. " Id.

For that purpose, Mrs. Clinton would avoid the crudity of bald militarism. Militarism, as a foreign policy force, has been largely ineffective and anathema since the great victories over militarism in the middle of the last century and the success of the largely American efforts to reduce its conceptual value in foreign policy. Smart power means reducing the militarist option, though by no means avoiding it altogether. "Use our military not as the solution to every problem but as one element in a comprehensive strategy." Id. Like Ms. Nossel, Mrs. Clinton understands the value of networks and institutions as mechanisms through which problems can be managed and issues diffused--long enough to overcome them by inertia if necessary. Mrs. Clinton declares:
Make international institutions work, and work through them when possible. Contrary to what many in the current administration appear to believe, international institutions are tools rather than traps. The United States must be prepared to act on its own to defend its vital interests, but effective international institutions make it much less likely that we will have to do so.
Id. And most important of all, Mrs. Clinton, like Ms. Nossel, understands the value of ideas and their utility in foreign policy. She says: "Stand for and live up to our values. The values that our founders embraced as universal have shaped the aspirations of millions of people around the world and are the deepest source of our strength -- but only as long as we live up to them ourselves. As we seek to promote the rule of law in other nations, we must accept it ourselves. As we counsel liberty and justice for all, we cannot support torture and the indefinite detention of individuals we have declared to be beyond the law. " Id.

The point of all of this is also clear in Mrs. Clinton's mind: produce a stronger America, defeat America's enemies, and reassure its traditional allies. Id. She also posits the utility of networks and containment as the dual cords to be utilized around the necks of American enemies. . . and tightened.

The case in point is Iran. Iran poses a long-term strategic challenge to the United States, our NATO allies, and Israel. It is the country that most practices state-sponsored terrorism, and it uses its surrogates to supply explosives that kill U.S. troops in Iraq. The Bush administration refuses to talk to Iran about its nuclear program, preferring to ignore bad behavior rather than challenge it. Meanwhile, Iran has enhanced its nuclear-enrichment capabilities, armed Iraqi Shiite militias, funneled arms to Hezbollah, and subsidized Hamas, even as the government continues to hurt its own citizens by mismanaging the economy and increasing political and social repression. . . .

On the other hand, if Iran is in fact willing to end its nuclear weapons program, renounce sponsorship of terrorism, support Middle East peace, and play a constructive role in stabilizing Iraq, the United States should be prepared to offer Iran a carefully calibrated package of incentives. This will let the Iranian people know that our quarrel is not with them but with their government and show the world that the United States is prepared to pursue every diplomatic option.

Id. To these ends, networks of rising powers would serve as effective allies. Sounding liberal in a Kissinger kind of way, Mrs. Clinton suggests the utility of Russia and of the People's Republic of China, for the efforts to retain American hegemony on its own terms.
We need to engage Russia selectively on issues of high national importance, such as thwarting Iran's nuclear ambitions, securing loose nuclear weapons in Russia and the former Soviet republics, and reaching a diplomatic solution in Kosovo. At the same time, we must make clear that our ability to view Russia as a genuine partner depends on whether Russia chooses to strengthen democracy or return to authoritarianism and regional interference.

Our relationship with China will be the most important bilateral relationship in the world in this century. The United States and China have vastly different values and political systems, yet even though we disagree profoundly on issues ranging from trade to human rights, religious freedom, labor practices, and Tibet, there is much that the United States and China can and must accomplish together. China's support was important in reaching a deal to disable North Korea's nuclear facilities. We should build on this framework to establish a Northeast Asian security regime.

Id. Of course, the Americans might be late to this point. See, Larry Catá Backer, China’s People’s Liberation Army at 80: Projecting Power and the Shanghai Cooperation Organization, Law at the End of the Day, Aug. 1, 2007. And even liberal internationalism--soft power, can be too crudely applied. But the object remains the same however accomplished--to ensure the "building of the world we want." Clinton, supra. Thus, American "power and might can only be sustained and renewed if we can regain our authority with the world, the authority not simply of a large and wealthy nation but of the American idea. If we can live up to that idea, if we can exercise our power wisely and well, we can make America great again." Id.

Smart power, perhaps. Nossel and Clinton have been right to remind Americans of the realities of the framework within which global power contests are now waged. And Americans, more than anyone else, ought to remember their role in changing the rules under which military action was a first response. The global community now lives in a a world whose conceptual framework was erected to avoid another world situation--and national desires--that arose fully formed in the 1930s. To revert to the forms of action against which Americans fought (along with many others) is certainly ill advised. And that, perhaps, was the greatest error of Mr. Obama's predecessor and his claque. But the greatest irony is the conflation of global and national interests inherent in either smart power politics or liberal internationalism. In a world in which, as President Obama implied, the United States stands as the only proxy for the global community, a politics of inclusion, of networks and smart power, is one in which the universalist agenda of the United States--as global representative, is mopst likely to have the greatest effect. Smart power wqorks for the Amerivcans because, in effect, global values are American values. See Larry Catá Backer, Democracy Part XIV: “For Now We See Through A Glass, Darkly; But Then Face to Face”; On President Obama's Inauguration Speech, Law at the End of the Day, January 21, 2009. It is not for nothing, therefore, that the greatest military-ciultural foes of the Americans are nervous. See, e.g., John Warrick, To Combat Obama, Al-Qaeda Hurls Insults, Washington Post, January 24, 2009.

Ms. Nossel and now Mrs. Clinton remind us that the rules have changed. Or perhaps better put, that ther Americans are reverting to traditional values. They point to what they call smart power, liberal internationalism or similar monikers. They invoke the great patron saints of American liberalism. But the policies and frameworks they advocate are profoundly conservative in the world which has arisen since 1945. Global expectations can no longer be driven by brute force. And why should they? It is to the world of ideas and the example of action, it is to the control of the discourse of global policy that modern global politics--and warfare, now first turn. It is in those contests and on those battlefields that it will be interesting to see how well the Americans perform after an eight year absence.

Wednesday, January 21, 2009

Democracy Part XIV: “For Now We See Through A Glass, Darkly; But Then Face to Face”; On President Obama's Inauguration Speech

The Christian Bible’s New Testament remains a powerful source of guidance in times of trouble in the United States. Recourse to its insights, molded to the tastes of the speaker, have been a hallmark of political speech since the founding of the Republic, especially on the cusp of revolutionary times. And indeed, the manipulative symbolism that marked the event—the focus on Lincoln as multilayered mother to her offspring birthed by and now liberated from her emancipatory womb, and as great protector of the family in time of crisis threatening the foundation of the family (the American Republic)—was much in evidence, from the use of the Lincoln Bible to the rhetorical form of the construction of the speech. The parallels between 1861 and 2009, and the line from the mother of emancipation to the graduation ceremony of his offspring, now come to power, was inescapable.

And so it was with a great deal of interest that I awaited the selection of the Biblical insight that will serve to mark the initial phase of the presidency of its 44th holder. That selection was announced in the course of President Obama's inaugural address. See Barack H. Obama, Inaugural Address, January 20, 2009. President Lincoln had a preference for the Evangelists. President Obama chose that great Jewish architect of Christianity, Paul. And that insight—a reverie on the virtues of the charity and love of a man (and I mean to use this word in its fully gendered sense) for his family and of this nation for its global charge—suggest the character of an administration bent on unity and dominance within a values structures it, like its predecessor, will hold out to the world as the universal foundation of political, moral and social governance. Its essence is Platonic, and consciously so. For ideologues on the left and right, there is much that serves as a warning to a complacency grounded in misguided senses of victory or defeat.

My thoughts on Mr. Obama's Inaugural Speech follows, along with the full text of the speech.

Sunday, January 18, 2009

Glimmerings of Rule of Law Through the Party Apparatus in Cuba: Raul Castro Speaks

I have been suggesting that it might be possible to construct a legitimately constitutionalist state grounded in single party governance. Backer, Larry Catá, The Party as Polity, the Communist Party, and the Chinese Constitutional State: A Theory of State-Party Constitutionalism (January 10, 2009), Journal of Chinese and Comparative Law, Vol. 16, No. 1, 2009. But that construction requires something that most party-state systems find difficult to achieve during their revolutoionary phase--the institutionalization of power and its bureaucratization through a the institution of rule of law systems administered by a community of people sharing political power under the substantive principles underlying state organization. The adoption of a constitution does not necessarily produce a constitutionalist state. "These include the reflection of the party-state construct (1) in a division of the character of citizenship between economic and social citizenship, claimed by all persons, and political citizenship, which can be exercised through the Party, (2) in an understanding of political organization in which the state power and its institutions are subordinate to political authority, (3) in an institutionalization of political authority within a collective that serves as the source and conduit of constitutional values to be applied by the holders of state authority, and (4) in a system in which Party elaboration of rule of law values is contingent on state and party self discipline." Id. I have suggested the way that the Chinese have been moving toward the realization of such a legitimately constitutionalist state, though one whose values and distribution of power are significantly different (in values andimplementation) form Western democratic systems. See Backer, Larry Catá, A Constitutional Court for China within the Chinese Communist Party: Scientific Development and the Institutional Role of the CCP (November 28, 2008); Larry Catá Backer, The Rule of Law, the Chinese Communist Party, and Ideological Campaigns: Sange Daibiao (the 'Three Represents'), Socialist Rule of Law, and Modern Chinese Constitutionalism, Journal of Transnational Law and Contemporary Problems, Vol. 16, No. 1, 2006.

But while China has been moving forward in the constriuction of a constitutionlaist state grounded in Marxist Leninist principles, Cuba has lagged. It remains, to a great extent, struck at the moment of its founding--its revolutionary experience. The Americans have contributed greaty to this stagnation--its opposition to the government has permitted its leaders to adopt a permanent state of revilutionary struggle. The Cuban state apparatus, and the Cuban Communist Party under whose guidance it is supposed to be operated, can continue to adaopt the pose of outsider, rather than of a state apparatus now half a century in power. In Havana, as in Miami, the clock stopped on January 1, 1959. And that is a shame.

Yet things are slowly changing, vene within the apparatus of the Cuban Communist Party. One gets a very small sense of the possibilities of this change, and its reflection of the Chinese approach, in recent remarks of Raul Castro to a Plenum of the Cuban Communits Party. Raul Castro Ruz, Intervención del Segundo Secretario del Comité Central del Partido Comunista de Cuba, compañero Raúl Castro Ruz, en las conclusiones del VI Pleno del Comité Central del PCC, efectuado en el Palacio de la Revolución, La Habana, el 28 de abril de 2008, "Año 50 de la Revolución" reprinted in Granma Internacional, January 18, 2009. The language is still laced with the aesthetics of 1959--the Party continues to exist in revolutionary times:
Lo examinado hoy en el Pleno y los acuerdos adoptados constituyen un paso importante en esa dirección, y también en la de afianzar el papel del Partido como vanguardia organizada de la nación cubana, que lo situará en mejores condiciones para enfrentar los retos del futuro y, como ha expresado el compañero Fidel, para asegurar la continuidad de la Revolución cuando ya no estén sus dirigentes históricos. Id.
The Revolution of 1959 remains fresh--the touchstone of of the work of the Party, in its search for perfection as the vaguard organization of the Cuban people. As such "no hay otra alternativa que la de trabajar unidos por seguir adelante, avanzando con el mismo espíritu de lucha y firmeza de estos casi 50 años de Revolución, transcurridos en medio de constantes agresiones, amenazas, guerras y hostilidades de todo tipo a que nos ha sometido el imperio." Id.

Yet Raul Castro also suggests the need for movement. "En ese empeño tendremos, como meta principal, seguir mejorando nuestro aún imperfecto pero justo sistema social, en medio de la realidad actual, que sabemos en extremo compleja y cambiante, y todo indica seguirá siéndolo en el futuro." Id. And it is in this context that one encounters something new--a suggesiton for institutonalization of Party power and state organization along new lines.


En estos tiempos, y los que están por venir, resulta necesario y decisivo contar con instituciones políticas, estatales, de masas, sociales y juveniles fuertes. Reafirmo lo que expresé el pasado 24 de febrero: mientras mayores sean las dificultades, más orden y disciplina se requieren, y para ello es vital reforzar la institucionalidad, el respeto a la ley y las normas establecidas por nosotros mismos.

Los acuerdos que hemos aprobado dan fin a la etapa de provisionalidad iniciada el 31 de julio del 2006 con la Proclama del Comandante en Jefe, hasta el mensaje en que nos expresó su propósito de ser sólo un soldado de las ideas, vísperas del 24 de febrero del 2008. Durante esos 19 meses, trabajamos colegiadamente, junto a otros compañeros, sobre la base de la delegación de funciones que él realizó. A esto me referí con más amplitud en el punto de la agenda sobre la Comisión del Buró Político. Id.
Raul Castro here raises the spectre of rule of law governance--not just for the state, but for the Party. He also references the delegation of state power through a bureaucracy. It is possible ot see very hazy parallels between this line of development and the recent suggestions crystalized in the more sophistacted form of scientific development described by Hu Jintao. Hu Jinato, Report at 17th National Congress of the Communist Party of China (Oct. 15, 2007) Section VI.
And maybe that institutionalization is necessary to continue to develop both CCP and State: from a system in which the CCP represents a collection of individuals who together comprise a revolutionary vanguard (to which political power over the state and its organs might be appropriate) to a system in which the CCP becomes the source and protector of the core values of Chinese society to which an ever broadening base subscribes. That is, the CCP moves from a revolutionary vanguard party outside the system, to become the system itself—the values and principles that ground the construction and operation of all organs of political power in the nation. Backer, Larry Catá, A Constitutional Court for China within the Chinese Communist Party: Scientific Development and the Institutional Role of the CCP (November 28, 2008);

Rule of law based institutionalization, even one based on a rule fo law based Party structure, ought to be encouraged if the state is to survive in it present form. The real quesiton is whether the very limited reference to institutionalization and rule fo law governance portends significant changes in the form of the organization of Party-State power in Cuba, or whether it is meant to serve as a power for the continuaiton of the sort of siege rule that hasd characterizede the organization of the Cuban state since 1959. If the revolution is to survive its principal progentors it will have to move beyond January 1, 1959 and beyond the limits of its organization along Soviet lines. Raul Castro suggests that this may be possible in Cuba. The quesiton will be whether the Party-state apparatus can be reformed in time.

Wednesday, January 14, 2009

Employees, the Enterprise and the State: Professor Mary Kreiner Ramirez on Whistleblower Protection

Professor Mary Kreiner Ramirez of Washburn University Law School has published an article well worth reading, "Blowing the Whistle on Whistleblower Protection: A Tale of Reform," 76:1 University of Cincinnati Law Review 183 (2007).

Professor Ramirez has taken on a difficult problem in Blowing the Whistle, harmonizing the objectives of general framework legislation with the distinct imperatives of the specific regulatory contexts in which such a framework must be effectively implemented. The problem is made more difficult by the tensions inherent in the framework itself, all of which Professor Ramirez ably summarizes in her introduction. How does one stretch the notion of loyalty inherent in an employment relationship to impose loyalty obligations to employer, state and society simultaneously? Whistleblower statutes attempt to provide a framework in which the principal duty of loyalty to employer is preserved but made contingent on the greater duty of the employer to the state and its regulations.

Professor Ramirez chooses a particularly thorny context in which to explore these issues—the whistleblower provisions of the Sarbanes Oxley Act of 2002. She starts with an analysis in which the issues arise. Here she does an admirable job of moving from the general to the specific and from regulatory objectives to implementation deficiencies. She nicely naturalizes the problems in the difficult social and cultural context in which whistle blowing is understood, and the consequences of that context in the lives of whistle blowers. Whistle blowing statutes are, in a sense, perverse. Their aim, effectively, is to privatize enforcement of law, by deputizing employees and empowering them to come forward, without consequence, to denounce employer wrongdoing. The employee works for the state in this capacity, and thus owes a measure of loyalty to the extent of the obligation to inform imposed by law. But that deputization upends the traditional hierarchical relationship between employer and employee—a relationship heavily privileged by the state as well. Indeed, the Sarbanes Oxley Act is riddled with this deputization of private actors, and the monopolization of the remedial power. See, Larry Catá Backer, Surveillance and Control: Privatizing and Nationalizing Corporate Monitoring After Sarbanes-Oxley, Law Review of Michigan State University-Detroit College of Law. As a consequence, the employee whistleblower is pulled simultaneously in two directions; and, as Professor Ramirez convincingly shows, the employee-enforcer is torn in two in the process.

In Part III, Professor Ramirez moves from the general to the specific—focusing on the way the whistleblower provisions of the Sarbanes Oxley Act both to evidence the general deficiencies of the current approach to regulating whistle blowing, as well as to demonstrating the way in which the Sarbanes Oxley whistle blowing provisions as specifically elaborated, produces it own set of perverse incentives. In the process she lays the groundwork for the heart of her analysis, a suggestion for the creation of an omnibus provision standardizing a general framework for the protection for whistleblowers that would provide them more effective protection when engaging, for all practical purposes, in unpaid work as government agents.

That approach is then elaborated in Part IV, in which she moves back from the contextual to the general. Here she elaborates arguments from policy as well as from efficiency perspectives. It is here that she tackles head on the issue of dual loyalty at the heart of the whistleblower problem. She considers the issue from multiple perspectives—business interests, economic and social costs, and the interests of senior managers. In each case, whistleblowing serves to threaten the traditional nexus of rules regulating relationships. The irony, of course, is that many of those relationships are also creatures of statute. The law, in effect, works against itself. In that context, Professor Ramirez nicely demonstrates the deficiencies of the current whistleblower framework as an overlay on the realities of the organization and functioning of the offices of in-house legal counsel. She was thus able to combine both analysis and the suggestion of corrective implementation strategies in an effective manner that makes for a strong contribution to the field.

Professor Ramirez’s work suggests the depth of issues at the heart of something that might appear as simple on its surface as whistleblowing. At the heart of the whistleblowing conundrum is the contradiction in building relationships between labor, management, shareholders, economic entities and the state that remain true with respect to relations already regulated by law among these actors (for example: shareholder/entity; labor/capital; entity/state etc.) and that between these actors and the state apparatus. The conflicts of loyalty inherent in whistleblower provisions suggest the difficulties of teasing out the appropriate relationship between these actors in ways that do not threaten the matrix of other relationships. It is clear that senior managers owe a specific duty of loyalty to their shareholders. And it is also true that employees owe a duty of loyalty to their employers. Whistleblower provisions suggest that there may be developing a parallel specific duty of loyalty to the state, as well.

Lastly, whistleblowing analysis is no longer confined to the national arena. When the state seeks top interpose itself within the relationship matrix of the internal affairs of the entity, that effort might come up against conflicting similar attempts by other states. In a sense, each state seeks to use its legislative power to privilege its relationship with the entity in a manner similar to the way that shareholders seek to use their investment power to privilege their voice within corporate organization. But such privileging might produce extraterritorial effect or conflict with other actors.

Interlocking relations between public and private actors, the allocation of public obligations on private actors, and the undertaking of private market activity by public actors defines the frontiers fo law and regulation. Professor Ramirez suggests that in that context much of the traditional frameworks for lawmaking, governance and analysis are no longer adeqaute. The coming years will see the emergence of new regulatory frameworks and techniques. Or more likely it will evidence failure as traditional techniques are piled on on another until the edifice of regulation collapses fo its own weight and irrelevance.

Wednesday, January 07, 2009

Global Economic Collapse and the Search for Sources of Values in Economic Theory: The Role of Religion, a Catholic Perspective

The following paper was presented on January 7, 2009 at the American Association of Law Schools Annual Meeting at the extended section program hosted by the Section on Socio-Economics in a Panel entitled: Socio-Economics and Faith in a Higher Power. The mwwting was held in San Diego, California.

Global Economic Collapse and the Search for Sources of Values in Economic Theory: The Role of Religion, a Catholic Perspective
Larry Catá Backer

In the mid-1980s, the world was about to witness the collapse of the global system of totalitarian Soviet style economic and political organization in Europe, and the triumph of private economic globalization grounded in principles of classical economics. It is ironic, then, that just at that moment, two great alternatives to the rising model became crystallized. One was grounded in religion. The other on a morally based communal rationalist universalism. Both criticized the soon to be dominant theoretical framework for its “emptiness.” Both suggested that the emerging global economic order offered a framework—and process—but no substance, and no ethical or moral grounding. Without that grounding, they suggested, the long-term viability of the framework itself could be threatened. Both, thus, suggested that this focus on process and the values consequentialism inherent in that focus, the substantive vacuum, were at the heart of the ultimate failure of that system; a failure evident even at the moment before its global triumph in the following decades.

Today, one of the great proponents of these alternatives lies dying in a hospital complex somewhere in Cuba. The other is being hailed as a great prophet by certain of his adherents in the West. A recent newspaper article thus proclaimed:

Pope Benedict XVI was the first to predict the crisis in the global financial system, a "prophesy" dating to a paper he wrote when he was a cardinal, Italian Finance Minister Giulio Tremonti said.

"The prediction that an undisciplined economy would collapse by its own rules can be found" in an article written by Cardinal Joseph Ratzinger, who became pope in April 2005, Tremonti said yesterday at Milan's Cattolica University.

German-born Ratzinger in 1985 presented a paper entitled "Market Economy and Ethics" at a Rome event dedicated to the Church and the economy. The future pope said a decline in ethics "can actually cause the laws of the market to collapse." (Krause-Jackson & Totaro 2008).

The paper, subsequently published in 1986 and long slumbering, has been unearthed. And others followed the story for a time during the initial stages of the economic collapse of late 2008, with little on the context in which this prediction was first suggested.

Yet at the time he made this ‘prophesy,’ then Cardinal Ratzinger was as much concerned about the rise of liberation theology as a threat to the Church and its role in Latin America, as he was about alternatives to market theory. (Ratzinger 1984; Ratzinger 1986). In the 1980s, between the Church and its flock in the Americas stood economic theory, just as between the Church and its flock in Eastern Europe stood that great old enemy—Marxist economic theory. And indeed, as he spoke, and wrote, he might well have had in mind the similar prophesies of Fidel Castro, also delivered in a series of addresses to a wide audience in the mid 1980s, and also suggesting the inevitable collapse of the rising global economic framework for its immoral values. (Castro 1985: Castro 1985a; Castro 1985b).

My purpose today is not to argue the relative merits of each position, or even to opine as to the prophetic nature and missions of either man. Instead, my task is the more modest one of briefly exploring the then Cardinal’s prophesy, in the context in which it was made, with a sidelong glance at the similar prophesy of the then leader of the Cuban state. My object is to consider the power and place—the epistemology—of values within economic theory in general as conceived in these prophesies, and the construction, role and power of values-generating and values-guarding institutions (or frameworks) in particular.


Prophesy, it seems, requires a backwards view looking forward. And so Cardinal Ratzinger (Now Benedict—the name I will now use anachronistically here) starts at the end in order to see forward—for economics and for the role of the Church in that enterprise. And that end? He suggests that while the world focuses on the great political and ideological conflict between East and West, the economic tensions between North and South threaten to tear apart the cohesion of the human family” (Ratzinger 1986) as effectively as the military weapons of the United States and the Soviet Bloc. At the core of the great North-South struggles is the failure of economic systems—but principally the private market oriented system of the West—to “guarantee progress and even distributive justice.” (Ratzinger 1985). It is this failure that Benedict addresses—both as to its consequences for economic order and with a mind to its solution in a “new economic idea” (id.) necessarily grounded in “new moral impulses. It is at this point that a dialogue between Church and economy becomes both possible and necessary.” (Id.).

For this purpose, Benedict sets three economic systems in his sights, as well as a rebuttal to the existence of a possible fourth. The three principal economic systems include those grounded in classical economics, those positing a morally driven centralized economy grounded in post-colonial or liberation theory, and Marxist economic systems. Each he judges a failure, and for similar reasons. All three, he suggests, are siblings in the foundations of their failures, and each, in its own way, exacerbates the dysfunction of valueless economics in their power to provide the greatest good for the human family.

There is, for Benedict, a certain power in the fourth—religion “as a socio-political and hence as an economic-political factor.” (Id.). But even this is rejected, and bent, if somewhat ambiguously, to the service of greater goals. Benedict thus tells his audience that the “Church should not enter into dialogue here as a mere component in the economy, but rather in its own right as Church.” (Id.). He casts aside as a misreading, the objection, said to have arisen from out of the Second Vatican Council that the autonomy of the economic realm is to be respected “above all.” (Id.).

For Benedict, all three economic models share two fundamental failures in their philosophical foundations. The first is their shared determinism. The second is their “renunciation of ethics as an independent entity relevant to the economy.” (Id.). The nature of the failure is evidenced by the distance between promise and delivery under any of these systems. “In fact, the misery in the world has increased in shocking measure during the last thirty years.” (Id.).

The determinism of classical economics is an irony. Benedict describes the classical system as one grounded in the ultimate goodness of free process and the impediment of ethics in the attainment of the good.

Following the tradition inaugurated by Adam Smith, this position holds that the market is incompatible with ethics because voluntary “moral” actions contradict market rules and drive the moralizing entrepreneur out of the game. For a long time, then, business ethics rang like hollow metal because the economy was held to work on efficiency and not on morality. The market's inner logic should free us precisely from the necessity of having to depend on the morality of its participants. The true play of market laws best guarantees progress and even distributive justice. (Id.).
That freedom from ethics hides a determinism that serves as a fatal limit to the success of this theory. The limitations are of two kinds. The first is a false freedom: “in which man is completely controlled by the binding laws of the market while believing he acts in freedom from them.” (Id.). The second is a false belief that process necessarily includes only the attainment of good, or that the workings of process systems like classical economics can only produce the good. “It presupposes that the free play of market forces can operate in one direction only, given the constitution of man and the world, namely, toward the self-regulation of supply and demand, and toward economic efficiency and progress.” (Id.).

Conceding that the “two presumptions are not entirely wrong” (id.), individual free choice and welfare maximization, standing alone, cannot be “universally applicable and correct, as is evident by the problems of today’s world economy.” (Id.). But the problem is more fundamental than that. Benedict suggests, in a slyly deconstructive manner, that the real problem is that choice is never free of the context in which it is made, personal, national, and the like, and that such contextualism necessarily distorts the freedom of choice and the vectors for the "good" of a process system.

It is becoming ever so clear that the development of the world economy has also to do with the development of the world community and with the universal family of man, and that the development of the spiritual powers of mankind is essential in the development of the world community. These spiritual powers are themselves a factor in the economy: the market rules function only when a moral consensus exists and sustains them. (Id.).
Yet, for all that, as mere process it produces but is hardly in a position to inevitably produce that which is good. It can as easily be directed toward other goals. That, of course, is the point that Castro and the non-aligned movement were making at the same time. (Castro 1985a).

And it is to this suggestion that Benedict next turns. Benedict sees something valuable in the liberation theology and related models and their reaction to the values of classical economics. He is drawn to the equivalence in such systems between sin and injustice, an equivalence made implicitly by Castro and explicitly by the followers of liberation theology. (Castro 1985b).

The result is that broad sectors of the Third World, which at first looked forward to development aid with great hopes, now identify the ground of their misery in the market economy, which they see as a system of exploitations, as institutionalised sin and injustice. For them, the centralized economy appears to be the moral alternative, toward which one turns with a directly religious fervor, and which virtually becomes the content of religion. (Id.).
Here there appears to be a place for morals within economic systems. The centralized economy would substitute just control and distributive justice for the individual desires of disaggregated economic actors. This is a moral project. Yet, the

examples adduced thus far are certainly not encouraging, but the hope that one could, nonetheless, bring this moral project to fruition is also not thereby refuted. It seems that if the whole were to be attempted on a stronger moral foundation, it should be possible to reconcile morality and efficiency in a society not oriented toward maximum profit, but rather to self-restraint and common service. Thus in this area, the argument between economics and ethics is becoming ever more an attack on the market economy and its spiritual foundations, in favor of a centrally controlled economy, which is believed now to receive its moral grounding.
But this is religious fervor turned to failure as well. (Ratzinger 1986). For under these systems, the individual is subsumed by the community. The egoism of the state substitutes for the aggregate egoisms of the individual. But egoism itself remains central to the system. Yet in a global order in which aggregate human welfare maximization is the goal, even a world of hundreds of economic actors—as centrally planned as they like—even these national aggregations impede the search for a universal framework of the good. It is true that the context in which the good is now considered is broader—but not yet broad enough. “An economic policy that is ordered not only to the good of the group — indeed, not only to the common good of a determinate state — but to the common good of the family of man demands a maximum of ethical discipline and thus a maximum of religious strength.” Id.

And thus the problem of determinism from an opposite extreme, a suggestion made clearer as Benedict considers what he views as the more extreme version of the liberation theology, post-colonialist, centralized economic model—that of the traditional Soviet style Marxist states, the “radical antithesis of the market economy.” (Id.). Here the problem of determinism is the inverse of that under classical economics—the individual ceases to exist. “Marxism, too, is deterministic in nature and that it too promises a perfect liberation as the fruit of this determinism. For this reason, it is a fundamental error to suppose that a centralized economic system is a moral system in contrast to the mechanistic system of the market economy.” (Id.). This is, for Benedict, a more dangerous and extreme form of determinism than are systems based on notions of classical economics:

“for at least the latter recognizes the realm of the subjective and considers it as the place of the ethical. The former, on the other hand, totally reduces becoming and history to economy, and the delimitation of one's own subjective realm appears as resistance to the laws of history, which alone are valid, and as a reaction against progress, which cannot be tolerated. Ethics is reduced to the philosophy of history, and the philosophy of history degenerates into party strategy.” (Id.).
And thus, determinism is flawed precisely because it reduces human freedom in the service of freedom. In the one case, its focus on individual freedom occults both the limits imposed by the rules under which such freedom is exercised, and, tied to the individual, also reduces to insignificance the power of the system to seek to maximize communal and global welfare as distinct from the aggregated choices of individuals. Marxist and centrally planned economies suffer the opposite problem—the elimination of ethics in the service of the state. This is an aggregation that obliterates both the individual and the global community in favor of an aggregate of states that are neither the most basic nor the broadest component of humanity.

What is missing in both is an ethics, now more clearly understood as a meta framework through which the good can be attained at any given level of choice. And thus the second, and for Benedict the more important failing of all three systems—“the fact that determinism includes the renunciation of ethics as an independent entity relevant to the economy.” (Id.). And it is a failing not merely systemically, but also for the way in which it reduces religion, and with it the Church, to a passive and reflective element of something greater. “Religion is traced back to economics as the reflection of a particular economic system and thus, at the same time, as an obstacle to correct knowledge, to correct action — as an obstacle to progress, at which the natural laws of history aim.” (Id.). Religion, indeed, is reduced to a reflection of a passing reality that must be overcome.

For the rest, the entire system lives in fact from the apotheosis of the central administration in which the world spirit itself would have to be at work, if this thesis were correct. That this is a myth in the worst sense of the word is simply an empirical statement that is being continually verified. And thus precisely the radical renunciation of a concrete dialogue between Church and economy which is presupposed by this thought becomes a confirmation of its necessity. (Id.).
All three systems, then, avoid or reject any framework of ethics existing above the process or other framework rules within which they are constituted. And it is this inversion that both reduces Religion to irrelevance and its assertion of a role in framing a meta system of morals to guide in the attainment of the “good” to valuelessness. Morality is the after-the-fact set of justifications for the systems they serve.

And the consequence for the Church, and Religion, as Benedict suggested, is to be reduced to yet another player in the game of dominance of economic systems. Benedict notes the way both classical economics and Marxism are adroitly reduced the universalist aims of Religion to mere competitor or appendage. And he notes the power of the argument that religion tends to serve the dominant economic master—Calvinism and classical economics for example. He also notes the power of the charge that Catholicism, in particular, “includes no corresponding education to freedom and to the self-discipline necessary to it, favoring authoritarian systems instead — is doubtless even today still very widespread, and much in recent history seems to speak for it.” (Id.). Yet, the answer does not lie in classical economics, which “we can no longer regard so naively . . . as the salvation of the world.” Rather, the difficulties posited by economic criticism suggest a greater clarity in the role of the Church, rather than in the abandonment of its mission.

And thus Benedict comes to his prophesy: Religion without an embrace of the economic sphere, the sphere of social justice is as incomplete, and flawed, as economics without the universalist moral framework that can only be provided by Religion. “It is becoming an increasingly obvious fact of economic history that the development of economic systems which concentrate on the common good depends on a determinate ethical system, which in turn can be born and sustained only by strong religious convictions. Conversely, it has also become obvious that the decline of such discipline can actually cause the laws of the market to collapse.” (Id.; emphasis supplied). Religion provides the only framework through which the right goals, at the right levels of generality, can be framed under any system of economic organization. “Today we need a maximum of specialized economic understanding, but also a maximum of ethos so that specialized economic understanding may enter the service of the right goals. Only in this way will its knowledge be both politically practicable and socially tolerable.” Id.

And so Benedict has traveled from the separation of economics and religion to the necessity of religious oversight of the framework through which economics can be correctly understood and deployed. The search for the good is paramount: and religion serves as the only true superior source of the values and morals through which the good can be known. The execution of that good, of course, can be left to the technically proficient, as can the development of those process rules and alternatives. That is of less concern to the Church. But values must frame all, and the Church must frame values. Benedict starts from an observation of the world—that there is more misery now than there had been in the past. He posits the cause as the systems deliberately imposed on individuals, states and the globe each suggesting that provides the key to the alleviation of misery, distributive justice and maximum welfare for individuals and the state. He then suggests the causes of that failure: first the determinism inherent in all economic theory not subordinated to universal systems of values, and second the consequence of that determinism as the renunciation of the independence of ethics or its relevance to economic problems. He argues that when religion, and the universal ethical moral principles it serves is reduced to a consequence of the economic systems under which it operates, ethics itself becomes deterministic. Yet the very failure of any of the three systems considered to alleviate the misery of the many serves to prove the flaws in this inversion. And the continued failure to recognize the fundamental governing importance of religion, and through religion ethics, to serve as a structuring element of economics, will inevitably cause the a-moral laws of the markets to collapse.


Globalization, and globalized economic systems, then, require a global framework. That framework is essential if one is to avoid the distortions of the sources of parochial frameworks. Benedict surveys the current crop of economic frameworks and finds little but distortion. Each of the systems is tied to the local from which it means to generalize its experiences and insights into universals; none of them truly proceeds from the global down. Where liberation theology and Castro would posit the supremacy of the state as representative of the people, and seek to derive moral frameworks from the attainment of the good of those people, Benedict posits the supremacy of morals (and religion as the only true guardian of such morals) as representative of humanity beyond the individual and the state. Classical economics protects the individual; liberation theology and Soviet Marxism the state. But moral values safeguards the global community. Thus, morals and the moral framework suggests both content (what is the good), the frame of reference (with respect to which actors is the good to be considered), and the organization (who is to safeguard the understanding of the good so conceived) of the human communities which both religion and economic system are meant to serve.

Yet, there is a small fly in the ointment. Benedict’s own solution rests on a great presumption—the presumption of faith in the divine supremacy of the moral system over which he serves in a guardian capacity. It is to the battle among the keepers of universalisms—religious communities, rationalist communities and others—that the values basis of economics, whether classical, liberation theological or Marxist will be contested. Even liberation theology continues to resist utter elimination in Latin America. (Backer 2008). But that is a fight for another day. "The consequence for the traditional state system appears to be the same, whatever the form of globalization embraced, from the most benign to the most aggressive, and whatever the character of opposition to globalization endorsed. The attachment to a particular nation-state bounded by a finite territory no longer appears to be the critical factor in the debate about globalization." (Backer 2006).


Larry Catá Backer, Economic Globalization Ascendant: Four Perspectives on the Emerging Ideology of the State in the New Global Order, University of California, Berkeley La Raza Law Journal, Vol. 17, No. 1, 2006.

----------, Paraguay's New President and Ex-Bishop: Reform, Religion, and Constitution, Law at the End of the Day, July 30, 2008.

Fidel Castro Ruz, Clausura del dialogo juvenil y estudiantil de america latina y el caribe sobre la deuda externa, celebrado en el palacio de las convenciones, el 14 de Septiembre De 1985, “Año Del Tercer Congreso,” delivered Sept. 14, 1985, La Habana, Cuba,, and translated as “Castro 15 Sep. Comments on Latin American Debt” at (University of Texas “Castro Speech Database).

----------, Speech by President Fidel Castro at the Continental Dialogue on the Foreign Debt held at Havana's Palace of Conventions Aug. 4, 1985, (Castro 1985a).

----------, Discurso pronunciado a Delegados a la Conferencia Sindical de Los Trabajadores de América Latina y el Caribe sobre la Deuda Externa, durante la Sesión de Clausura del Evento, el día 18 de Julio de 1985, (Castro 1985b).

Flavia Krause-Jackson and Lorenzo Totaro, Pope ‘Prophesized’ Market Collapse, Financial Post Mobile, Nov. 20, 2008.

Joseph Cardinal Ratzinger, “Church and economy: Responsibility for the future of the world economy,” COMMUNIO 13 (Fall 1986): 199-204, available as “Market Economy and Ethics” (I use the translation of the initial paper by Stephen Wentworth Arndt, provided courtesy of Dr. Johannes Stemmler, secretary emeritus of the BKU (Federation of Catholic Entrepreneurs) and secretary of Ordo socialis in Köln, Germany to the Action Institute (U.S.)).

----------, Sacred Congregation for the Doctrine of the Faith. Instruction on Christian Freedom and Liberation (1986).

---------- Liberation Theology, Preliminary Notes, (1984) available at (reproduced from THE RATZINGER REPORT — an interview with Cardinal Ratzinger and Vittorio Messori (Ignatius Press 1984)).