Basel Committee: Assessment methodology and the additional loss absorbency requirement for global systemically important banks

Assessment methodology and the additional loss absorbency requirement for global systemically important banks - consultative document issued by the Basel Committee
July 19, 2011

http://www.bis.org/press/p110719.htm

The Basel Committee on Banking Supervision issued on July 19, 2011 a consultative document on Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

At its June 25, 2011 meeting, the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee, agreed on the consultative document setting out measures for global systemically important banks (G-SIBs). These measures include the methodology for assessing systemic importance, the additional required loss absorbency and the arrangements by which they will be phased in.

Following the agreement, the GHOS submitted this consultative document to the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. The package including this consultative document was endorsed for publication at the FSB Plenary meeting on July 18, 2011.

The assessment methodology for G-SIBs is based on an indicator-based approach and comprises five broad categories: size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity and complexity.

Based on the current results of applying the assessment methodology, 28 banks would be subject to the additional loss absorbency requirement due to their global systemic importance. It should be noted that this number will likely evolve over time as banks change their behaviour in response to the incentives of the G-SIB framework. Moreover, the Basel Committee will address any outstanding data issues and re-run the proposed assessment methodology using updated data well in advance of the implementation date.

The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank's systemic importance. To provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future, an additional 1% loss absorbency would be applied in such circumstances.

The higher loss absorbency requirements will be introduced in parallel with the Basel III capital conservation and countercyclical buffers, ie between Jan 1, 2016 and year end 2018 becoming fully effective on Jan 1, 2019.

Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank, noted that "the rationale for the policy measures proposed today is to deal with the cross-border negative externalities created by global systemically important banks which current regulatory policies do not fully address. The proposed measures will enhance the going-concern loss absorbency of global systemically important banks and reduce the probability of their failure. Along with the measures announced today by the Financial Stability Board, they will contribute to a safer and sounder banking and financial system".

Is Fiscal Policy Procyclical in Developing Oil-Producing Countries?

A new IMF working paper by Nese Erbil "examines the cyclicality of fiscal behavior in 28 developing oil-producing countries (OPCs) during 1990-2009. After testing five fiscal measures - government expenditure, consumption, investment, non-oil revenue, and non-oil primary balance - and correcting for reverse causality between non-oil output and fiscal variables, the results suggest that all of the five fiscal variables are strongly procyclical in the full sample. Also, the results are not uniform across income groups: expenditure is procyclical in the low and middle-income countries, while it is countercyclical in the high-income countries. Fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group."

Excerpts (notes excluded):

Both the neoclassical and Keynesian theories support the idea that effective fiscal policy should smooth the volatility of output during the business cycle. Barro’s (1973) ―tax-smoothing‖ hypothesis of optimal fiscal policy suggests that, for a given path of government expenditure, tax rates should be held constant over the business cycle, and the budget surplus should move in a procyclical fashion. According to the Keynesian approach, however, if the economy is in recession, policy should increase government expenditure and lower taxes to help the economy out of the recession. During economic booms, the government should save the surpluses that emerge from the operation of automatic stabilizers and, if necessary, go further with discretionary tax increases or spending cuts. As a result, fiscal policies are expected to follow countercyclical patterns through automatic stabilizers and discretionary channels. In other words, one would expect a positive correlation between changes in output and changes in the fiscal balance or a negative correlation between changes in output and changes in government expenditure.

However, empirical studies show that fiscal policies are procyclical in developing countries and in OPCs.5 They increase spending with an increase in oil revenue during an oil price boom. They are forced to reduce spending because of a revenue decline as a result of a drop in oil prices. Since, in general, these countries are not able to accumulate savings in years with high oil revenues, they can only finance deficits by cutting expenditure during revenue shortfalls. Fouad and others (2007), Abdih and others (2010), and Villafuerte and Lopez-Murphy (2010) find that oil-producing countries followed procyclical fiscal policies during the recent oil price cycle. Baldini (2005) and De Cima (2003) also present evidence for the procyclicality of fiscal policies in two oil-producing countries, Venezuela and Mexico. More recent studies, e.g. Ilzetzki and Vegh (2008), find, using instrumental variable regression, strong evidence of procyclical fiscal policy in developing countries.

Two broad arguments that have been proposed as an explanation for procyclical policies in developing counties also apply to OPCs: constraints on financing (or limited access to credit markets) and factors related to the structure of the economy ( the budget, political, power, and social structure, and weak institutions). In general, these factors are presented separately but they go together and are likely to reinforce each other. For example, weak institutions, the budget structure, or a corrupt government may hinder prudent fiscal policies, which may, in turn, affect fiscal sustainability and creditworthiness by amplifying the financing constraints.

Liquidity and borrowing constraints emerge when a developing country needs financing the most--during a downturn--and that is when it is least likely to be able to obtain it. Many countries do not have significant foreign assets or developed domestic financial markets to raise funds. When these countries face large terms of trade shocks (i.e., a sharp fall in oil prices in the case of OPCs), investors may lose confidence and be less likely to lend, because they fear that the lack of policy credibility and discipline may force the government to run up large budget deficits and to default.6 Governments in this situation will also experience recurring credit constraints in world capital markets (―sudden stops,‖ as explained in Calvo and Reinhart (2000)), which hamper their ability to conduct countercyclical policies.

Oil stabilization funds have been increasingly used by OPCs as an instrument to cope with oil revenue volatility. These funds are aimed at stabilizing budgetary revenues: when oil revenues are high, some portion of the revenue would be channeled to the stabilization fund; when oil revenues are low, the stabilization fund would finance the shortfall. However, the creation of such funds is found to have no impact on the relationship between oil export earnings and government expenditure in countries where no sound and transparent fiscal and macroeconomic policies were implemented.7 Moreover, some oil funds have operated outside existing budget systems and are often accountable to only a few political appointees. This makes such funds especially susceptible to abuse and political interference. Therefore, stabilization funds should not be regarded as a substitute for sound fiscal management.

The other argument proposed to explain the difficulty in implementing countercyclical policy focuses on procyclical government spending due to three aspects of the economy and the government: the budget structure, the weak political structure and institutions, and corruption in government.

First, developing countries run procyclical fiscal policies because of their budget structure. These countries have a few automatic stabilizers built into their budgets. As a result, government spending in developing and emerging countries displays less of a countercyclical pattern than in industrial countries. For example, Gavin and Perotti (1997) note that Latin American countries spend much less on transfers and subsidies than do richer OECD economies (24 percent of total government spending, compared with 42 percent in the industrial countries). Furthermore, most developing countries and OPCs cannot raise revenue effectively through taxes since they usually suffer from inefficient tax collection systems, owing to the low level of compliance with tax laws, insufficient political commitment, and a lack of capacity, expertise, and resources.8 Additionally, non-oil tax bases in these countries are in general very low.9

Second, weak institutions and political structure encourage multiple powerful groups in a society to attempt to grab a greater share of national wealth by demanding higher public spending on their behalf. This behavior, called the ―voracity effect‖ by Tornell and Lane (1999), results in fiscal procyclicality arising from common pool problems, whereby a positive shock to income leads to a more than proportional increase in public spending, even if the shock is expected to be temporary. This is discussed extensively in ―resource curse‖ literature as a reason for low economic growth in resource-rich countries.10 Moreover, fiscal policies are more intense in countries with political systems having multiple fiscal veto points and higher output volatility (Stein, Talvi, and Grisanti, 1998;and Talvi and Végh, 2000). Similarly, Lane (2003) and Fatas and Mihov (2001) find that countries with power dispersion are likely to experience volatile output and procyclical fiscal behavior.

Lastly, Alesina and Tabellini (2005) argue that a more corrupt government displays more procyclical fiscal policies as voters, who do not trust the government, demand higher utility when they see aggregate output rising. This behavior would be more prevalent in democracies since a corrupt government is accountable to the voters, whereas, in a dictatorship, the government would not be accountable and, even if corruption were widespread, voters could not influence fiscal policy. Alesina and Tabellini conclude that corrupt governments in democracies, rather than credit market imperfections, are the underlying cause of procyclical fiscal policy.


[...]


The results confirm that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. Most of the variables on the quality of institutions and the political structure appear to be significant for the low- income group. Two of the variables are significant for the middle-income countries: the composite institution index and checks and balances. None of the institutional variables turns out to be significant for the high-income countries.21 Domestic financing constraints seem to matter for the low-income group. But fiscal policy is affected more by the external financing constraint in the middle- and high-income groups, as they may be more integrated into the global financial system than the low-income countries.

Despite their many differences, all the OPCs face volatile and unpredictable oil revenues, a situation that makes fiscal management challenging. For this reason, it is imperative for them to formulate effective countercyclical fiscal policies by which they can smooth government expenditure, decouple it from the volatile oil revenues, and prevent boom-and-bust cycles. Breaking away from a procyclical fiscal policy will enable them to sustain long-term growth and keep the safety net that the poor need. Sound fiscal policies and discipline require strong institutions, a higher-level bureaucracy, and more transparency. Strong institutions and transparency would also help reduce the ―voracity effect,‖ which, in turn, would facilitate the accumulation of financial assets and build up confidence among investors to raise funds when needed.

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IMF working paper: Iran — The Chronicles of the Subsidy Reform

A recent IMF Working Paper by staff of the Middle East and Central Asia Department, "Iran — The Chronicles of the Subsidy Reform," [1] analyses the December 2010 changes in subsidies of domestic energy and agricultural prices, which increased about 20 times, making it the first major oil-exporting country to reduce substantially implicit energy subsidies.

Their paper reviews the economic and technical issues involved in the planning and early implementation of the reform, including the transfers to households and the public relations campaign that were critical to the success of the reform. It also looks at the reform from a chronological standpoint, in particular in the final phases of the preparation. The paper concludes by an overview of the main challenges for the second phase of the reform.

Buy a print copy at http://www.imfbookstore.org/ProdDetails.asp?ID=WPIEA2011167 or request a PDF version from us for free.

Excerpts:

On Saturday, December 18, 2010, at 9:00 p.m. Tehran time, speaking in a televised “conversation with the nation”, President Ahmadinejad announced the start of what he termed the most sweeping economic “surgery” in Iran’s modern history. Just after midnight on December 19, Iranian media began releasing announcements detailing the new price structure for liquid fuels. Within twenty-four hours, new natural gas, electricity, and water tariffs were published, and allowable ceilings for the increase in taxi and public transport tariffs followed. At the time, close to 80 percent of Iran’s population was granted unrestricted access to compensatory payments that had been deposited in specially-created bank accounts starting in October 2010.

The reform, officially referred to as Targeted Subsidies Reform, made Iran the first major energy producing and exporting country to cut drastically massive indirect subsidies to energy products and replace them with across the board energy dividend transfers to the population. It is estimated that the price increases removed close to US$50–US$60 billion dollars in annual product subsidies. By December 2011, in the first 12 months following the price increase, Iranian households will have received at least US$30 billion in freely usable cash, and another $10–$15 billion will have been advanced to enterprises to finance investment in restructuring aimed at reducing energy intensity.

[...]

Although oil and gas production has accounted for an increasingly smaller share of real GDP, oil and gas revenues remain the main source of foreign exchange earnings and fiscal revenues. The share of oil in real GDP fell from an average of 40 percent of real GDP in the 1960s to about 10½ percent in the last decade, reflecting average annual non-oil GDP growth rate of 5.7 percent compared to only 4.4 percent for oil and gas GDP. Oil and gas receipts accounted for about 72 percent of export revenues in the last decade, despite rapid non-oil export growth.  Oil and gas revenues also account for 65 percent of fiscal revenues, and are likely to remain the main source of financing for development projects in the foreseeable future notwithstanding recent efforts to diversify fiscal revenues.

Iran’s high dependence on oil export revenues has had a profound impact on its business cycle. In the most recent business cycle during 2002-2008, fiscal spending and credit growth increased at the same time as export revenues and oil prices, resulting in an overheating of the economy and a surge in inflation. The subsequent tighter monetary and fiscal policies coincided with the sharp fall in oil exports caused by the international recession of 2008-2009. As a result, inflation and output declined sharply.

Domestic energy prices have historically been set administratively in Iran, as in the majority of oil exporting countries. They were set at a level high enough to cover production costs and have been changed only occasionally. This worked well when international oil prices were relatively stable and low, and close to production costs. However, when international prices began to rise after 2002, low domestic energy prices became increasingly out of line with the market value of oil. In addition, high domestic rates of inflation and subsequent exchange rate depreciations contributed to further erode domestic energy prices vis-à-vis their international benchmarks. The March 2002 unification of exchange rates and the resulting rial depreciation also accentuated a growing disparity between domestic and international energy prices.

Increasingly cheaper energy stimulated demand, making Iran the country with the highest level of energy subsidy. Not surprisingly, domestic energy use and energy intensity in Iran, as in many other energy producing countries, increased rapidly. Cheap domestic energy prices led to a rapid increase in domestic energy consumption. As a result, Iran became one of the most energy-intensive economies in the world. The high domestic absorption of crude oil distillates, natural gas, and electricity reduced the availability of these energy products for the export market. Iranian oil energy companies were also increasingly starved of funds needed for investment since domestic energy prices were set at barely cost recovery levels. Environmental pollution and its impact on human health, as well as the time lost due to traffic congestion on Iranian roads provided additional urgency for the reform. Not surprisingly, by 2007 some analysts started questioning not only Iran’s plans to increase its oil production capacity, but also its ability to stop a decline in oil production and exports.


[...]

The Iranian authorities were clear from the outset that the main reform objective was to reduce waste and rationalize consumption. By compensating households for the energy price increases, most consumers would be better off because the higher energy price would discourage some marginal gasoline consumption, while the cash compensation would allow consumers to buy more other goods and services.

[...]

The reform would also improve social equity in the distribution of Iran’s hydrocarbon wealth. For the poor who benefited little for cheap domestic energy price, the compensation would represent a large share of their income, lifting virtually every Iranian out of poverty.  This gave the government a powerful public relations and moral argument in support of the reform.

The likely large substitution effect triggered by large price increases could provide a significant stimulus to Iran’s domestic production and further diversification efforts, particularly given the slow growth in recent years, and relatively high, double-digit unemployment. The distribution of about $30 billion in annual compensatory payments directly to the population would support domestic demand and nonenergy sector growth.  The reform was not expected to contribute to fiscal consolidation. The reform legislation, and the political debate that preceded it, ruled out using the reduction of energy subsidies to improve the country’s fiscal balance. To the contrary, Iranian reforms, including the privatization program launched in 2006, aimed at reducing the size and the role of the public sector in the economy. However, potential large savings in domestic energy use could make significant quantities of crude oil and refined products available for exports (Box 2). The revenue from such exports could support a virtuous cycle of investment in the energy sector that would add production and refining capacity and further increase exports.


References

[1]  Dominique Guillaume, Roman Zytek, and Mohammad Reza Farzin: Iran — The Chronicles of the Subsidy Reform. July 2011.

Statements by the Parti communiste des ouvriers tunisiens/حزب العمال الشيوعي التونسي‎

Statements by the Parti communiste des ouvriers tunisiens/حزب العمال الشيوعي التونسي‎
http://themoornextdoor.wordpress.com/2011/07/13/studies-i-pcot-on-foreign-affairs-i/

1. Libya

PCOT: “Statement on the military intervention in Libya”
LINK: http://www.albadil.org/spip.php?article3741
DATE: 20 March, 2011
A number of imperialist countries (France, the United States, etc.) have launched air and missile attacks on sites said to belong to Mu’amar al-Qadhafi. These attacks came after the decision of the “Security Council,” which gave the green light to initiate military operations in Libya.
The Tunisian Communist Workers’ Party is concerned that the purpose of this intervention is not the protection of the Libyan people from the oppression of Qadhafi, but instead the occupation of the country, to subjugate its people, plunder its resources and use its territory to establish military bases for the control of North Africa in order to ensure the security of the Zionist Entity and safeguard the interests of the imperialist powers in the region. France, the United States and all western countries which have launched attacks on Libya today have no interest in the triumph of the popular revolts blowing down Arab regimes, corruption and unemployment, things which long found support and backing from the colonial powers, so today we see they are quick to take the necessary precautions so as not to let things get out of hand.
The brotherly Libyan people will be able to overthrow Qadhafi, depending on their capabilities and the support of other Arab peoples (and all the revolutionary forces of the world), and are not in need foreign intervention which will only bring them more killing and destruction, as well as violations of their sovereignty and the occupation of their land and the plunder of their resources.
The Tunisian Communist Workers’ Party expresses its rejection of the military intervention and calls for their immediate halt. It also calls on all anti-imperialist forces in the Arab and Islamic world at large to move and calls on all the peoples of the world to come out in marches and demonstrations and engage in all forms of struggle in order to stop this interference.
Long live the struggle of Arab peoples for freedom, dignity and the fall of the Arab regimes and corrupt puppets. Down with the imperialist enemies of the people and the protectors of the Zionist Entity.
– The Tunisian Communist Workers’ Party, 20 March, 2011.

2. Palestine

Tunisian Union of Communist Youth: “On the Anniversary of Land Day: Let the Revolution of the Arab Peoples be a step in the direction of the liberation of Palestine”
LINK: http://www.albadil.org/spip.php?article3754
DATE: 30 March, 2011
Let the Palestinian people be revived today, the thirty-fifth anniversary of Land Day under the obnoxious Zionist occupation and under political division, which has bedeviled Palestinian ranks and prevented success in stopping the gushing of settlements, which seek to obliterate the Arab identity of Palestinians towns and villages under the mantle of “more land and fewer Arabs”. The celebration of this anniversary in these particular circumstances mark national resistance and are a reminder of the persistence of resistance in the face of this racist [regime] which does not hesitate to use the dirtiest and most arrogant methods to swallow up the Palestinian territories. There is no doubt that the return of sovereignty to the Arab peoples, especially the Tunisians, will provide strong support for the Palestinian cause after the removal Ben Ali and Mubarak, who dedicated themselves in service of the occupation and forced their people to remain silent and easily suppressed demonstrations and campaigns [against Israel] in obedience to the racist entity to provide a good “neighborhood” and faith.
The Tunisian Union of Communist Youth salutes the steadfastness of the Palestinian people, reiterates its absolute support as it has since its establishment as an advanced and progressive site for the Palestinian national cause and:

• That the unity of the Palestinian ranks, nation, resistance, democracy best answers and expresses the demands of the Palestinian reality, especially with the failure of successive governments to put an end to the barbaric and racist policy back up by the United States of America and employed by the regimes of the Arab countries;
• That the Tunisian people, on the day after their glorious revolution bear more responsibility on the basis of national and humanitarian bonds to provide support for the brotherly Palestinian people in regaining their usurped land and their right to impose their sovereignty in the context of a progressive and democratic state.

Thus it emphasizes breaking all forms of normalization with the Zionist enemy and annulling all secret treaties which the previous regime spent its time on.
It calls for all the activities of the community of activists, parties, organizations, associations and personalities toward the activation of solidarity with and to publicize the Palestinian cause and to celebrate this anniversary in a manner fitting of its symbolism.
Long live the Palestinian people.
Downfall to Zionism, imperialism and reactionary Arabs.
Long live the Tunisian Revolution supporting the brotherly Palestinian people.
Immortality to the martyrs and victory to the resistance. 
– Tunisian Union of Communist Youth. Tunis, 30 March, 2011.

3. Syria

Article by Samir Hammouda: “Syria: The Pending Dictatorship…”
LINK: http://www.albadil.org/spip.php?article3755
DATE: 1 April, 2011
The Arab masses continue to make history. Current events in Syria today developed from ideological struggle and political fact. The most notorious dictatorships, including those hide by painting themselves as “nationalist” and “resisting Zionism” also downfall by means of mass vibrations.
From its start till now the popular uprising in Syria proceeds with more than 150 martyrs and hundreds of wounded after only a few days. The martyrs and the wounded are not the result of Zionist bombing or terrorism. Instead they come from the bloody repression of the “nationalist” Syrian regime.
In that country, as in Tunisia, Egypt, Yemen, Bahrain, Algeria, Morocco and Libya events are in essence repeating by similar ways, despite different specificities in this or that country, for be sure that the catastrophe is the Arab reality and true despotism for all Arab regimes.
The uprising of the masses in Syria is the result of the same underlying social, economic and political causes which shook the pillars of dictatorship in the rest of the Arab world. Syria is also a country of poverty, unemployment, regional disparities and is penetrated by liberal capitalism. In Syria, too, there is a total absence of freedoms, suppression of the opposition for the sake of maintaining sectarianism and smashing people’s most basic political, economic and cultural rights. In Syria corruption is rampant and the minority of the local bourgeoisie holds a monopoly on the country’s economy and wealth and the control of the political police has a hold on the judiciary and the throats of the citizens.
The policies and words of the Syrian regime in the face of popular protests and its suppression and distortions are of the same version know  to Arab peoples under the despotic regimes in Tunisia, Egypt, Yemen and other countries. If Bashar al-As’ad accused his opponents of being controlled by outsiders and the public of a tendency to drift along according to foreign schemes hostile to the country’s interests this is not the best political speech since Ben Ali and Mubarak or Qadhafi and Ali Saleh. All dictatorships, whatever their ideological dress — “nationalist” or “socialist” or “Islamic” — resort to the same outdated and false arguments to justify tyranny and the depravation of the people’s liberties as is necessary for political and social emancipation. While the Syrian regime boasts of thousands at the demonstrations of its supporters its security and military apparatus massacres and tortures its opponents. But history does not run out of lessons. Yushenko was boasting thousands at his crowds before his downfall, Ben Ali bragged of two million members in his own party a few days before fleeing.
But the popular uprising in Syria increases the taste for blood and for politics and other dimensions at the local level as in the rest of the Arab world. The Syrian regime is the last in a series of regimes that embraced the Ba’th project on the basis of Arab nationalist aspirations for unity, socialism and liberation from colonialism and Zionism. In recent decades, the Syrian regimes support has been an important component in Arab power, not only on the nationalist file, but also on the leftist and Islamist ones. This was done under the banner of “nationalism” and claiming that the Syrian regime is part of the nationalist forces that stand on the front lines of confrontation with the Zionist Entity.
We have stood on many occasions against political forces urging us to overlook the dictatorial approach of this regime on the pretext of standing against the Zionist Entity and we consider this approach opportunistic, harmful and against the development of the revolutionary movement and combativeness in the Arab world and national liberation. Patriotism and resistance to colonialism and to Zionist and imperialist plans facing us cannot be in contradiction with the people’s enjoyment of their full democratic and political freedoms, or their condition at the forefront. It is true that political freedoms alone are not sufficient to realization of national aims, but the sovereignty of the Arab peoples and the revival of the Arab world and unity in the face of imperialism will not be achieved without them. Why would democracy for the Arab peoples not antagonize the Zionist Entity if this were not a threat to its very existence?! And why has America supported and still support the tyranny of Arab regimes if these do not serve its interests and objectives?! And how can our peoples achieve unity and finally dispose of the poisons of religious conflict, sectarianism, tribalism and local infighting among their parties without citizenship and equality without democracy and the triumph of citizenship and equality without conquering discrimination based on classism, sectarianism, religion, gender or ideology?!
The failure of the Syrian regime once again confirms the failure of authoritarian regimes in achieving national goals: unity and socialism and liberation from colonialism and Zionism. If bourgeois democracy is the gateway to the dismantlement of Arab dictatorships and despotic regimes then the Arab people are not doomed to merely copy them and are instead able to overcome their shortcomings and negative aspects toward  broader and greater democracy, democracy responsive to the grassroots, national political ambitions and economic and cultural rights.
No one today can predict how events in Syria will evolve, nor the depth or extent of the preparedness of the Syrian people to topple Bashar al-As’ad yet it is certain the Syrian regime will not respond to calls for political reform for it is not in its character or interest of a single Arab dictatorship to respond to the people’s demands for freedom. The regime that represses its people and harasses its opponents does have a future or a way out of crisis and collapses by its own internal rot, the laws of its own design and by the advancement of the masses, sooner or later.
– Samir Hammouda, 1 April, 2011

Cultural Analysis: Concepts and Questions / From Cultural Topography: A New Research Tool for Intelligence Analysis

Cultural Analysis: Concepts and Questions 
From Jeannie L. Johnson and Matthew T. Berrett: Cultural Topography: A New Research Tool for Intelligence Analysis. Studies in Intelligence Vol. 55, No. 2, extracts, June 2011. https://cia.gov


Identity
•Is individual identity seen as comprising one’s distinct, unique self, or is it bound up in a larger group (family, clan, tribe)?
•Does this group see itself as responsible for and capable of solving social problems? Are problems responded to with energy or left to fate?
•Which myths and national narratives compose the stories everyone knows? How do these speak about group identity?
•What is this group’s origin story? Does it inform group members of their destiny?
•What would this group list as defining traits of its national, tribal, ethnic character?
•Is one aspect of identity being overplayed, not because it is foundational for most decisions but because it is being threatened or diminished?


Values
•For the linguist, which concepts/things are described in nuanced ways (meaning that many words have been assigned to them)? Which concepts are missing from the language? (For example, the concept of “fair play” is hard to find outside of English.)
•What generates hope in this population?
•Which is viewed more highly as a communicative tool—emotion or logic? Are conversational styles which emphasize logic viewed as trustworthy?
•Is conspicuous consumption valued as a status marker? If not, what incentives exist to work hard?
•To what extent do security concerns trump liberty concerns in this society? Which parts of liberty are deemed attractive?
•Is social mobility considered a good thing, or is it deemed disruptive to a highly organized system?  Would this group fight to keep a hierarchical arrangement even if offered opportunities for egalitarianism?
•To what extent does loyalty trump economic advantage?
•Which is more value-laden for this group—“progress” or “tradition”?
•Is optimism rewarded as a character trait or is it considered naive, juvenile, and possibly dangerous?
•Which character qualities are consistently praised?
•What composes the “good life”?
•What sorts of myths, hero figures, segments of history, or identity markers does the material culture celebrate? What is revealed by the decorations in homes, modes of dress, food eaten (or not eaten), monuments respected (as opposed to those covered with graffiti), gifts given, etc.?
•In describing a proposed project, what will “impress” this audience? The project’s size? Its historical relevance? The technology used to produce it? How might new projects best be framed in order to win popular support?


NORMS

Political
•What is considered a legitimate pathway to power? How do “heroes” in film and other popular media obtain their power? Do they act as isolated individualists or in concert with others?
•“What gives a public the comfortable feeling that the way that decisions are reached and leaders are chosen is ‘right’?”
•How does the group view compromise?
•Where does “genuine” law come from? (Nature? God? A constitution? Current political institutions? Imagined, future institutions? Moral conscience? A personality from the past?)
•Is adherence to state-manufactured law admired or disdained? To what extent is state law equated with “right” and “wrong”?

Social
•Is social status in this society primarily ascribed (i.e., one is born into it) or achieved? If achieved, how so?
•What are the primary markers of a person of high rank in this society? How would you recognize him/her? Does political power or intellectual prestige rank higher than economic surplus?
•What is the process for establishing trust? How does one know when it has been achieved?
•Do people perceive their own place and the dominant hierarchy as natural?
•To what extent are subordinates responsible for their own actions?
•What do proverbs say about social expectations and the perceived pathway to success?


Economic
•What are the group’s views on work? Which types are admired? Which are disdained? What are the economic implications?
•Which economic activities are considered immoral?
•Is it considered appropriate to “master” the natural environment and bend it to one’s will?
•To what extent is the economy intertwined with kin obligations?
•What are obstacles to private property ownership?
•How does this culture group stack up when evaluated against the traits some claim are necessary for successful market economies? These can include:

• •Is there trust in the individual?
• •Are wealth and resources perceived as finite or infinite? Is the focus on “what exists” or “what does not yet exist”?
• •Is competition seen as healthy or unacceptably aggressive?
• •Is this society comfortable with a questioning mind?
• •Does the education system encourage investigative learning?
• •Are the “lesser virtues”—punctuality, job performance, tidiness, courtesy, efficiency – admired?
• •Which are emphasized—small achievements accomplished by the end of the day (preferable for market economies) or grandiose projects (the unfinished megaworks of progressresistant economies)?

•What is the “radius of trust” in this community? Is trust extended to family only? How far does it extend to strangers?
•What are prestige commodities within this community? Why? Might these serve as stronger incentives for cooperation than direct funding?
•Is risk taking admired or negatively sanctioned? How widely spread is the “harm” of individual failure (damages family honor, potentially ignites retribution cycle, etc.)?

Security
•What defines “victory” for this group in a kinetic conflict?
•What types of battlefield behavior would result in shame?
•What level of internal destruction is acceptable?
•How do accepted myths describe this group’s military history? What is its projected destiny?
•Are allies viewed as reliable, or historically treacherous? What is the resultant ethic regarding alliance loyalties?


Time/Change Orientation
•Does this group behave according to linear time? Is there a marked contrast between rural and urban regions? Do deadlines matter?
•What is the future orientation of this group? Does it see itself as capable of changing the near future? Is it deemed appropriate or laudable to make aggressive efforts to do so?
•Which time frames are referenced with strong positive emotion—past or future scenarios?
•Is there a significant gap between socioeconomic expectations and reality? (This often is a precursor of social shifts.)


Problem-Solving Devices
•What is the order of activities for solving a social problem (often called an action chain)? Does face-to-face confrontation happen first or last? Is violence used as a signal or is it an endgame?
•How do those outside of official channels of activity (i.e. women in seclusion, youth in elder-oriented cultures) play a part in problem-solving processes?
•Which is preferred—action or deep deliberation? Is this group comfortable with trial and error as a discovery method?
•Are individuals comfortable with making a wide range of personal choices? Are individual choice and accountability practiced social norms? Would the choices present in democratic and market systems be overwhelming?
•To what extent must community consensus be reached in order for a decision to go forward?


PERCEPTIVE LENS

Cognitive processes
•What sources of information yield ‘truth’? Scientific/factual processes? Dreams? Inspired authority figures?
•Are most situations set into dichotomous frames? Are they made to be black and white? How comfortable are group members with situational complexity? How patient are they in working to understand it?

Of Self
•What are the basic expectations about the future? (“Poverty becomes a greater problem the moment wealth is perceived as a definite possibility.”) How might typical aspirations within this society be charted?
•How does this group characterize/perceive its own history? Which events are highlighted? Which are omitted?
•What does this group’s history tell it about “dangerous” behaviors/circumstances for a society? (For example, Chinese—chaos, Americans—tyranny).


Of Others Generally
•How do members of this group assign intentions? What motives make the most sense to them? (If the best US intentions do not “make sense” to the host population, they will assign intentions that do. It is to our advantage to understand and then emphasize areas of cognitive congruence when embarking on joint ventures.)
•What is this group’s view on human nature? Are people generally trustworthy? Are they prone to excess and beset by vices, or are they able to regulate themselves? How are these views used for legitimating less or more government?
•How does this group obtain its information about the outside world? Which sources are considered most reliable? How are those sources biased or deficient?
•Are outsiders perceived as fundamentally different or fairly similar to group members?


Of the US Specifically 
•What are regarded by this group as US vulnerabilities?
•What does this group believe drives Americans? What do they value?
•Does this group see common ground with its American counterparts? In which areas?
•To what extent does this group believe American rhetoric matches intentions?


Cosmology (The way the world works...origin and structure of the universe)
•When explanations for events are not easily accessible, how does this group fill in the blanks?

PwC Chairman Aims to Keep Millennials Happy

PwC Chairman Aims to Keep Millennials Happy
By JAVIER ESPINOZA
WSJ, July 11, 2011
http://online.wsj.com/article/SB10001424052702303365804576434223787503598.html

When Dennis Nally started at PricewaterhouseCoopers LLP 37 years ago, the business was simpler, says the chairman of the accounting and management-consultancy. Back then nearly 80% of firm revenue stemmed from PWC audit work in the U.S.

Today, the company has 175,000 employees operating in 154 countries. And about half of PwC's global revenues derive from tax and advisory work, which includes consulting on operations, human resources and M&A, among other things.

About 18% of the firm's revenue comes from work for clients in developing markets in Asia, the Middle East, South America and Africa. Over the next five years, the company expects this to grow to 40%, as its clients become increasingly focused on emerging markets.

Recruiting and hiring, particularly in those markets, is the biggest challenge the firm and its clients are facing, says Mr. Nally. As evidence, he quotes from PwC's annual global CEO survey, released in April, in which more than 90% of the business leaders surveyed said that they are focused on making significant changes to their human-resource policies in the next 12 to 18 months.

The Wall Street Journal spoke with Mr. Nally in London where he talked about hiring and the importance of keeping the so-called millennial generation happy. Edited excerpts:

WSJ:How do you define talent?

Mr. Nally:Having the technical skills is important but that's almost a given these days. [Talent is also] having the right softer skills in terms of being [able] to work in a collaborative environment, teaming with people, good communication skills, good sensitivities to cultural diversity.

WSJ:What's the biggest challenge for companies when trying to recruit talented staff?

Mr. Nally:The competition for talent in the emerging markets has never been greater and that's placing a lot of pressure on salaries. Having a competitive compensation base is really important. It's [also] about how to create an environment where people want to be. This millennial generation is not just looking for a job, they're not just looking for salary and financial benefits, they're looking for skill development, they're looking for mobility, they're looking for opportunities to acquire different skills and to move quickly from one part of an organization to another. How you manage that sort of talent and how you deal with their expectations is very different from what's been done in the past.

So, clearly articulating your people strategy, what you can deliver and importantly what you expect in return is key. Connecting with your employees so they understand you can deliver the career they want is key.

WSJ:How do you go about creating that connectivity?

Mr. Nally:The human capital agenda has to be driven by the CEO. It's so strategic today that you want to have great support coming from the HR organization, but if this isn't viewed as just as strategic as new products and services or research and development, [it] won't be successful.

WSJ: Why is this thirst for talent more evident now than before?

Mr. Nally: The opportunities are so significant, coming from all different directions in all parts of the world that the demand for talent is at an all-time high. In today's global competitive workplace, you can't think just in the context of your own territory.

WSJ: What sort of policies will companies need to put in place?

Mr. Nally: The millennium generation is probably the most technological group of people ever joining the workforce. How they want to work, use social media and team within a company is very different than the prior generation. If your human policies aren't responsive to what they are looking for, they are going to go to a company that is. They want less-hierarchical structures, they want more flexibility, they want to work as hard but they want to define how they do their work. If you can't figure out a way to accommodate that kind of flexibility, you're not going to be able to retain that talent.

WSJ: What [is PwC] doing to attract and retain talent?

Mr. Nally:We have adapted both how we recruit and how we work with people once they join us to suit the millennial generation. For example, in the U.S. we have set up a LinkedIn application that allows students to track the career paths of existing graduate trainees already in the firm so a student can see how a career with PwC develops. In the U.K., we use a Facebook application to connect recruits together before they join so they can begin to build their own PwC community.

We also provide mentors for our people from day one both formally and informally and encourage people to actively use their mentors to build skills and experience. We understand that flexibility and the ability to gather useful experience are key, as a result we actively encourage our people to move both between different business areas and around the world to gain experience. We also provide career breaks, flexible working, cycles of experience outside PwC and we actively encourage volunteering.

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Correction: Dennis Nally is the chairman of PricewaterhouseCoopers. In an earlier version of this article, the caption and headline incorrectly said Mr. Nally was the CEO.

Richard Clarke's China's Cyberassault on America

China's Cyberassault on America. By RICHARD CLARKE
If we discovered Chinese explosives laid throughout our national electrical system, we'd consider it an act of war. China's digital bombs pose as grave a threat.
The Wall Street Journal, Wednesday, June 15, 2011
http://online.wsj.com/article/SB10001424052702304259304576373391101828876.html

In justifying U.S. involvement in Libya, the Obama administration cited the "responsibility to protect" citizens of other countries when their governments engage in widespread violence against them. But in the realm of cyberspace, the administration is ignoring its primary responsibility to protect its own citizens when they are targeted for harm by a foreign government.

Senior U.S. officials know well that the government of China is systematically attacking the computer networks of the U.S. government and American corporations. Beijing is successfully stealing research and development, software source code, manufacturing know-how and government plans. In a global competition among knowledge-based economies, Chinese cyberoperations are eroding America's advantage.

The Chinese government indignantly denies these charges, claiming that the attackers are nongovernmental Chinese hackers, or other governments pretending to be China, or that the attacks are fictions generated by anti-Chinese elements in the United States. Experts in the U.S. and allied governments find these denials hard to believe.

Three years ago, the head of the British Security Service wrote to hundreds of corporate chief executive officers in the U.K. to advise them that their companies had in all probability been hacked by the government of China. Neither the FBI nor the Department of Homeland Security has issued such a notice to U.S. executives, but most corporate leaders already know it.

Some, like Google, have the courage to admit that they have been the victims of Chinese hacking. We now know that the "Aurora" attack (so named by the U.S. government because the English word appears in the attack software) against Google in 2009 also hit dozens of other information technology companies—allegedly including Adobe, Juniper and Cisco—seeking their source code. Aurora wasn't an isolated event. This month Google renewed its charge against China, noting that the Gmail accounts of senior U.S. officials had been compromised from a server in China. The targeting of specific U.S. officials is not something that a mere hacker gang could do.

The Aurora attacks were followed by systematic penetrations of one industry after another. In the so-called Night Dragon series, attackers apparently in China went after major oil and gas companies, not only in the U.S. but throughout the world. The German government claims that the personal computer of Chancellor Angela Merkel was hacked by the Chinese government. Australia has also claimed that its prime minister was targeted by Chinese hackers.

Recently the computer-security company RSA (a division of EMC) was penetrated by an intrusion which appears to have stolen the secret sauce behind the company's SecureID. That system is widely used to protect critical computer networks. And this month, the largest U.S. defense contractor, Lockheed, was subject to cyberespionage, apparently by someone using the stolen RSA data. Cyber criminals don't hack defense contractors—they go after banks and credit cards. Despite Beijing's public denials, this attack and many others have all the hallmarks of Chinese government operations.

In 2009, this newspaper reported that the control systems for the U.S. electric power grid had been hacked and secret openings created so that the attacker could get back in with ease. Far from denying the story, President Obama publicly stated that "cyber intruders have probed our electrical grid."

There is no money to steal on the electrical grid, nor is there any intelligence value that would justify cyber espionage: The only point to penetrating the grid's controls is to counter American military superiority by threatening to damage the underpinning of the U.S. economy. Chinese military strategists have written about how in this way a nation like China could gain an equal footing with the militarily superior United States.

What would we do if we discovered that Chinese explosives had been laid throughout our national electrical system? The public would demand a government response. If, however, the explosive is a digital bomb that could do even more damage, our response is apparently muted—especially from our government.

Congress hasn't passed a single piece of significant cybersecurity legislation. When the Chinese deny senior U.S. officials' claims (made in private) that Beijing is stealing terabytes of data in the U.S., Congress should not leave the American people in doubt. It should demand answers to basic questions:

What does the administration know about the role of the Chinese government in cyberattacks on public and private computer networks in the United States?

If there is widespread Chinese hacking of sensitive U.S. networks and critical infrastructure, what has the administration said about it to the Chinese government? Specifically, did President Obama raise concerns about these attacks with Chinese President Hu Jintao at the White House this spring?

Since defensive measures such as antivirus software and firewalls appear unable to stop the Chinese penetrations, does the administration have any plan to address these cyberattacks?

In private, U.S. officials admit that the government has no strategy to stop the Chinese cyberassault. Rather than defending American companies, the Pentagon seems focused on "active defense," by which it means offense. That cyberoffense might be employed if China were ever to launch a massive cyberwar on the U.S. But in the daily guerrilla cyberwar with China, our government is engaged in defending only its own networks. It is failing in its responsibility to protect the rest of America from Chinese cyberattack.

Mr. Clarke was a national security official in the White House for three presidents. He is chairman of Good Harbor Consulting, a security risk management consultancy for governments and corporations.