Chicago Global

Governing the World by Law and Lottery?

pular support not only makes enforcement of international policies more difficult. It also increasingly results in violent protest against international organizations, as witnessed at meetings of the WTO, IMF, and the World Bank.

Reasons for the failures of international organizations can be found in principal-agents problems. The principals (the citizens of member states) have little control over the actions of their agents (the different international organizations). The delegation of competencies to international organizations provides no adequate procedures that ensure that the principals can influence the performance of their bureaucratic agents.

Increased transparency could solve the acceptance problem among the world citizen. However, knowledge about the different policies and the reasoning behind it alone does not bring better control over the agents due to the lack of political accountability of the international actors.

Also the more narrow and strict definition of the competencies of international organization as well as of the standards under which they act could tighten the grip on these bodies. This way the detection of failures and the distribution of responsibility for them would be easier. But this approach does not allow for the principals taking consequences out of the failures of their agents.

Stutzer and Frey (Making International Organizations More Democratic (2005), 1:3 Review of Law and Economics 305) propose increased citizen participation in international organizations in order to solve the acceptance problem. All citizens of member countries of an international organization should be given a potential right of participation in the organization’s decision-making by way of initiatives and referenda to change the ground rules of such organizations and by granting the right to recall high bureaucrats of these organizations. Since such direct democratic elements would encounter enormous transaction costs in large international organizations which cover up to billions of citizens, only a randomly selected sample of these citizens actually gets to exercise the above rights.

While random selection of voters seems arbitrary and uncertain, it gives every member of the potential electorate the same probability of being selected. Introducing quotas for nationalities, religions, genders, regions, or wealth levels would be complicated and bound to bias the selection of the voters.

The authors expect several improvements as a result of their proposal: Efficiency should be raised by effectively controlling higher public officials in international organizations. At the same time, influence of special interests in international governance should be weakened as citizens’ influence increases. Finally, collective decisions should become more self-enforcing, due to the strengthened legitimacy of international agreements.

While this seems to be an interesting approach, it remains doubtful that acceptance and support of international organizations will grow significantly after introducing such referendums and initiatives. Basic problems of international law - such as the difficulty of identifying and sanctioning violations of international law or the perceived partial immunity of powerful global players from international law - remain and will often frustrate people’s trust in the organizations administering that law. Finally, an increase of effectiveness of the work of international organizations by citizen participation requires a considerable level of education and access to information that is not ensured worldwide today.

Stutzer and Frey (Making International Organizations More Democratic (2005), 1:3 Review of Law and Economics 305) propose increased citizen participation in international organizations in order to solve the acceptance problem. All citizens of member countries of an international organization should be given a potential right of participation in the organization’s decision-making by way of initiatives and referenda to change the ground rules of such organizations and by granting the right to recall high bureaucrats of these organizations. Since such direct democratic elements would encounter enormous transaction costs in large international organizations which cover up to billions of citizens, only a randomly selected sample of these citizens actually gets to exercise the above rights.

While random selection of voters seems arbitrary and uncertain, it gives every member of the potential electorate the same probability of being selected. Introducing quotas for nationalities, religions, genders, regions, or wealth levels would be complicated and bound to bias the selection of the voters.

The authors expect several improvements as a result of their proposal: Efficiency should be raised by effectively controlling higher public officials in international organizations. At the same time, influence of special interests in international governance should be weakened as citizens’ influence increases. Finally, collective decisions should become more self-enforcing, due to the strengthened legitimacy of international agreements.

While this seems to be an interesting approach, it remains doubtful that acceptance and support of international organizations will grow significantly after introducing such referendums and initiatives. Basic problems of international law - such as the difficulty of identifying and sanctioning violations of international law or the perceived partial immunity of powerful global players from international law - remain and will often frustrate people’s trust in the organizations administering that law. Finally, an increase of effectiveness of the work of international organizations by citizen participation requires a considerable level of education and access to information that is not ensured worldwide today.

Banning Age Discrimination in Employment - US Lessons for European Lawmakers

In 2000, the European Union adopted Directive 2000/78/EC prohibiting, among others, direct or indirect discrimination on grounds of age in employment. This Directive contains precise definitions of direct and indirect discrimination and of harassment and allows certain exceptions to the principle of equal opportunities, which are defined as legitimate in a limited range of circumstances. Substantial changes in Member State legislation have been observed in recent years in direct consequence of the adoption of the EU legislation. However, some countries, including Germany, have not fully transposed the provisions yet. The Commission has already initiated infringement proceedings against certain Member States and is due to publish a report in 2006 on the state of transposition of Directive 2000/78/EC. The latest deadline for transposing the Directive into German law is December 31, 2006. The German parliament is in the process of meeting that deadline by enacting the Antidiscrimination Act (ADG).

In the United States age discrimination in employment is forbidden by the federal Age Discrimination in Employment Act (ADEA) that was enacted in 1967. The ADEA arose out of the legal culture of Title VII of the 1964 Civil Rights Act. The language of the ADEA mostly tracks that of Title VII, and judges frequently look at Title VII case law in evaluating ADEA cases. The Act protects workers above the age of forty against discrimination on basis of age in hiring and discharge practices, as well as in setting the terms and conditions of employment. Furthermore, mandatory retirement is forbidden.

Since its enactment, the ADEA produced certain unintended consequences, such as failing to promote hiring of elderly, allowing for windfalls to already wealthy employees, and contributing to the unemployment of elderly people. This sparked heated debates about the efficacy, efficiency, and moral legitimacy of the ADEA. In his book "Aging and old Age" (1995, p. 319), Judge Posner sums up his analysis of the act as follows: "The age discrimination law is at once inefficient, regressive, and harmful to the elderly." Overall one can observe a growing consensus that the anti-discrimination principle should be discarded in favor of older norms of laissez-faire and free market.

Age discrimination can be best explained by the model of statistical discrimination. A person’s age is widely used by employers as a proxy for that person’s productivity. Of course, one can argue that this decline in productivity with increasing age is a misconception. However, it seems unlikely that profit maximizers will continuously employ an irrational proxy over a long time. Market pressures should prevent this behavior without the need of legal intervention. It seems more likely that the use of this proxy is actually cost efficient for employers given the high information costs of individual assessment of productivity. By outlawing the use of the age proxy, the ADEA burdens employers with additional information costs. Alternatively, they will use new, less efficient proxies in the future shifting the disadvantages from the elderly to a new disfavored group while still incurring an efficiency loss. Moreover, the less efficient selection proxy will lead to a less productive workforce in the firm. Either way, the ADEA’s outlawing of the age proxy is costly.

Furthermore, prohibition of mandatory retirement by the ADEA has harmful effects on life cycle wage patterns. In such implied contracts the worker is paid below his marginal product during the beginning of his career and above marginal product towards the end. This way employee shirking is reduced without high monitoring costs resulting in higher career productivity and therefore higher career wages for the employee. In this mutually beneficial agreement, mandatory retirement used to form the natural ending point. This is particularly important to the employer that he does not have to continue to pay wages above marginal product beyond a certain point. Ex ante the employee agrees to that "mandatory" retirement in order to enter into an life cycle agreement. It is only ex post that the employee disapproves of retirement given his wage above productivity and reservation wage. By prohibiting mandatory retirement, the ADEA life cycle contracts takes away the natural ending point to life cycle contracts making them less attractive for the employment parties. Since life cycle contracts are usually seen as an efficient way to align the incentives and interest between employers and employees thereby decreasing labor market efficiency.

Several authors point out that the ADEA is largely ineffective in enforcing the prohibition of age discrimination in hiring decisions. The main reason for that is the relief offered by the statute. Injunctive relief is often not adequate since the plaintiff would enter into a job with tensions with the employer from the start. Also in hiring situation, substantial damages are extremely difficult to prove for several reasons. The plaintiff usually would have earned a wage in the denied employment that is only slightly higher than his reservation wage because if the new job would pay much more than his present job, it is hard to prove that the plaintiff was the best-qualified applicant. This prediction is backed up by several empirical studies that show hiring cases under the ADEA are rare and hardly ever successful (see Posner, 1995, p. 329 for data). The ADEA is therefore a not an effective protection against age discrimination in hiring situations.

In addition, the ADEA produces costs of compliance, administration, and litigation just like legal interventions often do. However, this statute might be particularly costly due to numerous record keeping requirements. Furthermore, the risk of costly litigation is particularly high because of the burden of proof and expensive remedies. The ADEA plaintiff is entitled to jury trail under §626(c)(2) and remedies, such as injunctive relief, reinstatement, front pay, attorney’s fees and liquidated damages under §626(b).

Finally, some argue that the ADEA acts as a barrier for elderly workers from employment. Posner (1995, p. 325) finds that anti-discrimination laws can be counterproductive. "Antidiscrimination laws can boomerang against the protected class as employers take rational measures to minimize the impact of the laws."(Posner, Economic Analysis of Law, 2003, p. 351). Hiring elderly worker brings about the risk of ADEA litigation for the employer. The effect of discouraging hiring will not be prevented by the ADEA’s ban on discrimination in hiring decisions. As shown above, the ADEA is not effective in enforcing this ban and therefore will not be able to counteract the strong incentive against employing the protected group.

In the face of these arguments it seems doubtful that the German ADG and other European equivalents will contribute to solving the problems of elderly in the labor market. More likely, the already highly regulated German labor market will receive additional costly burdens. Moreover, the introduction of the anti-discrimination principle to protect elderly workers does not fit in well with the German employment law background. While in the absence of a general wrongful discharge law the antidiscrimination principle serves the function of protecting employees from arbitral firings, there seems to be no need for such protection in Germany where a wrongful discharge law is in place.

There can clearly be benefits from looking abroad for models for policy design. It would make sense, however, not to copy without first evaluating the legal discussion about the model in the other country and taking into account the differences in the legal cultures.

Foreclosure in Indonesia

A dispute between Deutsche Bank and Beckkett Pte Ltd, a Singapore registered group, gained attention among business people both in the western and in the eastern world. It involves one of the first cases following the Asia crisis in the late 90s in which a western creditor to an Indonesian real estate business was able to seize collateral and dispose of it. Therefore, the dispute is relevant both as a legal and as an economic and political issue.

The (undisputed) and simplified facts are as follows: In 1997 Deutsche Bank granted a bridging loan in an amount of $ 100m to a majority owned subsidiary of Beckkett called Asminco Bara Utama. The loan was intended to finance the expansion of Beckkett’s stake from 15% to 40% in Adora Indonesia, one of the largest Indonesian coal mines. The loan was secured by the 40% stake of Beckkett in Adora. Furthermore, Beckkett provided a guarantee. The following year, Asminco defaulted on the loan. After lengthy negotiations Deutsche Bank finally decided to foreclose on the shares and to sell them to another Indonesian business tycoon, Edwin Soeryadjaya, for $ 44.2m.

On February 21, 2006 Beckkett sued Deutsche Bank before the Singapore High Court asking to cancel the sale, return the shares as well as damages and payment for any lost dividends. First, Beckkett claims that Deutsche Bank was obliged under the loan agreement to raise a long term loan agreement when the bridge loan was due. Second, it alleges that Deutsche Bank disposed of the pledged shares at a too low price in order to wind up the guarantor, Beckkett.

Deutsche Bank, counterseeking the remaining amount that is still owed from the loan, both contests the alleged collusion with the buyer when selling the shares and its obligation to raise another loan fund. Moreover, it argues that Beckkett is only interested in the shares of the coal mine company as the price for Indonesian coal has risen significantly after the sale of the shares. With the recent upswing in global commodity prices, that stake is now estimated to be worth more than $400 million.

One Indonesian journalist reports on a blog that one of the parties invited six Indonesian journalists – not including him – to fly to Singapore paying for hotel, air tickets and meals to cover the trial (http://yosef-ardi.blogspot.com/2006/02/beckkett-vs-deutsche-bank-media-law.html). A day later, the journalist reports, an article on the trial was published in the newspaper Bisnis Indonesia. 80% of the article consisted of Beckkett’s arguments. For the journalist, it was clear which party invited the six journalists.

What makes the case so interesting for the business world is less its legal details. More important is its impact on the economic and political situation in the country.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.

First, Deutsche Bank’s reputation in the entire region is at stake. Critics of Deutsche Bank consider the case as an example of an over-enthusiastic global bank that provided the so called “tiger”-states with credit before the financial crisis of 1997 revealing the weak pillars on which the boom of those countries was founded at the time.

Second, a judgment against Deutsche Bank could be detrimental to Indonesia’s economy. International creditors, private equity investors and hedge funds follow the case closely which has been dogged by endless legal battles over document disclosure and marred by threats of intimidation and harassment. Wolfgang Topp, Deutsche Bank's Asia-Pacific managing director, talks of the bank “being literally held to ransom”, according to court documents. Topp says that he was interrogated by Indonesian police over allegations he was party to “deception or fraud” over the sale of the shares.

In the past, some questionable rulings against foreign investors did a lot of harm to the confidence of foreign investors in Indonesian judges to enforce contracts. The lack of legal recourse is widely considered as one of the major obstacles for foreign companies to invest in Indonesia. In case of a judgment against Deutsche Bank, Indonesia’s President, Susilo Bambang Yudhyono, will have a hard time to persuade foreign companies to invest in Indonesia, which is south-east Asia’s largest economy.

A verdict is not expected before next June.

Uncle Sam sticks his nose

On February 3, 2006, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury, enforced an American statute in Mexican territory forcing Mexico City’s Sheraton Hotel, a Mexican company and subsidiary of a U.S. corporation (Starwood Hotels and Resorts Worldwide, Inc.), to expel a group of Cuban citizens out of the premises of the said hotel. The group of Cubans was staying at the hotel attending business meetings with executives of American companies. (1)

The OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. (2)

The abovementioned episode was an extraterritorial application of “The Cuban Liberty and Democratic Solidarity Act” -also known as the Helms-Burton Act-. The Act was primarily designed by the U.S. Congress to inhibit foreign countries and U.S. corporations (or their subsidiaries based in third countries), from doing business in or with Cuba.

In fact, the Act expressly urges the President to encourage foreign countries to restrict trade and credit relations with Cuba.

The extraterritorial application of the Helms-Burton Act, had a major impact in Mexico’s political setting and raised the question: How far is the U.S. willing to go with the extraterritorial application of its public policy in order to pursue their international purposes?

As the Helms-Burton Act establishes, it was enacted in 1996 “to seek international sanctions against the Castro government in Cuba, to plan for support of a transition government leading to a democratically elected government in Cuba, and for other purposes”. (3)

In “Section. 2. Findings” of the Act, the American Congress listed some events that made the Cuban economy decline of at least 60 percent, as of 1996, being the first one in the list the end of Cuban subsidization by the former Soviet Union and 36 years of communist tyranny and economic mismanagement by the Castro Government.

Despite the problem that there is a clear absence of democracy in Cuba, which is not the main stream of this opinion, what I find questionable is the set of reasons or findings of the American Congress to enact and enforce the Statute. Section 2 of the Act addresses that “…(9) The United States has shown deep commitment, and considers it a moral obligation, to promote an protect human rights and fundamental freedoms…”.

On the other hand, the fact that the OFAC is enforcing U.S. laws abroad should not pass unnoticed by the international community, almost every country in the world has an American corporation (or subsidiary) within the limits of its territory, consequentially, they are a potential target for the OFAC’s arbitrary procedures.

Although the Helms-Burton Act has been criticized internationally since its enactment, the only countries that had designed specific countermeasures against its application has been ironically Mexico -Commerce and Investment Protection Act from Extraterritorial Enforcement of Foreign Law- and Canada -Foreign Extraterritorial Measures Act-.

I insist, “the ends doesn’t justify the means” the fact that the U.S. “moral obligation” to promote and protect human rights could be a reasonable cause, doesn’t give them “carte blanche” to run over foreign legal systems arbitrarily enforcing their public policy.

The extraterritorial application of the law must obey international treaties; diplomatic and judiciary channels are the obvious outset to interpret and resolve controversies between nations, we must condemn the unilateral decision of the Department of the Treasury of applying U.S. laws abroad.

The expansion of American freedom and form of democracy has struck the international scenario for decades in many ways, some reprehensible, some not; perhaps divine inspiration, moral obligation or the idea of “manifest destiny” is still shaping the decisions and measures of the OFAC’s officers, is it? Is just a question.

(1) Commercial activity with Cuba is forbidden for U.S. citizens and firms.
(2) http://www.ustreas.gov/offices/enforcement/ofac/mission
(3) Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, (Codified in Title 22, Sections 6021-6091 of the U.S. Code) P.L. 104-114, One Hundred Fourth Congress of the United States of America.

Bird Flu Reaches Chicago

At a time when avian influenza is spreading in numerous countries, the recent research of Malani* and Laxminarayan** has struck my particular interest. The paper was presented at the University of Chicago Law and Economics Workshop and examines the incentives of countries to invest in disease surveillance and to report possible outbreaks of diseases using a game-theoretic model. It also evaluates the different policy instruments the World Health Organization (WHO) uses to encourage countries to detect and report the outbreak of diseases.

The policy instruments of the WHO that are discussed include subsidies for surveillance, medical assistance to control outbreaks, and trade sanctions for failure to report outbreaks. In addition, the paper considers the possibility of conditioning surveillance subsidies on the WHO’s right to audit a country’s surveillance measures.

The countries’ incentives to disclose an outbreak of a disease are conflicting. On the one hand, international assistance in coping with a disease and preventing an epidemic can be of great economic value. On the other hand, reporting an outbreak can inflict great economic costs by triggering trade sanctions and embargos by other countries. Through backward induction, these incentives also influence the country’s decision on whether and how much to invest in surveillance. Only if reporting the outbreak seems desirable, a country will consider it in its interest to detect the disease by investing in surveillance. And if reporting seems harmful, limited surveillance could be desired.

Using a game-theoretic model to compare the costs attached to the different reporting and surveillance investment decisions of a country, the paper reaches the following conclusions about the effects of WHO policy instruments:

Medical assistance after reporting induces a country to report an outbreak by easing the costs of the disease and by helping to prevent an epidemic. However, the bigger the medical resources of that country, the smaller the increase in incentive will be.

Unconditional subsidies for surveillance create moral hazard problems. The recipient will reduce his own investments in surveillance.

For countries that already have an incentive to report an outbreak, subsidies for surveillance conditioned on WHO auditing will have the same effect as unconditional subsidies. But conditional subsidies will even discourage those countries, that do not intend to report, to invest any own resources in surveillance. For those countries, conditional aid for surveillance means that an outbreak will always be known to the world due to WHO auditing which will likely bring about sanctions of trade partners.

The effect of conditional subsidies for surveillance on the decision to report or not will largely depend on the size of the subsidy. Due to limited WHO resources the subsidies will often not reach the critical amount necessary to induce the country to report.

The effect of punitive trade sanctions on a country’s incentives is limited if the country in question is too poor to experience much decline in exports beyond that caused by the disease itself. Furthermore, such sanctions against a poor country weakened by disease will encounter moral and political resistance. However, the influence of sanctions on incentives greatly depends on what triggers the sanctions. In contrast to sanctions that follow the report of an outbreak, sanctions that are triggered by a country’s probability of an outbreak can actually increase the incentive to report. Such pre-emptive sanctions can be as informal as consumer reaction to rumors about dubious hygienic conditions in the agricultural industry of a particular country.

With the ongoing increase in global trade and travel, it is unavoidable that disease control, as a global public good, requires global solutions in form of international legal protections. This research gives valuable insights in the effects and possibilities of global health policy design. However, it also points to limits of the role of law in this area and the possible abilities of consumers to influence countries through informed choices about what to buy.

*Associate professor at University of Virginia Law School and visiting professor at the University of Chicago Law School.

**Fellow at the Resources for the Future.

Enjoying Italian soccer in a Chinese living room

90 are the minutes in a soccer game and 90 is the number Italians traditionally associate with fear. In this story, fear is what three major pay-tv and pay per view broadcasters operating in Italy are dealing with. Soccer is currently Italy’s most productive (and indebted) industry. Plus, like in any good ‘global economy’ thriller these days, China is also involved. But let’s start from the beginning….

Rupert Murdoch’s Sky, Silvio Berlusconi’s Mediaset and La7 (controlled by former telecom incumbent Telecom Italia) hold broadcasting rights for Italian Serie A (first division soccer), for satellite pay-tv (Sky) and for digital terrestrial pay-per-view (the others). Somehow (in a seemingly lawful way), such rights were sold to a number of Chinese broadcasters which merrily undertook to display the games on tv and on their Internet websites. An Italian peer-to-peer website, before each game, published the links to the live events broadcasted in China and a remarkable share of the Italian soccer audience began to link to Chinese websites and watch live premium soccer on laptop rather than subscribing pay-tv or pay-per-view.

The three broadcasters, cold with fear for their subscription and advertisement revenues, sought an interim injunction to block the Italian website. The injunction was first granted, but ultimately revoked by the judge in Milan, on the ground that the server allegedly infringing the broadcasting rights (to which the links referred) is located in China and the mere linking to copyrighted materials is not illegal. The Italian website has already resumed its activity. Italian soccer teams and broadcasters, having learned that globalization carries the pros and cons of a truly open worldwide market, are now considering measures to prevent ‘parallel broadcasting’ of Italian soccer. Someone screams for restrictive measures on Chinese broadcasters and retaliation. Someone else wants pressure to be put on Chinese government to prevent retransmission in Italy. However, many in Europe have learned the bittersweet lesson that the mouse cannot play hardball with the cat and that the threat of secluding a market of a few millions soccer-addicted fans to Chinese companies is not going to work with who is comfortably sitting on a few hundreds million customers hungry for soccer (and, what counts most, for other made in Italy products).

Meanwhile, waiting for the virtues of trade negotiations to become apparent, the Italian soccer supporter is enjoying an overdose of free calcio.