Strategy Op. Ed.

-Hugo Chavez -- "dictator-in-training"

With the shut down and takeover of independent television broadcaster RCTV, Hugo Chavez appears to be about to take off the training wheels and convert himself into a "freely-elected socialist dictator".  It appears that Mr. Chavez has sufficient support in Venezuela and Latin America and elsewhere for him to convert a Venezuela's struggling democracy into a proprietary dictatorship.

Castro is Chavez's role model. Once a pariah, Fidel Castro's PR has improved thanks to the Bush Administration's abuses in Iraq and Guantánamo, as well as the election of sympathetic Presidents in Bolivia, Argentina and Brasil. Even Castro's illness has helped; he hardly looks like a dangerous dictator anymore. Then again, neither did Franco nor Pinochet.

Michael Moore's recent appearance at Cannes, with his much acclaimed "Sicko", was also a boost for Castro. Moore counterpointed the "success" of Cuba's bare bones medical system with the horrifically expensive U.S. system that leaves 40 million Americans uninsured while it makes drug companies and doctors rich. At Cannes, no one seemed to worry that Moore does not see how badly Cuban medicine has deteriorated without Soviet subsidies. Just as in "Fahrenheit 9-11", he was right about the message of what a mess the U.S. is in, though Moore's tendency to take cheap shots stripped credibility from a story that needed to be told.

But as annoying as Castro is, China and the democratically-elected Latin American Presidents Chavez counts as allies will have a much more serious influence on Chavez's future.

Why China? China's growing power and status is a boon to dictatorships all over the world that claim that democracy is an obstacle to serving the people. No surprise then that corrupt governments, e.g., Sudan, are happy to deal with the Chinese who systematically turn a blind eye to human rights violations. We can expect strengthened relations between China and Venezuela, particularly in oil.

With the U.S. engaged in it own violations of rights in Iraq, we don't seem to have a good answer to China's policies. Our moral standing has been badly damaged. In the 1990's it seemed that we were making progress, however, with tougher laws and healthy pressure from NGOS and the press, but the war in Iraq has taken us several giant steps backwards.

That said, I have great hope for China. We should not forget that China's capitalist revolution is a permanent threat to a selectively repressive one-party State, China will change, but not soon enough to help Venezuela.

Which brings us back to RCTV and the immediate problem in Venezuela. The Chavez government depends on support from Bolivia, Brasil and Argentina for its legitimacy. The dependency is due largely to the failure of the Chavez government to make real progress meeting its citizens fundamental needs despite the influx of billions in oil money. As yet this has not undermined popular support for Mr. Chavez, who see their leader welcomed as part of a group of committed socially-oriented Latin American Presidents.

We should not underestimate Chavez's support in Venezuela. During decades the majority of Venezuelans suffered under corruption and incompetent governments. Chavez won election by giving voice to the formerly disenfranchised; in fact, Chavez was also supported by many middle-class and professional Venezuelans anxious for change. But Chavez was impatient with democracy from the start, and his authortarian bent and populist rhetoric divided the country. Sadly, the incompetent opposition, unable to defeat Chavez at the polls, supported a coup attempt. Chavez survived, and since has progressively moved to install his version of socialism. Increasingly he has maintained power by engaging in populists measures against the "oligarchy", encouraging squatters to expropriate land, nationalizing utilities, and has invented a broad array of Chavezist social programs and citizens groups with great fanfare. While it is difficult to gauge the real impact of the Chavezist social policies, the real data on crime and unemployment have worsened considerably and key infrastructure appears to be deteriorating.

As the situation inside Venezuela deteriorates, the Chavez government has become increasingly authoritarian. Finally, Chavez moved to take over RCTV, the television broadcaster in Venezuela not emitting hours and hours of Chavez talks and "educational" programming.

Which brings us to big question: Why haven't Latin America's other leftist democratic government condemned his actions? To begin with, Chavez provides financial support as well as trade agreements on highly favorable terms. Second, other leftist leaders are delighted that Chavez has the U.S. government so worried that they look like positive allies. Third, Chavez's expropriations and violations of legal agreements with multinationals gives them bargaining power at home.

The Presidents of Brasil, Bolivia and Argentina could do a great deal by coming out strongly against Chavez's takeover of RCTV. Brasil's Lula da Silva is probably the most important, but he has refused to comment: "It is a problem of Venezuelan legislation. A problem of the Venezuelan government... In the same way I don't want them to give opinions about what I do here, I don't want to comment on what they do."

And so Chavez will continue to disregard minority rights, separation of powers, and the rule of law. Recent violations include expropriating property without compensation, creating a private militia, assuming control of the judiciary and now the media. Without pressure from friendly governments, Chavez will move ahead to institutionalize control. With the pieces in place, Chavez will get the legislature to "vote" for dictatorship. Chavez's dictatorship will squash those foolish enough to express disagreement. They will be hounded, their civil rights abused, jailed and forced to leave the country. Or, as in the case of some stubborn landowners, simply murdered.

What A Quote in The Economist Can Do

The Economist decided to quote me in an article on Spanish multinationals. The result was a spike in my blog hits, mostly from people who had entered and, having read my blog, left perplexed by how little my blog is about the issues raised in The Economist article. For those who will come to blog the rest of this week because of The Economist quote, here goes.

I am fascinated by the power of interest rates to change our lives. Yesterday, my colleague, Rafael Pampillón, gave in his economics blog a clear and concise explanation of the EURIBOR, the price of money for Euro currency. On 19 occasions over the last 5 years, the European Central Bank has raised interest rates and made life worse for all of us who have a variable-rate mortgage. Why would they do such a horrible thing?

The European Central Bank must balance the divergent economic policies of socialist and conservative governments against the data on real and expected inflation (oil prices), real and expected growth, consumer confidence, etc. before fixing the price of money and, in effect, how much we pay on our home loans.

What drives European central bank decisions? Europeans, especially Germans, fear inflation, Europeans have live through runaway inflation, followed by social unrest and war. European Union rules emphasize government control of spending and combating inflation. As the number of EU menbers have grown, controlling government spending has become more difficult and the challenges facing the European Central Bank have increased. Combating inflation has become more, not less important, as price stability is fundamental to the continued success of the European project in the face of expansion and the rejection of the European constitution. The European Central Bank will continue to raise combat inflation by making borrowing more expensive if need be. Raise the price of money, people have less money, and prices must fall.

It is all so deceptively simple. If only real life worked this smoothly. During the Nixon Administration in the U.S. we had a bout of stag-flation -- slow growth with high inflation spurred on by a spike in oil prices. Nixon imposed wage and price controls. Would a Republican administration do something so interventionist? Yes, it would. Even better yet, Nixon opted for special windflall profit taxes on oil companies that benefitted from having acquired cheap oil rights before prices skyrocketed.

Did intervention work? Not very well, but it gave the appearance that government was taking action. Curiously, the damage to home owners was less severe than the scenarios painted by The Economist this week. Back then, we had only fixed-rate mortgages, and homeowners did not have to worry about interest rate risk. As long as they hung onto their jobs, they were fine. While other things got more expensive, their home loan payments remained the same, so that the relative cost of owning a home actually decreased. The downside for mortgage holders was that margins were bigger for banks to compensate for assuming the interest rate risk.

Today, most Spaniards have variable interest loans at miraculously low prices, with the average loan at EURIBOR + 0,76%, between 1% - 3% lower than what most would pay with a fixed-rate mortage. In fact, Spain has, I believe, the cheapest variable-rate home loans in the world. Unfortunately, individuals are far less prepared to take on interest rate risk than banks. After 19 straight central bank EURIBOR increases, and interest rates back at 2001 levels, many who took out loans when interest rates were low are hurting. As their pain increases, loan defaults go up; at the same time, contractors slow home building, economic growth slows, people lose jobs. The economy adjusts, almost automatically; it's all part of the economic cycle.

As I am not an economist, I don't have much more to say about how it works. Rather, my analysis starts here, where classical economics bleeds into sociology. I am interested in how this plays out in social life. In Spain, an economic slowdown would quite different consequences than in France or Germany, where demographic and social change has been less dramatic in the last decade. In Spain, housing starts last year, approximately 800,000, were higher than France, Germany and Great Britain put together. Much of the work force for the housing boom is immigrant labor which has entered Spain in the last few years also at a rate greater than France, Germany and England combined. Without immigrant labor, the housing boom would have been impossible. Immigrants, many illegal, are frequently underpaid and work often in unhealthy and dangerous conditions. But they have work. A slow down in the construction industry will fall disproportionally on them. Out of work, their options are few, magnifying the social ills that accompany unemployment and discrimination.

To make matters even more difficult, Spanish banks, which have led much of Spain's economic renaissance, would also suffer. No wonder The Economist is worried. The Spanish government's options are limited. It can do little to affect monetary policy which is run by the European Central Bank. Rodríguez Zapatero probably would not get much support from the much more conservative German and French governments either, especially if Germany continues to build growth and the new Sarkozy government institutes economic reforms. I can imagine Sarkozy once again lambasting Spain for being an immigrant "sieve" and suggesting that Rodríguez Zapatero cut taxes if he wants to help Spaniards have more money to pay their home loans. Silent but smiling, Angela Merkel will nod her head, Yes, happy to get even over the E.on deal.

The bottom line is that the two interrelated factors that could most affect the Rodríguez Zapatero government in the year running up to the Presidential elections are out of its hands -- interest rates and energy prices. Of course, most Spaniards are not worried about what's good for the government, they are worried about what's good for them. If things go badly, they will blame the government for failing to control what it had little control over. Believe it not, it is perfectly fair.

John Browne, Bill Clinton and Middle-Aged Men Who Lie

Sir John Browne resigned yesterday as CEO of BP, two months ahead of schedule, following the publication in The Daily Mail, a British tabloid, of details of his affair with Jeff Chevalier. The whole business is both comic and mean.

We should keep in mind that John Browne did not lose his job as CEO of BP because of his affair with Chevalier. Browne was already set to step down in July due to a disasterous oil leak and an explosion in a Texas City refinery that killed 15 and exposed serious safety difficencies at BP. The company that Browne had rechristened "Beyond Petroleum", "the green energy company", had tripped up on badly managed cost-cutting designed to maintain profitability. Green and oil, it turns out, is a mix that requires major sustained investment that may not bring short-term profits.

Browne's personal life was never an issue during 40 years at BP. Even at the worst moments in the Chevalier affair, BP treated John Browne well. When the accusations of misbehavior were brought to BP's Board of Directors earlier this year, the board took its time, investigated the charges, and found that "the allegations of misuse of company assets and resources were unfounded or insubstantive."

It sounds good up until last word "insubstantive". Who uses such a word?  On reading the BP Board's statement of support for Browne, I re-read the word again and again. And then it dawned on me. The choice of the word was positivley Clintonesque. We all remember Mr. Clinton arguing in the Monica Lewinsky case that he "never had sex" with "that women", though when faced with evidence he did admit to having "physical contact". The physical contact was sufficiently substantive to warrant being called sex by everyone else other Mr. Clinton, whose definition of sex seemed to find its derivation in teenage debates over what constitutes a virgin. In my mind's eye, I imagined  Clinton describing his relationship with Monica Lewinsky as insubstantive.

Insubstantive is a wonderful word. In legal language, or in the quasi-legal sense as it is being used by BP's Board, it describes actions that fall into a class of behaviors potentially in violation of the law, but that are so trivial or unimportant as not to transgress the intention of the law. (Property law does specify permissible insubstantive changes, but that's not at issue in this case.)

Legalese aside, frequently company ethics codes include substantive prohibitions of the use of company property as well as other rules on personal behavior. Apparently, BP's Board decided that Browne had violated neither legal nor ethical codes in permitting Chevalier to use a company computer or telephone; nor did they find censorable sending a package to Chevalier using a company employee, or being invited to come along to company dinners and trips, etc.

In the world of privilege, it is not always clear when insubstantive transmigrates into substantive, though in recent years more than one CEO has lost his job for using company contractors for private benefit, expensive junkets with spouse or girl/boy friend, etc. In his own defense, Browne insists that he did nothing wrong, and as far as I can tell from the evidence, Browne's alleged misuse of company resources is small potatoes. (This does not mean that I approve, only that I know the difference between the Browne's alleged abuses and back-dating stop options.)

Insubstantive is also a grammatical term for nouns that are not material. Happiness, for example, is the classic insubstantive noun. It has no weight, though it is, with life and liberty, an inalienable right that we all wish to pursue. Choosing one's partner is a large part of that pursuit. BP had no problem with Browne's choice, though I suspect that some questioned Sir John Browne's judgment in selecting a man 30 years younger than he and of comparatively modest means.

When Browne and Chevalier parted ways, Browne paid for his ex's apartment in Toronto for a year, before Chevalier was offended by the paltry pay-off. He felt he deserved something akin to the legal safeguards of an ex-spouse, and he went to The Daily Mail looking for substantive compensation.

In denying Chevalier the opportunity to maintain the opulent lifestyle that had together, Browne demonstrated the same lack of understanding Clinton displayed when he thought that Monica Lewinsky would settle for a roll in the hay (in fact, a cramped space under a desk) instead of the recognition she expected for having been the President's "muse". Even without Linda Tripp taping her conversations with Lewinsky, it is easy to imagine the affair going public. After all, there was the substantive evidence of the blue dress. I will spare you the details.

And so in January, the impoverished Chevalier approached The Daily Mail to sell them the story of his four year relationship with Browne. Browne went to court to stop publication. Unfortunately, this required Browne to lie to the judge about Chevalier; inevitably the judge figured it out, exposed Browne as a liar, and The Daily Mail was permitted to publish the damning news.

Yesterday, in a public statement Browne admitted to lying, though only about insubstantive things like where he met Chevalier, saying he did so out of embarrassment. As The Daily Mail reported, "Lord Browne said he met Mr Chevalier by chance while exercising in Battersea Park, but according to one report today they met through a male escort agency website, suitedandbooted.com.

Which brings us back to the Clinton analogy. Like Browne, Clinton lied about his relationship with Monica Lewinsky to avoid embarrassment. He lied on national television and in legal depositions and before the U.S. Congress. Clinton and Browne both lied for the same reasons -- embarrassment. Of course, they were both afraid of what the revelations might do to their reputations, but most of all they were ashamed of what they had done. It was embarrassment that turned them into such bad liars.

In the case of Bill Clinton, it was my firm belief that he should have sìmply refused to respond to questions about his personal life. Even when it was clear that Linda Tripp had the tapes and there was no denying that he lied, he should have said: "Of course I lied about Ms. Lewinsky. What sane man goes on national television and declares he has cheated on his wife?" That might have been the end of it, but embarrassed and confused Clinton ended up wallowing in public penance.

We ought not to expect more from Sir John Browne. Imagine the respected CEO of British Petroleum telling a judge that he met the man of his dreams through a gay escort service. This was too much for Browne, and so he lied to avoid the awful embarrassment of this becoming public.

But unlike Clinton, whose lover was moved by the insubstantive, Browne had an easy out; Chevalier just wanted to feel the weight of money. All Browne had to do was offer Jeff Chevalier a separation agreement of a couple of million pounds, non-disclosure included. Aside from having saved himself the embarrassment and the legal hassles, he would be set to collect 30,000,000 pounds at his July retirement which he now will not get. I am afraid that I simply don't know why Browne did not buy off Chevalier.

On that sorry note, we might ask ourselves what lessons can be learned from all this? Unfortunately, there is not much that is new here. There will always be powerful middle-aged men who are fools about sex and youth. If they are lucky, the lack of judgment does no harm and appetites are satisfied, but when you have the kind of power Clinton and Browne exercised, not knowing what the object of your desire really wants can be a very dangerous mistake.

Telefonica Controls Telecom Italia

Surprise, surprise. Telefonica now controls Telecom Italia. With its new stake in Olympia, the consortium that includes Mediobanca, Generali, Intesa Sanpaolo and Benetton, Telefonica will enjoy two seats on Telecom Italia's Board of Directors In the new company. Telefónica will also, according to the company's press release will also have the right of first refusal of on the sale of shares, as well as veto rights in certain decisions related to share ownership changes, divididend policyand divestitures." Telefonica will also be required to maintain a strict separation between management of Telefonica and Telecom Italian.

To make the mess as simple as possible, Telefonica is the largest shareholder in Olympia, which is the largest shareholder in Telecom Italia, and Telefonica is the only Olympia member that knows anything about Telecoms. It the perfect deal. As for possible opposition from the Italian government ... Forget it! Paolo Gentiloni, Italy's communications minister, declared that he was delighted with Telefonica's investment great just minutes after the official announcement was made.

Recently Telecom Italia, the fith largest European telecom, had been pursued by AT&T and France Telecom, with the French dropping plans to buy into Telecom Italia just last week. France Telecom's excuse for dropping out of the running was that they did not think that mega-takeovers were the way to build a great company. Fighting against what governments want probably is not the best way either, so we can't fault the French for pulling back, especially when it was clear that Telefonica was the government favorite.

Telefonica's triumph is perfectly consistent with the Mediterranean strategy developed by Zapatero and Prodi, and is widely seen as tit-for-tat for permitting Enel's takeover of Endesa. In line with the "progressive" Mediterranean political world view, we can expect Enel some time next year to invite Endesa's President, Manuel Pizarro, who has strong links to Spain's opposition Partido Popular, to leave in favor of someone closer to Spain's President José Luis Rodríguez Zapatero.

For all this non-market shenanigans, what really matters is how consumers and shareholders will be effected. In this case, probably not all that much. To start with, there is no particular reason to believe that consumers will benefit from Telefonica's incursion into Italy. Fortunately, there is no reason to believe that consumers will be hurt either. On the one hand, It is doubtful that Telefonica's two board members will inspire Telecom Italia to provide breathtaking new services and much greater efficiency; on the other hand, as digital information is limitless, unlike fossil fuel, and switching costs are low, Telecom Italia customers don't have to worry nearly as much about price increases as Endesa customers. We ought not to forget that Endesa's new owners have to make up somehow for paying double the September 2005 share price.

As for Telefonica itself, both top managment and the Spanish government could not be happier. Telefonica's market capitalization makes it the world's fifth largest telecom and Europe's "largest integrated operator"; the Spanish government has no intention of losing Telefonica to anyone, at anytime. Similarly, there is little chance that the Spanish government would look favorably on a possible takeover of BBVA or Santander. I think it would be fair to argue that no other country in Europe is as committed as Spain to building its multinationals. This is, perhaps, a reflection of Spain's recent rise to the ranks of the big players and the pride that is taken in being the market leader in Latin America in banking, telecom and energy, as well as an emerging player in Europe. More than once, I have seen Spaniards point with pride to a Zara store on the main shopping street of a European capital. After suffering post-Civil War poverty and 40 years of dictatorship, Spaniards understand all too well what it means to have and to have not.

A footnote. Last year, the Benetton family tried to sell Autostrade to Abertis, but Prodi put a stop to the takeover his first week in office. There is talk that the takeover may be revived.

Endesa Epilogue

In his testimony before the Spanish Congress, the resigning President of the CNMV (the Spanish SEC), Manuel Conthe, accused the economic advisors of Spain's President, José Luis Rodríguez Zapatero, and the Vice-President of the CNMV, Carlos Arenillas, of intervening in the takeover process in favor of Enel-Acciona, prejudicing the interests of E.ON.

Few doubt that there was interference; after all, the fascinating Endesa melodrama began with the takeover bid by Gas Natural. The hostile bid was promoted by the Spanish government in September 2005 and defended by President Rodríguez Zapatero in the name of building a "national energy champion" in a frontal attack on EU competition policy.

Government intervention is neither surprising or new in takeover bids in "strategic" industries; such behavior has become a standard feature of industrial policy throughout the world. But the Endesa case is different. For a year and a half, the battle has been played out on the front pages of the Spanish newspapers and on the national television news. Why did this happen when, in fact, most people never did understand what was going on nor care who owns Endesa?

For Spain's two leading political parties, the Endesa takeover was a centerpiece in a battle over their respective political agendas. PSOE, the ruling party, thrust Endesa into the controversy over regional rights by bringing Endesa into play in the middle of the negotiation over the Automous Region of Catalonia Statutes. The takeover was clearly part of the package to get in support of the Statutes promoted by PSOE. The Partido Popular, opposed to the Statues, took advantage of PSOE's clumsy handling of the Gas Natural bid to attack PSOE's interventionism. To be fair, Partido Popular was as disingenious as PSOE. No one actually believes they really wanted Endesa to be sold to the German E.ON rather than remain Spanish; their is ample evidence of Partido Popular interventionism defending Spanish MNEs during the Aznar Administration. In short, the Spanish public had to put with up its two leading political parties fighting it over Endesa as if who owned the company was as important a public issue as education, crime or immigration.

In the end, the only ones who have benefitted from the whole mess are those Endesa stockholders who sold their shares during the last 18 months, and observers like me who have had fun writing about it. As I have argued on more than one occasion, the real losers are Acciona and Enel shareholders (including the Italian public that owns 30% of Enel via its government) who have probably paid too much for Endesa, and consumers who will undoubtedly pay higher energy fees.

From the beginning of the takeover process, my opposition has been based on my belief that consumers will be hurt. We should not be shy in reminding the parties involved that competition policy is about protecting consumers.

Endgame Endesa: Winners and Losers

With the announcement of the pending Acciona-Enel takeover bid of 42 Euros for Endesa, it appears that we are finally entering into the endgame. E.ON's bid of 38,75 Euros is more than 10% less, and, even more importantly, is opposed by the Spanish government. In short, E.ON can except no regulatory support from the Spaniards, whereas the Acciona-Enel bid follows meetings between Presidents Rodríguez Zapatero and Prodi.

What can the Germans do? They can be foolish and beat the bid and consummate the transfer of 15.000 - 25.000 million Euros from German hands to mostly Spanish hands. Or they can pull back and buy energy assets at reasonable prices and where they are welcome.

This is not the way the European Union said it was supposed to be, but it is the way it is, customarily has been, and will continue to be in most places in the world for the foreseeable future.

Acciona and Enel shareholders will surely be short term losers here, though perhaps the support of the two Mediterranean economic powers may make a difference. Spain and Italy have similar concerns in immigration and tourism; the countries share cultural traditions and feel comfortable with each other. We shall now see, as well, if the Italians return the favor to the the Spaniards by letting the Abertis-Autostrade take-over go through and by favoring Spanish banks in the coming consolidation of the banking industry in Italy.

Where did the Germans go wrong? Their ONLY MISTAKE was making a hostile take-over bid without buying shares first. Once the bid was made, they were prohibited by law from buying. Had they bought before announcing, they could have pocketed billions. Why they made this mistake is impossible to say for sure. Perhaps they thought that they had a wonderful strategy for building the world's largest energy company. Unfortunately, growth is not a strategy, it is an objective. They had no strategy for meeting their objective other than trying to take away from Spain the company the Spanish government had tried to give to Gas Natural. The mistake will cost them several hundred million Euros, far less than if they proceed with their folly.

Why the U.S. Has No Anti-Terrorism Strategy

On October 10th, 2006 I wrote "Values and Facts: A Strategíst's Guide to Defeating Terrorism" in which I argued that internal strength was the best way to defend the U.S. from international terrorism. The argument is clear: Bush administration measures violate U.S. values and ideals, and this, not terrorist attacks, is the principal threat to the United States.

i am afraid that I underestimated the incompetence of the Bush Administration. Attorney General Gonzales' infantile "please catch me for doing this, Daddy" firing of federal judges demonstrates once again the lack of sophistocation the Bush Administration brought to even the simplest dirty tricks. They never figured out that the skulldudgery played in election campaigns simply won't cut it once you are in office. No one told them that governing is not just spin and that you make policy decisions that affect people's lives ... or worse, cost people's lives.

The enemies of the United States (Ahmadinejad, Chávez, the Taliban, Al Quaeda) revel in the failure. Among the enemies' successes we have: The Iraq disaster, the tragi-comic federal response to Hurricane Katrini, no energy policy, no immigration policy, no education policy -- no policy on anything other than defending the Administration's improvised initiatives and lame cover-ups of wrong-doing. Consider a banal but telling example. Bush administration incompetence gives dictator-in-training Hugo Chávez his day in the sun on whirlwind parallel Latin American tour that consists of little more than slandering the President of the United States to cheering crowds while President Bush encounters a chorus of boos and protest. The principal success of the Bush Latin American tour is to consecrate Mr Chávez, a megalomanic who will one day, no doubt, do great damage to Venezuela, as a hero.

Alas, the U.S. shoots itself in the foot, and we, and the rest of the world, suffer because there is no anti-terrorism strategy. Nothing could be more obvious on a weekend when demonstrations throughout the world call for the end of U.S. operations in Iraq and the international presence in Afghanistan, and the closure of the detention center in Guantanomo. The demonstrations call for a stop to the U.S. role in death and stupidity. They don't, however, provide an answer to terrorism. Nor do they address the equally serious problem of the maintenance and expansion of fundamentalist regimes that systematically violate the rights of women.

At the moment, for the American demonstrators, September 11th seems like one awful but distant nightmare against the constant nightmare of demoralizing U.S. failures -- big and small, morally egregious and farcical. How does one balance the threat of a terrorist attack inside the United States against death in Iraq, corruption of the legal system, Iran with the bomb, North Korea with the bomb, tremors in the U.S. real estate market, global warming, a rise murder rate, New Orleans converted into a permanent disaster area, etc.?

Yes, we need a strategy to combat international fundamentalist Muslim terrorism, but first we need a government that can give us back government. When I predicted that the American people would begin massive protests in February, 2005, it was in the hope that there was a chance, even with a Bush Administration, to fix things.

Once again, I was much too optimistic. Two years later, this weekend's protests lack the energy and commitment we need. Americans are demoralized and confused. Americans have witnessed government corruption and chancanery in the past (remember Reagan's, Edward Meese "the Sleaze"), but never so persistently. Our expectation is that governments will lie and commit wrong-doing to defend its specific interests and cover-up mistakes; we never thought that our government's disregard for the law and American values and traditions would thoroughly permeate and incapacitate public life. The American people are in shock and awe of their own government. The most damaging event to the American psyche was the Bush Administration's decision to offer up to the entire world the Guantanomo fiasco, including defending "mild forms of torture" as a legitimate interrogation tactic. I, for one, never imagined that an American government would violate in this bold way our most deeply held values.

We, the American people, are depressed and we need out of this funk. Unfortunately, there is not much chance of this happening before 2008 elections.

In the interim, international terrorism and repressive fundamentalist regimes will prosper. There are few signs of a coordinated international response that includes the resolve to carry out the necessary coordinated, and sometimes covert, operations. Foreign governments are retreating from cooperation with the U.S. and the European Community has yet to show that it can substitute for the U.S. in the fight against terrorism.

Two things, however, could change the current situation: 1) a deepening of the Sunni - Shiite rift that erupts in violence within Iran; or 2) a major terrorist attack in China. I wish for neither. No one ought to be so sick as to pin his hopes on death. The mere thought gives us a good idea of how much damage an incompetent Bush administration can do.

Fashion and CSR: Dolce & Gabbana, Armani Junior, Rape and Child Abuse

Earlier this month, Dolce & Gabbana ran an ad that depicts a spectacularly beautiful women being violated by a group of men. This week, Armani Junior used an ad with two young girls, no more than 6 or 7 years old, wearing make-up and photographed, according to the Spain's Children's Rights Ombudsman, Arturo Canalda, as if they were promoting "sexual tourism". The D&G campaign ran in Spain and Italy early this month before it was pulled; the Armani campaign continues with the photo featured prominently on its website.

Both companies have gotten their share of free press. When women's groups, children's group and government officials protested in Spain, the newspapers and television news shows did their civic duty by covering the news -- and made sure to show the ads so that everyone could decide on his or her own the extent to which the companies were appealing to prurient interests. No doubt both companies were delighted to see their ads in print and on the news for free. I will NOT print the photos here.

In this world of stakeholder management and CSR it must seem shocking that I describe the firms (i.e., the owners and top management) as delighted. Forget about shock or disgust. Fashion industry executives know that offending some stakeholders is good for sales. As long as the government does not shut you down or your own customer segments get turned off, it's money in the bank.

The responses by the two companies have been standard procedure. Dolce & Gabbana first defended their ad, called the Spanish government "behind the times". Not until pressure came in Italy from members of parliament did the company cave in. Designer-owner Stefano Gabbana said that he was sorry, but defended once again the creative idea behind the ad campaign. He claimed had been inspired to produce an ad campaign that would "recall an erotic dream, a sexual game."

In his own "Rape of the Sabine Women" fantasy way, Stefano Gabbana apologized, insisting that D&G had never intended to offend anyone. This is not true. The company's segmentation strategy is based on offending some to capture a larger part of the "rebellious with money". By taking stabs at the sensibilities of those who are "behind the times", they send a strong message to their target segment: "you are different". Never mind that their target all wear the same clothes, drive the same cars, listen to the same music, experience the same ennui. These shared values define a coherent cohort.

It is a large, and growing, cohort. Big enough for D&G, Armani and quite a few others in the luxury good business. The core of the segment is best described as: psuedo-rebellious work-a-holics who satisfy their need to break norms by submitting themselves to fashion.

The foregoing description is completely unfair. It is obvious to the point of being hackneyed, and it is offensive to those who buy D&G and Armani, but it perhaps will help those who read this blog and buy from these companies to get the point. These companies do not respect you! The description of the cohort is D&G's and Armani's description of its customers, not mine.

The two companies and the two campaigns are not equally bad. The D&G ad is so obviously lame they should have been embarrassed to have thought of it. The actors in the photo are, at least, adults, though they should have known better.

The Armani ad is more complex and far more troubling. It is not immediately obvious that an "innocent" photo of two small children dress in expensive summer clothing is an invitation to sexual tourism. In fact, Armani continues, as I said earlier, to keep it on its website, and I have found no official response yet from the company. They obviously see nothing wrong.

This ought get us to wondering why Armani Junior does not get it. So here's why. Armani Junior's advertising fits in perfectly with the drive to get children to identify with brands earlier and earlier (Armani launched Armani Baby in 2006), and, more importantly, to get children to behave as adults earlier and earlier. You need not take my word on this: you can read any of the dozens of books lamenting children's advertising, starting with Juliet Schor's "Born to Buy". 

But not everyone selling to kids are bad guys. I am even willing to accept that most of them want to do the right thing and support CSR programs.

One of my favorite examples is Neopets, owned by MTV Networks, who has pioneered in "immersive advertising" (they have copyrighted the term); branded products are placed in a virtual game space and kids play educational and fun games to get points so that they buy fast food, sugar-coated cereals and other great stuff for their virtual pets. There are some 40 million users world-wide. In June 2005, MTV paid $160 million for the site to try to get kids plugged into their products as early as possible.

It works. And who am I to criticize? As much as I dislike "immersive advertising", the advertisers love it. Moreover, Neopets is as socially responsible as you can get. Their website includes first-rate educational materials and does an outstanding job of helping parents monitor their kids use of internet and on-line games.

So why am I fuming? My friends and colleagues tell me that I get way too worked up over this stuff. But like the sentimentalist that I am, I keep asking what can we do to protect children. Which brings me back to the Armani Junior ad. It is easy to imagine a fair number of Moms and Dads leafing through the Armani Junior catalog to the precise photo that children's groups have denounced. I can picture Mom and Dad looking at each other and crooning, "Aren't those girls just so cute?", and then calling out to their own lovely daughter, "Sweetheart, come on over here, we have this cute little outfit to show you."

Perhaps it has not occured to these Moms and Dads that their children might be victims of their parents' crass materialism. Perhaps it is not so important; after all these children have access to products and markets and education. For much of the rest of the worlds' children, however, their options are much simpler: children in poverty, children as workers, children as prostitutes, children as soldiers. For the girls we can add: girls without schooling, girls as domestic slaves, girls suffering genital mutilation.

It is hard to imagine D&G or Armani Junior understanding the rhetorical path that I have used to associate their uncreative ad campaigns with rape and child abuse, but there is little I can do about that. What I would like to do is to invite Stefano Gabbana to my house to explain the ad to my 13 year old daughter who looked at it as if it were something she had seen a million times before, though when she saw the pained expression on my face she knew something was wrong, and I said, "This is really bad," and she said, "I Know," and I thought, it could get worse.

... And then I saw the Armani Junior ad.

Rajoy, Rodríguez Zapatero, and the Death of Strategy

Dear Readers,

I apologize beforehand for the strident tone and language in this post.  Rarely have I been so frustrated by the incompetence of politicians. We in Spain (I am a resident for 15 years) and in the United States (I am a U.S. citizen) are increasingly unhappy with those entrusted to govern.

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On Saturday, March 10th, I listened to Mariano Rajoy, leader of the opposition Popular Party (PP) in Spain, bungle the opportunity to address a protest march audience of nearly 1,000,000 people. Rajoy's confused attempt to capture why we fight terrorism and defend human dignity served principally to demonstrate why his party had lost the elections following the terrorist attacks on March 11th, 2004.

The only coherent argument Rajoy made was to ask Spaniards ("the good Spaniards" as he calls his supporters) to reject the PSOE government because in its arrogance it is unwilling to listen to the people and return the ETA terrorist Iñaki de Juana Chaos to prison.

While Rajoy bumbled, PSOE fumed. Before, during, and after Rajoy was finished speaking, the ruling PSOE government was busy trotting out its list of epithets, accusing PP of playing politics with terrorism and undermining democracy. PSOE called PP liars and hypocrits. PSOE leaders made faces, groaned, lamented, bellowed, whined, and bleated.

The proverbial dance of history repeating itself first as tragegy, then as farce ... repeated itself. The tragedy we have lived and died with over and over again. Nearly 1,000 men and women have been murdered at the hands of ETA over a period of more than 30 years. And now one of the cruelest of the ETA assassins, Iñaki de Juana Chaos, has achieved, via a hunger strike, his transference to a hospital in San Sebastián, near his home in the Basque region, where he was welcomed by a throng of supporters. de Juana's triumphant arrival at the hospital was the lead on television news, as were reports of ETA political party leaders coming to the hospital for their "state visits" to de Juana. It is difficult to imagine how the government could have managed this worse.

No wonder 1,000,000 men and women desparate for justice were prepared to demonstrate in protest on the weekend of the anniversary of the March 11th terrorists attacks here in Madrid, perpetrated, in this case, by Muslim extremists. No doubt millions more would have been ready had the protests be organized by a civil society group other than PP.

Perhaps the protest is best understood as an event organized by the government itself. The government's incompetence gave de Juana Chaos the opportunity to return home in style. Throw in pictures of de Juana Chaos strapped to hospital bed in Madrid being force fed, stories of de Juana Chaos showering with his girlfriend in hospital and receiving conjugal visits (I have no idea if these stories are true, though I did, as everyone in Spain has, see the photos), and we have a government capable of infuriating nearly everyone, even its most fervent supporters. In the end, 1,000,000 protesters were willing to listen to Mariano Rajoy as the price they had to pay for shouting No! to the unspeakable.

Can anything be done to help politicians learn how to lead? At IE business school, we have a program in management that we run for parliamentarians. Party members and office holders from PSOE, PP, and Izquierda Unida (the leftist party here in Spain). I have been privileged to teach the strategy classes on a couple of occasions. It's fantastic. What could be better than for a strategy professor to be in a room with professional politicians from different political parties and talk strategy. Moreover, I like the students; they are fun, engaging; they lack skills.

Last year, in discussing the Endesa case, we established that PSOE did not have an effective strategy and was thus taken by surprise by E.ON's takeover bid. Since then, PSOE apparently has learned something about how takeovers work, and today E.ON appears cornered and Spanish government may yet achieve its goal of keeping control of Endesa in Spanish hands.

During the same session, just to make sure that the PSOE parliamentarians did not think I had anything against them, I discussed how PP lost the March 14th 2004 elections. The elections had come just three days after the terrorist attack of March 11th. On March 13th, there were protests outside PP headquarters accusing PP of lying about who perpetrated the attacks. PP insists that they believed it was ETA not Muslin extremists; PP blames the loss on PSOE dirty tricks, including breaking the law on campaigning the day before elections.

I told the PP parliamentarians that they were a bunch of cry babies. They had the elections won, but they defeated themselves. I explained that they could have easily won the elections: all that was needed was for then President, José María Aznar, to call the leader of the opposition, José Luis Rodríguez Zapatero, to appear with him before the Spanish people, call for national unity, fair elections, and promise to find and punish the perpetrators. But in his arrogance, Aznar decided to accuse ETA of the attacks, ignore the opposition, and PP was summarily voted out of office.

In my arrogance, I suggested to ALL the politicians in the class that they must never blame the opposition for their defeat; that's what the opposition reason for being is to defeat always seeks. Sometimes, the opposition even does things you think are not very nice. Following defeat, the strategist's job is to seek within his own actions the cause of failure. Only then may he avert the tragedy of repeating his worst mistakes. When I finished with my little speech, I offered, just as arrogantly, my services as a strategist to help them get it right next time. I failed to convert them in clients. Their loss, I arrogantly maintain.

If elections were held today, President Rodríguez Zapatero would likely suffer the same fate as his predecessor, José María Aznar, for precisely the same reasons. The electorate may excuse a politician for defending a losing strategy. The people may even excuse a politician for insulting their intelligence and common sense (I am afraid that this is a daily practice in most parts of the world). But the people do not excuse a politician insulting their pain, their shared tragedy. For this, there should be no pardon.

Then again, things could get still worse. The Spaniards still have a few things to learn about incompetent government from the Bush adminstration.

Lula da Silva Becomes a Free-Trade Hawk; President Bush Becomes A Social Justice Advocate

On Monday, Brasil's President Lula da Silva slammed the U.S. for placing tariffs on cane sugar ethanol (54 cents per gallon) and U.S. President George Bush announced a Latin American tour and an aid package to help Latin America solve its social problems.

The flipflop of roles is welcome, but I am afraid President Bush and the U.S. comes out rather shabbily in all this. Despite the noise President Bush's new Latin American focus, the U.S. proposal will only lift aid to the region to $1,6 billion, chicken feed compared to the oil money Hugo Chavez, dictator-in-training, is throwing around.

[Please excuse the bad mixed agricultural metaphor. Chicken feed, which is also thrown, like oil money; corn which is feed for chickens but is being shifted to ethanol; sugar cane which is cut, shabby clothes that are badly cut. You get the idea. Playing with words instead of facing the problem.]

A little playful, however forced, comic relief is to be expected when the news at home is the latest, worst, and most depressing scandal of the Bush Administration: American soldiers die for nothing in Iraq, and the wounded return to the horrors of Walter Reed Hospital.

Returning, however, to the good news. The shift in U.S. - Latin American relations is a welcome change from puerile ideologies to real-politik. Joining "puerile" with "ideology" are something both Mr. Bush and Mr. Chavez are skilled at. They brandish ideology about, employing lame insults and stock phrases ("liar", "axis of evil") in an attempt to justify ill-advised actions rather than providing reasoned arguments.

I will try to demonstrate that I do care about reasoned arguments. The two reasons I have supported the election of "Anti-Bush" and "Anti-MNE" leftists to the Presidency of Latin American countries is that: 1) these leaders represent formerly underrepresented groups; and 2) once elected they need to provide economic growth, jobs and progress on social issues for their constituents in order to get re-elected.

There is hope even in Venezuela, where Hugo Chavez (whom I did not and do not support) has foolishly sought to waste oil money on buying votes, building an civil society infrastructure loyal to him personally, and investing in Cuba's dictatorship.

Though other elected leftist leaders don't mind taking Venezuela's money and enjoying photo opportunities, they have shown a much more reasoned and pragmatic approach to defending their ideologies. Brasil's Lula de Silva, President Kirchner of Argentina, Uruguay's Tabaré Vázquez, and even Bolivia's Evo Morales all realize that social justice requires economic growth and investment. While none has been able to eradicate corruption, elections are free and fair, there is a free press, economic growth is encouraging if not spectacular, despite unnecessary intervention in the economy. The balance is positive, though there is the threat, especially in Bolivia, that if things go badly, leaders may curtail economic and civil liberties and take a step backwards,

I think we can say that South America is doing better now than 10 years ago, and that the poor, the vast mayority in the continent, are far better represented, though progress on improving their living conditions is painfully slow.

The picture from the United States is much less encouraging. The last five and half years since September 11th in the United States are best described as a series of awful failures. A month after the attacks, American were hopeful thanks to the extraordinary response of civil society. Since then, not much has gone right. The scandal at Walter Reed, the Veterans' hospital, is the next step in a general deterioration of government consistent with the mismanagement of Hurricane Katrina, incompetence and corruption in Iraq, and curtailment of civil liberties.

No wonder Latin American leaders say they do not look to the U.S. for leadership anymore. If they need a political model, Chilé will do nicely. If they need an economic theory, free trade is not bad: You let us sell our stuff to you and you can sell your stuff to us. Of course, in this respect Lula da Silva has it easy; Brasil has something to sell. For other Latin American Presidents, it's more complicated, but we know the right formula: Free trade, free elections, eliminate corruption, fiscal responsibility: spend on education, health services and family planning.

Meanwhile, in the United States, we will have to survive another 21 months with a President whose administration is now responsible for mistreating wounded American soldiers. If there is an unpardonable offense in the United States, it is failing war veterans.