JERSEY FRAUD

Sovereign Bank and CIT Financial have implicated Dinesh Dalmia, also sought by the Interpol seeking repayment of loans to a North Brunswick, N.J. outsourcing company called Allserve Systems Corp.

Major U.S. companies are in federal bankruptcy court demanding they get back $83 million they loaned to a New Jersey outfit they claim is linked to an international fugitive financier.

Dinesh Dalmia, who is being sought by Interpol, has been implicated by Sovereign Bank and CIT Financial, among others, seeking repayment of loans to a North Brunswick, N.J. outsourcing company called Allserve Systems Corp.

In a Newark courtroom Wednesday, the creditors told Judge Rosemary Gambardella that they weren't buying Allserve's explanation of two disasters hitting call centers in India within months of each other.

As The Post has reported, Dalmia's activities have ranged from a failed effort to sell a germ warfare facility to the Iraqi government following the attacks of Sept. 11, to his alleged use of identity-hiding offshore shell company accounts in the British Virgin Islands to sequester millions looted from a publicly traded company, DSQ Software Ltd.

Interpol has issued a so-called Red Notice for Dalmia who is also wanted for securities fraud in his native India.

Allserve, which filed for bankruptcy on Nov. 18, said its business was, in effect, swallowed by a sink-hole that opened under its offices in the city of Chennai, India, last March.

After that, the company said, its Chennai operation was relocated to other offices in the city. But, the company claimed, the new location was gutted in a fire six weeks ago, which permanently knocked it out of business.

The creditors contended that Allserve's efforts to get bankruptcy protection appeared to be part of a pattern of fraud that may involve Dalmia as well.

The company, according to the creditors, has refused to identify its top officials, or explain where most of its computers are now located.

They also said it won't explain what happened to more than $35 million of cash that appears to have vanished from Allserve's accounts between July and October.

Federal law requires companies to provide a breakdown of their revenues for the full year prior to filing for bankruptcy.

But it is impossible to tell from the documents that Allserve submitted whether its accounting for revenues covers "Year to Date," or "Current Month," or the seven-month period between the sink-hole event and the fire, since the accounting is described as covering all three time frames simultaneously, the documents show.

A separate exhibit in the case file, for Allserve's general ledger, shows that between August and October of this year, when Allserve's financial noose was supposedly tightening, the company nonetheless wired all of its gross revenue for the period — more than $11 million — to two affiliated companies in India.

Both affiliates share common addresses in Chennai, where they had supposedly set up operations after the sink-hole had swallowed Allserve's offices.

But documents from a variety of Indian Web sites show the two operations had actually been located at the latter address for years.

Other creditors include the Bostonia Investment Group, Qwest Communications, GATX Technologies Services and Republic Bank.

http://www.suchetadalal.com/articles/display/46/1795.article

US law has fugitive Indian financier running

An Interpol ‘red corner’ notice against Dinesh Dalmia, who once headed the stock exchange-listed DSQ Software and DSQ Biotech, is clearly no barrier to the rogue industrialist making news overseas. Over the past two years, an American investigative journalist got on his trail and tracked Dalmia down to a palatial house in New Jersey and to a clutch of equally controversial new businesses. While Indian intelligence agencies struggle to find anything new, Dalmia has been a busy man indeed. But a week ago, Dalmia was on the run again, after bankruptcy proceedings filed against him in the US courts led to some decisive action. His hectic activities in several countries finally seem headed for a consolidated investigation and conclusion. Here is a quick recap of the past four years.

After being caught at fraudulently trying to place shares equal to 50% of DSQ Software’s capital with three Mauritius-based companies, Dinesh Dalmia ditched the Indian operations, sold his most lucrative international contracts to Ramesh Vangal’s Scandent Solutions and vanished from India. Scandent later listed on Indian SEs through a reverse-merger with a little known company. After abandoning the DSQ companies, Dalmia surfaced in the US as owner of a series of BPO outfits with offices in New Jersey, London and India (Gurgaon, Bangalore and Chennai) under the name Allserve Systems Corporation. These activities were exposed when Dalmia first attempted an audacious takeover of a US company called Aegis Communication and again last year, when he tried to reverse-merge another affiliate into TACT (The A Consulting Team, Inc), a Nasdaq-listed company. Both deals fell through following exposure by the NY Post. Interestingly, Ramesh Vangal, one of the largest shareholders and founder-promoter of Scandent Solutions, suddenly stepped down last week to spend more time with his flagship Katra group, which has interests in healthcare, beverages and marine bulk infrastructure.

Meanwhile, the Securities and Exch-ange Board of India (Sebi), the Securities Appellate Tribunal, the Enforcement Dire-ctorate and the Company Law Board issu-ed serious penalty orders against Dalmia in the two DSQ probes as recently as a mo-nth ago, and the Serious Fraud Investi-gation Office also continues to probe him.

Dalmia still thrived in the US, having raised a massive $82 million for his BPO operations. But, his penchant for diverting funds raised for a specific business to numbered accounts in Tortola seem to have destroyed the BPO business, too, and he filed for bankruptcy a month ago. During the recovery proceedings, his creditors discovered that his assets were barely worth $22 million. Bunce Atkinson, Federal trustee to the bankruptcy proceedings, then ordered all Allserve operations in the US be terminated after the court obtained “reliable information” that “very large fraudulent transfers” of debtor property have been made to India and that the company had been conducting fraudulent business activities subsequent to its bankruptcy petition. In an e-mail (available with me) to creditors’ representatives, Mr Atkinson said: “Over the last few days, the Trustee has received reliable information that has led him to determine that this Debtor has not materially complied with its obligations to make full disclosure to the Trustee of its assets, liabilities or operations...The Trustee has also received additional information that indicates that at least a prima facie case exists to seek the avoidance of very large fraudulent transfers and preferences and to further investigate allegations of actual fraud.”

• While our agencies struggle for leads, US law takes Dalmia by the collar
• Federal trustee to bankruptcy proceedings there issues a damaging order
• Money from Dalmia’s defunct firm may have gone into a hedge fund here

He then ordered the dismissal of Allserve employees worldwide, stop-ped payroll and cash transfers to them and changed locks on Allserve offices. A written demand is also understood to have been filed for accounting of debtor equipment in India.

Meanwhile, Christopher Byron of the New York Post reports that some money from Dalmia’s defunct Allserve Systems may have gone into an offshore hedge fund called the India Deep Value Fund, which recently applied for registration with Sebi and is bound to come in for close scrutiny in light of US media reports. Acti-ng on a tip that Dalmia had returned home, Indian intelligence agencies had launched a hunt for him in Delhi last week, but they seem to have drawn a blank again.

Strangely, neither the enforcement directorate nor the CBI has initiated any serious probe into Dalmia’s overseas she-nanigans and businesses, although he owes money to scores of Indian creditors.

http://www.suchetadalal.com/articles/display/479/1915.article

Employment, social justice and societal well-being

The purpose of economic activity is to increase the well-being of individuals, and economic structures that are able to do so are more desirable than those that do not. This proposition might seem anodyne, but on closer inspection it is far more complex. To be sure, all politicians – left, right and centre – pay homage to it. Yet, the policies that are pursued often turn out to be antithetical to it. Much of traditional economics has indeed provided considerable comfort to those

politicians who have a different agenda, and created considerable confusion
for those who are sympathetic.
A second proposition, also deceptively anodyne, is that for a large fraction of the world’s population, work – employment – is important. For individuals who lose their jobs, it is not just the loss of income that matters, it is also the individual’s sense of self. Unemployment is associated with a variety of problems and pathologies, from higher divorce rates, higher suicide rates to higher incidences of alcoholism. And the relationship is not just a correlation: there is a causal connection. Some individuals can keep themselves happy and gainfully “employed” without a job. But for many, employment – the fact that someone else
recognizes their “contribution” by paying them – is important.

This article aims to explain how standard economic theory – reflected in much of the popular policy folklore – has served to undermine the above propositions or runs counter to them. The first section shows how policies based on a neoclassical view of the labour market ultimately weaken workers’ bargaining position because of pervasive market failures. The next two sections critically discuss the welfare and employment implications of a wider set of policies – from capital market liberalization to pro-cyclical fiscal and monetary management –
which are pursued on the theoretical assumption that efficiency and equity /distribution can be dealt with separately. The fourth section is a plea for labour to be seen as an end in itself, not a means of production, and development as a transformation of society; while the fifth section looks at the role of the international community in setting the objectives of socio-economic development. A concluding section sums up the discussion and offers some policy proposals aimed at providing full employment and better working conditions.

Labour and neoclassical economics
One of the great “tricks” (some might say “insights”) of neoclassical economics is to treat labour like any other factor of production. Output is written as a function of inputs – steel, machines, and labour. The mathematics treats labour like a commodity, lulling one into thinking of labour like an ordinary commodity, such as steel or plastic. But labour is unlike any other commodity. The work environment is of no concern for steel; we do not care about steel’s well-being (though to be
sure, we may take care that the environment does not lead to its rusting or otherwise adversely affect its performance characteristics). Steel does not have to be motivated to work as an input. Steel does whatever it is “told” to do. But management is generally highly concerned with motivating labour.

The distinction arises from labour’s human aspect. Individuals decide how hard they work, and with what care. The environment affects their behaviour, including the incentives with which they are confronted. In standard theory, individuals contract to perform a certain job, and are paid if and only if they complete that job. It is assumed that contract enforcement is costless – partly because of the assumption that information exists about whether the task (which is specified in
infinite minutia) has been completed. Yet, information imperfections abound in the economy, and these information imperfections have profound impacts on the way an economy behaves, a fact recognized by the 2001 Nobel Prize (which focused in particular on information asymmetries). While this is not the occasion to review all of the implications of information imperfections, I want to highlight three that are particularly germane to the theses of this article.

First, imperfect information leads to imperfect competition; but the striking result of our research was that even a little bit of information imperfection – even a small cost of searching for a new job, for instance – can have a large effect. Economists always knew that information was imperfect, but they hoped that a little bit of imperfection would only change the equilibrium in a small way, and that the imperfections were indeed small. These hopes were not based on analytical work, but rather on the realization that if these assumptions were not
true, the models that economists have used for decades, and the conclusions
derived from these models, would be of little relevance. To put it perhaps over-grandly, it would have made much of economic analysis obsolete overnight. The new information economics showed, however, that even a small search cost could enable the equilibrium real wage to fall from the competitive level to the monopsony level (see Diamond, 1971; Stiglitz, 1985b and 1987a). Observers of labour markets had long been concerned with bargaining power asymmetries. Workers’ mobility is limited; employees who are fired – e.g. because they demand higher wages or better working conditions – may have a stigma, making it difficult for them to obtain another job, even if employers do not act collusively (and there may be tacit collusion); credit market imperfections (credit rationing,
which itself can be explained by information imperfections) can make it difficult for a worker who is unemployed to live well for long, putting the worker in a far more precarious position than the employer who has lost whatever rents were gained from the worker’s labour. What our analysis showed is that, despite other market imperfections that may exist, these alone put workers in a decidedly disadvantageous position.

Second, imperfect information leads to unemployment: even when wages are so high that the demand for labour is less than the supply, wages will not fall; for if a firm lowers its wages, workers’ effort or the quality of workers hired may decrease (or their turnover costs increase). To most of the world, this is hardly news. But to standard economic theory it is: neoclassical theory said that markets always clear; what seemed to be unemployment was nothing more than a sudden change in the demand for leisure. Information economics also
emphasized that the decentralized adjustment process often worked imperfectly, leading to temporary unemployment rates which even exceeded the equilibrium unemployment rates associated with efficiency wages. Yet traditional theory paid no attention to this – after all, with perfect information it is easy to move to the new equilibrium whenever the economy is disturbed.

Third, information economics has challenged the traditional economic theory which argues that markets are self-adjusting and efficient, and that the nature of the equilibrium (and its efficiency) depends neither on distribution nor on institutions. To traditional economists, the law of demand and supply determines the allocation of resources (including incomes), not institutions like sharecropping. Issues of efficiency could thus conveniently be separated from issues of distribution. Information economics has challenged each of these propositions: Bruce Greenwald and I showed that when information is imperfect or markets incomplete – that is, always – markets are not even constrained
Pareto efficient, i.e. that in principle, there existed interventions in the market which took account of the costs of information and of creating a market, and which made everyone better off (see Greenwald and Stiglitz, 1986). Our analysis found that there were pervasive market failures that might, in principle, be addressed by government intervention.

The retort that we ignored information imperfections in the public sector was simply wrong. We took them into account. We had, in fact, gone further, and identified reasons which made government’s information set, powers and constraints different from those of a decentralized private sector, and which provided an explanation for why, at least in principle, government might undertake welfare-improving actions (see, for example, Stiglitz, 1989).

We also showed that the nature of the equilibrium, including its efficiency, could well depend on the distribution of wealth. This can be seen most clearly in the case of simple agricultural economies, but in fact it holds true more generally. The agency problems associated with sharecropping arise because of the disparity between the ownership of land and capital. Problems of information asymmetry do not arise when workers work their own land.

Whether there was a political agenda in the back of the minds of those who formulated and developed the neoclassical theories, I will not venture to guess. But it is clear that the theories proved convenient for those with a particular set of interests. If, as neoclassical theory claimed, one could separate out efficiency issues from equity, one could pursue a political programme that focused only on the former – saying that if society wanted to change the distribution of income through its political process, that was an issue which it could turn to at any time; regardless of one’s views on equity, it then made sense to remove distortions in the economy which impeded efficiency.

In standard competitive models, any interference with the free workings of the economy had an adverse effect on efficiency, whether it was minimum wage laws or trade unions – which introduced imperfect competition in labour markets – or requirements on working conditions. After all, an employer who offered workers worse conditions would only be able to recruit by paying commensurately higher wages. Firms would therefore carefully balance the extra cost of improving the conditions against the extra wage costs of not doing so, and these extra wage costs represented the marginal benefit of improved working conditions. Interventions to enhance job security were criticized, not only
when they were made by government, but even when they resulted from collective bargaining because they were perceived as evidence of trade unions’ monopoly power. Public pension schemes were also criticized, with payroll taxes seen as leading to higher labour costs and thus explaining the rise in unemployment.

It was, of course, inconvenient that many of the central propositions had little empirical support. Card and Krueger’s (1995) work strongly demonstrated that minimum wage legislation does not have the serious adverse effect on employment predicted by the standard theory – and that it may even have a positive effect. But economic theory did not lend credence to many of the propositions either, even without recourse to modern information theories. Even if benefits did not depend on contributions, payroll taxes should largely be shifted
backwards (except for minimum wage workers), and hence have no effect on employment; and to the extent that benefits depend on contributions, there may be little or no effect on labour supply (not even a positive one). But information economics explained clearly why market equilibrium was generally inefficient, e.g. why firms “undersupplied” contract provisions enhancing job security (see, in particular, Shapiro and Stiglitz, 1984).

In short, the mantra of increased labour market flexibility was only a thinly disguised attempt to roll back – under the guise of “economic efficiency” – gains that workers had achieved over years and years of bargaining and political activity. To be sure, sometimes unions may have more than corrected the imbalance of bargaining power that previously existed, and used their power to push for excessive protection for their members, at the expense of other workers in the economy. If that happens, however, the answer is not to pretend that in the absence of such protections, the competitive market place would lead to efficient
or equitable outcomes; but rather to try to redress the imbalances.

While freedom of association and trade union rights are important in correcting the power imbalances that exist in labour markets, even workers enjoying such rights are typically in a disadvantageous position. It is far easier for an employer to replace recalcitrant workers than for employees to “replace” a recalcitrant employer, especially when the unemployment rate is high. Thus, there is an important role for government, e.g. in ensuring occupational health and safety.

“Market-friendly policies”: At whose risk?
There is a range of other policies – sometimes seemingly quite remote from the labour market – which affect the outcome of the bargaining process. Capital market liberalization enhances the bargaining power of capital: effectively, it gives “capital” the right to announce that if it is taxed unduly, or if other measures that it dislikes are adopted, it will leave the country. It enhances the threat point of capital, and therefore tilts the outcome more in its favour. In the extreme, it
means that capital cannot be taxed at all. Had similar measures been adopted to enhance labour mobility, they would have restricted the ability to tax labour as well (see, for example, Stiglitz, 1983a and 1983b). A well-known standard result in tax theory says that the optimal taxes should be inversely related to the elasticity of supply; capital market liberalization thus leads to a lower optimal tax.

“Labour market flexibility” and “capital market liberalization” may thus appear as symmetric policies, freeing up the labour and capital markets, respectively; but they have very asymmetric consequences – and both serve to enhance the welfare of capital at the expense of workers. So ingrained have these prescriptions become in the mantra of good policy that their distributional consequences have been almost totally ignored; and of course, if efficiency and distribution could be separated, as traditional theory argued they could be, the lapse might not have been so important.

It is not, of course, just that the advocates of these policies overlook the imperfections of competition and information. There are other market imperfections (some derived from imperfections of information) to which they turn a blind eye too. With imperfect insurance markets, individuals worry about the volatility of their income. They can smooth only imperfectly and often at great cost. Risk matters more than it would if markets were perfect. Indeed, surveys of poor workers suggest that insecurity is among their main concerns, and that instability is among the most important causes and manifestations of poverty
(see World Bank, 2000). Yet, the so-called Washington Consensus has not only pushed policies which enhanced instability, but it has also pushed for the elimination of job security protections (which markets by themselves will often not provide).
Another important set of market imperfections concerns corporate governance. Managers of firms may not act in the interests of shareholders, majority shareholders may not act in the interests of minority shareholders and, more broadly, the concerns of other stakeholders may not be adequately reflected in the firm’s decision-making process (see Stiglitz, 1985a).

The advocates of these “market friendly policies” (which might more aptly be called “capital market friendly” policies) have not consistently followed the neoclassical model’s symmetries. For instance, they talk about the discipline provided by capital market liberalization – the discipline of a capricious market place, exhibiting not only irrational exuberance but, from time to time, irrational pessimism. Those who subject themselves to this discipline know too that it has particular perspectives and ideologies. Imagine how different the discipline might
be if skilled labour, or unskilled labour, were perfectly mobile. It might, for instance, threaten to leave a country that did not provide adequate air quality, or which otherwise had a degraded environment.

Another manifestation of “capital market friendly policies” is the recent push for privatization of social security, with the replacement of defined-benefit programmes by defined-contribution programmes. While this is not the occasion for a full debate on the issues, it should be clear that privatization would be of immense benefit to those firms that managed the pension funds and provided the annuities, but it would at the same time impose greater risks on workers, since the market in most countries does not provide securities that are fully indexed
for inflation. Moreover, there is evidence suggesting that even in highly
efficient capital markets, like the United Kingdom’s, transaction costs are so high that benefits under privatization are reduced by 40 per cent (Murthi, Orszag and Orszag, 1999).

Advocates of the (capital) market friendly doctrines have not argued that all institutions do not matter. They argue that monetary institutions matter. Not content to change the broader economic environment in ways which tilt the balance of power, they have pushed for monetary institutions which tilt the balance of power further still, pressing for independent, non-representative central banks with a mandate solely for price stability. They try to use economic “reasoning” to support their conclusion, with regressions showing that countries with independent central banks have lower inflation. But they confuse ends with means – just as the entire enterprise which sees labour merely as input into production confuses ends with means. Inflation is of concern only to the extent that it leads to worse real outcomes, e.g. lower growth, more poverty, and greater inequality. And the link between independent central banks and these real outcomes is tenuous at best.

Even if one believed that institutionally it is preferable to have an independent central bank, independence is not the same as nonrepresentativeness. One can have an independent central bank, in which the differing interests of different stakeholders are represented. It is not the case that there is a single Pareto dominant policy, one to which all “reasonable” people can agree. And so long as that is the case, one cannot – or, at least, should not – delegate decision-making to technocrats. Still less should one delegate decision-making to one group whose interests are markedly different from those of other groups. I shall return to this point at the end of the next section.

Level of employment
The previous section argued that there is a role for government in the labour market: at the minimum, ensuring the right to collective action and enforcing minimum standards. The notion that markets fail to ensure socially efficient (and desirable) outcomes has long been recognized. Keynes pointed out that there might be persistent unemployment. But by a sleight of hand, what came to be called the neoclassical synthesis (Samuelson, 1997) argued that, once we correct for the market failure of massive unemployment, markets work efficiently.
Thus, the standard neoclassical model – with its implications of efficiency – prevailed. The neoclassical synthesis was simply an assertion, a hope, an attempt by those committed to the market model to limit the scope for potential government intervention. Bruce Greenwald and I argued that it was far more plausible to assume that there were pervasive market failures, of which massive unemployment was the most obvious manifestation, the tip of the iceberg that could not be ignored (Greenwald and Stiglitz, 1987). Research on the economics of information helped to explain what was wrong with the standard neoclassical
model: why there could be equilibrium unemployment, 8 why shocks to the economy could be amplified and result in the economy operating well below its “potential” for extended periods of time, and in the persistence of levels of unemployment far higher than the “equilibrium” level (see, for instance, Greenwald and Stiglitz, 1993).

Since Keynes and the Great Depression, few have believed in Say’s law, that an increase in the supply of labour would automatically bring about an increase in demand. The theories referred to above explained how government intervention could help stabilize the economy with less volatility and higher equilibrium levels of employment. The precepts of counter-cyclical fiscal and monetary policy have come to be taught as part of standard macroeconomics in universities around
the world. Remarkably, however, if we look at the data, we see that governments in less developed countries regularly engage in procyclical fiscal policies. Worse still, we have seen how the IMF has advocated fiscal and monetary tightening in the face of an impending recession. We have seen how these policies exacerbated the recessions in East Asia, helping to turn one into a depression, from which some have yet to fully recover. The IMF has also put in place strategies for financial market restructuring which have adversely affected macroeconomic performance. In its structural adjustment programmes, it has
often combined trade liberalization with interest rates so high that job and enterprise creation would have been impossible even in the best of economic circumstances, let alone in the more adverse circumstances prevailing in most developing countries. As the affected countries could not compete with the highly subsidized agricultural goods from the United States and elsewhere, the principles of comparative advantage did not play out in the way predicted by standard textbooks. Rather than moving from low productivity sectors to higher productivity, resources simply moved from low productivity to unemployment.

In transition economies as well, the policy framework all too often failed to lead to job creation. Even if the absence of a safety net implied that some employers did not fire their workers – resulting in less open unemployment than there might otherwise have been – it meant that they were underemployed, and often not paid. We now know the devastating effects – a GDP in Russia that is 40 per cent lower than ten years ago, and a poverty rate that has soared from 2 to 40 per cent or higher. Privatization, which was supposed to be the basis of wealth (and
job) creation, laid the foundation for asset stripping and job destruction.

Repeatedly, we have seen a vicious cycle come into play: with excessively high unemployment rates, deteriorating social cohesion, accompanied by a multitude of societal manifestations from urban violence to riots and civil strife, creating an unattractive environment for investment and job creation. We saw that in Indonesia, where I predicted in December 1997 that if the highly contractionary monetary and fiscal policies that had been imposed on that country were maintained, there would be civil and political turmoil within six months. My prediction, unfortunately, proved all too correct.

While high interest rates prevent job creation, in the case of heavily leveraged firms large increases in interest rates contribute to job destruction – again as we saw in East Asia. They force firms into bankruptcy, and even if the resources eventually get reallocated (though in the process there may be considerable losses in assets and asset values), in the interim there can be high unemployment. And unfortunately, lowering interest rates at that point does not undo the damage: the bankrupt firms do not become unbankrupt. This is one of
a number of important hysteresis effects within the labour market. In development, transition and crises – or even in ordinary economic downturns – markets do not automatically quickly lead to full employment, and it is now almost universally recognized that government has an important role in facilitating employment creation and the maintenance of the economy at full employment. We now know a great deal about how to design effective stimulus programmes. We know that monetary policy is more effective in constraining an economy in a boom than in stimulating an economy in recession, and that we therefore need to rely on fiscal measures. We also know a great deal about how to design effective fiscal measures, i.e. measures which operate quickly, which have high multiplier effects, and which do not exacerbate social divisions in countries where such divisions are strong. An example might be policies which change intertemporal prices to encourage consumption and investment during a period of
expected unemployment (in which the shadow prices of resources are low) and which reduce liquidity constraints that limit expenditures either on investment or on consumption. Such policies are indeed more effective than, say, tax cuts for the rich or permanent investment tax credits.

No matter how well we manage the economy, there will be downturns and, with downturns, unemployment. Yet while we know more about macroeconomic management, economic crises have become more frequent and deeper around the world: close to a hundred countries experienced crises in the last quarter of the twentieth century. I believe there are some reasons for this: changes in the global economic architecture, including capital market liberalization, have heightened risks beyond the coping ability of many developing countries. Thus, while countries need to be urged to construct adequate safety nets, anyone who is concerned with employment and decent work must be concerned about those features of the global economic architecture which contribute to volatility. Conversely, it seems perverse to argue simultaneously for measures that enhance global volatility and against measures that enhance worker security. Remarkably, however, this is precisely the position that advocates of the neo-liberal doctrines have taken.

The fact that there is a great deal of uncertainty in the dynamics of any economy implies that there is a great deal of uncertainty about the consequences of any policy. Today, for instance, we do not know how deep the recession will be, or would have been were it not for government intervention. All decision-making must take these risks into account; this entails a process of sequential decision-making, with policies revised as new information becomes available. But the policy structures must also take account of irreversibilities and non-linearities,
such as the fact, noted earlier, that while small increases in interest rates may not force a company into bankruptcy, large increases may, with huge implications for the dissolution of organizational capital; and subsequent lowering of interest rates may not undo the damage. Different policies entail different risks, with the risks being borne by different groups within societies. Not surprisingly, the policies advocated by those with financial interests result in a disproportionate share of the risks being borne by workers.

In framing macroeconomic policies, we need to keep our eyes on the ultimate objectives, not on intermediate variables – i.e. on employment, growth and living standards, not interest rates, inflation rates or exchange rates. Such variables are important only to the extent that they affect the variables of fundamental importance. Typically, however, macroeconomic analysis is framed around a trade-off between a variable that is of direct concern – employment and output today – and an intermediate variable: inflation. It is asserted that higher inflation
will lead to lower growth, though it is hard to find evidence of such a relationship being statistically and economically significant for countries which, like the United States, face low inflation. It is asserted that once inflation starts to grow, it will be difficult to turn it back – that the economy is on the edge of a precipice of price stability, from which it is easy to fall. Again, there is no evidence for this “precipice theory”. Finally, it is asserted that once inflation begins, it is very costly to reverse. The evidence however, is to the contrary – that the “augmented
Philips curve” is linear or convex, not concave, at least for the United States (Stiglitz, 1997).

No wonder then that there has been so little analysis of trade-offs between variables of fundamental concern: it is remarkably hard to establish such trade-offs. But even if one could, the analysis needs to focus on risks: what are the risks associated with excessively aggressive policies? With insufficiently aggressive policies? And who bears those risks? It should be clear that alternative policies force different groups within society to bear these risks. It follows then that macroeconomic policy is not a purely technical matter, and should therefore not be delegated to technocrats. It follows even more strongly that it is, to say the least, problematic to delegate decision-making to an independent central bank which is unrepresentative of the various groups

affected by macro-policy, which is dominated by financial interests, and which pays little if any attention to employment.
A concern for employment and workers thus leads us to advocate not only for strong macroeconomic policies committed to the maintenance of full employment, policies which lead to greater economic stability, and strong safety nets to protect workers against the inevitable fluctuations that remain even with the best of economic policies, but also for institutional arrangements which ensure that the interests and concerns of workers are adequately reflected. Throughout the world, even social democratic governments have failed, by their acquiescence in unrepresentative and independent central banks. There is indeed little evidence to support the view that countries with independent central

banks enjoy faster growth, high employment, higher living standards, or
higher real wages (holding everything else constant). It is, of course, hardly surprising that an independent central bank focusing exclusively on inflation leads to lower inflation; but as I said before, inflation is only an intermediate variable. Besides, even if one agrees on independence, it does not follow that the mandate of the central bank should focus exclusively on inflation. I would argue that the Federal Reserve’s broader mandate, which embraces employment and growth, has served the United States well. And if one argues that monetary policy should take account of employment and other objectives, it implies that if the central bank is independent, it should not be dominated by financial
interests; workers should have a voice, and an important one at that.

Labour as a means versus an end, and development as a transformation of society

While much of this article focuses on economic analysis – e.g. institutions and policies which contribute to increasing employment, and of the inadequacies of the neo-liberal model – I would be remiss if I failed to note that what is at stake is not just models of how the economy works but also objectives. As noted earlier, much of the neo-liberal doctrine has seen labour solely as an input into production, an input just like any other input. But if improving living standards is the objective of economics, then improving the welfare of workers becomes an end in itself; and only if one believes that the market leads to efficient outcomes
can one feel confident in not paying explicit attention to workers’ welfare, trusting that the market will make all the correct tradeoffs.

Elsewhere (Stiglitz, 1998), I have argued that development is more than just the accumulation of capital and the reduction of distortions (inefficiencies) in the economy. It is a transformation of society, a departure from traditional ways of doing things and traditional modes of thinking. If development were mainly a matter of capital accumulation, then successful development would entail primarily making a country more attractive for capital, enhancing the “security” of capital.

If, however, development is to be broader based, then we must pay at least as much attention to workers and their security. We must persuade them that change can benefit them. But if they are exposed to increased insecurity and higher unemployment it will not; and many of the “reform” policies have done exactly that. On a more positive note, successful democratic development entails questioning authority and participation in decision-making: democratic workplaces as well as democratic political processes. These entail more democratic governance structures at all levels.

The role of the international community
The principles set forth in this article so far are hardly radical, though in the terms of market-fundamentalist doctrines, which prevail in certain circles, they might seem so. This last section on the role of the international community begins with a simple premise, which should not be controversial either, though I am afraid it may appear to be so. That is, the international community should not push policies that contravene the above principles. Yet, that is precisely what the
international community has been doing, through the Washington Consensus policies that have prevailed within the international economic institutions. They have pushed macroeconomic policies that have resulted in unnecessarily high unemployment, with pro-cyclical monetary and fiscal policies, the worst and most dramatic manifestations of which were witnessed in East Asia. To those who have worked in developing countries, however, their effects have been clear for years. The international economic institutions have pushed financial policies that have replaced automatic stabilizers with automatic destabilizers: as economies go into recession, non-performing loans increase, and strict enforcement of capital adequacy standards forces banks to cut back credit, automatically accelerating the decline. They have pushed privatization of old-age pensions: this exposes the elderly to risks from which they might otherwise have been protected and imposes transaction costs which, while enriching the providers of
financial services, markedly diminish the benefits received by the elderly. They have not only pushed policies like capital market liberalization which expose countries to enormous risks they cannot manage well, but they have also pushed “labour market flexibility”, making workers bear more fully the brunt of the adverse consequences of those policies. They have opposed, or at least not supported, demands for rights to collective action on the argument that this would intrude into politics – though in a myriad of other contexts, they feel perfectly
comfortable doing so. This is not the occasion to try to explain why the institutions in question have taken such stances, though given their governance structure they can hardly come as a surprise: they are run by finance ministers and central bank governors, whose interests, perspectives and ideology are often not fully sympathetic with the concerns of workers.

But I think the international community should go further. The IMF was established more than a half century ago out of fear that, as the Second World War came to an end, the world would once again sink into a global recession. The IMF was supposed to put pressure on countries to pursue expansionary policies – recognizing that a downturn in one country has spillover effects on others (a negative externality) – and to provide the resources with which that could be done. It has not only abandoned its original mandate; it has, perversely, taken up the opposite cause, all too often providing funds to countries only on the
condition that they engage in contractionary policies. As noted earlier, many developing countries have pro-cyclical fiscal policies. All too often this perversity arises not from a lack of knowledge of modern economics, but from a lack of resources. As the expression goes, banks love to lend to those who do not need their money; so when developing countries go into recessions, they pull their loans, exacerbating the downturn. Thus, developing countries may not only face exorbitant interest rates – with risk premiums that reflect an irrational pessimism
which is the counterpoint to the excessive exuberance of the boom – they may also find themselves unable to access credit. There is now considerable support for the hypothesis that there may be credit rationing (Eaton and Gersovitz, 1981), the presence of which can be explained by theories of imperfect and asymmetric information (see, for example, Stiglitz and Weiss, 1981). The presence of such credit rationing (sometimes referred to as liquidity constraints) provides the ration ale for the IMF: why an international public institution is required. But unfortunately, rather than providing needed liquidity to developing countries
to enable them to pursue full employment policies, the IMF typically provides liquidity to countries only on the condition that they pursue contractionary policies.

But there is a more fundamental criticism of IMF strategies, one which focuses on countries’ trade deficits. Countries with large trade deficits are told to cut them back, but never is a word of criticism levelled at the countries maintaining sustained trade surpluses. If deficits are vice, then surpluses must be virtue. How different from Keynes’ conception: it was then surplus countries that were seen as the source of the problem, as their insistence on high levels of savings contributed to “underconsumption” and an insufficiency of aggregate demand, which threatened global prosperity. There was even discussion of imposing
penalties on surplus countries.

The more modern IMF seems to have missed a central point: the sum of all trade surpluses and deficits must add up to zero, so if some countries – like Japan and China – insist on having large surpluses, other countries must have correspondingly large deficits. The deficits are like hot potatoes. As one country is forced to eliminate its deficit, it must show up somewhere else in the system. With a focus on trade deficits, no wonder there is always an impending crisis somewhere in the world. These issues have taken on a greater urgency today as the world is slipping into a major slowdown. The issue is not whether growth will be negative: the point is that the global economy is performing markedly below its potential, and the gap will inevitably result in increases in unemployment.

There is a simple remedy. As has just been observed, problems of insufficiency of global aggregate demand were very much on the minds of Keynes and others at the time the IMF was established. There is a framework for enhancing aggregate purchasing power, namely through the creation of Special Drawing Rights (SDRs). One way of thinking about this is the following: assume that the nations of the world wish to maintain reserves equal to a fixed percentage of their GDP; with global GDP of around US$40 trillion and growth of around 2 per cent, if reserves were equal to 5 per cent of GDP, aggregate reserves would grow by US$40 billion a year. Given the surpluses of China and Japan, a number twice that size might be more realistic. An annual issue of SDRs in that amount would just offset the purchasing power set aside in reserves and thus not be inflationary. The SDRs could be used to pursue global interests – from helping the poorest countries to improving the global environment.

For the past several decades, the IMF has focused on bailing out creditors and pushing the neo-liberal agenda. The time is ripe for the IMF to return to its original mission – i.e. ensuring global liquidity, to enable sustained global growth and, with that growth, full employment. But I think the international community should go still further: it is not enough just to do “no harm”, or to have the IMF return to its role in promoting global economic prosperity. The international community should push for decent work , for full employment and better
working conditions. Today there is international surveillance of countries in terms of their conformity to international norms for macroeconomic policies and financial institutions. The IMF’s Article IV Consultations have grown beyond a review of whether countries are complying with the articles of agreement, to an intrusive review of a variety of policies. But while some macroeconomic indicators get enormous attention, others, such as the level of employment, the level of wages and disparities in pay, are virtually ignored. I believe very
strongly that information helps shape behaviour: if we focus on unemployment,
we will almost inevitably seek to ensure that it remains within reasonable limits, and if it does not, we will inquire into why not. If we demand that there be a “labour impact statement” before programmes (such as structural adjustment programmes) are adopted, then it is more likely that policies which minimize the adverse impacts on workers will be adopted.

Labour market experts must conduct the reviews. It is high time that we recognize that there are trade-offs in economic policies, that there is not a single Pareto-dominant policy. We should also recognize that there is a great deal of uncertainty about the consequences of economic policies and that there is, perhaps unsurprisingly, a correlation between those with particular perspectives /interests and the dominant views of the economy. It was those from the financial community who were the most ardent advocates of capital market liberalization, sliding over both the absence of compelling empirical and theoretical evidence
that it increased growth and the presence of compelling evidence that it increased instability. Within the economics profession, labour economists are the most sceptical about claims that even moderate minimum wages result in significant unemployment. But even if one does not accept the Card and Krueger (1995) findings that there is no adverse effect, their results make a compelling case that if there is an adverse effect, it is not large.

We need a new framework for Article IV Consultations, one that is conducted with greater openness and transparency, with broader participation. These consultations would serve not to impose conditions on countries, but rather to enhance the kinds of dialogue on economic policy that should be central to democracy. This may be a modest reform, but it is a small step that we can take
towards the creation of economic policies that promote social justice and societal well-being.

Concluding remarks
Labour policy has in many countries been subsumed under broader economic policies which, all too often, have come to be dominated by commercial and financial interests. Those defending such interests have been successful in propagating the idea that policies which advance their interests benefit all – a new version of trickle-down economics which suggests that workers do not even have to wait long, or at all, to receive the benefits of these wise policies. They claim there is a single Pareto-dominant set of policies, and therefore economic
policy can simply be entrusted to technocrats, whose job is to craft that Pareto-dominant policy. For too long labour has acquiesced, sometimes becoming a more effective advocate of that Pareto-dominant policy than those whose interests it serves.

What I am calling for is not a return to class warfare, but a simple recognition of long-standing principles: there are trade-offs; there is uncertainty; different policies affect different groups differently; the role of the economic adviser is to inform policy-makers of the consequences of different decisions; and it is the role of the political process to make those decisions.

The fact that these principles have often been subverted has some important implications. While we all speak passionately about the importance of democratic principles, we also recognize that our democracies are imperfect, and that some groups’ voices are heard more loudly than others. In the arena of international economic policy, the voices of commercial and financial interests are heard far more loudly than those of labour and consumer interests. As just noted, they have tried to convince others, with remarkable success, that there is no conflict
of interests – which means that there are no trade-offs. The consequences
speak for themselves: the growing dissatisfaction with the reform policies is partly a consequence of the fact that so many have actually been made worse off. In Mexico, for instance, the incomes of the poorest 30 per cent of the population have actually declined over the past 16 years. All of the income gains (reflected in increases in average GDP per capita) have occurred among the richest 30 per cent, and especially among the richest 10 per cent. According to the Inter American Development Bank, no country in Latin America for which data on income distribution are available can boast a decline in income inequality during the 1990s (IDB, 2000).

Government – and the international economic institutions, which are intergovernmental public institutions – play a role in determining the economic framework (including on those issues that affect labour relations). Therefore, one cannot separate politics from economics, as they are intimately intertwined. This was recognized by Teddy Roosevelt at the turn of the last century: his attack on trusts was not so much motivated by the loss of efficiency from the Harberger triangles resulting from monopoly power, as by the loss of democracy from the concentration of political power that follows from the concentration of economic power. The more stringent laws concerning the concentration of media power reflect similar concerns. Yet the economic policies that the international institutions have often pushed have resulted in the devastation of the middle classes and the aggrandizement of economic power. When national monopolies are sold prior to the establishment of effective regulatory and anti-trust institutions, those who hold these monopoly powers will use their wealth to perpetuate it. The Bill Gateses and the John D. Rockefellers of the world have clearly not been the strongest advocates of competition policy! The interplay
between politics and economics has been seen most dramatically in Russia, where the privatization process resulted in the devastation of the middle class, and the creation of huge inequalities and an oligarchy which, if it seeks to establish a rule of law, will use its wealth and power to try to ensure that that rule of law favours itself.

I have tried in this article to broaden the discussion beyond the confines of economics: there are market failures, and there is a role for government in correcting those market failures. Markets by themselves may fail not only to create full employment, but also to provide the right kind of working conditions. There are imperfections of competition and imperfections of corporate governance, and laws granting workers the rights to association and collective bargaining may serve to redress the balance, to give more effective voice to the concerns of workers, to enhance overall economic efficiency.

Advanced industrialized countries have developed a variety of institutions – including a strong independent academia, think tanks and NGOs – which give voice to broader national concerns, to the interests of consumers and workers, and which limit the scope, even if imperfectly, of special interests. This is not so in many developing countries.

They have been instrumental in perpetuating the myth that there is a single Pareto-dominant strategy – and the notion that economic policy is apolitical. Not only are they not supposed to enter into political matters (though they do so regularly and inevitably), they refer to the member governments as their shareholders, suggesting that they are more akin to corporations than to

political institutions.
Yet what is at stake for these countries is not just a matter of economic
efficiency, but the kind of society into which they will evolve, and the creation or survival of meaningful political democracy. In other words, income distribution and the creation of institutions which give effective voice to the concerns of workers matter, not just for economic efficiency, but for the dynamics of political and economic change. To take but one example: land reform. In many countries of the world, land is highly inequitably distributed, and much of the land is held in the form of sharecropping. The 50 per cent share which farmers must pay attenuates incentives. Were a government to impose a 50 per cent tax, however, the international economic institutions would speak out loudly about the attenuation of incentives. The seeming lack of concern on the part of the IMF is hardly a surprise: land reform would disturb established economic interests and might even question existing property rights, regardless of how those property claims had come to be established. An even stronger case for land reform can be made: several of the most successful developing countries carried out major land

reforms prior to – or at early stages of – their development transformation.
With interests of trade unions coinciding with those of the landless, the two can be a potent force for land reform.

Development is more than just the accumulation of capital and the enhanced efficiency of resource allocation; it is transformation of society. Equitable, sustainable and democratic development requires basic labour rights, including freedom of association and collective bargaining.

If we, as an international community, are to promote equitable, sustainable and democratic development – development that promotes societal well-being and conforms to basic principles of social justice – we must reform the international economic architecture. We must speak out more loudly against policies which work against the interests of workers. At the very least, we must point out the trade-offs, we must insist on democratic processes for determining how economic decisions are made. We have remained silent on these issues for too long – and the consequences have been grave.

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FUGITIVE FINANCIER'S STOCK FRAUD SCAM GETS PERSONAL

FOR the past two months this column has been chronicling the Krakatoa-like eruptions of fraud, forgery and identity theft that have been darkening the sky over New Jersey in the bankruptcy proceedings of a North Brunswick computer company called Allserve Systems Corp.

Allserve, which claimed (for a time) to be world leader in the booming computer-based business of corporate outsourcing, is the plaything of Dinesh Dalmia, a rogue financier from Calcutta. Last week the company brought evidence of one of Dalmia's most remarkable, and scary talents — a Zelig-like ability to dress himself in the camouflaging identity of virtually any person or company that comes near him.

Latest example: An unlisted cell phone number that was issued by then-Nextel Communications in April 2002 to a Bronx security guard, Gilberto Alvarez.

Last week, Alvarez's cell phone number was discovered in the bankruptcy files of one of Allserve's creditors, where it adorned an invoice seeking $1.3 million from the subsidiary of a Cincinnati-based software company called Cincom Systems — with the money to flow to a company secretly controlled by Dalmia.

This was all astonishing news to Alvarez, who insists that he knows nothing of Dalmia or the Allserve affair, and said he has no idea how his cell phone number turned up on the invoice.


Dalmia certainly knows the answer to that question if no one does. But like the rest of Allserve's largely Indian-born top brass, he's reported to have left the country and returned to India — leaving behind the mystery of Alvarez's cell phone number along with a lava flow of bank fraud, forgery and money laundering that now stretches from New Jersey to Singapore.

The invoice itself — ostensibly issued by Allserve supplier IGTL Solutions (USA) Inc. — is actually a tissue of lies, and the bankruptcy case file contains at least a dozen more like it, from its hoaked-up and bogus logo to its make-believe street address. The invoice even includes what purports to be IGTL's main corporate switchboard number. In reality, the number belongs to Alvarez's cell phone.

The invoice, issued in June 2004, seeks payment for $1.3 million worth of enumerated computer equipment, and directs that payment be made to a bank account at the Franklin Park, N.J., branch of PNC Bank.

BEHIND this hoax lay more than a year of history, beginning with the incorporation of IGTL as a New Jersey shell company housed in Allserve's North Brunswick office and having Dalmia as its president. The company's name was chosen to match, word for word, the name of a separate, and fully functioning, computer vendor based in Arlington, Va.

The idea behind the brazen ploy — which amounted not simply to the theft of a single individual's identity but to that of an entire corporation — was to give the invoice enough legitimacy so that Cincom would pay the $1.3 million bill without thinking. And the scam worked, because a subsequent notation on the invoice indicates the charge was approved for payment.

The use of Alvarez's cell phone number on a forged invoice is now just one more thing for the FBI to investigate as its agents struggle to scope out the ever-widening dimensions of the Allserve bankruptcy and the chicanery of its buccaneering Mister Big, Dinesh Dalmia.

From the start, Dalmia's calling card has been the purloined identity — a disturbing fact when one considers that much of the growth in the outsourcing business is coming from U.S. banks, credit-card companies and other such financial services outfits, which are blithely outsourcing their customer billing and records-keeping work to offshore data-processing sweat shops run by men like Dalmia.

Now, the collapse of Allserve has brought to light a whole new demi-world of stolen corporate identities featuring Dalmia-linked fake and "mirror image" companies, each set up to facilitate swindles that have so far bilked close to $100 million from a long list of presumably savvy U.S. lenders.

In California and Delaware, investigators have uncovered Dalmia-controlled mirror image and fake companies designed to look — on paper at least — like clones of Allserve's own business partners. In Delaware, there's even a mirror image of Allserve itself — set up as part of a failed scheme to take over a Texas-based outsourcing company called Aegis Communications.

No company has been more shaken by this skullduggery than privately held Cincom, one of the nation's largest, oldest and most-respected software companies. Some of the others that got snookered are International Business Machines, CIT Group and Wells Fargo Bank.

Almost immediately after setting up Allserve in early 2003 as an outsourcing operation in the U.S., Dalmia set up a fake version of Cincom as a Delaware shell. But Cincom officials discovered it and threatened to sue, causing Dalmia to stop — at least temporarily.

But a year later, Dalmia began worming his way into Cincom all over again. This time it happened through a mid-level Cincom sales manager who has now been put on leave by the company and is thought by officials to be facing indictment for a variety of offenses involving payments to Dalmia-linked companies. Others at Cincom are believed to be targets as well.

In London, yet more forged invoices tied to Cincom have now surfaced. One seeks a $911,690 payment, in the name of a Santa Clara, Calif., company called Cincom Systems Inc., to an account at the same Franklin Park, N.J., branch of PNC Bank listed on the invoice containing Alvarez's cell phone number.

A search of California business records reveals no such company, but does disclose a resident named Anoop Kapoor, who has held positions as a top official at both the London and New Jersey Allserves.

For two-and-a-half years, The Post has been pretty much a voice alone in warning of Dalmia The Despicable's arrival in town and what it might lead to. Yet no one listened as he prepared to pick the pockets of U.S. corporations a hundred times his size, then skedaddle back to India.

Now readers of this column have been up close and personal with a man who epitomizes all that is worst in the scruple-free business climate of the developing world. So, isn't it time for us to say, "Enough's enough!" — and put an end to this nutty outsourcing racket once and for all?

JUST forget about the liberal whining over the millions of entry- level computer jobs that have been wiped out in the U.S. already by this foolhardy approach to cost-cutting. Instead, think only about Gilberto Alvarez, the Bronx security guard, and how lucky he was that Dalmia didn't get his hands on more than just his cell phone number.

Then ask yourself this: If we can't even catch a thug like Dalmia while he's parading around New York robbing us all blind, then how on earth will we ever catch him — or others like him — if we're dumb enough to hand him all the computerized records of value that we have, so that they never have to leave the safety of their own squalid, corrupt home countries to steal it in the first place?

Isn't that what this all comes down to . . . really . . . in the end? Not being hopelessly stupid about the same thing . . . twice? Say goodnight, Gracie, it's been fun.

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Iridium’s delayed launch

Investors in the failed Iridium satellite phone project of Iridium are seeking around $4 billion in damages from Motorola, whose group was the lead promoter of the Iridium project


Iridium’s delayed launch
By Anna Marie Kukec
Daily Herald Business Writer

Some called it fraud.



But it more likely was just “tech-testosterone,” said Herschel Shosteck, president and chairman of The Shosteck Group, a wireless technology consulting firm in Silver Springs, Md.

He referred to creditors’ initial shock-and-awe regarding Iridium LLC, a revolutionary satellite communications company, and its system that was developed by Motorola Inc. and launched in 1998. The $5 billion network attracted few subscribers and nose-dived into bankruptcy the following year.

“It was pure fantasy, not fraud. It was delusional, not fraud. It was insanity, not fraud,” said Shosteck, an adviser who tried to dissuade some investors at the time. “Fraud implies purpose or knowledge in transmitting false information or intent to gain money from something. These people just didn’t understand anything.”

Since then, Motorola has spent millions settling several lawsuits arising after Iridium’s bankruptcy. And a trial is scheduled for Oct. 23 on a lawsuit against Motorola by the Official Committee of the Unsecured Creditors of Iridium in Bankruptcy Court in New York. The case, filed in July 2001, seeks around $4 billion in damages for claims alleging breach of contract, warranty and fiduciary duty, among others.

How it started

In 1987, Motorola developed the Iridium concept as a way to provide mobile phone service anywhere in the world through a network of more than 60 orbiting satellites. After more than a decade of work, Iridium began offering service in 1998.

A few months later, Iridium ran into trouble. Subscribers weren’t jumping for it, due to cost and quality of service issues, and great strides in Motorola’s own cellular technology were nudging it aside.

In 1999, Iridium defaulted on loans totaling about $1.5 billion and filed for bankruptcy protection.

“Iridium was absolutely brilliant, but it was economically not viable,” Shosteck said. “If you’re in trouble in the middle of the Antarctic, you’re not going to call your mother-in-law in New York. You’re going to call for help. … The business just wasn’t going to generate enough revenue from the developing world and the capital investment was just too great.”

Also, Iridium was competing with other satellite networks, including Globalstar. With the quick advances in the cellular phone network, the market became saturated, said David Weissman, senior telecom analyst with Zacks Investment Research.

“You must also consider the intellectual property and the technology learning curve that it brought to Motorola back then, and how adaptive the company was in progressing back to more mainstream markets where it is now,” said Weissman. “Iridium also was a partial response to defense and government requirements for closer reliance on the latest commercial off-the-shelf technology. The massive network may have not panned out, but Motorola developed a better understanding of its customer requirements.”

A new company

In 2000, a new group of investors led by Dan Colussy formed Iridium Satellite LLC and acquired all the assets for around $25 million. They pumped in another $100 million to get operations going again.

“I was a user of the system and realized what a tremendous network it was,” Colussy said during an interview while on business in Portugal. “It was just too valuable and too much of an advanced piece of technology at the time to let it just go away.”

The Iridium system has the unique ability to reach all of the world’s remote areas, including the airspace, the oceans and the many under-developed parts of the globe that have no communications systems, Colussy said.

Since none of the satellites were destroyed after the bankruptcy filing, the system remained intact and ready. Colussy, who became the new company’s CEO, pursued subscribers from different industries, such as aviation, maritime and government agencies.

Iridium secured a contract with the U.S. Department of Defense and has played major roles in the Hurricane Katrina region as well as the war in Iraq.

Today, Iridium remains privately held. It posted $188 million in revenue in 2005 and has around 100 employees, mostly at its Bethesda, Md., headquarters and facilities in Tempe, Ariz.

It has about 162,000 subscribers and anticipates $200 million in revenues this year. By 2013, Iridium plans to replace its 66 satellites with newer technologies, Colussy said.

Meanwhile …

While the new Iridium rose from the ashes, Motorola has been dealing with residual suits from the old company.

The lenders’ claim for a $300 million guarantee had been filed in federal court in New York. That case led to a judgment against Motorola in early 2002, which was appealed. The judgment, which totaled $371 million including interest, was paid by Motorola in April 2002.

In March 2003, Motorola paid $12 million to settle remaining lawsuits filed by Chase Manhattan Bank, resolving five legal disputes with the lenders. Motorola had a $260 million counterclaim against Chase, but dropped it with this settlement. The settlement also covered a case filed in a New York state court alleging that Motorola and the old Iridium had “fraudulently induced” Chase and 17 other lenders of old Iridium to enter into the Senior Secured Credit Agreement. That case sought the entire unpaid balance of the $800 million loan, plus interest and expenses.

Motorola still faces another lawsuit filed in U.S. Bankruptcy Court in July 2001 by the Official Committee of Unsecured Creditors seeking damages in excess of $4 billion.

“While the still pending cases are in various stages and the outcomes are not predictable, an unfavorable outcome of one or more of these cases could have a material adverse effect on the company’s consolidated financial position, liquidity or results of operations,” Motorola said in a government filing.

Motorola executives declined comment for this story, but did release a statement saying “Motorola believed that Iridium would be technically and commercially successful as was demonstrated by Motorola’s commitment to the Iridium project. Iridium was a technical success and the system is still up and running today.”

Iridium ranks as one of Motorola’s more embarrassing failures, said Carmi Levy, senior research analyst for Info-Tech Research Group.

“This is an example of hype spinning out of control, of proper elements of due diligence not being performed, and of failure to properly assess competing technologies which could potentially — and ultimately did — kill demand for the initial launch of Iridium,” he said.

Levy compared the Iridium frenzy with the Internet boom of the late 1990s, where companies assumed the momentum of the market would more than make up for failures to address the fundamentals of business.

“Both Motorola and Iridium have evolved into different companies since all of that happened,” said Levy. “I believe the market recognizes the Motorola of today is a much more evolved firm than the Motorola that decided to back the launch of Iridium.”

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Why is corporate India worried about the N.Narayana Murthy Committee?

Background: In just over a year since the Securities and Exchange Board of India’s (SEBI) corporate governance rules came into existence, Indian companies have shown that the can follow the rules without necessarily imbibing the spirit of good governance.

But Indian companies actually began to look good in comparison with the extent of corporate scandal and outright fraud that continues to be unearthed in some of the biggest and most respected companies of the world.

The corporate clean up that followed revelations from Enron, WorldCom, Tyco, Morgan Stanley etc. led to a further tightening of rules in India. What followed was the N.Narayana Murthy Committee set up by SEBI (Click here for more) and the Naresh Chandra Committee ( Click here for more) by the Department of Company Affairs (DCA) –. Between them, the two reports have examined all corporate relationships and come up with a set of recommendations that would make corporate disclosures more comprehensive and the capital market safer for investors.

But corporate India is furious. I learn that the Tata group, surprisingly enough, dashed off a letter to the powerful Confederation of Indian Industries (CII) asking why it had not objected to some of the recommendations. Rahul Bajaj, Chairman of Bajaj Auto, speaking at the CII’s Western Region Annual Meeting last month felt that “we are going too far” with the disclosures.

CII then decided to debate the issue at its Annual Meeting in Delhi on April 28 and 29.

The CII’s main grouse is apparently the Narayana Murthy Committee’s recommendation that independent directors should step down from the board after three terms of three years each. Which is nine years prospectively after the recommendation is accepted (if it is accepted by SEBI and made mandatory).

Speaking at the seminar, Senior Tata Director J.J.Irani said that directors began to make the best contribution only after they have been on the board for 20 odd years. Considering that people are usually invited to be directors only after they are 45 or older, J.J.Irani seems to suggest that an independent director is truly useful only after the age of 65. Yet, most world leaders today are in their 40s and 50s. Bill Clinton finished two terms as the most powerful man on earth by the age of 52. Tony Blair is under 50 so is Russia’s Vladimir Putin.

Ironically, R.Gopalakrishnan, a senior Tata director specifically represented the Tata group on the committee but he made no dissent while on the committee. In fact, another highly regarded committee member is a director on several Tata companies and he did not object either.

It makes you wonder whether the recommendations of the Narayana Murthy Committee are really the issue, or there are other worries at work here.

The CII invited me to participate in its discussion on April 29. Here is what I think and what I said at the meeting.

CII National Conference – April 29 Thank you for inviting me to what promises to be a tricky session. I hope can be at least as blunt on the subject of corporate governance as Rahul Bajaj was about Narendra Modi’s governance.

I am told that this particular discussion is born out of Corporate India’s fear that we are going too far on the issue of corporate governance. That we are getting “holier” than most developing and developed countries. And, that there is no rationale for rules and disclosures being made more stringent.

Lets look at various events since the code came into existence. The CII triggered off the good governance debate and published its code for desirable corporate governance in 1998. This was followed by the Kumar Mangalam Birla report --- substantially a copy of the CII code- that was converted into a mandatory reporting requirement by SEBI under the listing agreement of stock exchanges.

Is SEBI wrong in tightening the rules after the Kumar Birla code? Surely, those of you who have followed corporate developments, after SEBI’s code became mandatory can’t be asking that question.

If the focus of good corporate governance is maximising shareholder value, while ensuring fairness to all stakeholders—then Indian companies haven’t done too well.

The best of corporate groups have short-changed investors—especially during mergers and takeovers.

Independence of directors has been exposed as a sham in some of the best groups, which were unable to spot rampant insider trading and illegality. · Our largest private sector companies have brazenly indulged in price manipulation and, dare I say, insider trading. · Leading companies have found obnoxious loopholes or used the opaqueness of Sec. 391 of the companies act (or the scheme of arrangement via the High Court route) to leave retail investors out in the cold. Yet, these are the people they call their co-owners. AND, I am not talking about the bottom 1000 of India’s 6000 odd listed companies – I speak about the top 50.

Whenever we discuss good governance, the issue of form v/s substance comes up repeatedly. Has the code led to compliance in substance? Many of you will readily admit that it has not. Even today, very few companies appoint truly independent directors. One industrialist told me that the renowned international banker on his board happens to be his ‘sadu’ – which makes him technically ‘independent’ but not necessarily so. I am sure there are a hundred other examples.

Had SEBI’s code actually worked, we ought to have seen a revival in investor confidence and some signs of the primary market looking up. That has not happened. And it is not because companies don’t need money. There are at least three good issue waiting to hit the market – Maruti, TCS and maybe Bharat Petroleum – but they are reportedly worried about poor investor response. So clearly, there is scope for a sequel to the Kumar Birla effort.

Now consider the strange reactions to the Narayana Murthy committee report. Instead of being released for discussion on SEBI’s website, the report, curiously enough found its way to the Finance Secretary (FS). I learnt from government sources that the report could not be released until the FS gave our “independent regulator” the green signal to do so.

Now that it has been released for discussion, corporate India is worried that its implementation would make it “holier” than other developed countries.

Well, my suspicion is that most of these worries stem from the fact that Narayana Murthy headed the committee.

Why? Because Mr. Murthy heads a company that Forbes magazine described as “a model of transparency, not just for the rest of corporate India but for companies everywhere”. He mentors the only company in the world to publish financial statements according to the accounting standards of eight countries. And there is a probably a justifiable fear that this man maybe trying to impose his standards on the rest of corporate India.

If that is indeed a worry, then you have got it all wrong. In fact, because of his insistence on democratic proceedings, he couldn’t impose his views even on the committee – not that he tried—he was insistent on a workable code rather than a fanciful one. Funnily enough, the same democratic proceeding also ensured that SEBI could not impose its views about corporate governance ratings on the committee.

Let me take a few minutes of your time to describe how Mr.Murthy conducted the proceedings. The entire report was completed in exactly three meetings – not because he wrote the whole report – or sub-contracted it to Omkar (Dr.Omkar Goswami is a Senior Economist with the CII and a director of Infosys Technologies), -- but because he followed a system of elimination of less favoured issues.

The homework began before the first meeting with every member submitting a two-page note on governance issues that ought to be taken up by the committee. These were aggregated, by Infosys—and converted into a simple set of points for further discussion. This eliminated the usual round of opinions and speeches that usually happen on Day 1 of any new committee.

The discussion led to the identification of 75 odd issues. Each committee member was then asked to rate every one of these on a scale of 1 to 10, on the following parameters:

Importance: is the issue important enough

Fairness: Does the report enhance fairness?
Accountability: Will it make companies more accountable?
Transparency: Will it increase transparency?
Ease of implementation: Is it easy to implement?
Verifiability: Is the recommendation verifiable?
Enforceability: Is it enforceable?

The submissions were again processed by Infosys – or rather Sumant Chidambi of Progeon – and aggregated. Only those issues that scored more than 50 marks were taken up for discussion at the second meeting. These were issues that received high ratings from a majority of members.

The result? All extreme views were eliminated.

What is more important from your point of view is that several issues raised by the four investor activists on the committee scored below 40 and were eliminated. Since the process was transparent, there were no protests. In fact, there has been one belated dissent note from Prof. Manubhai Shah. Significantly enough, his views have not been endorsed by the other investor activists in a mindless show of solidarity. (Click here for more)

Similarly, some demands were diluted by a majority vote. For instance, the debate on the term of independent directors started with a demand that independent directors much change every 3 to 5 years. Finally, the majority decision settled for almost a decade – three terms of three years, to be applied prospectively. This means, that all companies have nearly a decade in which to expand the pool of people capable of being their directors. Or to spot talent outside your current charmed circle.

Finally, I suspect that when SEBI set up the Narayana Murthy committee, it hoped that the committee would endorse its pet project of mandating corporate governance ratings. But despite an eloquent presentation by SEBI officials, the committee has not recommended mandatory corporate governance ratings. In fact, Narayana Murthy was one of those who insisted that they are far too subjective to work—although he surely had no reason to worry about his own rating.

Since governance ratings went out of the window, some follow up demands from investor activists were also eliminated. One of these was a demand that only companies with good governance ratings be invited to prestigious committees or made office bearers of industry associations.

All this only goes to show that the report is about what is doable and acceptable to the widest cross-section of people connected with business and industry. Let me conclude by saying – don’t worry. Indian business has a long way to go before it needs to worry about becoming ‘holier’ than other developed countries.

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Phaneesh Murthy of Infosys: The Sexual harassment saga

Phaneesh Murthy, the marketing hotshot from Infosys Technologies Ltd who had to leave India's most respected company following a sexual harassment suit has cost the company $ 3.9 million in settlement and costs. Phaneesh, who has got away lightly in terms of loss of reputation, has expressed irritation at the settlement announced on 11 May 2003. The normally reticent Infosys has reacted to his claims in a detailed press release, about what threatens to turn into a dirty Indian battle if Phaneesh persists with his charges.

Here is Infosys's clarification on settlement of sexual harassment lawsuit

Bangalore, India - May 12, 2003 In response to Infosys' announcement that it has settled the litigation with its former employee, Reka Maximovitch, Mr. Phaneesh Murthy, its former director and officer, has asserted that since the settlement was not his preferred route, he did not contribute to the settlement amount. He has further asserted that Infosys settled this matter because of its upcoming ADR offering, and the company wanted to retaliate against him because he has filed a lawsuit against the Company demanding the release of certain shares in Infosys' possession.

Infosys' spokesperson R. Nithyanandan, Corporate Counsel and Head - Legal, termed every one of these assertions as being blatantly false, and offered the following clarifications:

On Phaneesh's asserted reasons for Infosys settling this matter:

"As has been stated, Infosys settled this matter because it believed it was in the best interests of the company to do so. The company has disclosed in all its SEC filings as early as October 2002 that the case with Reka may materially impact the earnings of the company. As the company had already disclosed the risk in its filings there is no connection between the settlement and the proposed ADR offering.

This case was settled on April 25, 2003 as the depositions were to start on the same day. A reading of the many public filings in this case would bring forth the grave nature of the allegations made against Phaneesh."

On Phaneesh's claim that he was an unwilling party to the settlement:

"In the settlement discussions, Infosys had made it clear that it was willing to settle with Reka, without Phaneesh.

For Phaneesh to participate in the settlement, Infosys had clearly specified that (a) he agree to Infosys having the right to sue him for all his actions and lack of contribution (b) he further agree that in the event Infosys sued him for his actions, including for breach of his fiduciary duties and indemnification, he would have no recourse to the insurance company and (c) that the company not be bound by any term of confidentiality with respect to this settlement or the case.

Initially, Phaneesh refused to participate in the settlement on these terms. When Infosys confirmed to him that the company was anyway going ahead with the settlement alone, Phaneesh came back voluntarily and signed the settlement and agreed to every condition that Infosys had set. As the company retained its right to sue Phaneesh for his actions and lack of contributions, it went ahead with the settlement without any contribution from Phaneesh.

If Phaneesh believed he was innocent and wanted to clear his name, he should have stayed in the lawsuit by himself and defended his position. We had given him this option. Instead of fighting to clear his name, he elected to settle."

On Phaneesh's claim that Infosys is withholding his shares and that he has initiated legal action to retrieve them: "

Infosys has not received any notice of demand in respect of these shares from Phaneesh and the company is unaware of any lawsuit filed by Phaneesh in this regard.

Under the company's 1994 ESOP scheme, every employee is required to meet all the liabilities including taxes, on the grant of the options. Every employee has entered into an agreement with the Infosys Employees Welfare Trust (EWT) to indemnify the EWT and the Company for any tax liability and as part of such indemnity agreed to keep a part of his/her shares with the EWT to meet any tax liability. The EWT is holding 25,600 shares belonging to Phaneesh Murthy as part of a tax indemnity he had signed on December 15, 1997. The company has not singled out Phaneesh Murthy for this indemnity or withholding of shares. More than thousand employees, who received stock options under the 1994 ESOP Plan, have signed the same indemnities and their shares are also being withheld under a similar tax indemnity. The tax liability is not settled and is currently being agitated in the Karnataka High Court. As a result, the EWT has retained this indemnity till the matter is resolved fully and finally. Signing such an indemnity is a condition for participation in the ESOP. Phaneesh has been aware of these facts since 1997 and his lawyers were again given this data in March 2003."

About Infosys Technologies Ltd. (NASDAQ: INFY) Infosys, a world leader in consulting and information technology services, partners with Global 2000 companies to provide business consulting, systems integration, application development and product engineering services. Through these services, Infosys enables its clients to fully exploit technology for business transformation. Clients leverage Infosys' Global Delivery Model to achieve higher quality, rapid time-to-market and cost-effective solutions. Infosys has over 15,000 employees in over 30 offices worldwide. For more information, visit www.infosys.com.

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