1. Why do you think the English Premier League has historically charged different prices for broadcasting rights in different European markets?
2. Do you think the European Court of Justice was right to rule that the league could not stop people from buying premier League soccer feeds from other countries? Explain your reasoning?
3. Who benefits from the EU ruling? Who will the losers be?
4. If you were running the English Premier League, what would your strategy be on broadcast rights going forward?
Case Study 2
When the former World Bank economist Bingu wa Mutharika became president of the East African nation of Malawi in 2004, it seemed to be the beginning of a new age for one of the world’s poorest countries. In landlocked Malawi, most of the population subsists on less than a dollar a day. Mutharika was their champion. He introduced a subsidy program for fertilizer to help poor farmers and gave them seeds. Agricultural output expanded, and the economy boomed, growing by 7 percent per year between 2005 and 2010. International donors loved him, and aid money started to pour in from the United Kingdom and the United States. By 2011, foreign aid was accounting for more than half of Malawi’s annual budget.
In 2009, to no one’s surprise, Mutharika was reelected president. Then things started to fall apart. Mutharika became increasingly dictatorial. He pushed aside the country’s central bankers and ministers to take full control of economic policy. He called himself “Economist in Chief.” Critics at home were harassed and jailed. Independent newspapers were threatened. When a cable from the British ambassador describing Mutharika as “autocratic and intolerant of criticism” was leaked, he expelled the British ambassador. Britain responded by freezing aid worth $550 million over four years. When police in mid-2011 killed 20 antigovernment protestors, other aid donors withdrew their support, including most significantly the United States. Mutharika told the donors they could go to hell. To compound matters, tobacco sales, which usually accounted for 60 percent of foreign currency revenues, plunged on diminishing international demand and the decreasing quality of the local product, which had been hurt by a persistive drought.
By late 2011, Malawi was experiencing a full-blown foreign currency crisis. The International Monetary Fund urged Mutharika to devalue the kwacha, Malawi’s currency, to spur tobacco and tea exports. The kwacha was pegged to the U.S. dollar at 170 kwacha to the dollar. The IMF wanted Malawi to adopt an exchange rate of 280 kwacha to the dollar, which was closer to the black market exchange rate. Mutharika refused, arguing that this would cause price inflation and hurt Malawi’s poor. He also refused to meet with an IMF delegation, saying that the delegates were “too junior.” The IMF put a $79 million loan program it had with Malawi on hold, further exacerbating the foreign currency crisis. Malawi was in a tailspin.
In early April 2012, Mutharika had a massive heart attack. He was rushed to the hospital in the capital Lilongwe, but ironically, the medicines that he needed were out of stock—the hospital lacked the foreign currency to buy them! Mutharika died. Despite considerable opposition from Mutharika supporters who wanted his brother to succeed him, Joyce Banda, the vice president, was sworn in as president. Although no one has stated this publicly, it seems clear that intense diplomatic pressure from the United Kingdom and United States persuaded Mutharika’s supporters to relent. Once in power, Banda announced that Malawi would devalue the kwacha by 40 percent. For its part, the IMF unblocked its loan program, while foreign donors, including the UK and United States, stated that they would resume their programs.
Questions
1. What were the causes of Malawi’s currency troubles?
2. Why did Mutharika resist IMF calls for currency devaluation? If he had lived and remained in power, what do you think would have happened to the economy of Malawi assuming that he did not change his position?
3. Now that Malawi’s currency has been devalued, what do you think the economic consequences will be? Is this good for the economy?
Case Study 3
In October 2006, the Industrial and Commercial Bank of China, or ICBC, successfully completed the world’s largest ever initial public offering (IPO), raising some $21 billion. It beat Japan’s 1998 IPO of NTT DoCoMo by a wide margin to earn a place in the record books (NTT raised $18.4 billion in its IPO). The ICBC offering followed the IPOs of a number of other Chinese banks and corporations in recent years. Indeed, Chinese enterprises have been regularly tapping global capital markets for the last decade, as the Chinese have sought to fortify the balance sheets of the country’s largest companies, to improve corporate governance and transparency, and to give China’s industry leaders global recognition. Since 2000, Chinese companies have raised more than $100 billion from the equity markets. About half of that came in 2005 and 2006, largely from the country’s biggest banks. Shares sold by Chinese companies are also accounting for a greater share of global equity sales—around 10 percent in 2006 compared to 2.8 percent in 2001, surpassing the total amount raised by companies in the world’s second largest economy, Japan.
To raise this amount of capital, Chinese corporations have been aggressively courting international investors. In the case of ICBC, it simultaneously listed its IPO shares on the Shanghai stock exchange and the Hong Kong exchange. The rationale for the Hong Kong listing was that regulations in Hong Kong are in accordance with international standards, while those in Shanghai have some way to go. By listing in Hong Kong, ICBC signaled to potential investors that it would adhere to the strict reporting and governance standards expected of the top global companies.
The ICBC listing attracted considerable interest from foreign investors, who saw it as a way to invest in the Chinese economy. ICBC has a nationwide bank network of more than 18,000, the largest in the nation. It claims 2.5 million corporate customers and 150 million personal accounts. Some 1,000 institutions from across the globe reportedly bid for shares in the IPO. Total orders from these institutions were equivalent to 40 times the amount of stock offered for sale. In other words, the offering was massively oversubscribed. Indeed, the issue generated total demand of some $430 billion, almost twice the value of Citicorp, the world’s largest bank by market capitalization. The listing on Hong Kong attracted some $350 billion in orders from global investors, more than any other offering in Hong Kong’s history. The domestic portion of the stock sales, through the Shanghai exchange, attracted some $80 billion in orders. This massive oversubscription enabled ICBC to raise the issuing price for its shares and reap some $2 billion more than initially planned.
1. Why did ICBC feel it was necessary to issue equity in markets outside of China? What are the advantages of such a move? Can you see any disadvantages?
2. What was the attraction of the ICBC listing to foreign investors? What do you think are the risks for a foreigner associated with investing in ICBC?
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