Professional Documents
Culture Documents
Of Economics
2nd EDITION
Lidija Rangelovska
A Narcissus Publications Imprint, Skopje 2007
1
© 2004-7 Copyright Lidija Rangelovska.
All rights reserved. This book, or any part thereof, may not be used or reproduced in
any manner without written permission from:
Lidija Rangelovska – write to:
palma@unet.com.mk or to
samvaknin@gmail.com
Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review":
http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html
2
CONTENTS
I. A
II. B
III. C
IV. D
V. E
VI. F
VII. G
VIII. H
IX. I-J
X. K
XI. L
XII. M
XIII. N
XIV. O
XV. P-Q
XVI. R
XVII. S
XVIII. T
XIX. U-V-W
XX. X-Y-Z
XXI. The Author
3
A
Accounting (in Eastern Europe)
Hermitage Capital Management, an international
investment firm owned by HSBC London, is suing PwC
(PricewaterhouseCoopers), the biggest among the big four
accounting firms (Andersen, the fifth, is being
cannibalized by its competitors).
4
But Browder's charges are supported by Boris Fyodorov,
a former Russian minister of finance and a current
Gazprom independent director. Fyodorov manages his
own investment boutique, United Financial Group.
Browder is a former Solomon Brothers investment
banker. Other investment banks and brokerage firms -
foreign and Russian - are supportive of his allegations.
They won't and can't be fobbed.
5
behalf of management rather than shareholders." In a
series of outlandish ads, published in Russian business
dailies in late February, senior partners in the PwC
Moscow office made this incredible statement: "(Audit)
does not represent a review of each transaction, or a
qualitative assessment of a company's performance."
That was before Enron. The tables have turned. The Big
Five - from disintegrating Andersen to KPMG - are being
6
chastised and fined for negligent practices, flagrant
conflicts of interests, misrepresentation, questionable
ethics and worse. Their worldwide clout, moral authority,
and professional standing have been considerably dented.
7
The Russian Investor Protection Association (IPA) and
Institute of Professional Auditors (IPAR) embarked on a
survey of Russian investors, enterprises, auditors, and
state officials - and what they think about the quality of
the audit services they are getting.
8
The Big Six accounting firms were among the first to
establish a presence in Russia. Together with major league
consultancies, such as Baker-McKinsey, they coached
Russian entrepreneurs and managers in the ways of the
West. They introduced investors to Russia when it was
still considered a frontier land. They promoted Russian
enterprises abroad and nursed the first, precarious, joint
ventures between paranoid Russians and disdainful
Westerners.
9
Accounting (in USA)
On May 31, 2005, the US Supreme Court overturned the
conviction of accounting firm Arthur Anderson on
charges related to its handling of the books of the now
defunct energy concern, Enron. It was only the latest
scene in a drama which unfolded at the height of the wave
of corporate malfeasance in the USA.
10
balance net results (of past operations) against net
resources (available for future operations)".
11
increased. The effect of this on stock values and, thereby,
on executive rewards are secondary and tertiary outcomes
not caused directly by the accountancy.
12
members. The GAAP has been tempered by political and
business lobbying. Moreover, accounting rules for
taxation purposes and applied to companies quoted on
stock exchanges are not always consistent with the
GAAP.
13
Alas, sometimes the IAS and the GAAP are in
disagreement. The two rule-making bodies - FASB and
IASB - are trying to cooperate to eliminate such
differences.
14
A: There are no standard practices for governmental
accounting - whether national, federal, state, or local. The
International Federation of Accountants (IFAC) urged
accountants to follow various practices. It subsequently
settled mainly on accrual accounting standards.
15
treated as capital expenditures to balance the operating
budget.
16
A cash-based system cannot engender a credible balance
sheet. It produces meaningless and incoherent information
on assets and liabilities and the ownership, or trusteeship, of
separate (or separable) funds. It is not a sound system of
budgetary control. When year-end unpaid invoices are held
over, it creates a false impression of operating within
approved budgetary limits. Thus, local government units
can run serious budgetary deficits that are hidden from
public view merely by not paying their bills on time and
in full! A cash accounting system will not reveal this.
17
the auditors whose obligation is to report to the
shareholders on the credibility and legality of the financial
statements. The shareholders may appoint an audit
committee to review the audit reports on their behalf. The
audit is carried out by Certified Public Accountants with
recognized accounting credentials. Both the qualified
accountants in the audit firm and those in the corporation
are subject to professional discipline of their accounting
institutions and of the law.
18
However, it is quite common, in many countries, for local
government financial statements to be audited by properly
authorized public officials. Auditors should be qualified,
independent, experienced, and competent. Audits should
be regular and comprehensive. It is unclear whether or not
public official auditors always fulfill these conditions.
19
There seems to be an unwillingness to accept that the two
systems are intended to operate quite differently. What is
good for a central government is not necessarily equally
good for a local government unit. For example, the main
purpose of local government is to provide public services,
with only enough authority to perform them effectively. It
is almost always the responsibility of a central or state
government to enact and enforce the criminal and civil
law. Local by-laws or ordinances are usually concerned
only with minor matters and are subject to an enabling
legislation. Moreover, they may prove to be "ultra vires"
(beyond their powers) and, therefore, unconstitutional, or
at least unenforceable.
20
individual members may die, resign or otherwise cease their
membership.
21
externalities (such as sewerage and solid waste
management), the provision of whole or partial public
goods (such as street lighting, or roads) and merit goods
(such as education, health, and welfare), and services that
the community, for economic or social reasons, seeks to
subsidize (such as urban transport). Left to the private
marketplace, these services would be absent, or under-
supplied, or over-charged for.
22
Third, the central government may lend directly to local
governments, or guarantee their borrowing. Finally, local
governments are left to their own devices to raise loans as
and when they can, on whatever terms are available. This
usually leaves them in a precarious position, because the
market for this kind of long and medium term credit is
thin and costly.
Q: In the age of the Internet and the car, isn't the added
layer of municipal bureaucracy superfluous or even
counterproductive? Can't the center - at least in smallish
countries - administer things at least as well?
23
River (which flows through the Washington area) are
substantially different from those to the south and west.
Finally, the Boston area, a cradle of U.S. democracy, is
governed by a conglomerate of over 40 local government
jurisdictions. Even its most famous college, Harvard, is in
Cambridge and not in Boston itself. Many of the
jurisdictions are so small (Boston is not very big by U.S.
standards) that common services are run by agencies of
the State of Massachusetts.
Afghanistan, Economy of
24
against the Soviet occupation of Afghanistan - another
2000 tonnes (their fee for providing military and security
services to the Taliban). Even at the current, depressed,
prices, this would fetch well over 2 billion US dollars in
next door Pakistan. It also represents 5 years of total
European consumption and a (current) street level value in
excess of 100 billion US dollars. The Taliban intends to
offload this quantity in the next few months and to
convert it to weapons. Destabilizing the societies of the
West is another welcome side effect.
II. Agriculture
25
have been vacated. Close to 70% of all villages are
demolished. Unemployment - in a mostly unskilled
workforce of 11 million - may well exceed 50%. Poverty
is rampant, food scarce, population growth unsustainable.
The traditional social safety net - the family - has
unraveled, leading to widespread and recurrent famine
and malnutrition. The mainstays of grazing and cattle
herding have been hampered by mines and deforestation.
26
exchange dealing is conducted in thousands of small,
privately owned, exchange offices. Rich Afghani traders
have invested heavily in small scale and home industries
(mainly in textiles and agri-business).
III. Trade
27
through this duty free corridor (and promptly re-exports
them illegally to Pakistan). Pakistani authorities
periodically react by unilaterally dropping duty free items
off the ATT list. The Afghans proceed to import the
banned items (many of them manufactured in Pakistan's
archrival, India) via the Gulf states, Russia, Ukraine
(another important drug route) and into Pakistan.
Agent-Principal Problem
In the catechism of capitalism, shares represent the part-
ownership of an economic enterprise, usually a firm. The
value of shares is determined by the replacement value of
the assets of the firm, including intangibles such as
goodwill. The price of the share is determined by
transactions among arm's length buyers and sellers in an
efficient and liquid market. The price reflects expectations
regarding the future value of the firm and the stock's
future stream of income - i.e., dividends.
28
Alas, none of these oft-recited dogmas bears any
resemblance to reality. Shares rarely represent ownership.
The float - the number of shares available to the public - is
frequently marginal. Shareholders meet once a year to
vent and disperse. Boards of directors are appointed by
management - as are auditors. Shareholders are not
represented in any decision making process - small or big.
29
Managers will always rob blind the companies they run.
They will always manipulate boards to collude in their
shenanigans. They will always bribe auditors to bend the
rules. In other words, they will always act in their self-
interest. In their defense, they can say that the damage
from such actions to each shareholder is minuscule while
the benefits to the manager are enormous. In other words,
this is the rational, self-interested, thing to do.
30
provoking persistent interest and excitement around the
business. Shareholders, in other words, do not behave as
owners of the firm - they behave as free-riders.
31
Why do citizens protest against a smaller government -
even though it means lower taxes?
AIDS
The region which brought you the Black Death,
communism and all-pervasive kleptocracy now presents:
AIDS. The process of enlargement to the east may,
unwittingly, open the European Union's doors to the two
scourges of inordinately brutal organized crime and
exceptionally lethal disease. As Newsweek noted, the
threat is greater and nearer than any hysterically conjured
act of terrorism.
32
The effective measure of quarantining the HIV-positive
inhabitants of the blighted region to prevent a calamity of
medieval proportions is proscribed by the latest vintage of
politically correct liberalism. The West can only help
them improve detection and treatment. But this is a tall
order.
33
UNAIDS and WHO have just published their AIDS
Epidemic Update. It states unequivocally: "In Eastern
Europe and Central Asia, the number of people living
with Human Immunodeficiency Virus - HIV - in 2002
stood at 1.2 million. HIV/AIDS is expanding rapidly in
the Baltic States, the Russian Federation and several
Central Asian republics."
34
How misleading even these dire data are is revealed by an
in-depth study of a single city in Russia, Togliatti. Fully
56 percent of all drug users proved to be HIV-positive,
most of them infected in the last 2 years. Three quarters of
them were unaware of their predicament. One quarter of
all prostitutes did not require their customers to use
condoms. Two fifths of all "female sex workers" then
proceeded to have unsafe intercourse with their mates,
husbands, or partners. Studies conducted in Donetsk,
Moscow and St. Petersburg found that one seventh of all
prostitutes are already infected.
35
heroin routes have shifted to central Asia, spreading its
abuse among the destitute and despondent populations of
Azerbaijan, Kazakhstan, Georgia, Kyrgyzstan, Tajikistan
and Uzbekistan. In many of these countries and, to some
extent, in Russia and Ukraine, some grades of heroine are
cheaper than vodka.
36
The political class is unmoved. President Vladimir Putin
never as much as mentions AIDS in his litany of speeches.
Even Macedonia's western-minded and western-propped
president, Boris Trajkovski, dealt with the subject for the
first time only yesterday. Belarus did not bother to apply
to the United Nation's Global Fund to Fight AIDS,
Tuberculosis, and Malaria or to draw approved resources
from the World Bank's anti-TB/HIV/AIDS project.
37
The first step in confronting the epidemic is proper
diagnosis and acknowledgement of the magnitude of the
problem. Macedonia, with 2 million citizens, implausibly
claims to harbor only 18 carriers and 5 AIDS patients. A
national strategy to confront the syndrome is not due until
June next year. Though AIDS medication is theoretically
provided free of charge to all patients, the country's health
insurance fund, looted by its management, is unable to
afford to import them.
38
annual dose of the least potent antiretroviral cocktail
would cost hundreds of dollars - about half a year's wages.
At market prices, free medicines for all AIDS sufferers in
this vast country would amount to as much as four fifths
of the entire federal budget, says Ruehl.
39
delayed marriage with a commitment-phobic European
Union.
Albania, Economy of
Blessed with Chinese GDP growth rates (7-8% annually
in each of the last 3 years) and German inflation (4%,
down from 32% in 1997, mostly attributable to increases
in energy and housing costs), it is easy to forget Albania's
Somali recent past.
40
EU'S capacity for making political promises is more
impressive than our past record of delivering financial
assistance". The aid was bungled and mired in pernicious
bureaucratic infighting. The EU's delegation in Tirana was
recently implicated in "serious financial irregularities".
41
in Greece and Italy - Albania would have been in dire
straits. Money from Albanian drug dealers, immigrant
smugglers, and other unsavory characters still filters in
from Prague, Zurich, and the USA. These illicit - but
economically crucial - funds may explain the
government's foot dragging on the privatization of the
omnipresent Savings Bank (83% of all deposits, no loans,
owns 85% of all treasury bills, 2% net return on equity)
and its reluctance to overhaul the moribund banking
system and enact anti money laundering measures. It took
crushing pressure by IFI's to force the government to hive
off the Savings Bank's pension plan business into
Albapost, the local Post Office.
42
$50 million a year and aid per capita has tripled to c. $160
since 1997. Pervasive electricity shortages (despite budget
draining subsidies of imported energy) hamper economic
activity. Albania was rated 100th (out of 174) in the
UNDP's Human Development Index and 90th (out of 175)
in UNICEF's Report on the State of the World's Children
(under-five mortality). Its neighbors ranked 55-73.
43
Macedonia is (abnormally for geographical neighbors) not
an important trading partner, Albania has responded
positively to all the Macedonian initiatives for economic
and political integration of the region. It is here, in
regional collaboration and synergy, that Albania's future
rests. Should the region deteriorate once more into
mayhem and worse, Albania would be amongst the first
and foremost to suffer. Hence its surprisingly conciliatory
stance in the recent crisis in Macedonia. It seems that
Albanian politicians have wisely decided to move from a
"Great Albania" to a prosperous one.
44
origin. Albanian and Iranian officials on state visit to
Tirana last month called for closer economic, trade and
international collaboration. An agreement on double
taxation was subsequently signed. Albania inked and
ratified the statute of the International Criminal Court,
much-opposed by the USA.
45
the following observations of the United Nations
Conference on Trade and Development (UNCTAD) make
sense:
46
investment and $1 billion in private remittances. This, of
course, led to a widening trade deficit in both 2001 and
2002 - though the exchange rate is eerily stable.
47
slippage in meeting targets for bill collection and losses
could prolong the crisis."
48
Bank supervision was strengthened, anti money
laundering measures introduced, arrears with foreign
creditors were largely regularized and an anti-corruption
program implemented (by the venal and crime-infested
Socialists, thunder the no less tainted opposition). The
European Union intends to sign a Stabilization and
Association Agreement with Tirana next month.
49
fervor of true converts, such as Romania, Croatia,
Bulgaria, or even Serbia. Unless Albanians take their own
future seriously - no one else will.
50
intensive, pattern over-fitting can be a problem, its rules
are often difficult to interpret, and the statistical testing is
cumbersome - he insists that "trading rules are picking up
patterns in the data not accounted for by standard
statistical models" and that the excess returns thus
generated are not simply a risk premium.
51
A less fanciful definition may be the one offered by
Edwards and Magee in "Technical Analysis of Stock
Trends":
52
"One way of viewing it is that markets may witness
extended periods of random fluctuation, interspersed with
shorter periods of nonrandom behavior. The goal of the
chartist is to identify those periods (i.e. major trends)."
53
Investors move in herds and are inclined to seek patterns
in the often bewildering marketplace. As opposed to the
assumptions underlying the classic theory of portfolio
analysis - investors do remember past prices. They
hesitate before they cross certain numerical thresholds.
54
It is not clear why should fundamental analysis be
considered superior to its technical alternative. If prices
incorporate all the information known and reflect it -
predicting future prices would be impossible regardless of
the method employed. Conversely, if prices do not reflect
all the information available, then surely investor
psychology is as important a factor as the firm's - now oft-
discredited - financial statements?
55
prohibited, derivatives proliferate, individual participation
in the stock market increases, and transaction costs turn
negligible - a major rethink of our antiquated financial
models is called for.
56
Anarchy (as Organizing Principle)
The recent spate of accounting fraud scandals signals the
end of an era. Disillusionment and disenchantment with
American capitalism may yet lead to a tectonic
ideological shift from laissez faire and self regulation to
state intervention and regulation. This would be the
reversal of a trend dating back to Thatcher in Britain and
Reagan in the USA. It would also cast some fundamental -
and way more ancient - tenets of free-marketry in grave
doubt.
57
freedoms accorded to each and every person. John Stuart
Mill weighed against the state's involvement in the
economy in his influential and exquisitely-timed
"Principles of Political Economy", published in 1848.
But the ethos and myth of "order out of chaos" - with its
proponents in the exact sciences as well - ran deeper than
that. The very culture of commerce was thoroughly
permeated and transformed. It is not surprising that the
58
Internet - a chaotic network with an anarchic modus
operandi - flourished at these times.
59
ourselves by thwarting the work of that invisible regulator
- the market.
Arms Trade
In a desperate bid to fend off sanctions, the Bosnian
government banned yesterday all trade in arms and
munitions. A local, Serb-owned company was
documented by the State Department selling spare parts
and maintenance for military aircraft to Iraq via Yugoslav
shell companies.
60
entities. The weapons were plundered from the Polish
army and sold at half price to Croatia and Somalia, both
under UN arms embargo.
61
of the Tamara radar systems to Iraq in 1997. Czech firms,
such as Agroplast, a leading waste processing company,
have often been openly accused of weapons smuggling.
"The Guardian" tracked in February a delivery of missiles
and guidance systems from the Czech Republic through
Syria to Iraq.
62
and Asian, Swiss, Austrian, and British trading
conglomerates - all obscurely owned and managed.
63
president, Robert Kocharian, indignantly denied
knowledge of such transactions and vowed to get to the
bottom of the American allegations.
64
and armies of Ukraine, Russia, and even Romania use
Belarus to mask the true origin of weapons sold in
contravention of UN sanctions.
65
millions of dollars in Iraqi debts. Albanian crime gangs
collude with weapon smugglers based in Montenegro and
Kosovo. The Balkan - from Greece to Hungary - is
teeming with these penumbral figures.
Asian Tigers
The first reaction of economies in transition is a sharp
decline in their production, mainly in industrial
production. In the countries which attained independence
with the demise of the British Empire (where the sun
never set) - industrial production fell by 20% on average.
Even this was because these countries continued to
maintain economic ties with the "mother" (the United
Kingdom). They also continued to trade among
themselves, with the rest of the British Empire, through
the Commonwealth mechanism.
This was not the case when the second biggest empire of
modern times collapsed, the Soviet empire. When the
USSR and the Eastern Bloc disintegrated - the
COMECON trading bloc was dismantled, never to be
replaced by another. All the constituents of the former
66
Eastern Bloc preferred to trade with the west rather than
with one another. The Empire left in its wake mountains
of trade debts, total lack of liquidity and money losing
barter operations carried out in unrealistic prices.
67
c. This lack of liquidity also prevented the
investment in capital assets (plant modernization,
personnel training, data processing and decision
making tools) necessary to sustain efficiency
gains, increase productivity and maintain
competitiveness.
68
an theoretical model of the marketplace, or rule-
of-thumb thinking. The result was mountains of
shoddy merchandise, of low quality and very little
demand. Antiquated design and lack of
responsiveness to market needs and consumers'
wishes only exacerbated the situation.
69
with capital replenishment and the total absence of
capital markets did not help.
But it seems that the worst is over and that the scene is
fast changing.
70
through more or less successful privatization or
transformation schemes and appropriate legislation to
minimize the role of the state in the economy.
71
Israel, Ireland and … France and Japan (!) are examples
of poor, agricultural countries, which made the transition
to thriving industrial countries successfully.
72
f. Low taxation and small government budgets (less
than 20% of GDP compared to twice as much in
the West - and 3 times as much in France today).
73
Not that these countries are exempt from problems. The
process of maturation creates many of them. There is the
dependence on export markets and volatile exchange rates
(which determine the terms of trade). When the West
reduced its consumption of microchips and the Dollar
appreciated by 50% against the Japanese Yen - all the
tigers suffered a decline in economic growth rates, current
account deficits of 5-8% of their GDP, strikes (South
Korea) and Stock Market crashes (Thailand, to name but
one of many). In Singapore and in Hong Kong, the
industrial production plummeted by 5% last year (1996).
74
game: money. They have many more years of economic
growth ahead:
Asset Bubbles
The recent implosion of the global equity markets - from
Hong Kong to New York - engendered yet another round
of the semipternal debate: should central banks
contemplate abrupt adjustments in the prices of assets -
such as stocks or real estate - as they do changes in the
consumer price indices? Are asset bubbles indeed
inflationary and their bursting deflationary?
75
Central bankers counter that it is hard to tell a bubble until
it bursts and that market intervention bring about that
which it is intended to prevent. There is insufficient
historical data, they reprimand errant scholars who insist
otherwise. This is disingenuous. Ponzi and pyramid
schemes have been a fixture of Western civilization at
least since the middle Renaissance.
76
controlled and directed it. Nor has anyone made explicit
promises to investors regarding guaranteed future profits.
The hysteria was evenly distributed and fed on itself.
Subsequent investment fiddles were different, though.
77
years. The prices of some shares increased by 1-2 percent
daily.
78
stations and army barracks and expropriated hundreds of
thousands of weapons.
79
People know that they are likelier to lose all or part of
their money as time passes. But they convince themselves
that they can outwit the organizers of the pyramid, that
their withdrawals of profits or interest payments prior to
the inevitable collapse will more than amply compensate
them for the loss of their money. Many believe that they
will succeed to accurately time the extraction of their
original investment based on - mostly useless and
superstitious - "warning signs".
80
commission. The true record is kept in the second,
inaccessible, set of files.
81
But there is another - potentially the most pernicious -
type of asset bubble. When financial institutions lend to
the unworthy but the politically well-connected, to
cronies, and family members of influential politicians -
they often end up fostering a bubble. South Korean
chaebols, Japanese keiretsu, as well as American
conglomerates frequently used these cheap funds to prop
up their stock or to invest in real estate, driving prices up
in both markets artificially.
82
society in Britain. It was allowed to take in deposits but
was really merely a mortgage bank. The Depository
Institutions Deregulation and Monetary Control Act of
1980 forced S&L's to achieve interest parity with
commercial banks, thus eliminating the interest ceiling on
deposits which they enjoyed hitherto.
But this was too little and too late. The S&L's were
rendered unable to further support the price of real estate
by rolling over old credits, refinancing residential equity,
and underwriting development projects. Endemic
corruption and mismanagement exacerbated the ruin. The
bubble burst.
83
association (out of a total of more than 3,000) became
insolvent instantly, unable to pay their depositors. They
were besieged by angry - at times, violent - clients who
lost their life savings.
84
The FDIC is designed to be independent. Its money comes
from premiums and earnings of the two insurance funds,
not from Congressional appropriations. Its board of
directors has full authority to run the agency. The board
obeys the law, not political masters. The FDIC has a
preemptive role. It regulates banks and savings and loans
with the aim of avoiding insurance claims by depositors.
85
(FHLB). Those banks and the thrifts make up the Federal
Home Loan Bank System (FHLBS). FHFB gets its funds
from the System and is independent of supervision by the
executive branch.
86
prolonged equity bull market allowed thrifts to float new
stock at exorbitant prices.
But the very fact that S&L's were poised to exploit these
opportunities is a tribute to politicians and regulators alike
- though except for setting the general tone of urgency and
resolution, the relative absence of political intervention in
the handling of the crisis is notable. It was managed by
the autonomous, able, utterly professional, largely a-
political Federal Reserve. The political class provided the
professionals with the tools they needed to do the job.
This mode of collaboration may well be the most
important lesson of this crisis.
87
of the big bull market or else to meet just one person with
whom he might discuss some general doubts without
being regarded as an imbecile or a person of deliberately
evil intent - some kind of anarchist, perhaps."
88
economy ... (The Depression was brought on by) ensuing
failures of policy."
89
business show any further signs of fatigue, the banking
system is in a good position now to administer any needed
credit tonic from its excellent Reserve supply."
90
But it was not long before irate customers began blaming
their stupendous losses on advice they received from their
brokers. Alec Wilder, a songwriter in New York in 1929,
interviewed by Stud Terkel in "Hard Times" four decades
later, described this typical exchange with his money
manager:
91
Everyone was duped. The rich were impoverished
overnight. Small time margin traders - the forerunners of
today's day traders - lost their shirts and much else
besides. The New York Times:
92
of production and employment. In 1929, Norman
engineered a collapse by puncturing the bubble."
93
"The Daily News" concurred: "The sagging of the stocks
has not destroyed a single factory, wiped out a single farm
or city lot or real estate development, decreased the
productive powers of a single workman or machine in the
United States." In Louisville, the "Herald Post"
commented sagely: "While Wall Street was getting rid of
its weak holder to their own most drastic punishment,
grain was stronger. That will go to the credit side of the
national prosperity and help replace that buying power
which some fear has been gravely impaired."
94
production which had averaged only 67 in 1921 ... had
risen to 110 by July 1928, and it reached 126 in June 1929
... (but the American people) were also displaying an
inordinate desire to get rich quickly with a minimum of
physical effort."
95
divided by a moving average of 10 years worth of
earnings reached 28 just prior to the crash. Contrast this
with 45 on March 2000.
96
the notorious Smoot-Hawley Tariff Act of 1930. He traces
all the important moves in the market between March
1929 and June 1930 to the intricate protectionist danse
macabre in Congress.
97
The general buoyancy in real estate prices in the capital
coupled with the adjacent Spitalfields urban renewal
project have lifted prices. A house not 50 yards from the
scene of the Ripper's last - and most ghoulish - slaying
now sells for over 1 million pounds. In central London,
one bedroom apartments retail for an outlandish half a
million.
98
Homeowners in both the UK and the USA - spurred on by
aggressive marketing and the lowest interest rates in 30
years - have been refinancing old, more expensive,
mortgages and heavily borrowing against their "equity" -
i.e., against the meteoric rise in the market prices of their
abodes.
99
United States and Italy (65% rise since 1997), it falls
behind Ireland (179%) and South Africa (195%). It is in
league with Australia (with 113%) and Spain (132%).
100
purchasing decisions on expectations of outsized
returns—a recent survey of buyers in Los Angeles
indicated that they expected their homes to increase in
value by a whopping 22% a year over the next decade—
nasty downturns in at least some markets seem likely."
Auction
Months of procrastination and righteous protestations to
the contrary led to the inevitable: the European
Commission assented last week to a joint venture between
Germany's T-mobile and Britain's mmO2 to share the
mammoth costs of erecting third generation - 3G in the
parlance - mobile phone networks in both countries. The
two companies were among the accursed winners of a
series of spectrum auctions in the late 1990's. Altogether
telecom firms shelled well over $100 billion to secure 3G
licences in markets as diverse as Germany, Italy, the UK,
and the Netherlands.
101
Judged narrowly, from the sellers' point of view, these
auctions have been an astounding success. But the
outcomes of the best auctions encompass the widest
possible utility - including the buyers' and the public's.
From this wider angle, go the critics, spectrum auctions
have been an abysmal failure.
102
highest bid. In a Dutch auction, the auctioneer announces
a series of decreasing prices and awards the article to the
first bidder. These epithets are used in financial markets to
designate other types of auctions.
103
process or deter "outsider" entrants. New participants
often underbid, expecting incumbents to overbid.
104
their interests lie and how much they can pay and the
auction process extracts this information from them in the
form of a bid. They may misread the market and go bust -
but this is a risk every business takes.
Austria, Economy of
Harry Potter would have surely enrolled. A school for
wizardry has just opened in Austria in the forbidding
mountains around Klagenfurt. The apprentices will be
granted a sorcerer's diploma upon completion of their
105
studies. This is a wise move. Austria may need all the
witchcraft it can master in the next few years.
106
annual income per capita is c. $26,000), multilingualism,
plurality of cultures and stable currency made it the
natural hub for multinationals eyeing the territories of the
former Soviet bloc. Novartis Generics, for instance, is a
subsidiary of the Swiss pharmaceuticals giant Novartis.
But it is headquartered in Austria. It has just concluded
the purchase of the Slovenian generic drugs company,
Lek.
107
The Schoessel government pursued privatization,
deregulation and budget discipline. This business-friendly
attitude sustained the economy in a difficult global
recessionary environment. Companies in virtually all
sectors of the economy - from Telekom Austria to Erste
Bank - beat analyst expectations and disclosed robust
profit figures, rising equity and declining debts.
108
understanding, pledges, contracts, and programs usually
follows these encounters.
109
in the field of renewable energy resources. It is involved
in the E75 motorway project which links the country to
Greece through Macedonia. Despite the fact that Russia's
debt to Austria of more than $3.5 billion is long overdue,
bilateral trade is expanding briskly. Austria is a member
of the Danube Cooperation Process centered around the
economic and environmental issues of the 13 riparian
signatories.
110
Austrian banks act as both retail outlets and investment
banks. Bank Austria, for instance, purchased stakes in
Croatia's Splitska Banka and Bulgaria's fourth largest
financial institution, Biochim. It is bidding for Romanian
and Albanian banks. But it also lent aggressively to
Bulgaria's second mobile phone operator, GloBul. Meinl
Bank will advise the Macedonian government in its
privatization of the debt-laden and inefficient electricity
utility. Raifeissen Zentralbank Austria is heavily involved
in lending related to fossil fuels in Romania and
elsewhere.
111
nationalization of the banks. Industrial cross-shareholding
within financial-industrial complexes might entangle the
government in a process of reverse privatization. Austria
would do well to sprint less vigorously where others fear
to tread.
112
B
Balkans, Economies of the
Macedonia is a useful microcosm of the post-communist
countries of the Balkan (self-importantly renamed by its
denizens "Southeast Europe"). Prodded by its pro-Western
president, Boris Trajkovski, it vocally - though
implausibly - aspires to NATO and European Union
membership. Its socialist prime minister - newly-elected
in a remarkably smooth transfer of power - has just inked
a landmark "social contract" with the trade unions.
113
privatization deals were annulled as well. Regrettably,
though quite predictably, this newfound righteous zeal is
aimed only at the functionaries and politicians of the
opposition which constituted the former government.
114
Both Serbia and Montenegro have endured botched
presidential elections. Disenchantment with much-derided
politics and much-decried politicians is evident in the
abysmally low turnout in all the recent rounds of voting.
Tensions are growing as Yugoslavia is again slipping into
a constitutional crisis. The new union of Serbia and
Montenegro is a recipe for instability and constant
friction. A lackluster economy doesn't help - industrial
production has nudged up by an imperceptible 2.5 percent
from a vanishingly low basis.
115
million into the ailing economy. A dearth of foreign
investment and decreasing foreign aid leave the
ramshackle country exposed to a soaring balance of
payments deficit.
116
So much of Croatia's economy - especially its banking
system - is in European hands that it is a de facto EU
member, if far from being a de jure one. It, too, relies on
IMF financing, though - the latest $140 million standby
arrangement was just initialed.
117
domestic investors. GDP is already growing at a
respectable annual clip of 4.5 percent.
118
investment. Some major properties - such as Romtelecom
- will go on the block next year.
119
freelancers with little or no acquaintance with the region.
Even The Economist - usually a fount of objective
erudition - blundered last week. It made a distinction
between "wily" Albanian "rebels" and "moderate"
Albanian "nationalists" in the ruling coalition. Alas, these
two groups are one and the same: the "wily rebels" simply
established a party and joined the government.
120
penetrate its markets and render the prices of its own
produce irresistible.
121
Consensus". Thus, it attributes "economic stability" (what
is this?) and "price stability" to the use of "external
anchors", namely exchange rate pegs.
122
The section of the report which deals with "fiscal
consolidation" astonishingly ignores the informal sector of
the region's economies. With the exception of Croatia, the
"gray economy" is thought to equal at least one half the
formal part. More than one tenth of the workforce are
employed by underground enterprises.
123
The report ignores completely - at least on the regional
level - crucial issues such as banking reform, inter-
enterprise debt, competition policy, liberalization,
deregulation, protection of minority shareholders and
foreign investments, openness to foreign trade, research
and development outlays, higher education, brain drain,
intellectual property rights, or the quality of infrastructure.
These matters determine the economic fate of emerging
economies far more than their budget deficits. Yet,
shockingly, they are nowhere to be found in the 62 pages
of "The West Balkan in Transition".
Banking, Austrian
In the second half of 2005, Erste Bank, Austria's second
largest, took over yet another East and Central European
financial institution: Romania's BCR (Romanian
Commercial Bank). This acquisition threw into sharp
relief the post-Communist Mittel-European strategy of
Austrian banks, big and small.
124
continued growth as well as challenges in Central and
Eastern Europe." Confronted with domestic near-
vanishing margins and over-branching, Austrian banks
established banking franchises in the growth markets of
central and eastern Europe - from Croatia to the Czech
Republic.
125
A: Austria has adopted the EU banking laws. Austrian
banks within the European Union have no no special
advantages or disadvantages.
126
A: The Lombard Club was eventually historically justified
in the post-war economy. The arguments presented by the
Austrian banks were very weak because there was no
awareness of wrongdoing. We think that the fines are
rather high since the effect of the cartel was minimal and
bank margins in Austria were much lower than in other
EU countries. Mr. Haider wrongly claims his involvement
in the EU-Lombard Club decision. He is a populist and a
free-rider on the poor and small folks.
127
three big German banks - HVB, Bayerische Landesbank,
and Deutsche Bank - are already present in Austria.
128
Companies are covered up to 90 percent of this amount.
There is a centralized claims institution for the banking
sector.
Banking, German
Denial is a ubiquitous psychological defense mechanism.
It involves the repression of bad news, unpleasant
information, and anxiety-inducing experiences. Judging
by the German press, the country is in a state of denial
regarding the faltering health of its economy and the
dwindling fortunes of its financial system.
129
How are these xenophobic defenses to be erected? By
mergers and acquisitions among German banks in the
fragmented domestic market. Consolidation would lead to
higher profits and less digestible takeover targets, goes the
logic.
130
On September 19, 2002 Moody's changed its outlook for
Germany's largest banks from "stable" to "negative". In a
scathing remark, it said:
131
SMAX exchange for small-caps were shut down in
October 2002, the former having lost a staggering 96
percent of its value since March 2000. This compared to
Britain's AIM, which lost "only" half its worth at that
point. Even Britain's infamous FTSE-TechMARK faded
by a "mere" 88 percent.
132
collapsed in April 2002, Philip Holzmann AG owed
billions to Deutsche Bank with whom it had a cordial
working relationship for more than a century. But the
bank also owned 19.6 percent of the ailing construction
behemoth and chaired its supervisory board - the relics of
previous shambolic rescue packages.
133
When German insurers and banks, for instance, branched
into faddish businesses - such as the Internet and mobile
telephony - they did so in vacuum. Germany has few
venture capitalists and American-style entrepreneurs. This
misguided strategy resulted in a frightening erosion of the
strength and capital base of the intrepid investors.
134
temporary respite. As the EU enlarged and digested the
Czech Republic, Hungary, and Poland in May 2004 -
German franchises there came under the uncompromising
remit of the Commission once more.
135
today is even more integrated. The collapse of one or
more major German banks can result in dire consequences
and not only in the euro zone. The IMF says as much in
its "World Economic Outlook" published on September
25, 2002.
136
Under chapter 7, for instance, cars and homes are exempt
assets, untouchable by indignant creditors. Even under
chapter 13, debt repayments are rescheduled and spread
over 5 years to cover only a fraction of the original credit.
137
introduces bankruptcy trustees where the management is
suspected of fraud. Compare this to Britain where
managers are responsible for corporate debts they
knowingly incurred while the firm was insolvent.
138
default) fails, the company itself can file (ask the court)
for bankruptcy in a "voluntary bankruptcy filing".
139
The priority creditors include administrative debts, unpaid
wages (up to a given limit per worker), uninsured pension
claims, taxes, rents, etc.
Each state has modified the Federal Law to fit its special,
local conditions.
Still, a few things - the spirit of the law and its philosophy
- are common to all the versions. Arguably, the most
famous procedure is named after the chapter in the law in
which it is described, Chapter 11. Following is a brief
discussion of chapter 11 intended to demonstrate this
spirit and this philosophy.
140
b. To eliminate burdensome debt obligations,
which obstruct the proper functioning of the firm
and hinder its chances to recover and ever repay its
debts to its creditors.
141
A more in-depth study of the bankruptcy laws shows that
they prescribe three ways to tackle a state of malignant
insolvency which threatens the well being and the
continued functioning of the firm:
Chapter 11 - Reorganization
142
PRIORITY rule, that says that the claims of creditors
have categorical precedence over ownership claims.
Rather, under chapter 11, the interests of the creditors
have to be balanced with the interests of the owners and
even with the larger good of the community and society at
large.
Chapter 10
Chapter 15
143
In England, for instance, the court appoints an official
"receiver" to manage the business and to realize the
debtor's assets on behalf of the creditors (and also of the
owners). His main task is to maximize the proceeds of the
liquidation and he continues to function until a court
settlement is decreed (or a creditor settlement is reached,
prior to adjudication). When this happens, the receivership
ends and the receiver loses his status.
144
law - a number which mushroomed to 30,000 by May
1997.
145
1. Reorganization, debt-consolidation (a reduction of
the debts, new terms, debt for equity swaps) and a
program of rehabilitation.
2. Sale of the corporate liabilities in auctions.
3. Classic bankruptcy (happens in 23% of the cases
of insolvency).
It is when the going gets better, that the going gets tough.
This enigmatic sentence bears explanation: when a firm is
in dire straits, in the throes of a crisis, or is a loss maker –
conflicts between the shareholders (partners) are rare.
When a company is in the start-up phase, conducting
research and development and fighting for its continued,
profitable survival in the midst of a massive investment
cycle – rarely will internal strife arise and threaten its
existence. It is when the company turns a profit, when
there is cash in the till – that, typically, all manner of
grievances, complaints and demands arise. The
internecine conflicts are especially acute where the
ownership is divided equally. It is more accentuated when
146
one of the partners feels that he is contributing more to the
business, either because of his unique talents or because
of his professional experience, contacts or due to the size
of his initial investments (and the other partner does not
share his views).
147
clients, its marketing position degenerates, its
performance and customer satisfaction deteriorate. This is
mortal danger and it should be nipped in the bud.
148
Life is not that simple when it comes to dividing a stream
of income or of profits. Income can be distributed to the
shareholders in many ways: wages, perks and benefits,
expense accounts, and dividends. It is difficult to
disentangle what money is paid to a shareholder against a
real contribution – and what money is a camouflaged
dividend. Moreover, shareholders are supposed to
contribute to their firm (this is why they own shares) – so
why should they be especially compensated when they do
so? The latter question is particularly acute when the
shareholder is not a full time employee of the firm – but
allocates only a portion of his time and resources to it.
149
shareholder will accept the market's verdict. To perfect
this technique, the CURRENT functionaries should also
submit their bids under assumed names. This way, not
only the issue of their compensation will be determined –
but also the more basic question of whether they are the
fittest for the job.
150
remuneration level befitting the shareholder's position.
Any compensation that he receives above this level is
evidently a hidden dividend. The arbitration can be carried
out directly by the market or by select specialists.
151
should be used only when the firm is divided to clear
profit and loss centres, which could be completely
disentangled from each other.
152
fashionable term today is "moral hazard". The implicit
guarantees of the state and of other financial institutions
move us to take risks which we would, otherwise, have
avoided. Partly it is the sophistication of the banks in
marketing and promoting themselves and their products.
Glossy brochures, professional computer and video
presentations and vast, shrine-like, real estate complexes
all serve to enhance the image of the banks as the temples
of the new religion of money.
153
and makes its audit reports publicly available. Such
audited financial statements should consolidate the
financial results of the bank with the financial results of
its subsidiaries or associated companies. A lot often hides
in those corners of corporate holdings.
154
the activity preceded this arbitrary date. The same applies
to financial statements, which were not inflation-adjusted
in high inflation countries. The statements will look
inflated and even reflect profits where heavy losses were
incurred. "Average amounts" accounting (which makes
use of average exchange rates throughout the year) is even
more misleading. The only way to truly reflect reality is if
the bank were to keep two sets of accounts: one in the
local currency and one in USD (or in some other currency
of reference). Otherwise, fictitious growth in the asset
base (due to inflation or currency fluctuations) could
result.
155
Another oft-used figure is the net income of the bank. It is
important to distinguish interest income from non-interest
income. In an open, sophisticated credit market, the
income from interest differentials should be minimal and
reflect the risk plus a reasonable component of income to
the bank. But in many countries (Japan, Russia) the
government subsidizes banks by lending to them money
cheaply (through the Central Bank or through bonds). The
banks then proceed to lend the cheap funds at exorbitant
rates to their customers, thus reaping enormous interest
income. In many countries the income from government
securities is tax free, which represents another form of
subsidy. A high income from interest is a sign of
weakness, not of health, here today, gone tomorrow. The
preferred indicator should be income from operations
(fees, commissions and other charges).
156
rates of 33% and more are the norm. Finally, there is the
common stock to total assets ratio. But ratios are not cure-
alls. Inasmuch as the quantities that comprise them can be
toyed with – they can be subject to manipulation and
distortion. It is true that it is better to have high ratios than
low ones. High ratios are indicative of a bank's underlying
strength, reserves, and provisions and, therefore, of its
ability to expand its business. A strong bank can also
participate in various programs, offerings and auctions of
the Central Bank or of the Ministry of Finance. The larger
the share of the bank's earnings that is retained in the bank
and not distributed as profits to its shareholders – the
better these ratios and the bank's resilience to credit risks.
157
largely reflect the management's appraisal of the business.
This has proven to be a poor guide.
158
doubly true with banks. If you see a bank fervently
engaged in the construction of palatial branches – stay
away from it.
Just in case they misread the market risks and these turned
into credit risks (which happens only too often), banks are
supposed to put aside amounts of money which could
realistically offset loans gone sour or future non-
performing assets. These are the loan loss reserves and
provisions. Loans are supposed to be constantly
monitored, reclassified and charges made against them as
applicable. If you see a bank with zero reclassifications,
charge offs and recoveries – either the bank is lying
through its teeth, or it is not taking the business of
banking too seriously, or its management is no less than
divine in its prescience. What is important to look at is the
rate of provision for loan losses as a percentage of the
loans outstanding. Then it should be compared to the
percentage of non-performing loans out of the loans
159
outstanding. If the two figures are out of kilter, either
someone is pulling your leg – or the management is
incompetent or lying to you. The first thing new owners of
a bank do is, usually, improve the placed asset quality (a
polite way of saying that they get rid of bad, non-
performing loans, whether declared as such or not). They
do this by classifying the loans. Most central banks in the
world have in place regulations for loan classification and
if acted upon, these yield rather more reliable results than
any management's "appraisal", no matter how well
intentioned.
Of the two sides of the balance sheet, the assets side is the
more critical. Within it, the interest earning assets deserve
the greatest attention. What percentage of the loans is
commercial and what percentage given to individuals?
How many borrowers are there (risk diversification is
inversely proportional to exposure to single or large
borrowers)? How many of the transactions are with
"related parties"? How much is in local currency and how
much in foreign currencies (and in which)? A large
exposure to foreign currency lending is not necessarily
healthy. A sharp, unexpected devaluation could move a
lot of the borrowers into non-performance and default
and, thus, adversely affect the quality of the asset base. In
which financial vehicles and instruments is the bank
invested? How risky are they? And so on.
160
the bank. The crucial question is: what are the cash flows
projected from the maturity dates of the different assets
and liabilities – and how likely are they to materialize. A
rough matching has to exist between the various
maturities of the assets and the liabilities. The cash flows
generated by the assets of the bank must be used to
finance the cash flows resulting from the banks' liabilities.
A distinction has to be made between stable and hot funds
(the latter in constant pursuit of higher yields). Liquidity
indicators and alerts have to be set in place and calculated
a few times daily.
161
Perhaps the single most important factor is the general
level of interest rates in the economy. It determines the
present value of foreign exchange and local currency
denominated government debt. It influences the balance
between realized and unrealized losses on longer-term
(commercial or other) paper. One of the most important
liquidity generation instruments is the repurchase
agreement (repo). Banks sell their portfolios of
government debt with an obligation to buy it back at a
later date. If interest rates shoot up – the losses on these
repos can trigger margin calls (demands to immediately
pay the losses or else materialize them by buying the
securities back).
162
increased, eating into the bank's liquidity (and
profitability) even further. Banks are then tempted to play
with their reserve coverage levels in order to increase their
reported profits and this, in turn, raises a real concern
regarding the adequacy of the levels of loan loss reserves.
Only an increase in the equity base can then assuage the
(justified) fears of the market but such an increase can
come only through foreign investment, in most cases. And
foreign investment is usually a last resort, pariah, solution
(see Southeast Asia and the Czech Republic for fresh
examples in an endless supply of them. Japan and China
are, probably, next).
In the past, the thinking was that some of the risk could be
ameliorated by hedging in forward markets (=by selling it
to willing risk buyers). But a hedge is only as good as the
counterparty that provides it and in a market besieged by
knock-on insolvencies, the comfort is dubious. In most
emerging markets, for instance, there are no natural sellers
of foreign exchange (companies prefer to hoard the stuff).
So forwards are considered to be a variety of gambling
with a default in case of substantial losses a very plausible
way out.
163
professional banking system exists – no good borrowers
will emerge.
Banks, German
Denial is a ubiquitous psychological defense mechanism.
It involves the repression of bad news, unpleasant
information, and anxiety-inducing experiences. Judging
by the German press, the country is in a state of denial
regarding the waning health of its economy and the
dwindling fortunes of its financial system.
164
"The rating agency stated several times already that
current difficult economic conditions that are hurting the
banking business in Germany come on top of the legacy
of past strategies that were less focused on strengthening
the banks' recurring earning power. Indeed, the German
private-sector banks, as a group, remain among the
lowest-performing large European banks."
165
Only 1 company floated on the Neuer Markt this year -
compared to more than 130 two years ago. In an
unprecedented show of "no-confidence", more than 40
companies withdrew their listings last year. The Duetsche
Boerse promised to create two new classes of shares on
the Frankfurt Stock Exchange. It belatedly vowed to
introduce more transparency and openness to foreign
investors.
166
According to the German daily, Frankfurter Allgemeine
Zeitung, the cost to income ratio of German banks is 90
percent. Mass bankruptcies and consolidation - voluntary
or enforced - are unavoidable, especially in the
cooperative, mortgage, and savings banks sectors,
concludes the paper. The process is a decade-old. More
than 1500 banks vanished from the German landscape in
this period. Another 2500 remain making Germany still
one of the most over-banked countries in the world.
167
In a sense, Germany - and definitely its eastern Lander - is
a country in transition. Risk-aversion is giving way to
risk-seeking in the forms of investments in equities and
derivatives and venture capital. Family ownership is
gradually supplanted by stock exchange listings, imported
management, and mergers, acquisitions, and takeovers -
both friendly and hostile. The social contracts regarding
employment, pensions, the role of the trade unions, the
balance between human and pecuniary capital, and the
carving up of monopoly market niches - are being re-
written.
168
less exposure to the parts of the former Habsburg Empire,
and struggling with a stagnant domestic economy -
German banks found it difficult to turn central European
banks around as successfully as the likes of the Austrian
Erste Bank did. They did make inroads into niche
structured financing markets in north Europe and the USA
- but these seem to be random excursions rather a studied
shift of business emphasis.
169
The Germans deny this prognosis - and the diagnosis -
vehemently. Bundesbank President Ernst Welteke - a
board member of the European Central Bank - spent the
better part of last week implausibly denying any crisis in
German banking. These are mere "structural problems in
the weak phase", he told a press conference. Nothing
consolidation can't solve.
Banks, Stability of
Banks are the most unsafe institutions in the world.
Worldwide, hundreds of them crash every few years. Two
decades ago, the US Government was forced to invest
hundreds of billions of Dollars in the Savings and Loans
industry. Multi-billion dollar embezzlement schemes were
unearthed in the much feted BCCI - wiping both equity
capital and deposits. Barings bank - having weathered 330
years of tumultuous European history - succumbed to a
bout of untrammeled speculation by a rogue trader. In
1890 it faced the very same predicament only to be
salvaged by other British banks, including the Bank of
England. The list is interminable. There were more than
30 major banking crises this century alone.
170
and their activities. The USA sports a few organizations
which insure depositors against the seemingly inevitable
vicissitudes of the banking system.
171
Banks operate through credit multipliers. When Depositor
A places 100,000 USD with Bank A, the Bank puts aside
about 20% of the money. This is labelled a reserve and is
intended to serve as an insurance policy cum a liquidity
cushion. The implicit assumption is that no more than
20% of the total number of depositors will claim their
money at any given moment.
172
This means that every $100,000 deposited with Bank A
could, theoretically, become $900,000: $400,000 in
credits and $500,000 in deposits.
173
First, there are the operational costs of money lending
itself. Money lenders are engaged in arbitrage and the
brokering of funds. In other words, they borrow the
money that they then lend on. There are costs of
transportation and communications as well as business
overhead.
174
the money supply and the monetary aggregates and
through them to fine tune economic activity.
Also, the higher the interest rates, the more money earned
by the banks. They lend this extra money to Borrowers
and multiply it through the credit multiplier.
175
Conversions of foreign exchange into local currency are
net contributors to inflation. On the other hand, a high
exchange rate also increases the prices of imported
products. Still, all in all, higher interest rates contribute to
the very inflation that are intended to suppress.
Belarus, Economy of
176
Most of the post-communist countries in transition are
ruled either by reformed communists or by authoritarian
anti-communists. It is ironic that the West - recently led
more by the European Union than by the USA - helps the
former to get elected even as it demonizes and vilifies the
latter. The "regime change" fad, one must recall, started in
the Balkans with Slobodan Milosevic, not in Afghanistan,
or Iraq.
177
Leonid Kuchma, Ukraine's former president, has been
accused by the opposition and by the international media
of every transgression - from selling radar systems to Iraq
to ordering the murder of a journalist. He hadn't visited a
single European leader - with the exception of Romano
Prodi, the chief of the European Commission - in the last
five years of his much-maligned reign.
178
hosted by the American Enterprise Institute, then US
ambassador to Belarus, Michael Kozak, chastised
president Lukashenka for having "chosen the wrong side
in the war on terrorism" and threatened that he "will soon
face the consequences of his illegal arms sales (and
military training) to Iraq." The Polish delegate mocked
Lukashenka and his "friends in Baghdad". Poland used to
rule west Belarus between the world wars and Poles
residing there are staunch supporters of the opposition to
the wily president.
179
this unlikely couple together are two military bases with
questionable relevance.
180
Strolling the drab, though tidy, streets of soot-suffused
Minsk, it is hard to believe that Belarus was once one of
the most prosperous parts of the USSR. The average
income was 1.2 times the Soviet Union's. GDP per capita
was 1.5 times the average. Yet, Belarus has rejected
transition. It tolerated only a negligible private sector and
mistreated foreign investors.
181
Official unemployment is 2 percent, though, with
underemployment, it is probably closer to 10-15 percent,
or half Poland's. According to the Encyclopedia
Britannica 2002 Yearbook, Russia spends c. $1 billion
annually to subsidize Belarusian energy consumption and
to purchase unwanted Belarusian products. But even if
true, this amounts to a mere 3 percent of GDP.
182
are curtailed, not to mention the massive abuse of human
rights in Chechnya.
Bosnia-Herzegovina, Economy of
Bosnia-Herzegovina (heretofore "Bosnia") is an artificial
polity with four, tangentially interacting, economies.
Serbs, Croats and their nominal allies, the Bosniaks each
maintain their own economy. The bloated, fractured, turf
conscious, inefficient, and often corrupt presence of the
international community, in the form of the Office of the
High Representative, among others, constitutes the fourth
- and most dominant - parallel economy.
183
continuing flow of direct international budget supports
and soft loans, the RS government would be bankrupt."
And the RS actually enjoyed a disproportionate part of the
more than $5 billion in aid that flooded Bosnia since
1996. The world Bank has disbursed c. $690 million of
the $860 million it committed to Bosnia as a whole - twice
its disbursements in Slovenia and Macedonia combined.
184
Still, Bosnia is quintessentially "Balkan" - stifled by red
tape, capricious laws, rampant corruption, venality,
nepotism, and cronyism run amok. Its state enterprises are
patronage machines and its banks coerced into political
and unwise lending, propping up zombie enterprises.
Credit to the private sector grows at less than nominal
GDP which indicates a failure of financial intermediation
by the banking system.
185
notoriously irrelevant (defense spending is still off budget,
for instance) but it trades mainly with Germany,
Switzerland, and Croatia. It has gaping fiscal (6% of
GDP, including arrears) and current account (22% of GDP
excluding transfers!) deficits and heavy external debt
(close to 80% of GDP) - though a lot of it is long term and
concessionary.
186
least 40 percent of these, most of them men, are presumed
dead. Education was disrupted, disability benefits soared,
destitute, single parent families are the norm.
187
In the meantime, the rate of unemployment has leveled off
at 40 percent. In the Republika Srpska, a family of four
typically consumes one and a half times the average
salary. The Sarajevo-based UN Independent Bureau for
Human Issues found that 60 percent of BiH's population
lives below the poverty line. Imports exceed exports by a
margin of 4 to 1. Corruption scandals erupt daily.
188
people. The same is true for defense. Proportionately,
Bosnia spends twice as much on defense as the United
States and four times more than the European average.
Bosnia has twice as many judges per head of population
as Germany, yet each German judge deals with four times
as many cases per year as his Bosnian counterpart."
189
"The programme is planned to last until 2004, and in my
opinion it should be a symbolic start of the international
community's care for this region against which serious
mistakes were committed during the war by the very same
international community."
190
criminalized wealthy and mighty. Its Potemkin banks are
dysfunctional and arthritic. Its triple and multilayered
bureaucracies refuse to collaborate. Red tape suffocates
entrepreneurships and barriers to entry often culminate at
the point of a gun.
191
The revival of this middle class, the institution of
incentives to save and to form capital, the introduction of
competing financial intermediaries into the moribund
banking system, the encouragement of domestic
investment, the enhancement of business-related services,
the establishment of new institutions (such as business
courts) to circumvent the hopelessly corrupt ones Bosnia
sports - should have been the top priorities of the
successive High Representatives of this makeshift
country.
192
disputes; improving enforcement of secured transactions,
and ensuring equal access to public procurement; and,
easing business exit through strengthened bankruptcy and
liquidation systems."
The likes of the EBRD and the World Bank should have
sapped the stifling might of the putrid elites of Bosnia by
fearlessly providing functional and, where necessary,
foreign-managed, alternatives. This is not without
precedent. Bosnia's Central Bank is successfully governed
by an IMF-appointed New Zealander. The EBRD runs
much of business-related regulatory organs.
193
for politicians and government officials in BiH and its
constituents - demonstrates to potential investors -
Bosnians and foreigners alike - that the international
community is unwilling, or, worse, unable, to take on the
entrenched anti-business kleptocracies of BiH.
194
income. Four of these institutions were financially
sustainable, i.e., they can cover all expenses, including the
cost of maintaining the value of their capital, as well as
adjustments that fully account for subsidies and write-offs
for non-recoverable loans. These results make
microfinance institutions in Bosnia and Herzegovina high
performers among such initiatives worldwide."
195
at the end of 1999 notwithstanding, the IMF's
subservience to its American paymasters is nowhere more
transparent than in BiH.
Brain Drain
Human trafficking and people smuggling are multi-billion
dollar industries. At least 50% of the 150 million
immigrants the world over are illegal aliens. There are 80
million migrant workers found in virtually every country.
They flee war, urban terrorism, crippling poverty,
corruption, authoritarianism, nepotism, cronyism, and
unemployment. Their main destinations are the EU and
the USA - but many end up in lesser countries in Asia or
Africa.
196
7 million, the Middle East - 9 million, and Europe - 30
million.
197
As a result, Europe has recently tightened its admission
(and asylum) policies even more than it has in the 1970's.
It bolted and shut its gates to primary (economic)
migration. Only family reunifications are permitted. Well
over 80% of all immigrants to Britain are women joining
their husbands, or children joining their father. Migrant
workers are often discriminated against and abused and
many are expelled intermittently.
198
But these are the distant echoes of past patterns of
migration. Traditional immigration is becoming gradually
less attractive. Immigrants who came to Canada between
1985-1998 earn only 66% of the wages of their
predecessors. Labour force participation of immigrants
fell to 68% (1996) from 86% (1981).
199
one hand migratory pressures will continue and that on the
other hand in a context of economic growth and a
declining and aging population, Europe needs immigrants.
In this context our objective is not the quantitative
increase in migratory flows but better management in
qualitative terms so as to realize more fully the potential
of immigrants' admitted."
200
"upgrade" to immigrant status while in residence. Many
H1-B visas were cancelled due to the latest economic
slowdown - but the US provides other kinds of visas (E
type) to people who invest in its territory by, for instance,
opening a consultancy.
201
The haves-not thus end up subsidizing the haves by
exporting their human capital, the prospective members of
their dwindling elites, and the taxes they would have paid
had they stayed put. The formation of a middle class is
often irreversibly hindered by an all-pervasive brain drain.
202
affected remittances). The IADB thinks that remittances
will total $300 billion in the next decade (Latin American
immigrants send home c. 15% of their wages).
203
Thailand established in 1997, within the National Science
and Technology Development Agency, a 2.2 billion baht
project called "Reverse the Brain Drain". Its aim is to "use
the 'brain' and 'connections' of Thai professionals living
overseas to help in the Development of Thailand,
particularly in science and technology."
204
2000 there was a shortage of around 850,000 technicians
in the US and nearly 2 million in Europe..."
205
We are in the wake of the downfall of all the major
ideologies of the 20th century - Fascism, Communism, etc.
The New Order, heralded by President Bush, emerged as a
battle of Open Club versus Closed Club societies, at least
from the economic point of view.
206
d. To belong to a meritocracy one needs to satisfy a
series of demands.
207
humans. They are, therefore, subject to human failings.
Can qualifications be always judged "objectively,
unambiguously, unequivocally"? and what about "the
right personality traits" or "the ability to engage in
teamwork"? These are vague enough to hide bias and bad
will. Still, at least the appearance is kept in most of the
cases - and decisions can be challenged in courts.
208
The drive for privatization of state enterprises in most
East and Central European countries provides a glaring
example of oligarchic machinations.
209
The reason is that the best and the brightest - when shut
out by the members of the ruling elites - emigrate. In a
country where one's job is determined by his family
connections or by influence peddling - those best fit to do
the job are likely to be disappointed, then disgusted and
then to leave the place altogether.
210
resources - and land this investment in a rich country. This
is also one of the biggest forms of capital flight and
capital transfers in history.
211
What is even more important:
212
the creation of marketable personal brands (think
Beckham, or Tiger Woods).
213
The penury of the intellect is guaranteed by the anti-
capitalistic ethos of science. Scientific knowledge and
discoveries must be instantly and selflessly shared with
colleagues and the world at large. The fruits of science
belong to the community, not to the scholar who labored
to yield them. It is a self-interested corporate sham, of
course. Firms and universities own patents and benefit
from them financially - but these benefits rarely accrue to
individual researchers.
214
the electronic media as a matter of policy. Literacy has
plummeted even in the industrial and rich West.
Budget, Balanced
Government budgets represent between 25% and 50% of
he Gross Domestic Product (GDP), depending on the
country. The members of the European Union (Germany,
France) and the Scandinavian countries represent the apex
of this encroachment upon the national resources. Other
countries (Great Britain, to name one) fare better. But
even the more developed countries in South East Asia do
not clear the 25% hurdle.
215
Another method of financing the budget is by borrowing
either in the capital markets (by selling bonds as the
government of the USA does) - or by "voluntarily"
deducting part of the wages (as Israel used to do until a
decade ago). Such borrowing has grave repercussions: the
national debt grows, debt service (repayments of interest
on the debt plus the principal of the debt) consumes more
and more of the national resources and the government
crowds individuals and - more importantly - businesses
out of the credit markets. In other words, the money that is
lent to the government is not available to finance
consumption, investments and working capital for
businesses. The competition on the scarce resource of
capital increases its price, interest rates. Government
borrowing has disastrous economic consequences in the
long term: reduced consumption, heightened interest rates,
stagnant investments - all leading to recession and
negative or reduced growth rates.
The two best known examples are the United States and
the European Union.
216
necessity to constrain it and to abolish as many of its
functions as politically and economically feasible. Small
Government was a pillar of the treaty with the people
which led the Republicans to their landslide
Congressional victory in 1994.
217
already provokes interest group to pressurize the
administration to be less tight fisted and possessed more
of a social conscience.
218
competition. One of the more important functions of any
administration is to act anti-cyclically, to encourage
economic activity in times of recession - and to hold the
economic horses when they go wild. A government
cannot do this when its hands are tied behind its back by a
totally arbitrary limitation: no more than 3% budget
deficit (why 3? why not 2.65%?). This Maastricht
criterion will prove, in the long run, to be lethal to the
very idea of a European Union.
What is a budget?
219
In this sense, a budget is also a monitoring tool. By
comparing financial projections, finances allocated to
specific purposes in the budget - to the actual use made of
the funds and to the extent that they were expended, it
becomes clear whether the government "has kept its
word", "changed its mind", or "reneged on its promises".
A budget is a promise, it is a contract between the elected
government and the nation, it is approved by parliament
and has the status of a law. A budget can be altered only
through a vote in parliament. It is a document of
unparalleled importance, second only to the constitution.
220
the floods in the Czech Republic (3 billion USD) and in
Poland (2 billion USD). Geopolitical processes like wars
and peace agreements in the Middle East (the 1979 peace
cost Israel almost 4 billion USD to implement). The
onerous, depressingly uniform demands of the IMF from
poor countries: austerity, fiscal tightening, a monetary
squeeze, privatization, deregulation and so on.
221
and hopes. They are prone to mistakes, greed, cronyism,
ulterior motives. The existence of a mechanism to amend
budgets is, therefore, of the essence and to be greeted. A
budget amendment is often ceased upon by the opposition
as proof of the government's fallibility and failure. But in
a changing world - they who do not adapt through change
are doomed. Governments that amend their budgets
midway merely admit that they are made of humans and
are doing their nation a service.
Bulgaria, Economy of
Bulgaria is proof that not all currency boards are destined
to an Argentine denoument. Having witnessed its GDP
plunge by one third between 1989 and 1997, it has risen
by 11% in the three years since, driven by net exports and
domestic demand, in equal measures. This was achieved
as hyperinflation was reduced to an annual rate of 1.7% in
1998. It has since worryingly climed back to 11.4% last
year and has come down to only 8% since, due to higher
energy prices and a severe draught. Bulgaria also re-paid
its sovereign debt so that it now constitutes less than 70%
of its GDP. This is often attributed to strict fiscal policies
(the budget deficit amounts to c. 1% of official GDP and
wage bills in most loss making state enterprises have been
frozen) and to a successful implementation of a currency
board. The boards is very popular with the Bulgarian: it
gave them a stable currency, increased exports, liquified
banks and halved interest rates, among other benefits.
After years of crony privatizations ("management and
employee buyouts") financed by criminal groups and
followed by widespread asset stripping and a botched
voucher cum investment funds scheme - more than 80%
222
of bank assets and 50% of state enterprises have been
genuinely privatized (often through the stock exchange).
A series of well publicized and government sponsored
raids by police ands tax authorities on the likes of
"Multigrup", the penumbral holding company, have gone
a long way towards decriminalizing the economy. And
corrupt Ministers are being given the boot as a matter of
course. The authorities have also been making the right
noises regarding health care, pensions and bank
supervision. Real investment, depressed wages, and
restructuring led to higher productivity and enhanced
competitiveness.
223
taxes are stratospheric and drive people into the thriving
informal economy (estimated to be about one third of the
total). And, despite being a trading nation, Bulgarian
customs duties and tariffs are both complex and high.
224
billion in export proceeds during the Danube-blocking
1999 Kosovo crisis and its aftermath. The war affected
rail transport and tourism as well. Bulgaria may be
adversely affected by fighting in its tiny neighbour,
Macedonia, and in Bosnia. The meltdown of Turkey's
economy - one of Bulgaria's important trading partners -
and a looming recession in the USA and Japan - may also
have an impact. Should inflation or the current account
deficit worsen, the government will have to tighten its
fiscal stance and, thus, induce a recession. Elections in
June may make it difficult to maintain fiscal discipline,
though.
225
Bulgaria experienced one of the most difficult periods of
transition among the post-communist countries. Poverty
reached a nadir in the years 1993-1998 with food
rationing and shortages of basic subsistence goods. The
government of the barely reformed Communists
("Bulgarian Socialist Party"), headed by Jan Videnov,
wrought total devastation on Bulgaria. Hyperinflation,
rising unemployment, a dysfunctional financial sector,
cronyism, organized crime, an unrestructured and
crumbling industrial sector brought it down in the 1997
elections, won by the UDF (United Democratic Forces)
coalition.
226
talks) ameliorated the national mood of disappointment
for a while. Recently, though, a series of corruption and
wiretapping scandals and criminal shootouts have
tarnished the UDF's image. The war in Macedonia has the
potential to scare away foreign investors and embroil
Bulgaria in a third Balkan War. Anxiety is high.
227
The Bulgarian left provides for a very disheartening
political landscape.
228
Czech Republic and Poland, the EU's prospective
members in central Europe.
229
Following the joint Vilnius Group declaration, Albania,
Croatia, Bulgaria and Macedonia received private and
public assurances that their NATO applications now stand
a better chance. Bulgaria started the second round of
negotiations with the military alliance yesterday and
expects to become full member next year. The head of the
US Committee on NATO Enlargement Bruce Jackson
stated: "I'm sure that Bulgaria has helped itself very much
this week."
230
election outcomes to inter-ethnic relations. James Purdew,
America's ambassador to Sofia and a veteran Balkan
power broker, spent the last few weeks exerting pressure
on the Bulgarian government, in tandem with the
aforementioned Bruce Jackson, to oust the country's
Prosecutor General and reinstate the (socialist) head of the
National Investigation Services.
231
soldiers-technicians and 18 planes on the country's soil
and will pay for making use of the infrastructure, as they
have done during operation "Enduring Freedom" (the war
in Afghanistan).
232
commitment to the European Union, its values and its
agenda?
233
8%. Half the population is under the official poverty line.
A sham privatization of state assets allowed criminal
business groups to infiltrate the Bulgarian economy. The
private sector is encumbered by venal red tape and
inflexible labour laws. These problems are further
compounded by the deteriorating economic outlook of
Turkey, one of Bulgaria's largest trade partners - and the
political strife in Macedonia, its neighbour and vital
transport route.
234
miracles. We would hope that things start improving by
the third year. The king himself talks of 800 days." The
PM made clear that "The Bulgarian economy cannot grow
without growth of the income of the population", and that
he intended to attract back Bulgarian flight capital by
revamping the banking system, introducing international
accounting standards, and attracting foreign investors to
buy shares in Bulgarian firms.
235
His colleague, US educated Deputy Prime Minister and
Minister of the Economy, Nikolai Vassilev, 32, is an
emergent market analyst. His economic agenda includes
the tired - and hitherto vague - recipes of privatization,
fighting corruption, reinforcing capital markets, and tax
reform to encourage re-investment by firms. Vassilev and
Ljubka Kachakova (a PriceWaterhouseCoopers Brussels
employee) authored the inventory of free-market slogans
that passes for the economic platform of National
Movement for Simeon II. Kostov immediately pointed out
the incompatibility of said platform with Bulgaria's
current and future obligations to the EU.
236
expressed concern regarding the decline in Bulgaria's
foreign exchange reserves due to the need to repay 1.3
billion US dollars of foreign debt this year. He warned
against a negative tendency in the trade balance of
Bulgaria as imports far exceeded exports in the last few
years. In the same event, he opinionated that the capital
markets should be completely liberalized. He argued for
free purchases of land - including agricultural land - by
foreigners. He identified these restrictions as the cause of
the decline in the value of Bulgarian assets and its
divergence from the EU. Bulgarians - he exclaimed -
underestimate the potential role and contribution of capital
markets. "In the updated 'Program 2001' of the Bulgarian
Government, the economic and financial policies of the
incumbents are reduced to envisioning support for the
commercial banks of the most elementary type" - he
accused. Foreigners - he added - "have no confidence" in
the Bulgarian capital markets. He succeeded to attract the
attention of Kostov himself, who responded to him at
length.
237
will fill a big hole in the lives (of the Bulgarians)." - says
Andrey Raichev, Director of Gallup Bulgaria, to the same
paper.
Business Plan
There are many types of symbols. Money from investors,
banks or financial organisations is one such kind of
symbols.
238
right! - I never thought of it" or "(arranged) This way it
makes sense").
239
Clear signs of the failure of a Business Plan to manipulate
would be remarks like: "Why is he using this strange
method for calculation?", "Why did he fail to calculate the
cost of financing?" and even: "What does this term mean
and what does he mean by using it?"
240
systems. Some of them are closely and formally linked to
the business at hand (Laws, customs tariffs, taxes, for
instance). Some are informally linked to it: substitute
products, emerging technologies, ethical and
environmental considerations. The Business Plan is
supposed to resonate within the mind of the reader and to
elicit the reaction: "How very true!!!"
241
A computer is the physical embodiment of a symbol
system - and so is a bank doling out credit. The same
principles apply to the human organism.
242
Using this theory of the manipulation of symbols we can
differentiate three kinds of financing organizations:
243
244
C
Capital Flows, Global
The recent upheavals in the world financial markets were
quelled by the immediate intervention of both
international financial institutions such as the IMF and of
domestic ones in the developed countries, such as the
Federal Reserve in the USA. The danger seems to have
passed, though recent tremors in South Korea, Brazil and
Taiwan do not augur well. We may face yet another crisis
of the same or a larger magnitude momentarily.
What are the lessons that we can derive from the last crisis
to avoid the next?
The first lesson, it would seem, is that short term and long
term capital flows are two disparate phenomena with very
little in common. The former is speculative and technical
in nature and has very little to do with fundamental
realities. The latter is investment oriented and committed
to the increasing of the welfare and wealth of its new
domicile. It is, therefore, wrong to talk about "global
capital flows". There are investments (including even long
term portfolio investments and venture capital) – and
there is speculative, "hot" money. While "hot money" is
very useful as a lubricant on the wheels of liquid capital
markets in rich countries – it can be destructive in less
liquid, immature economies or in economies in transition.
245
even discouraged. The introduction of fiscally-oriented
capital controls (as Chile has implemented) is one
possibility. The less attractive Malaysian model springs to
mind. It is less attractive because it penalizes both the
short term and the long term financial players. But it is
clear that an important and integral part of the new
International Financial Architecture MUST be the control
of speculative money in pursuit of ever higher yields.
There is nothing inherently wrong with high yields – but
the capital markets provide yields connected to economic
depression and to price collapses through the mechanism
of short selling and through the usage of certain
derivatives. This aspect of things must be neutered or at
least countered.
246
competition legislation – many countries have fostered the
vacuum within which financial crises breed.
247
Both approaches have their merits and both should be
applied in varying combinations on a case by case basis.
Casino
154,000,000. This is the number of Americans who
visited the gambling institutions in the USA in 1995.
Another 177,000,000 participated in other forms of
gambling: car races, horse races, other sports tournaments.
They have spent well over 44 BILLION USD on
gambling. On average, they lost 20% of the money that
they invested - and this, approximately, is the profit of this
industry in the US. The industry's annual growth rate is
11% which is an excellent figure for an industry which
commenced its operations in 1940 in a desert in the State
of Nevada. Wall Street likes casinos and shares of
gambling related companies skyrocketed and yielded
much more than the Dow Jones Average Index. Hotels
chains - such as Hilton and ITT - are competing fiercely to
purchase casinos.
248
delicate terms: casinos exact a heavy social and economic
price from the countries in which they operate.
249
encouraged the construction of hotels, restaurants and
other tourist attractions and diversions. This also
increased the revenues of the casinos considerably.
250
Macedonia. But this will ruin the economic justification
for the establishment of such an institutions. Experience
gathered in other countries also teaches us that the local
citizens will find ways around this prohibition.
251
Casinos also cause jobs to be cancelled. Older firms (old
hotels, restaurants, service firms) are closed down and
people get fired. The number quoted above also does not
take into consideration the natural (not related to
gambling) growth in employment in the USA as a whole.
Taking all this into account, the claims that casinos create
jobs looks more and more dubious. The more casinos
established - the less business each of them is able to do.
Some of them are making losses and are firing people,
exacerbating a bad employment scene.
252
(4) Casinos undoubtedly hurt the local economy when
they take money from local citizens. A Macedonian with
free income could use it to buy clothes, go to a restaurant
or buy a computer. If he spends this money in a casino -
other businesses suffer. Their turnover is reduced. They
must fire employees. They also pay less taxes - which
offsets the taxes that casinos pay. No one has ever
calculated which is more: the taxes that casinos pay - or
the taxes which businesses stop to pay because of reduced
consumption by local citizens who spent all their money
in a casino. Sometimes these businesses close down
altogether. Anyone who visited Atlantic City or Gary,
Indiana can testify to this. Atlantic City is a gambling
capital - and, yet, it is was of the most trodden down cities
of the USA.
253
Moreover, 4% of the population are "pathological
gamblers". Those who cannot stop and who will stop at
nothing - crime included - to get the money that they need
in order to gamble. 10% of the gamblers account for 80%
of the money wagered in casinos. 40% of white collar
crime (especially embezzlement and fraud) is rooted in
gambling. Families, immediate social circles and
colleagues in the workplace are gravely affected. The
direct costs are enormous. One small town in
Massachusetts (in the neighbourhood of a casino) had to
increase its police budget by $400,000 per year. Think
what the costs are for big cities with casinos in them!!!
Cellular Telephony
The government of Yugoslavia, usually strapped for cash,
has agreed to purchase 29 percent of Telekom Srbija, of
which it already owns 51 percent. It will pay the seller,
Italia International, close to $200 million. The Greek
telecom, OTE, owns the rest.
254
The mobile phone market is booming throughout central
and eastern Europe. According to Baskerville's Global
Mobile industry newsletter, annual subscriber growth in
countries as rich as Russia and as impoverished as
Albania exceeds 100 percent. Belarus is off the charts
with 232 percent. Macedonia (82 percent), Ukraine (79
percent), Moldova (86 percent), Lithuania (84 percent)
and Bulgaria (79 percent) are not far behind.
255
nibbling at their heels. Advanced cellular networks - such
as under the 2.5G protocol - are expected to take off.
256
Local initiatives have emerged where cellular phone
services failed to transpire. RIA-Novosti recounted how
11 pensioners, the residents of a village in Novgorod
Oblast have teamed up to invest in a community mobile
phone to be kept by the medic. The fixed line network
extended only to the nearest village.
257
Past liberalizations in central European markets - Poland,
the Czech Republic and Hungary - have not been
auspicious. Prices rose, the erstwhile monopoly largely
retained its position and competition remained muted. But
Romania is different. Its liberalization is neither partial,
nor hesitant. The process is not encumbered by red tape
and political obstruction. Even so, mobile phones are
likely to be the big winners as the fixed line infrastructure
recovers glacially from decades of neglect.
258
a brand new network. MTS also acquired a majority stake
in Ukrainian Mobile Communications (UMC), the
country's second largest operator. The Russian behemoth
is eyeing Bulgaria and Moldova as well.
259
central bank. On certain functions it has an absolute legal
monopoly.
260
interest rates that it charges on money that it lends to the
banking system through its "discount windows". Interest
rates is supposed to influence the level of economic
activity in the economy. This supposed link has not
unequivocally proven by economic research. Also, there
usually is a delay between the alteration of interest rates
and the foreseen impact on the economy. This makes
assessment of the interest rate policy difficult. Still,
central banks use interest rates to fine tune the economy.
Higher interest rates - lower economic activity and lower
inflation. The reverse is also supposed to be true. Even
shifts of a quarter of a percentage point are sufficient to
send the stock exchanges tumbling together with the bond
markets. In 1994 a long term trend of increase in interest
rate commenced in the USA, doubling interest rates from
3 to 6 percent. Investors in the bond markets lost 1 trillion
(=1000 billion!) USD in 1 year. Even today, currency
traders all around the world dread the decisions of the
Bundesbank and sit with their eyes glued to the trading
screen on days in which announcements are expected.
Interest rates is only the latest fad. Prior to this - and under
the influence of the Chicago school of economics - central
banks used to monitor and manipulate money supply
aggregates. Simply put, they would sell bonds to the
public (and, thus absorb liquid means, money) - or buy
from the public (and, thus, inject liquidity). Otherwise,
they would restrict the amount of printed money and limit
the government's ability to borrow. Even prior to that
fashion there was a widespread belief in the effectiveness
of manipulating exchange rates. This was especially true
where exchange controls were still being implemented
and the currency was not fully convertible. Britain
removed its exchange controls only as late as 1979. The
USD was pegged to a (gold) standard (and, thus not really
261
freely tradable) as late as 1971. Free flows of currencies
are a relatively new thing and their long absence reflects
this wide held superstition of central banks. Nowadays,
exchange rates are considered to be a "soft" monetary
instrument and are rarely used by central banks. The latter
continue, though, to intervene in the trading of currencies
in the international and domestic markets usually to no
avail and while losing their credibility in the process. Ever
since the ignominious failure in implementing the
infamous Louvre accord in 1985 currency intervention is
considered to be a somewhat rusty relic of old ways of
thinking.
262
One sure sign is the number of times that a bank chooses
to borrow using the discount windows. Another is if it
offers interest rates which are way above the rates offered
by other financing institutions. There are may more signs
and central banks should be adept at reading them.
263
determining the health, behaviour and operational modes
of commercial banks is so paramount that it is highly
undesirable for a central bank to supervise the banks. As I
have said, supervision by a central bank means that it has
to criticize itself, its own policies and the way that they
were enforced and also the results of past supervision.
Central banks are really asked to cast themselves in the
unlikely role of impartial saints.
264
cannot be utilized by the bank for its own operations or
for the betterment of its staff through education.
265
bank (at the same breath saying that it is completely
independent).
266
supervision needs to be overhauled and lessons need to be
learnt. The political independence of the bank needs to be
increased greatly. The bank must decide what to do with
TAT and with the other failing Stedilnicas?
267
And bank supervision must be separated from the central
bank and set to criticize the central bank and its policies,
decisions and operations on a regular basis.
268
The Czech Republic encapsulates many of the economic
and political trends in the erstwhile communist swathe of
Europe.
269
Additionally, the country is bracing itself for another bout
of floods, more devastating than last year's and the ones in
1997. Each of the previous inundations caused in excess
of $2 billion in damages. The government's budget is
already strained to a breaking point with a projected
deficit of 6.3 percent this year, stabilizing at between 4
and 6.6 percent in 2006. The situation hasn't been this dire
since the toppling of communism in the Velvet
Revolution of 1989.
270
Czech unit. Siemens Elektromotory's 3000 employees
export $130 million worth of electrical engines annually.
271
Indeed, supporting the United States was seen by the
smaller countries of the EU as a neat way to
counterbalance Germany's worrisome economic might
and France's often self-delusional aspirations at
helmsmanship. A string of unilateral dictates by the
French-German duo to the rest of the EU - regarding farm
subsidies and Europe's constitution, for instance - made
EU veterans and newcomers alike edgy. Hence the
deliberate public snub.
272
the definition of a colony and an economic hinterland.
From a low base, growth there - driven by frenzied
consumerism - is bound to outstrip the northern giant's for
a long time to come. But Germans stands to benefit from
such prosperity no less than the indigenous population.
"The Poles may differ with the French over security but
they will be with them in the battle to preserve farm
subsidies. The Czechs and Hungarians are less wary of
military force than the Germans but sympathize with their
approach to the EU's constitutional reform. In truth, there
are no more fixed and reliable alliances in the EU.
Countries will team up with each other, depending on
issue and circumstances."
273
CFO (Chief Finance or Financial Officer)
Sometimes, I harbour a suspicion that Dante was a
Financial Director. His famous work, "The Inferno", is an
accurate description of the job.
Organizational Affiliation
274
Despite the above said, the CFO can report directly to the
Board of Directors through the person of the Chairman of
the Board of Directors or by direct summons from the
Board of Directors.
275
governance is alien to most firms in developing countries
and companies are regarded by most general managers as
milking cows – fast paths to personal enrichment.
276
In developing countries, this is often confused with central
planning. Financial control does not mean the waste of
precious management resources on verifying petty
expenses. Nor does it mean a budget which goes to such
details as how many tea bags will be consumed by whom
and where. Managers in developing countries still feel that
they are being supervised and followed, that they have
quotas to complete, that they have to act as though they
are busy (even if they are, in reality, most of the time,
idle). So, they engage in the old time central planning and
they do it through the budget. This is wrong.
277
(3) To timely, regularly and duly prepare and present to
the Board of Directors financial statements and reports
as required by all pertinent laws and regulations in the
territories of the operations of the firm and as deemed
necessary and demanded from time to time by the Board
of Directors of the Firm.
278
combine to breed short-sightedness, speculative streaks, a
drive to get rich while the going is good (and thus rob the
company) – and up to criminal tendencies.
279
documents as may be required from time to time by the
Board of Directors of the firm.
280
everything and there are no identifiable owners (except in
a few companies). Absurdly, Communism (the common
ownership of means of production) has returned in full
vengeance, though in disguise, precisely because of the
ostensibly most capitalist act of all, privatization.
281
in the banking sector. A CFO who is unable to participate
in these games is deemed by the management to be
"weak", "ineffective" or "no-good". The lack of non-bank
financing options and the general squeeze on liquidity
make matters even worse for the finance manager. He
must collaborate with the skewed practices and decision
making processes of the banks – or perish.
282
The Russian military is stretched to its limits. Munitions
and spare parts are in short supply. The defense industry
shrunk violently following the implosion of the USSR.
Restarting production of small-ticket items is
prohibitively expensive. Even bigger weapon systems are
antiquated. A committee appointed by the Duma, Russia's
lower house of parliament, found that the average age of
the army's helicopters is 20. Russia lost dozens of them
hitherto and does not have the wherewithal to replace
them.
283
of financing the Russian war effort against the tiny
republic and its 1.5 million destitute or internally
displaced citizens. Even the staid Jane's World Armies
concurred.
No one knows how much the war has cost Russia hitherto.
It is mostly financed from off-budget clandestine bank
accounts owned and managed by the Kremlin, the
military, and the security services. Miriam Lanskoy,
Program Manager at the Institute for the Study of
Conflict, Ideology and Policy at Boston University,
estimated for "NIS Observed" and "The Analyst" that
Russia has spent, by November 2001, c. $8 billion on the
war, money sorely needed to modernize its army and
maintain its presence overseas.
284
Similarly, Jane's Defense Weekly put the outlay at $40-50
million a day - but most of it in cost-free munitions
produced during Soviet times. A leading Soviet military
analyst, Pavel Felgengauer, itemized the expenditures.
The largest articles are transport, fuel, reconstruction of
areas shattered by warfare, and active duty bonuses to
soldiers.
285
Russia is ensnared in an ever-escalating cycle of violence
and futile retaliation. Its society is gradually militarized
and desensitized to human rights abuses. Corruption is
rampant. Russia's Accounting Board disclosed that a
whopping 12 percent of the money earmarked to fight the
war five years ago has vanished without a trace.
Child Labor
From the comfort of their plush offices and five to six
figure salaries, self-appointed NGO's often denounce
child labor as their employees rush from one five star
286
hotel to another, $3000 subnotebooks and PDA's in hand.
The hairsplitting distinction made by the ILO between
"child work" and "child labor" conveniently targets
impoverished countries while letting its budget
contributors - the developed ones - off-the-hook.
287
The GAO published a report last week in which it
criticized the Labor Department for paying insufficient
attention to working conditions in manufacturing and
mining in the USA, where many children are still
employed. The Bureau of Labor Statistics pegs the
number of working children between the ages of 15-17 in
the USA at 3.7 million. One in 16 of these worked in
factories and construction. More than 600 teens died of
work-related accidents in the last ten years.
288
In many impoverished locales, child labor is all that
stands between the family unit and all-pervasive, life
threatening, destitution. Child labor declines markedly as
income per capita grows. To deprive these bread-earners
of the opportunity to lift themselves and their families
incrementally above malnutrition, disease, and famine - is
an apex of immoral hypocrisy.
289
Bangladesh in 1993 in anticipation of the American
never-legislated Child Labor Deterrence Act.
290
"In Africa children are generally treated as mini-adults;
from an early age every child will have tasks to perform in
the home, such as sweeping or fetching water. It is also
common to see children working in shops or on the
streets. Poor families will often send a child to a richer
relation as a housemaid or houseboy, in the hope that he
will get an education."
291
Common Agricultural Policy (CAP)
The June 2005 budget summit in Brussels foundered on
the issue of farm support and subsidies which now
consume directly 46.2% of the European Union's (EU)
funds. Tony Blair refused to let go of Britain's infamous
rebate (amounting to two thirds of its net contributions to
the community's coffers) unless and until these handouts
(which Britain's dilapidated agriculture does not enjoy)
are slashed. This followed close on the hills of the
rejection of the proposed EU constitution in French and
the Dutch referenda in May-June 2005.
292
to break the eerie stranglehold of 3-4 percent of Europe's
population - its farmers - on its budget and political
process.
293
This may further postpone the identical treatment much
coveted by the applicants. Theoretically, subsidies for the
farm sectors of the new members will increase and
subsidies flowing to veteran members will decrease until
they are equalized at around 80 percent of present levels
throughout the EU by the end of the next budget period in
2013.
294
It also ignores the distinct - and thorny - possibility that
the new members will end up as net contributors to the
budget.
295
Latvia, Slovenia and Lithuania are undecided about EU
membership or opposed to it altogether. The situation in
the Czech Republic is not much improved. Only Hungary
stalwartly supports the EU's eastern tilt.
296
support for Poland's 6 million farmers with the subsidies
given to the EU's 8 million smallholders. In a typical feat
of incongruity he said it will prevent them from
modernizing and alienate other professions.
297
are well represented in the legislature and soaring
unemployment - almost one fifth of all adults - makes
every workplace count.
298
European Commission and a make-believe European
Parliament. The constitution which was supposed to
restore central authority and participatory democracy is
dead in the water.
299
Farm protection in OECD countries fell from 37% of farm
receipts (1986-8) to 30% (2002-4) - still around $279
billion. This statistic masks yawning disparities between
countries. In New Zealand and Australia, producer
support amounts to less than 5% of farm receipts. It stands
at 20% in North America and climbs to 34% in the EU
and 60% in Japan.
300
Farming Conference. Gaymard drew the battle lines and
made clear that the French resistance is alive and kicking -
at least with regards to the European Commission's
proposed reforms of the European Union's Common
Agricultural Policy (CAP).
301
practices, such as the profuse application of anti-dumping
quotas and duties.
302
spending of all EU members. The comparable figure in
America is 1.5 percent.
303
This subverts traditional agriculture. Gaymard implied
that the destitute would do well to introduce a CAP all
their own and thus underwrite a thriving indigenous sector
for internal consumption and more stable export revenues.
304
architecture so laboriously erected in the last 20 years - if
they become convinced, as they should, that it is all
prestidigitation and a rich boys' club. It is a precipice and
France has just taken us all one step forward.
305
Ever the autistic solipsists, the IMF and World Bank
maintained in a press release that the talk shop "broadened
and deepened the debate to include a range of economic,
institutional and social issues that must be tackled if the
seven countries are to achieve the targets of the
Millennium Development Goals".
306
civil rights, up to - and including - the assassination of
opponents and dissidents. To raise these delicate issues
would have been impolitic when the IMF's largest
shareholder - the United States - has embraced these
despots as newfound allies.
307
proscriptions. To no avail. Annual GDP growth collapsed
from 10 percent in 1996-7 to less than 3 percent
thereafter.
308
prestidigitation by the proponents of the Washington
orthodoxy.
309
its denizens under the poverty line - may be regretting not
having heeded this lesson earlier.
Communism
The core countries of Central Europe (the Czech
Republic, Hungary and, to a lesser extent, Poland)
experienced industrial capitalism in the inter-war period.
But the countries comprising the vast expanses of the New
Independent States, Russia and the Balkan had no real
acquaintance with it. To them its zealous introduction is
nothing but another ideological experiment and not a very
rewarding one at that.
310
the mellifluous and prolix prose of the Habsburg codices
and patents. Most of the denizens of these moribund
swathes of Europe were farmers - only the profligate and
parasitic members of a distinct minority inhabited the
cities. The present brobdignagian agricultural sectors in
countries as diverse as Poland and Macedonia attest to this
continuity of feudal practices.
311
about the ruin of the body as a whole". The body in the
text being the body politic.
312
eleventh and twelfth centuries witnessed a concerted
effort by medieval scholars to apply "scientific" principles
and human knowledge to the solution of social problems.
The historian R. W. Southern called this period "scientific
humanism" (in "Flesh and Stone" by Richard Sennett,
London, Faber and Faber, 1994). We mentioned John of
Salisbury's "Policraticus". It was an effort to map political
functions and interactions into their human physiological
equivalents. The king, for instance, was the brain of the
body politic. Merchants and bankers were the insatiable
stomach. But this apparently simplistic analogy masked a
schismatic debate. Should a person's position in life be
determined by his political affiliation and "natural" place
in the order of things - or should it be the result of his
capacities and their exercise (merit)? Do the ever
changing contents of the economic "stomach", its
kaleidoscopic innovativeness, its "permanent revolution"
and its propensity to assume "irrational" risks - adversely
affect this natural order which, after all, is based on
tradition and routine? In short: is there an inherent
incompatibility between the order of the world (read: the
church doctrine) and meritocratic (democratic)
capitalism? Could Thomas Aquinas' "Summa Theologica"
(the world as the body of Christ) be reconciled with "Stadt
Luft Macht Frei" ("city air liberates" - the sign above the
gates of the cities of the Hanseatic League)?
313
conflicted with basic human drives and desires.
Communism was a throwback to the days before the
ascent of the urbane, capitalistic, sophisticated,
incredulous, individualistic and risqué West. it sought to
substitute one kind of "scientific" determinism (the body
politic of Christ) by another (the body politic of "the
Proletariat"). It failed and when it unravelled, it revealed a
landscape of toxic devastation, frozen in time, an ossified
natural order bereft of content and adherents. The post-
communist countries have to pick up where it left them,
centuries ago. It is not so much a problem of lacking
infrastructure as it is an issue of pathologized minds, not
so much a matter of the body as a dysfunction of the
psyche.
Competition Laws
A. THE PHILOSOPHY OF COMPETITION
314
goods and services which they consume. This, according
to current economic theories, can be achieved only
through effective competition. Competition not only
reduces particular prices of specific goods and services - it
also tends to have a deflationary effect by reducing the
general price level. It pits consumers against producers,
producers against other producers (in the battle to win the
heart of consumers) and even consumers against
consumers (for example in the healthcare sector in the
USA). This everlasting conflict does the miracle of
increasing quality with lower prices. Think about the vast
improvement on both scores in electrical appliances. The
VCR and PC of yesteryear cost thrice as much and
provided one third the functions at one tenth the speed.
315
improves itself, re-engineers its production
processes, introduces new management
techniques, modernizes - in order to fight the
competition, it stands to reason that it will reap the
rewards. Competition benefits the economy, as a
whole, the consumers and other producers by a
process of natural economic selection where only
the fittest survive. Those who are not fit to survive
die out and cease to waste the rare resources of
humanity.
316
opening up. At the end of such a wrong path awaits
economic disaster and the forced entry of competitors. A
country which closes itself to the world - will be forced to
sell itself cheaply as its economy will become more and
more inefficient, less and less non-competitive.
317
market and the biggest of them controls more than
12% of it.
318
These three antithetical approaches are, by no means,
new. One led to socialism and communism, the other to
corporatism and monopolies and the third to jungle-
ization of the market (what the Europeans derisively call:
the Anglo-Saxon model).
319
A country such as Macedonia - poor and in need of
establishing its export sector - should include in its
competition law at least two protective measures against
these discriminatory practices:
320
emphasizes social, regional development and political
consequences. The EU also protects the rights of small
businesses more vigorously and, to some extent, sacrifices
intellectual property rights on the altar of fairness and the
free movement of goods and services.
321
international trade which restrained competition, limited
access to markets, or fostered monopolistic control
whenever such practices had harmful effects on the
expansion of production or trade". the latter included:
322
antidumping and countervailing duty actions and
government subsidies constitute some elements of a more
general antitrust/competition law.
323
1629 (1986). A revised version was reissued. According
to it, " …Enterprises should refrain from abuses of a
dominant market position; permit purchasers, distributors,
and suppliers to freely conduct their businesses; refrain
from cartels or restrictive agreements; and consult and
cooperate with competent authorities of interested
countries".
324
According to its provisions, "independent enterprises
should refrain from certain practices when they would
limit access to markets or otherwise unduly restrain
competition".
2. Collusive tendering;
325
b. Discriminatory pricing or terms or
conditions in the supply or purchase
of goods or services;
c. Mergers, takeovers, joint ventures,
or other acquisitions of control;
d. Fixing prices for exported goods or
resold imported goods;
e. Import restrictions on legitimately-
marked trademarked goods;
f. Unjustifiably - whether partially or
completely - refusing to deal on an
enterprise's customary commercial
terms, making the supply of goods
or services dependent on
restrictions on the distribution or
manufacturer of other goods,
imposing restrictions on the resale
or exportation of the same or other
goods, and purchase "tie-ins".
326
Strategies' for Monopolization
327
Use predatory [below-cost] pricing (also known as
dumping) to eliminate competitors. - This tactic is mostly
used by manufacturers in developing or emerging
economies and in Japan. It consists of "pricing the
competition out of the markets". The predator sells his
products at a price which is lower even than the costs of
production. The result is that he swamps the market,
driving out all other competitors. Once he is left alone - he
raises his prices back to normal and, often, above normal.
The dumper loses money in the dumping operation and
compensates for these losses by charging inflated prices
after having the competition eliminated.
328
possibility to distribute small quantities), "old boy
networks" which share political clout and research and
development, using intellectual property right to block
new entrants and other methods too numerous to recount.
An effective law should block any action which prevents
new entry to a market.
329
certain market share as its goal (and will, therefore, not
tolerate anyone trying to prevent it from attaining this
market share) and any action which directly or indirectly
intimidates or convinces competitors to leave the industry.
Such an action need not be positive - it can be negative,
need not be done by the company - can be done by its
political proxies, need not be planned - could be
accidental. The results are what matters.
'Intimidate' Competitors
330
suspiciously like dumping) to buyers of its operating
system, "Windows". Inevitably it captured more than 30%
of the market, crowding out Netscape. It is the view of the
antitrust authorities in the USA that Microsoft utilized its
dominant position in one market (that of the Operating
Systems) to annihilate a competitor in another (that of the
browsers).
331
whenever he makes a headway, gains a larger market
share, launches a new product - can be construed as a
"pattern of retaliation".
332
a growing market share - the competitor will not feel
pressurized to learn and to better itself. In due time, it will
dwindle and die.
333
will exact a price and thus punish such a company
because, ultimately, its own brandname will suffer from
the proliferation.
'Vertical' Barriers
334
Practice vertical integration (buying suppliers and
distributionb and marketing channels).
335
'Consolidate' the Industry
336
and, ultimately, better positioned to lower prices, to
conduct costly research and development and to increase
quality. In the words of Porter: "(The) pay-off to
consolidating a fragmented industry can be high because...
small and weak competitors offer little threat of
retaliation."
Conspiracy Theories
Barry Chamish is convinced that Shimon Peres, Israel's
wily old statesman, ordered the assassination of Yitzhak
Rabin, back in 1995, in collaboration with the French. He
points to apparent tampering with evidence. The blood-
stained song sheet in Mr. Rabin's pocket lost its bullet
hole between the night of the murder and the present.
337
The distrust of appearances and official versions was
further enhanced by the Watergate scandal in 1973-4.
Conspiracies and urban legends offer meaning and
purposefulness in a capricious, kaleidoscopic,
maddeningly ambiguous, and cruel world. They empower
their otherwise helpless and terrified believers.
338
The monthly "Fortean Times" is the leading brand in
"strange phenomena and experiences, curiosities,
prodigies and portents". It is widely available on both
sides of the Atlantic. In its 29 years of existence it has
covered the bizarre, the macabre, and the ominous with
panache and open-mindedness.
339
no idea who I was, asking me if I'd like to appear on it ...
These days we've got conspiracy theories everywhere; and
about almost everything."
340
networking capabilities and by its environment of
simulated reality - "cyberspace". In his tome, "Enemies
Within: The Culture of Conspiracy in Modern America",
Robert Alan Goldberg comes close to regarding the
paranoid mode of thinking as a manifestation of
mainstream American culture.
341
It is impossible to tell how many people feed off the
paranoid frenzy of the lunatic fringe. I found more than
3000 lecturers on these subjects listed by the Google
search engine alone. Even assuming a conservative
schedule of one lecture a month with a modest fee of $250
per appearance - we are talking about an industry of c.
$10 million.
342
Majestic creates almost 30 primary Web sites per episode.
It has dozens of "bio" sites and hundreds of Web sites
created by fans and linked to the main conspiracy threads.
The imaginary gaming firm at the core of its plots,
"Amin-X", has often been confused with the real thing. It
even won the E3 Critics Award for best original product...
343
for instance - immortalize them. Memorabilia are sold
through auction sites and auction houses for thousands of
dollars an item.
344
often politically-motivated revision of past deals is hardly
the way to inspire confidence in jumpy foreign investors.
The Kazakh minister summed it up neatly: "It (revision)
would ruin the investment climate."
345
independent, lawyers that are knowledgeable,
businessmen who recognize the importance of contracts.
All of this has had to be developed, and it's not
surprising that it's taking quite a while."
346
The situation was so bad that Russian managers
collaborated only with commercial partners they knew
from the days of central planning (Kathryn Hendley and
others, 1997, "Observations on the Use of Law by Russian
Enterprises," published in Post-Soviet Affairs, Vol. 13).
347
Other scholars (Rose, 1999 and Kaariainen and Furman,
2000, to mention recent ones) report that foreign
businessmen complain about a low respect of the law,
contradictory legal rulings, and frequent breaches of
contract (reported in "Russian Enterprises and Company
Law in Transition" by S. Nysten-Haarala and published
by the International Institute for Applied Systems
Analysis in Austria).
348
enforce social order, have been shown in a number of
IRIS studies to be closely correlated with economic
growth."
349
have shorter planning horizons. Their interest in future tax
collection and national income is limited.
350
Moreover, it would be wrong to lump all the countries in
transition together.
351
decided not appeal his money laundering conviction in a
Swiss court. The Slovak daily "Sme" described in
scathing detail the newly acquired wealth and lavish
lifestyles of formerly impoverished HZDS politicians.
Some of them now reside in refurbished castles. Others
have swimming pools replete with wine bars.
352
Russia), spurious traffic tickets (as in Latin America), or
widespread stealthy payments for public goods and
services (as in Africa).
353
Anti-corruption projects are an integral part of every
Country Assistance Strategy (CAS). The Bank also
supports international efforts to reduce corruption by
sponsoring conferences and the exchange of information.
It collaborates closely with Transparency International,
for instance.
354
Moreover, bribing officials is often the unstated policy of
multinationals, foreign investors, and expatriates. Many of
them believe that it is inevitable if one is to expedite
matters or secure a beneficial outcome. Rich world
governments turn a blind eye, even where laws against
such practices are extant and strict.
355
Many rich world corporations and wealthy individuals
make use of off-shore havens or "special purpose entities"
to launder money, make illicit payments, avoid or evade
taxes, and conceal assets or liabilities. According to Swiss
authorities, more than $40 billion are held by Russians in
its banking system alone. The figure may be 5 to 10 times
higher in the tax havens of the United Kingdom.
356
a. The withholding of a service, information, or
goods that, by law, and by right, should have been
provided or divulged.
357
transparent provision of private benefits to public
officials."
358
To eradicate corruption, one must tackle both giver and
taker.
359
f. Strengthening of institutions: the police, the
customs, the courts, the government, its agencies,
the tax authorities - under time limited foreign
management and supervision.
360
criminality is doomed to failure. With them, it stands a
chance.
361
Erstwhile president of Sierra Leone, Momoh, amassed
hundreds of video players and other consumer goods in
vast rooms in his mansion. As electricity supply was
intermittent at best, his was a curious choice. He used to
sit among these relics of his cupidity, fondling and
counting them insatiably.
362
Diagnostic and Statistical Manual IV-TR (2000), the bible
of psychiatry, kleptomaniacs feel "pleasure, gratification,
or relief when committing the theft." The good book
proceeds to say that " ... (T)he individual may hoard the
stolen objects ...".
363
plunder as sanctions-busting operations. Hence the
confusion.
364
The main financial agent was "Beogradska Banka" and its
branch in Novi Sad. In a series of complex transactions
involving foreign exchange trades, smuggled privatisation
proceeds, and inflated import invoices, it was able to stash
away hundreds of millions of dollars. This money was
used to finance imports and defray the exorbitant
commissions, fees, and costs charged by numerous
intermediaries. Yugoslavia (and the regime) had no choice
- it was either that or starvation, freezing and explosive
social discontent.
365
The new Yugoslav authorities are likely to be deeply
frustrated and disappointed. Most of the money was
expended on essentials for the population. The personal
fortunes made are tiny by comparison and well-shielded
in off-shore banking havens. Milosevic himself has almost
nothing to his name. His son and daughter may constitute
richer pickings but not by much. The hunt for the
Milosevic treasure is bound to be an expensive, futile
undertaking.
366
Wolfensohn. And then they are made to listen to the IMF
lecture them on belt tightening and how uncompetitive
their economies are due to their expensive labour force.
To me, such a double standard is the epitome of
corruption. Organizations such as the IMF and World
Bank will never be possessed of a shred of moral
authority in these parts of the world unless and until they
forgo their conspicuous consumption.
Thus, we are better off asking "cui bono" than "is it the
right thing to do". Phenomenologically, "corruption" is a
common - and misleading - label for a group of
behaviours. One of the following criteria must apply:
367
To have a phone installed in Russia one must openly bribe
the installer (according to a rather rigid tariff). In many of
the former republics of Yugoslavia, it is impossible to
obtain statistics or other data (the salaries of senior public
officeholders, for instance) without resorting to kickbacks.
368
has coined the phrase "ambient corruption" to capture this
complex of features.
369
incorporated into decision making processes of all
economic players and moral agents. They develop "by-
passes" and "techniques" which allow them to restore an
efficient market equilibrium. In a way, all-pervasive
corruption is transparent and, thus, a form of taxation.
370
(3) Decision Altering Fees
371
forced to re-educate them prior to granting them a licence
to practice locally.
ERADICATING CORRUPTION
372
foreign) must be singled out for harsh (legal)
treatment and thus demonstrate that no one is
above the law and that crime does not pay.
373
5. Corruption is a symptom of systemic institutional
failure. Corruption guarantees efficiency and
favourable outcomes. The strengthening of
institutions is of critical importance. The police,
the customs, the courts, the government, its
agencies, the tax authorities, the state owned
media - all must be subjected to a massive
overhaul. Such a process may require foreign
management and supervision for a limited period
of time. It most probably would entail the
replacement of most of the current - irredeemably
corrupt - personnel. It would need to be open to
public scrutiny.
374
and, therefore, without proper investigation - denied by
their superiors in no uncertain terms.
375
and pinchbeck elites that now rule these tortured
territories. In short - forced to deal with the bedizened
miscreants that pass for businessmen and politicians in
this nether world - they are transformed, assuming in the
process the identity of their obdurately corrupted hosts.
376
they occupy the dead end, otiose and pension-orientated
jobs they do. Devoid of the charm, negotiating skills and
human relations required by the intricacies of their
profession - they are relegated to the Augean outskirts of
civilization. Dishonest and mountebank, they persist in
their mortifying positions, inured to the conniving they
require.
377
worldwide. From that moment on, no thief will be able to
fraudulently use your card. You can sigh in relief. The
danger is over.
But is it?
378
abused and the financial means of the cardholder are
exhausted.
379
situation whereby rules affecting the balances and
mandating operations resulting in debits and credits in the
bank account are not available to the account name
(owner). The issuer, at its discretion, may decide that
issuing a chargeback is the best way to rectify the
complaint.
380
4. Periodically, the merchant collects all the
transaction vouchers and sends them to his bank
(the "acquiring" bank).
381
pay directly to them by money order or by bank transfer.
The cardholder will be required to provide a security to
the credit card company and his spending limits will be
tightly related to the level and quality of the security
provided by him. The very issuance of the card is almost
always subject to credit history and to an approval
process.
382
to cancel the card. The details of all the issuing banks are
available in special manuals. These are published by the
clearing and payments associations of all the banks that
issue a specific type of card. All the financial institutions
that issue MasterCards, Eurocards and a few other minor
cards in Europe are members of Europay International
(EPI), for example.
Here lies the first snag: the catering bank often mistakes
the identity of the issuer. Many issuers - especially
branches of the same bank - are eponymous. Banks with
identical names exist in Prague, Budapest, Frankfurt,
London, Zagreb, or Vienna, for instance. In my case, they
alerted the wrong bank in the wrong country. My card was
never blocked. The thieves simply abused it to the limit.
383
on many a sales voucher ("No Refund – No
Cancellation") both refunds and cancellations occur daily.
384
cardholder with a receipt, normally with a copy of
the signed voucher.
385
cardholder is often required to provide a security to the
credit card company and his spending limits are tightly
supervised. Credit history, collateral, and background
checks are rigorous. Even then, the majority of the cards
issued are debit - rather than credit - cards.
Greenstein says:
386
Services or Visa. My years of experiences getting new
accounts, changing accounts, offsetting reserves, and
more - led me to create ChargebackPrevention.Com to
help less knowledgeable merchants benefit from my years
of 'education' in the field'."
387
Indeed, I can't help but recall those individual cases of
obvious abuse. Still, I'd have to say that the number of
people intentionally doing chargebacks to get money back
is quite low. I also believe that the ONE thing
Visa/MasterCard does right is to limit people in quality
dispute chargebacks. When they see someone doing it
excessively, they flag their account. I don't think there's a
big problem of people doing it regularly, but there is a
problem when consumers read articles like this one and
realize, in the back of their minds, that they can
chargeback. Then every slight problem with a merchant
gets blown out of proportion and they try to get the
product/service for free.
In sum, I would say that while there are some abuses - this
is the one area MC/VISA has "down pat" reasonably well.
There are ways they could improve the tackling of fraud
but I can't see many ways they can improve the treatment
of quality disputes. Everything is well-mediated. Every
once in a while you come across a grumpy anti-merchant
sort of chargeback handler burnt out and tired of his or her
job reviewing chargebacks all day. But such cases are few
and far between. Take it from someone who has
successfully reversed - or been involved in the reversal of
-hundreds of these!
388
chargebacks, fines, and reserve accounts (please explain
each of these terms)?
Thus, if you have a $50 sale and the customer has a gripe,
you may be slapped with a $15 fee for the slip request,
another $25 for the chargeback.. and then even if you
reverse the chargeback - some banks charge another $25
to do it. If the customer does a second chargeback, that's
another $25. So you can lose your $50 plus pay another
$90 by the time you're done - in the worst case scenario
with the worst merchant account conceivable!
389
• Extra charges if the merchant's batch isn't settled
every 24 hours;
• Additional fees and/or augmented rates for
international transactions;
• Specific per transaction fees for the type of
software being used or to have "the privilege" of
checking AVS or CVV2;
• Monthly statement fees - unless otherwise
negotiated.
390
nothing else but answer calls from merchants griping
about reserve accounts - and it's very difficult (but, from
our experience, not impossible) to get them to act in the
merchant's favor.
391
informing them what a great client we were and what a
great banking relationship we had. FirstData uses that
bank's letterhead and claims to represent it - but it refused
to release our funds despite the explicit request of the
bank whose merchant services they're contracted to
represent!
392
Question: Can you compare the advantages and
disadvantages of "card not present" and "card present"
sales? Is e-commerce hobbled by some of the procedures
and safeguards required by credit card companies and
clearinghouses?
393
merchants, AVS can cause problems of its own
and CVV2 still confounds customers and loses legitimate
sales when they fail to recite their credit card number by
heart.
394
you or I. I would never risk clientele by asking them to
sign up.
395
through off shore accounts - were leveraged by criminals
to garner political favors, to buy into legitimate businesses
and to infiltrate civil society.
Still, the ubiquity of crime in east Europe and its reach are
unprecedented in European annals. In the void-like
interregnum between centrally planned and free market
economies only criminals, politicians, managers, and
employees of the security services were positioned to
benefit from the upheaval.
396
Deprived of access to state largesse, criminals invested
their own capital in efficiently-run small to medium size
enterprises. Attuned to the needs and wishes of their
customers, criminals engaged in primitive forms of
market research, through neighborhood and grassroots
"pollsters" and "activists". They responded with agility
and in real time to changes in the patterns of supply and
demand by altering their product mix and their pricing.
They have always been pioneers of bleeding-edge
technologies.
397
forged, how-to manuals, goods and services on offer and
demand.
398
the way to an orderly community of learned, civilized,
law-abiding citizens.
399
nationalism and racism, paranoias and grievances to
recruit foot soldiers.
Croatia, Economy of
The first gay parade in Croatia's history ended in bloody
clashes with Nazi-saluting skinheads and the members of
a soccer fan club. Police fired teargas and arrested 26
marauders. Another 10 ended in the hospital. The 300
marchers called for increased social tolerance and
legislation to protect sexual minorities. The Minister of
Interior urged them to "love yourselves and fight for your
rights".
400
A survey carried out earlier this year in nine countries and
territories in Southeastern Europe by the International
Institute for Democracy and Electoral Assistance (IDEA)
showed Croats to be as worried about unemployment as
their Bosnian neighbors - despite having an incomparably
richer and more developed economy. Almost three
quarters rated joblessness as their greatest concern. Croats
tend to trust the private sector far more than they trust
their politicians.
401
candidates, Croatia repeatedly called upon the alliance to
expand aggressively in its forthcoming summit in
November 2002 in Prague.
402
fortnight ago, the chambers of commerce of the two
countries concluded two agreements which tackle the
thorny issue of claims following the succession of the
former federation. Croatia has even, controversially, taken
to handing to their prosecutors revered military figures
indicted by the war crimes tribunal in the Hague.
403
minister resubmitted the controversial treaty ratification
bill. Six HSLS deputies voted for and nine abstained.
404
deputy prime minister Goran Granic, defense minister
Jozo Rados, and two other incumbent ministers Hrvoje
Kraljevic and Andro Vlahusic.
405
Hague, the new Yugoslav ambassador apologized for
crimes committed against Croats by his compatriots,
Bosnian officials coped with a restive Croat population in
their patchwork country.
406
Yet, the implosion of world travel and tourism following
the September 11 atrocities, threatens this newfangled
economic foundation as well. Successive Croat
governments failed to tackle structural reforms decisively,
the victims of fractious and contentious party politics and
trade union extortion. Only recently has the wage bill of
the central government been trimmed (by 5%) and social
transfers rationalized - though the full implementation of
these measures has been put off, by an obstinate
parliament, to 2002. The collective agreement with state
and public workers signed earlier this month froze salaries
- and net employment - at this year's levels. IMF style
social engineering resulted in unrest and pet mutinies
within the administration. Earlier this month, the director
of the Croatian Health Insurance Institute blamed lack of
drugs and a deteriorating health care service on cuts in
health funds (and payment arrears, the result of a gigantic
deficit).
407
$202 million. Croatia is one of the Bank's darlings, with
$780 million committed and $550 million disbursed
(mostly on transportation infrastructure, urban
development, and finance-related projects).
408
veterans. But, the deficit trend is a more sustainable 2-
2.5%.
Currency Unions
409
I. The History of Monetary Unions
410
Hampshire and Rhode Island) were legal tender in all four
until 1750. The governments of the colonies even
accepted them for tax payments. Massachusetts - by far
the dominant economy of the quartet - sustained this
arrangement for almost a century. The other colonies
became so envious that they began to print additional
notes outside the union. Massachusetts - facing a threat of
devaluation and inflation - redeemed for silver its share of
the paper money in 1751. It then retired from the union,
instituted its own, silver-standard (mono-metallic),
currency and never looked back.
411
(the founding members of the LMU: France, Belgium,
Italy and Switzerland) agreed on a gold to silver
conversion rate and minted gold and silver coins which
were legal tender in all of them. They voluntarily limited
their money supply by adopting a rule which forbade them
to print more than 6 franc coins per capita.
412
a fixed exchange rate between the two metals (15 to 1)
ignoring fluctuating market prices.
Even at its apex, the LMU was unable to move the world
prices of these metals. When silver became overvalued, it
was exported (at times smuggled) within the Union, in
violation of its rules. The Union had to suspend silver
convertibility and thus accept a humiliating de facto gold
standard. Silver coins and tokens remained legal tender,
though. The unprecedented financing needs of the Union
members - a result of the First World War - delivered the
coup de grace. The LMU was officially dismantled in
1926 - but expired long before that.
413
innovation was to accept the members' banknotes (1900)
as well.
414
The East African Currency Area is a fairly recent debacle.
An equivalent experiment, involving the CFA franc, is
still going on in the Francophile part of Africa.
415
decisions of the much lauded Congress of Vienna (1815)
did wonders for labour mobility in Europe but not so for
trade. The baffling number of (mostly non-convertible)
different currencies did not help.
416
1875 and charged it with issuing the crisp new
Reichsmark. Bismarck forced the Germans to accept the
new currency as the only legal tender throughout the first
German Reich. Germany's new single currency was in
effect a monetary union. It survived two World Wars, a
devastating bout of inflation in 1923, and a monetary
meltdown after the Second World War. The stolid and
trustworthy Bundesbank succeeded the Reichsmark and
the Union was finally vanquished only by the bureaucracy
in Brussels and its euro.
417
always equal 20% of short term deposits in commercial
banks. All this made the CFA an attractive option in the
colonies even after they attained independence.
418
more economically coherent - alternative to the CFA franc
zone.
419
Madison and Jefferson) refused to countenance one. It
took the nascent USA two decades to come up with a
semblance of a central monetary institution in 1791. It
was modeled after the successful Bank of England. When
Madison became President, he purposefully let its
concession expire in 1811. In the forthcoming half
century, it revived (for instance, in 1816) and expired a
few times.
420
It is common to confuse the logistics of a monetary union
with its underpinnings. European bigwigs gloated over the
smooth introduction of the physical notes and coins of
their new currency. But having a single currency with free
and guaranteed convertibility is only the manifestation of
a monetary union - not one of its economic pillars.
421
controls, thus eliminating convertibility and inducing
panic.
422
But, in a monetary union with mutual guarantees among
the members (even if it is only implicit as is the case in
the eurozone), fiscal profligacy, even of one or two large
players, may force the central monetary authority to raise
interest rates in order to pre-empt inflationary pressures.
423
states, to implement political and technical
decisions, to control the money aggregates and
seigniorage (i.e., rents accruing due to money
printing), to determine the legal tender and the
rules governing the issuance of money.
424
shocks (affecting only some members, but not others), or
with the vicissitudes of the business cycle.
This does not bode well. This union might well become
yet another footnote in the annals of economic history.
Current Account
Only four months ago, the IMF revised its global growth
figures upward. It has since recanted but at the time its
upbeat Managing Director, Horst Koehler, conceded
defeat in a bet he made with America's outspoken and
ever-exuberant Treasury Secretary, Paul O'Neill. He
promised to treat him to a free dinner.
425
mismatches where their banks' and other corporate
international liabilities are dollar denominated but their
assets are denominated in the domestic currency. As these
mismatches cumulate, any foreign country is ultimately
forced to repay its debts in order to avoid a run on its
currency. But however precarious and over-leveraged the
financing of individual American borrowers—including
American banks, which intermediate such borrowing
internationally—might be, they are invulnerable to dollar
devaluation. In effect, America’s collective current-
account deficits are sustainable indefinitely."
426
non-domestic savings flows. By the end of last year,
foreign investors held $1.7 trillion in US stocks, $1.2
trillion each in corporate debt and treasury obligations -
12 percent, 24 percent, and 42 percent of the outstanding
quantities of these securities, respectively.
427
Rogoff alluded to the surreal appreciation of the dollar in
the last few years. This realignment of exchange rates
rendered imports to the USA seductively cheap and led to
"unsustainable" trade and current account deficits. The
IMF concluded, in its "World Economic Outlook",
published on September 25, that America's deficit serves
to offset - actually, finance - increased consumption and
declining private savings rather than productive
investment.
428
Rogoff - and many other scholars - foresee a sharp
contraction in American growth, consumption and,
consequently, imports coupled with a depreciation in the
dollar's exchange rate against the currencies of its main
trading partners. In the absence of offsetting demand from
an anemic Europe and a deflation-struck Japan, an
American recession may well translate into a global
depression. Only in 2003, the unwinding of these
imbalances is projected by the IMF to shave 3 percentage
points off America's growth rate.
But are the twin - budget and current account - deficits the
inevitable outcomes of American fiscal dissipation and
imports run amok - or a simple reflection of America's
unrivalled attractiveness to investors, traders, and
businessmen the world over?
429
For the first time in a long time, America's savings rate
turned negative. Americans borrowed at home and abroad
to embark on a fervid shopping spree. Even worse, the
part of the deficit that was invested rather than consumed
largely went to finance the dotcom boom turned bust.
Wealth on unimaginable scale was squandered in this
fraud-laced bubble. America's much hyped productivity
growth turned out to have been similar to Europe's over
the last decade.
Luckily for the US - and the rest of the world - its fiscal
stance during the Clinton years has been impeccable and
far stronger than Europe's, let alone Japan's. The
government's positive net savings - the budget surplus -
nicely balanced the inexorable demand by households and
firms for foreign goods and capital. This is why this fiscal
year's looming budget deficit - c. $200 billion - provokes
such heated debate and anxiety.
430
get low interest rates and that the low rates make for a
long and broad boom. And (those) like today's Paul
O'Neil. They think too much about competitiveness and
know too little about capital markets...
431
reignite inflation in an economy characterized by excess
capacity, falling prices, and bursting asset bubbles.
432
global economy's sink of last resort - absorbing one
quarter of world trade - other countries have an interest to
maintain and encourage American extravagance.
Countries with large exports to the USA are likely to
reacts with tariffs, quotas, and competitive devaluations to
any change in the status quo. The IMF couches the
awareness of a growing global addiction in its usual
cautious terms:
433
Last month, Arab intellectuals and leaders called upon
their governments to withdraw their investments in the
USA. This echoed of the oil embargo of yore. Ernest
Preeg of the Manufacturers Alliance was quoted by the
Toronto Star as saying: "China, for example, could
blackmail the United States by threatening to dump its
vast holdings of U.S. dollars, forcing up U.S. interest rates
and undermining the U.S. stock market. Chinese military
officials, he claimed, had included this kind of tactic in
their studies of non-conventional defence strategies."
434
According to the Russian headquarters of the bank, the
price tag of opening the branch reached "several million
dollars". Most of it was to convert the bank's global
systems to the 33-letters Cyrillic alphabet. This is an
illustration of the hidden business costs incurred by
preferring the idiosyncratic Slavic script to the widely
used Latin one.
435
Prominent Tatars - and the Moscow-based Center for
Journalism in Extreme Situations - have taken to calling
the amendment a violation of human rights and of the
constitution. This, surely, is somewhat overdone. The new
statute is easy to circumvent. A loophole in the law would
allow, for instance, the use of non-Cyrillic alphabets for
non-state languages.
436
Petar Stoyanov, distanced himself from a suggestion made
by professor Otto Kronsteiner, an Austrian professor of
Bulgarian studies, who advocates swapping the Cyrillic
character set for the Latin one.
437
Recently Latinized former satellites of the Soviet Union
seem to have been severed from the entire body of
Russian culture, science and education.
438
triumph of the Latin script seems inevitable, whether
sanctioned by officialdom or not.
439
D
Decision Support Systems
Many companies in developing countries have a very
detailed reporting system going down to the level of a
single product, a single supplier, a single day. However,
these reports – which are normally provided to the
General Manager - should not, in my view, be used by
them at all. They are too detailed and, thus, tend to
obscure the true picture. A General Manager must have a
bird's eye view of his company. He must be alerted to
unusual happenings, disturbing financial data and other
irregularities.
440
To assist in overcoming the above, there are four levels of
reporting and flows of data which every company should
institute:
441
The daily financial statements
442
to historical data and to simulate the future functioning of
his company under different scenarios.
443
l. Days receivable and days payable;
m. Current ratio, quick ratio, interest coverage ratio
and other liquidity and coverage ratios;
n. Valuation price ratios;
and many others.
444
So, the establishment of a decision system does not hinder
the functioning of the company in any way and does not
interfere with the authority and functioning of the
financial department.
Deposit Insurance
No country was exempt, all suffered collapsing or near-
collapsing banking systems. India had to nationalize the
fourteen biggest banks - and, later on, tens of private,
smaller ones - in 1969.
445
The FDIC covers deposits of up to 100,000 USD per
person per bank.
446
was immediately injected to heal the bankrupt institutions.
Using long term debt - which was not even part of its
obligations - the government was able to stabilize the
financial system and to fully compensate depositors for
their money.
447
1994 was arguably the worst year for banks in South
America since 1982. Banks collapsed all over that region.
448
sizeable chunk of the private banking sector - 27 banks in
total. This was really ominous and the government came
up with a creative solution: instead of saving the banks - it
saved the big clients of the banks. Sao Paolo received 66
billion USD in federal credits which assisted it in re-
financing and in re-scheduling its debts, especially its
debts towards Banespa. The bank was saved, the state was
saved, the federal budget was 66 billions poorer - and this
was only the beginning. In certain cases, the loan (asset)
portfolios were so bad and unrecoverable that the
government had to inject money to the bank itself -
because there were no more clients to inject money to.
Banco do Brazil received 7.8 billion USD on condition
that it writes off loans from its books. Another 13.6 billion
USD were given to private banks. The government also
cajoled banks into merging or into finding foreign
partners. The depositors were completely compensated
but only a few of the 27 saved banks are of any interest to
foreign investors. After all, a bank without assets is hardly
a bank at all.
449
of a very short time before the banks became insolvent
and closed down their operations, albeit "temporarily".
Four banks and 16 savings houses collapsed that year and
four more banks - the next. The bank supervision
discovered mountains and oceans of black money on
which the banks paid high rates of interest. The legal
"white" money - a much smaller amount altogether - bore
a lower rate of interest.
450
The logical - and inevitable - result was the collapse of
seven important Junsen, followed by a chain reaction of
banks ceasing to function.
Derivatives, Pricing of
The Royal Swedish Academy of Sciences has decided to
award the Bank of Sweden Prize in Economic Sciences in
Memory of Alfred Nobel 1997, to Professor Robert C.
Merton, Harvard University, and to Professor Myron S.
Scholes, Stanford University, jointly. The prize was
451
awarded for a new method to determine the value of
derivatives.
452
obligation, to buy or sell something at a pre-determined
price in the future. An importer that has to make a large
payment in a foreign currency can suffer large losses due
to a future depreciation of his domestic currency. He can
avoid these losses by buying call options for the foreign
currency on the market for foreign currency options (and,
obviously, pay the correct price for them).
453
Still, scholars like Case Sprenkle, James Boness and Paul
Samuelson used his formula. They introduced several now
universally accepted assumptions: that stock prices are
normally distributed (which guarantees that share prices
are positive), a non-zero (negative or positive) interest
rate, the risk aversion of investors, the existence of a risk
premium (on top of the risk-free interest rate). In 1964,
Boness came up with a formula which was very similar to
the Black-Scholes formula. Yet, it still incorporated
compensation for the risk associated with a stock through
an unknown interest rate.
454
depends on the current share price (professionally called
the "delta" of the option). A delta of 1 means that a $1
increase or decrease in the price of the share is translated
to a $1 identical movement in the price of the option.
455
and the expected cost if the option is exercised. The value
of the option is higher, the higher the current share price,
the higher the volatility of the share price (as measured by
its standard deviation), the higher the risk-free interest
rate, the longer the time to maturity, the lower the strike
price, and the higher the probability that the option will be
exercised.
456
of currency options, interest rate options, options on
futures, and so on.
457
The Black and Scholes formula could help make the right
decision.
Complete Markets
Practical Importance
458
Option contracts began to be traded on the Chicago Board
Options Exchange (CBOE) in April 1973, one month
before the formula was published.
459
He is most known for deriving a formula which allows
stock price movements to be discontinuous.
Devaluation
A Minister of Finance is morally right to lie about a
forthcoming devaluation and a woman has the right to lie
about her age. This is the common wisdom.
460
But before we examine the question whether all this is
true in the case of Macedonia - let us study a numerical
example.
461
The Locally Produced Import Substitutes will benefit:
they will still be priced at 2700 - while the competition
(Imports) will have to increase the price to 3100 not to
lose money!
462
1. The price of imported products goes up.
463
unions agree not to demand wage hikes and not to
strike.
Such economic pacts have been very successful in
stabilizing inflation in many countries, from Israel
to Argentina.
Still, some of the devaluation inevitably seeps into
the wages. The government can effectively control
only such employees as are in its direct
employment. It cannot dictate to the private sector.
464
2. That the devaluation is part of a long term macro-
monetary plan with clear, OPENLY DECLARED,
goals. In other words: the government and the
Central Bank should have designed a multi-year
plan, stating clearly their inflation objectives and
by how much they are going to devalue the
currency (MKD) over and above the inflation
target. This is much preferable to "shock therapy":
keeping the devaluation secret until the last minute
and then declaring it overnight, taking everyone by
surprise. The instinctive reaction is: "But if the
government announces its intentions in advance -
people and speculators will rush to take advantage
of these plans. For instance, they will buy foreign
exchange and put pressure on the government to
devalue by dilapidating its foreign currency
reserves".
465
became a national hit. It appreciated by 50% (!)
against the dollar, people sold their dollars and
bought Shekels - and all this with an inflation of
18% per year! It became a truly convertible
currency - because people could predict its value
over time.
466
Still, Macedonia could use successful examples in other
countries to argue its case. It could have made this
devaluation a turning point for the economy. It could have
reached a nationwide consensus to work towards a better
economic future within a national "Economic Agenda". It
is still not to late to do so. A devaluation should be an
essential part of any economic program. It could still be
the cornerstone in an export driven, employment oriented,
economy stimulating edifice.
467
signals of economic distress - it may be forced into
devaluation. International and local speculators will buy
foreign exchange from the government until its reserves
are depleted and it has no money even to import basic
staples and other necessities.
468
disastrous (and breathtakingly costly) consequences.
Suffice it to mention the Pound Sterling debacle in 1992
and the billion dollars made overnight by the arbitrageur-
speculator Soros - both a direct result of such misguided
policy and hubris.
469
the importance of the stability and predictability which are
a result of fixed rates: investors, businessmen and traders
can plan ahead, protect themselves by hedging and
concentrate on long term growth.
470
Some countries have a "crawling peg". This is an
exchange rate, linked to other currencies, which is
fractionally changed daily. The currency is devalued at a
rate set in advance and made known to the public
(transparent). A close variant is the "crawling band" (used
in Israel and in some countries in South America). The
exchange rate is allowed to move within a band, above
and below a central peg which, in itself depreciates daily
at a preset rate.
471
band systems which keep apace with inflation and do not
let the currency appreciate against the currencies of major
trading partners. Even then, the important question is the
composition of the pegging basket. If the exchange rate is
linked to one major currency - the local currency will
appreciate and depreciate together with that major
currency. In a way the inflation of the major currency is
thus imported through the foreign exchange mechanism.
This is what happened in Thailand when the dollar got
stronger in the world markets.
472
will have ended up earning an interest rate of 12%
annually. The exchange rate did not change appreciably -
so he would have needed the same amount of Shekels to
buy his DEM back. On his Shekel deposit he would have
earned between 12-16%, all net, tax free profit.
473
(=collect more taxes) to absorb liquidity and rein in
demand when foreign capital comes flowing in.
474
environmental doom, and economic mayhem. In the post
Cold War era, central governments have lost clout and
authority to their provincial and regional counterparts,
whether peacefully (devolution in many European and
Latin American countries) - or less so (in Africa, for
instance). As power shifts to municipalities and regional
administrations, they begin to examine development
projects more closely, prioritize them, and properly assess
their opportunity costs. The multinationals, which hitherto
enjoyed a free hand in large swathes of the third world,
are unhappy.
475
A. Nigeria
476
Royal Dutch/Shell, and Elf Aquitaine (now Total-
FinaElf). The oil companies maintain their own armies
("security") - including helicopters and heavy armor. They
rarely openly intervene in local protests and conflicts. But
their pronounced silence in the face of numerous
massacres, unlawful detentions, murders, beatings, and
other human rights abuses by the very army and police
with whom they often share their equipment and
manpower, forced Human Rights Watch to issue this
unusual statement: "Multinational oil companies are
complicit in abuses committed by the Nigerian military
and police." Oil multinationals are also a major source of
corruption in Nigeria.
477
"Essential Action and Global Exchange" has issued a
seminal report titled "Oil for Nothing - Multinational
Corporations, Environmental Destruction, Death and
Impunity in the Niger Delta" (January 2000). They
describe gas flaring, acid rain, pipeline leaks, health
problems, loss of biodiversity, loss of land and other
resources, malnourishment, prostitution, rape, and
fatherless children. Oil companies, says the report, refuse
to compensate the locals, or clean up, break their
promises, lie to the Western media, finance agents
provocateurs to provoke protesters and break up peaceful
demonstrations.
But this may be going too far. American oil firms and
Royal Dutch/Shell have collaborated fully with NGO's
since the public outcry following the execution of Ken
Saro-Wiwa, a prominent Nigerian environmentalist and
author in 1995 (though not so their Italian and French
counterparts). Activists in the Niger Delta often resort to
kidnapping, smashing oil installations, and even attacking
off-shore rigs. Security guards are a necessity, not a
luxury.
478
between the federal authorities and the 36 states (only 6 of
which, in the southeast, produce oil). The 1999
constitution calls for 13% of all onshore oil revenues to be
allotted to the states. But it is mum about offshore oil (the
bulk of Nigeria's production). At the time, northern states
have threatened to withhold agricultural produce from the
south should the Supreme Court plump in favor of the oil
producing states. Justice, in this case, may well provoke
the disintegration of Nigeria.
B. Morocco
479
demanded from the EU to cancel the "illicit and illegal"
contract between Total-FinaElf and Morocco.
480
The Sahrawis quote a UN resolution (A/res/46/64 dated
December 11, 1991) which says that "the exploitation and
plundering of colonial and non-self-governing territories
by foreign economic interests, in violation of the relevant
resolutions of the United Nations is a grave threat to the
integrity and prosperity of those Territories."
481
Divorce
"Even in modern times, in most cases husbands and wives
differ in their potential for acquiring property. In
separation of property, husbands and wives owning
property and dealing with each other will be in the same
position as unmarried adults.
482
divided depends on the law prevailing in their domicile
and upon the existence of a prenuptial contract.
483
There is also the transfer of tangible and intangible assets
from husband to wife. A couple of 7 years in the West
typically owns $100,000 in assets. Upon divorce, by
splitting the assets right down the middle, the man
actually transfers to the woman about $10,000 in assets.
484
services, protection, companionship to the extent that he
can provide it, etc.). This is also the marginal value added
of these services. It is safe to say that the services that the
woman renders to the man exceed the value of the
services that he provides her – by at least the amount of
US $150 per month. This excess value accrues to the
woman upon divorce.
485
There is only one plausible explanation to this apparently
self-defeating economic behaviour. Rearing children is an
investment with anticipated future rewards (i.e., returns).
There is a hidden expectation that this investment will be
richly rewarded (i.e., that it will provide reasonable
returns). Indeed, in the not too distant past, children used
to support their parents financially, cohabitate, or pay for
their prolonged stay in convalescence centres and old age
homes. Parents regarded their children as the living
equivalent of an annuity. "When I grow old" – they would
say – "my children will support me and I will not be left
alone." Such an economic arrangement is also common
with insurance companies, pension funds and other
savings institutions: invest now, reap a monthly cheque in
your old age. This is the essence of social security.
Children were perceived by their parents to be an
elaborate form of insurance policy.
486
to women eroded. Added impetus is given to prenuptial
property contracts, and to separation of acquests and other
forms of matrimonial property. Women try to keep all
their income to themselves and not involve it in the
matrimonial property. Men prefer this arrangement as
well, because they feel that they are not getting services
from women to an extent sufficient to justify a regular
monthly redistribution of their common wealth in the
women's favor. As the economic basis for marriage is
corroded – so does the institution of marriage flounder.
Marriage is being transformed unrecognizably and
assumes an essentially non-economic form, devoid of
most of the financial calculations of yore.
Due Diligence
A business which wants to attract foreign investments
must present a business plan. But a business plan is the
equivalent of a visit card. The introduction is very
important - but, once the foreign investor has expressed
interest, a second, more serious, more onerous and more
tedious process commences: Due Diligence.
First Rule:
487
The firm must appoint ONE due diligence coordinator.
This person interfaces with all outside due diligence
teams. He collects all the materials requested and oversees
all the activities which make up the due diligence process.
Second Rule:
Brief your workers. Give them the big picture. Why is the
company raising funds, who are the investors, how will
the future of the firm (and their personal future) look if the
investor comes in. Both employees and management must
realize that this is a top priority. They must be instructed
not to lie. They must know the DD coordinator and the
company's spokesman in the DD process.
488
• Comparison of the firm's products and services to
those of the competitors.
• Warranties, guarantees and after-sales service.
• Development of new products or services.
• A general overview of the market and market
segmentation.
• Is the market rising or falling (the trend: past and
future).
• What customer needs do the products / services
satisfy.
• Which markets segments do we concentrate on
and why.
• What factors are important in the customer's
decision to buy (or not to buy).
• A list of the direct competitors and a short
description of each.
• The strengths and weaknesses of the competitors
relative to the firm.
• Missing information regarding the markets, the
clients and the competitors.
• Planned market research.
• A sales forecast by product group.
• The pricing strategy (how is pricing decided).
• Promotion of the sales of the products (including a
description of the sales force, sales-related
incentives, sales targets, training of the sales
personnel, special offers, dealerships,
telemarketing and sales support). Attach a flow
chart of the purchasing process from the moment
that the client is approached by the sales force
until he buys the product.
• Marketing and advertising campaigns (including
cost estimates) - broken by market and by media.
• Distribution of the products.
489
• A flow chart describing the receipt of orders,
invoicing, shipping.
• Customer after-sales service (hotline, support,
maintenance, complaints, upgrades, etc.).
• Customer loyalty (example: churn rate and how is
it monitored and controlled).
Legal Details
• Balance Sheets;
490
• Income Statements;
• Cash Flow statements;
• Audit reports (preferably done according to the
International Accounting Standards, or, if the firm
is looking to raise money in the USA, in
accordance with FASB);
• Cash Flow Projections and the assumptions
underlying them.
Controls
Technical Plan
491
• Infrastructure (power, water, etc.);
• Transport and communications (example:
satellites, lines, receivers, transmitters);
• Raw materials: sources, cost and quality;
• Relations with suppliers and support industries;
• Import restrictions or licensing (where applicable);
• Sites, technical specification;
• Environmental issues and how they are addressed;
• Leases, special arrangements;
• Integration of new operations into existing ones
(protocols, etc.).
492
E
Earnings Yield
In American novels, well into the 1950's, one finds
protagonists using the future stream of dividends
emanating from their share holdings to send their kids to
college or as collateral. Yet, dividends seemed to have
gone the way of the Hula-Hoop. Few companies distribute
erratic and ever-declining dividends. The vast majority
don't bother. The unfavorable tax treatment of distributed
profits may have been the cause.
493
But how is the fair value to be determined?
494
though also driven by earnings hype - do not feature in
financial models of stock valuation.
But, if so, why the volatility in share prices, i.e., why are
share prices distributed? Surely, since, in liquid markets,
there are always buyers - the price should stabilize around
an equilibrium point.
495
are influenced by the price level - it is more difficult to
find buyers at higher prices - by the general market
sentiment, and by externalities and new information,
including new information about earnings.
496
The fundamental determinant of future income from share
holding was replaced by the expected value of share-
ownership. It is a shift from an efficient market - where all
new information is instantaneously available to all rational
investors and is immediately incorporated in the price of
the share - to an inefficient market where the most critical
information is elusive: how many investors are willing
and able to buy the share at a given price at a given
moment.
497
This renders diversification inefficacious. As long as
considerations of "expected liquidity" do not constitute an
explicit part of income-based models, the market will
render them increasingly irrelevant.
498
reforms, promoting competition, privatization and
entrepreneurship, taking into account the particular needs
of countries at different stages of transition. Through its
investments it promotes private sector activity, the
strengthening of financial institutions and legal systems,
and the development of the infrastructure needed to
support the private sector. The Bank applies sound
banking and investment principles in all of its operations.
In fulfilling its role as a catalyst of change, the Bank
encourages co-financing and foreign direct investment
from the private and public sectors, helps to mobilize
domestic capital, and provides technical co-operation in
relevant areas. It works in close co-operation with
international financial institutions and other international
and national organizations. In all of its activities, the Bank
promotes environmentally sound and sustainable
development."
499
commercial banks - often crowding them out with its
subsidized financing.
500
of Westernizing the Easterners - it has been Easternized
by them. Its sedentary though peregrinating employees are
more adept at wining and at dining the high and mighty
and at haughtily maundering in the odd, tangential,
seminar - than at managing a banking institution or
looking after the interests of their nominal shareholders
with the tutelary solicitude expected of a bank.
Macedonia
501
Russia
502
alternatives. It is not equipped to monitor its vast and inert
portfolio. By implication it collaborates in graft, tax
evasion and worse. It is a waste of scarce resources badly
needed elsewhere. It should be administered a coup de
grace. And its marbled abode - so out of touch with the
realities of its clients and its balance sheet - should be sold
to someone more up to the task. A bank, for instance.
503
Economics, Behavioral Aspects of
"It is impossible to describe any human action if one does
not refer to the meaning the actor sees in the stimulus as
well as in the end his response is aiming at."
Ludwig von Mises
504
forms of apparent selflessness, such as reciprocal altruism
(motivated by hopes of reciprocal benevolent treatment in
the future).
505
saint, seeking to selflessly maximize social welfare - or as
the villain, seeking to perpetuate and increase its power
ruthlessly, as per public choice theories.
506
Advertising is concerned with the dissemination of
information. Yet it is also a signal sent to consumers that a
certain product is useful and qualitative and that the
advertiser's stability, longevity, and profitability are
secure. Advertising communicates a long term
commitment to a winning product by a firm with deep
pockets. This is why patrons react to the level of visual
exposure to advertising - regardless of its content.
507
knowable constant - it should be amenable to scientific
treatment. "Prospect theory", "bounded rationality
theories", and the study of "hindsight bias" as well as
other cognitive deficiencies are the outcomes of this
approach.
508
inevitable conclusion of the logic, the language,
and the evolution of the theory.
509
room to emerging order, accommodate new data
comfortably, and avoid rigid reactions to attacks
from within and from without.
510
time and, sometimes, the experiment itself,
influence the subject and alter his or her mental
state - a problem known in economic literature as
"time inconsistencies". The very processes of
measurement and observation influence the subject
and change it.
511
They postulate an inexorable drive toward greater welfare
and utility (i.e., the idea of progress). They render our
chaotic world meaningful and make us feel part of a larger
whole. Economics strives to answer the "why’s" and
"how’s" of our daily life. It is dialogic and prescriptive
(i.e., provides behavioural prescriptions). In certain ways,
it is akin to religion.
512
Economies, Classification of
513
In the second one, the money thus generated is laundered
and legitimized. It is invested in legal, above-board
activities. The economy of the USA during the 19th
century and in the years of prohibition was partly
criminal. It is reminiscent of the Russian economy in the
1990s, permeated by criminal conduct as it is. Russians
often compare their stage of capitalist evolution to the
American "Wild West".
514
benefited from it. The dependence thus formed can easily
deteriorate into addiction. The economic players in such
economies engage mostly in lobbying and in political
manoeuvring - rather than in production.
515
of the markets for their goods and are overly exposed to
trade risks, international legislation and imports. Usually,
they specialize in narrow segments of manufacturing
which only increases the precariousness of their situation.
516
mere triggers. Again, Poland, Hungary, Slovenia (and to a
lesser extent, Croatia) come to mind.
517
trade go unreported. additionally, it has one of the lowest
weighted customs rate in the world. Openness to trade is
an official policy, actively pursued.
518
The denizens of central and east Europe are schizophrenic
about their education system. On the one hand, they are
proud of its achievements. According to the 1996 Third
International Maths and Science Study, The Czech
Republic and Slovakia fared better than Switzerland and
Netherlands in mathematics.
519
Neighboring countries, such as Italy and Greece, aware of
Bulgaria's cheap but well-educated cadre, have set up
bilateral cooperation schemes to tap it. Italy now allows
Bulgarians to spend six months on work and study in
Italian institutions. Both Uni Credito Italiano and Bulbank
are offering interest-free loans to the would-be students.
520
undergraduates. The record belongs to Poland - 195
private institutions with 378,000 learners, one quarter of
the total. Much smaller Romania had 54 establishments
with 131,000 pupils - one third of all students in higher
education.
521
percent of all businesses in the country. The vast majority
of all the owners-entrepreneurs turned out to be highly
educated.
522
demands of the Albanian minority. Yet, the opening of the
university in February last year did nothing to forestall an
armed uprising of Albanian rebels.
523
Capitalism cannot be "learned" or "imported" or
"emulated" or "simulated". Capitalism (or, rather,
liberalism) is not only a theoretical construct. It is not only
a body of knowledge. It is a philosophy, an ideology, a
way of life, a mentality and a personality.
524
capitalistically charged batteries waiting to unleash their
stored energy upon their lands - was realistic enough.
People were, indeed, charged: with pathological envy,
with rage, with sadism, with pusillanimity, with urges to
sabotage, to steal, to pilfer. A tsunami of destruction, a
tidal wave of misappropriation, an orgy of crime and
corruption and nepotism and cronyism swept across the
unfortunate territories of Central and Eastern Europe
(CEE). Transition was perceived by the many either as a
new venue for avenging the past and for visiting the wrath
of the masses upon the heads of the elites - or as another,
accelerated, mode of stripping the state naked of all its
assets. Finally, the latter propensity prevailed. The old
elites used the cover of transition to enrich themselves and
their cronies, this time "transparently" and "legally". The
result was a repulsive malignant metastasis of capitalism,
devoid of the liberal ideals or practices, denuded of ethics,
floating in a space free of functioning, trusted institutions.
525
of the party. Washington replaced Moscow. It was all very
familiar and cosy.
526
Trust is really the crux of the matter.
527
3. Trust related to knowledge and ability - the market
players assume that other players possess or have
access to, or will possess, or will have access to
the know-how, technology and intellectual
property and wherewithal necessary to materialize
their intention (and, by implication, the
transactions that they enter into). Another
assumption is that all the players are "enabled":
physically, mentally, legally and financially
available and capable to perform their parts as
agreed between the players in each and every
particular transaction. A hidden assumption is that
the players evaluate themselves properly: that they
know their strengths and weaknesses, that they
have a balanced picture of themselves and realistic
set of expectations, self esteem and self confidence
to support that worldview (including a matching
track record). Some allowance is made for "game
theory" tactics: exaggeration, disinformation, even
outright deception - but this allowance should not
overshadow the merits of the transaction and its
inherent sincerity.
528
stability are very much akin to the idealized
models that scientists study in the accurate
sciences (indeed, in economy as well).
529
overvaluation of one's self and others to
devaluation of both.
530
pattern, or invented pattern ("we have been
enslaved and submissive for five centuries - what
can you expect").
531
Brain drain - skilled people desert, en masse,
the fragmented economic system and move to
more sustainable ones.
Resort to illegal and to extra-legal activities.
Social and economic polarization. Interethnic
tensions and tensions between the very rich and
the very poor tend to erupt and to explode.
532
They do not disseminate the little, outdated knowledge
that they do possess. Rather they keep it as a guild would,
unto themselves, jealously. In the vanity typical of the
insecure, they abnegate all foreign knowledge. They
rarely know a second language sufficiently to read it.
They promote their brand of degreed ignorance with
religious zeal and punish all transgressors with fierceness
and ruthlessness. They are the main barriers to technology
transfers and knowledge enhancement in this wretched
region. Their instincts of self preservation go against the
best interests of their people. Unable to educate and teach
- they prostitute their services, selling degrees or
corrupting themselves in politics. They make up a big part
of the post communist nomenclature as they have a big
part of the communist one. The result is economics
students who never heard of Milton Friedman or Kenneth
Arrow and students of medicine who offer sex or money
or both to their professors in order to graduate.
533
meaningless. No one can understand what a Balkanian has
to say. Both syntax and grammar are tortured into
incomprehensibility. Evasion dominates, a profusion of
obscuring verbal veils, twists and turns hiding a vacuous
deposition.
All over the world, intellectuals are the vanguard, the fifth
column of new ideas, the resistance movement against the
occupation of the old and the banal. Here intellectuals
preach conformity, doing things the old, proven way,
protectionism against the trade of liberal minds. All
intellectuals here - fed by the long arm of the state - are
collaborators. True, all hideous regimes had their figleaf
intellectuals and with a few exceptions, the regimes in the
Balkans are not hideous. But the principle is the same,
534
only the price varies. Prostituting their unique position in
semi-literate, village-tribal societies - intellectuals in the
Balkans sold out en masse. They are the inertial power -
rather than the counterfist of reform. They are involved in
politics of the wrong and doomed kind. The Balkan would
have been better off had they decided to remain aloof,
detached in their archipelago of universities.
All that day of the eclipse of the last millennium, even the
intellectuals stayed in their cellars and in their offices and
did not dare venture out. They emerged when night fell,
accustomed to the darkness, unable to confront their own
eclipse, hiding from the evil influence of a re-emerging
sun."
535
Craven first:
536
a loss-making proposition. Formal training goes
unrewarded in these nether regions. Nepotism and
cronyism reign supreme. One's advancement, future
prospects, and career depend on one's connections or
family of origin. One's peers are perforce disqualified to
judge one's progress and accomplishments, having been
educated by the same inapts and oil snake salesmen that
here pass for "professors". Indeed, why bother with
textbooks and exams when social networking gets you
places faster and far more securely?
537
The Russian Unified Energy Systems electricity
monopoly was allowed to up its prices in 2002 by a mere
14 percent - barely the rate of Russian inflation. Its
chances to attract the $50 billion in investments it says it
needs in the forthcoming 10 years are slim as long as it
continues to charge its customers - both wholesale and
retail - a fraction of the cost of electricity its West
European counterparts charge theirs. A restructuring plan,
approved by the government in May 2001, is going
nowhere. The sale of loss making generating plants - even
at bargain basement prices and to insiders - is impossible
without a massive - and massively unpopular - boost to
electricity prices.
538
Yet, liberalization and privatization have acquired a bad
name after the debacles in California and elsewhere in the
world. Moreover, electricity generation depends on a free
market in fuels - a rarity in central and eastern Europe.
Prices cannot rise above the increase in net disposable
income.
539
retained ownership of the long-distance distribution
network.
540
Multilateral funds will not be enough, though. Private
capital is essential. In mid-2002, Macedonia has retained
Austria's Meinl Bank to act as consultant and prepare
within 11 months a sales strategy for the its national
electricity company ESM. That won't be easy. The utility
is in horrendous shape having served as the outgoing
coalition's agency of patronage and cash cow. The country
was reduced to importing more than one ninth of its
consumption from Bulgaria. Indeed, real no progress was
made by July 2005.
541
Electricity is no longer merely a national affair, but,
rather, a regional one. A memorandum regarding the
establishment of a southeast European energy market and
its ultimate integration with the European Union's was
signed In mid-November 2002 in Athens by ministers
from Albania, Bosnia-Herzegovina, Bulgaria, Croatia,
Greece, Macedonia, Romania and Yugoslavia. These
represent a market with more than 55 million consumers
who will be able to buy power directly from generating
utilities by 2005, pledged the document. As it turned out,
another pipe dream.
542
are comprised of the dividend yield of the shares plus the
appreciation in their value (due to the involvement of the
private sector) known as capital gains.
543
2. The distribution of vouchers universally, to all the
adult citizens of the country, so that they could all
share the wealth accumulated by the state in an
equitable manner. The vouchers are convertible to
baskets of shares in a prescribed list of state
enterprises (a nonchash method).
544
of the firm itself are leveraged in order to purchase
it (LBO).
545
anachronistic as dinosaurs. Many preferred to see them as
extinct as those ancient reptiles. An injection of private
initiative acquired the status of ideological panacea to the
corporate malaise of the public sector.
546
Employees want to maximize employment and the
economic benefits attached to it - managers and
shareholders wish to minimize this parameter and its
effects on the corporation. Managers wish to maximize
their compensation - employees and owners wish to
minimize or moderate it, each group for its own, disparate
reasons.
547
distribution of income among different strata of society.
But this trend was enhanced by the apparent corruption of
the privatization process.
548
these shares yet. It is by no means certain that they will. If
the managers and workers default on their obligations to
pay the state - the ownership of the company will revert
back to the state. This is paper privatization, a
transformation of expectations. No one can seriously
claim that the transformation is completed before the new
owners of the firms respect their financial obligations to
the state.
549
The Czech Republic is infamous for its cronyism and for
the massive transfer of wealth to the hands of a few
people close to government circles.
550
Sometimes, in economic reality, we have to give up
justice (or the appearance of it) - in order to secure the
very survival of the workers involved.
551
The Czechs bitterly remember how, in 1938, they were
sacrificed to the Nazis by a complacent and contemptuous
West. The Poles and Slovenes fear massive land
purchases by well heeled foreigners (read: Germans).
Everyone decries the "new Moscow" - the faceless,
central planning, remote controlling bureaucracy in
Brussels. It is tough to give up hard gained sovereignty
and to immerse oneself in what suspiciously resembles a
loose superstate.
552
surveys conducted by the EU in Estonia, Latvia, Slovenia
and Lithuania are undecided about EU membership or
opposed to it altogether. The situation in the Czech
Republic is not much different. Even in countries with a
devout following of EU accession, such as Romania,
backing for integration has declined this year.
553
the German-educated Zoran Djindjic? - they exclaim
triumphantly.
554
September, the German and French leaders, meeting tête-
à-tête in a hotel, dictated to other members the fate, for the
next 11 years, of half the EU's budget - the portion wasted
on the Common Agricultural Policy (CAP).
555
has other, more pressing priorities: "maintaining stability
in its region, making sure that Russian evolution is
benign and avoiding costly conflicts in which it has only
marginal interest".
556
united Germany. As the traumatic memories of the two
world conflagrations receded, Germany resorted to
applying its political weight - now commensurate with its
economic and demographic might - to securing EU
hegemony. Germany is also a natural and historical leader
of central Europe - the future lebensraum of both the EU
and NATO and the target of their expansionary
predilections, euphemistically termed "enlargement".
557
growth and peace. Yet, alas, this time around, it has thus
far been quite a cacophony.
558
realpolitik and the preservation of peace. They think that
America is a far more reliable sponsor of their long-term
safety and prosperity than the fractured European
"Union".
559
USA and foreign direct investment are still small but both
are growing fast.
560
When sanctions against Iraq are lifted - and providing
Saddam or his hand-picked successor are still in place -
Russian energy behemoths are poised to explore and
extract billions of barrels of oil worth dozens of billions of
dollars. Iraq owes Russia $9 billion which Russia wants
repaid.
561
second rank members - Britain by Europhobic choice and
Spain because it is too small to really matter. Russia - a
smooth operator - chose to side with France and Germany,
at least temporarily. The new and aspiring members
would have done well to follow suit.
562
Initiative is no exception. Held in Macedonia's drab
capital, Skopje, the delegates including the odd chief of
state, discussed their economies in what was
presumptuously dubbed by them the "small Davos", after
the larger and far more important annual get together in
Switzerland.
563
Macedonia's exports to Yugoslavia, its next door
neighbor, amount to merely half its exports to the
unwelcoming European Union - and are declining.
Countries from Bulgaria to Russia have shifted 50-75
percent of their trade from their traditional COMECON
partners to the European Union and, to a lesser degree, the
Middle East, the Far East and the United States.
564
to be far more divisive and effective than anything dreamt
up by Stalin.
565
enhancing propensities are likely to yield a giant and
venal welfare state with a class of aged citizens in the core
countries of the European Union living off the toil of
young, mostly Slav, laborers in its eastern territories. This
is the irony: the European Union is doomed without
enlargement. It needs these countries far more than they
need it.
566
case of deflation. In previous centuries, Europe exported
its excess labor and surplus capacity to its colonies - an
economic system known as "mercantilism".
567
As China and India grow in economic and geopolitical
importance, an enlarged Europe will find itself in the
profitable role of an intermediary between east and west.
The vote in Ireland two years ago (2002) was the second
time in 36 months that its increasingly disillusioned
citizenry had to decide the fate of the European Union by
endorsing or rejecting the crucial Treaty of Nice. The
568
treaty seeks to revamp the union's administration and the
hitherto sacred balance between small and big states prior
to the accession of 10 central and east European countries.
Enlargement has been the centerpiece of European
thinking ever since the meltdown of the eastern bloc.
569
between NATO's position - immunity for American
soldiers on international peacekeeping missions - and the
EU's (no such thing). Finally - and typically - the EU
backed down. But it was a close call and it cast in sharp
relief the tensions inside the Atlantic partnership.
570
new, working age, immigrants per year just to preserve a
stable ratio of workers to pensioners.
571
The countries of central and eastern Europe are new
consumption and investment markets. With a total of 300
million people (Russia counted), they equal the EU's
population - though not its much larger purchasing clout.
They are likely to while the next few decades on a steep
growth curve, catching up with the West. Their proximity
to the EU makes them ideal customers for its goods and
services. They could provide the impetus for a renewed
golden age of European economic expansion.
572
sudden introduction of competition in hitherto much-
sheltered sectors of the economy, giving up recently hard-
won sovereignty, shouldering the debilitating cost of the
implementation of reams of guideline, statutes, laws,
decrees, and directives, and being largely powerless to
influence policy outcomes. Faced with such a
predicament, some countries may even reconsider.
Entrepreneurship
The Dutch proudly point to their current rate of
unemployment at less than 2%. Labour force participation
is at a historically high 74% (although in potential man-
hour terms it stands at 62%). France is as hubristic with its
labour policies - the 35 hours week and the earlier
reduction in employers' participation in social
contributions. Employment is sharply up in a host of
countries with liberalized labour markets - Britain, Spain,
Ireland, Finland. The ECB brags that employment in the
euro zone has been rising faster than in the USA since
1997.
573
militant unions - such as Germany's IG Metal - threaten to
undo all the recent gains in productivity and wage
restraint.
574
Kauffman Center for Entrepreneurial Leadership found
gaping disparities between countries. More than 8 percent
of all Americans started a new business - compared to less
than 1.5 percent in Finland. Entrepreneurship accounted
for one third of the difference in economic growth rates
among the surveyed countries.
575
conducted last month (and reported in the Financial
Times) shows that a whopping 89 percent of all venture
capitalists predict an increase in the value of their
investments and in their exit valuations in the next 6
months.
576
Virtually all governments, east and west, support their
"small business" or "small and medium enterprises"
sector.
577
closely with the Cambridge Entrepreneurship Center
(UK), the Asian Entrepreneurship Development Center
(Taiwan), the Turkish Venture Capital Association, and
other institutions in Japan, Israel, Canada, and Latin
America.
578
Even before the introduction of the 35 hours week in
France, Americans worked 5 weekly hours more than the
French, according to a 1998 study by the Families and
Work Institute. Americans also out-worked the
industrious Germans by 4 hours and the British by 1 hour.
The average American work week has increased by 10%
(to 44 weekly hours) between 1977-98.
579
health problems suffered by workaholics - three times as
many heart failures as their non-addicted peers.
580
Entrepreneurship overlaps with two other workplace
revolutions: self-employment and flexitime. The number
of new businesses started each year in the USA tripled
from the 1960's to almost 800,000 in the 1990's. Taking
into account home-based and part-time ventures - the
number soars to an incredible 5 million new businesses a
year. Most entrepreneurs are self-employed and work
flexible hours from home on ever-changing assignments.
This kaleidoscopic pattern has already "infected" Europe
and is spreading to Asia.
Environmentalism
The concept of "nature" is a romantic invention. It was
spun by the likes of Jean-Jacques Rousseau in the 18th
century as a confabulated utopian contrast to the dystopia
of urbanization and materialism. The traces of this dewy-
eyed conception of the "savage" and his unmolested,
unadulterated surroundings can be found in the more
malignant forms of fundamentalist environmentalism.
581
over nature and the right to exploit its resources
unreservedly. Similar, veiled, sentiments can be found
among scientists. The Anthropic Principle, for instance,
promoted by many outstanding physicists, claims that the
nature of the Universe is preordained to accommodate
sentient beings - namely, us humans.
582
strands of this Malthusian Weltanschauung: the utilitarian
(a.k.a. anthropocentric, shallow, or technocentric) and the
ethical (alternatively termed biocentric, deep, or
ecocentric).
583
Efforts to capture "quality of life" considerations in the
straitjacket of the formalism of distributive justice -
known as human-welfare ecology or emancipatory
environmentalism - backfired. These led to derisory
attempts to reverse the inexorable processes of
urbanization and industrialization by introducing
localized, small-scale production.
584
environmental movement - whether in academe, in the
media, in non-governmental organizations, or in
legislature - is now comprised of a web of bureaucratic
interest groups.
585
has increased dramatically, but it simply has not kept pace
with our ability to alter them."
Envy
Conservative sociologists self-servingly marvel at the
peaceful proximity of abject poverty and ostentatious
affluence in American - or, for that matter, Western -
cities. Devastating riots do erupt, but these are reactions
either to perceived social injustice (Los Angeles 1965) or
to political oppression (Paris 1968). The French
Revolution may have been the last time the urban sans-
586
culotte raised a fuss against the economically
enfranchised.
587
injustice, touting reform, or promoting an
ideology.
588
obliterated. Women are modified to look like men and
given identical "beta faces". Tall buildings are razed.
589
beyond his control. In ... capitalism ... everybody's station
in life depends on his doing ... (what makes a man rich is)
not the evaluation of his contribution from any 'absolute'
principle of justice but the evaluation on the part of his
fellow men who exclusively apply the yardstick of their
personal wants, desires and ends ... Everybody knows
very well that there are people like himself who succeeded
where he himself failed. Everybody knows that many of
those he envies are self-made men who started from the
same point from which he himself started. Everybody is
aware of his own defeat. In order to console himself and
to restore his self- assertion, such a man is in search of a
scapegoat. He tries to persuade himself that he failed
through no fault of his own. He was too decent to resort to
the base tricks to which his successful rivals owe their
ascendancy. The nefarious social order does not accord
the prizes to the most meritorious men; it crowns the
dishonest, unscrupulous scoundrel, the swindler, the
exploiter, the 'rugged individualist'."
590
The eminent Nobel prize winning British economist and
philosopher of Austrian descent, Friedrich Hayek,
suggested in "The Constitution of Liberty" that innovation
and progress in living standards are the outcomes of class
envy. The wealthy are early adopters of expensive and
unproven technologies. The rich finance with their
conspicuous consumption the research and development
phase of new products. The poor, driven by jealousy,
imitate them and thus create a mass market which allows
manufacturers to lower prices.
Espionage
On November 11, 2002, Sweden expelled two Russian
diplomats for spying on radar and missile guidance
591
technologies for the JAS 39 British-Swedish Gripen
fighter jet developed by Telefon AB LM Ericsson, the
telecommunications multinational. The Russians
threatened to reciprocate. Five current and former
employees of the corporate giant are being investigated.
Ironically, the first foreign buyer of the aircraft may well
be Poland, a former Soviet satellite state and a current
European Union candidate.
592
marketing strategies. Microsoft has admitted to such a
compromising intrusion.
593
Counterintelligence News and Developments newsletter
pegs the damage at $13 billion in 1996 alone:
594
foreigners citing concerns about industrial espionage and
potential sabotage of oil and gas companies. The Kremlin
maintains an ever-expanding list of regions and territories
with limited - or outright - forbidden - access to
foreigners.
595
This is nothing new. According to History of Espionage
Web site, long before they established diplomatic
relations with the USA in 1933, the Soviets had Amtorg
Trading Company. Ostensibly its purpose was to
encourage joint ventures between Russian and American
firms. Really it was a hub of industrial undercover
activities. Dozens of Soviet intelligence officers
supervised, at its peak during the Depression, 800
American communists. The Soviet Union's European
operations in Berlin (Handelsvertretung) and in London
(Arcos, Ltd.) were even more successful.
Espionage, Industrial
The Web site of GURPS (Generic Universal Role Playing
System) lists 18 "state of the art equipments (sic) used for
advanced spying". These include binoculars to read lips,
voice activated bugs, electronic imaging devices,
computer taps, electromagnetic induction detectors,
acoustic stethoscopes, fiber optic scopes, detectors of
acoustic emissions (e.g., of printers), laser mikes that can
decipher and amplify voice-activated vibrations of
windows, and other James Bond gear.
The average net loss per incident reported was $19 million
in high technology, $29 million in services, and $36
million in manufacturing. ASIC than upped its estimate to
$300 billion in 1997 alone - compared to $100 billion
596
assessed by the 1995 report of the White House Office of
Science and Technology.
597
$750,000 from his "clients", who used the software in
their civilian aerospace projects.
598
the message throughout Silicon Valley and the Northern
District that the U.S. Attorney's Office takes seriously the
theft of intellectual property and will prosecute these
cases to the full extent of the law."
599
unauthorized employees, former employees, hackers or
terrorists and competitors."
600
undoubtedly intellectual property - but of which kind? Is it
software or printed matter?
601
financial information of his employer to lawyers
representing a rival paper locked in bitter dispute with
GDP.
602
placed in the stream of commerce. The sentences handed
down today (June 15, 2000) are among the longest
sentences ever imposed in an Economic Espionage case."
603
"Le Mond" reported back in 1996 about intensified
American efforts to purchase from French bureaucrats and
legislators information regarding France's WTO,
telecommunications, and audio-visual policies. Several
CIA operators were expelled.
604
Big Three carmakers. He quoted Clinton administration
officials as saying: "(the CIA) is a good source of
information about the current state of technology in a
foreign country ... We've always managed to get
intelligence to the business community. There is contact
between business people and the intelligence community,
and information flows both ways, informally."
605
Canada has become the focus of bitter mutual
recriminations and far flung conspiracy theories.
606
buys, or possesses a trade secret, knowing the same to
have been stolen or appropriated, obtained, or converted
without authorization (4) attempts to commit any offense
described in any of paragraphs (1) through (3); or (5)
conspires with one or more other persons to commit any
offense described in any of paragraphs (1) through (4),
and one or more of such persons do any act to effect the
object of conspiracy."
607
greatest threat to our national security since the Cold
War."
608
office has a White Collar Crime squad in charge of
thwarting industrial espionage. The State Department runs
a similar outfit called the Overseas Security Advisory
Council (OSAC).
But the FBI is only one of many agencies that deal with
the problem in the USA. The President's Annual Report to
609
Congress on "Foreign Economic Collection and Industrial
Espionage" dated July 1995, describes the multiple
competitive intelligence (CI) roles of the Customs
Service, the Department of Defense, the Department of
Energy, and the CIA.
610
fantastic. Mergers, acquisitions, joint ventures, research
and development partnerships, licensing and franchise
agreements, friendship societies, international exchange
programs, import-export companies - often cover up for
old fashioned reconnaissance. Foreign governments
disseminate disinformation to scare off competitors - or
lure then into well-set traps.
611
The following ad appeared in the Asian Wall Street
Journal in 1991 - followed by a contact phone number in
western Europe:
612
politicians and numerous politicians serve on corporate
boards.
Exchange Rates
We are used to reading financial statements denominated
in US dollars or to pay our rent in euros. Economic
indicators are normally converted to a common currency
to allow for international comparisons. The exchange
rates used are the official exchange rates (where foreign
exchange persist) or market exchange rates (where the
markets freely determine the exchange rates between the
local currency and foreign currencies). The theory says
that exchange rates are adjust through the mechanism of
the market so that the prices in local currency of a group
of identical goods and services represent equivalent value
in other currencies. Put differently: 31 Denars should buy
the same quantities of identical goods and services in
Macedonia as 1 DM buys in Germany. Otherwise, one of
the currencies is overvalued, the other one is undervalued
and the exchange rate is "wrong" (sometimes, kept
613
artificially wrong by the governments involved). This is
the Law of One Price.
614
based on market exchange rates usually greatly over- or
understate the value of a nation's economic activity.
615
exchange rates properly reflect the relative purchasing
power of the currencies involved. "The Economist" has
been publishing the Index for a few years now and the
results are amazing:
616
As the new decade entered, the United Nations devised an
index of Purchase Power Parity comparing the spending
prowess of most of its members. The index included a
basket of such items as average incomes, taxes, interest
rates, insurance, utilities, gasoline, milk, newspapers and
other typical expenses. As usual, the USA constituted the
benchmark at 100. The first published index showed
Greece at 35 (=three Greeks equal the purchasing power
of one American consumer). A few more numbers:
617
and interest payable on M1 type instruments) - Macedonia
is both inordinately illiquid and insanely expensive. To
rent an apartment here costs 50-100 DM per square meter
which is 60% of the rent in the most luxurious
neighbourhoods in Tel-Aviv. Israel's GDP, however is 35
times that of Macedonia and the minimum legal wage is
900 DM. To my mind, there is little question that the
purchasing power of the Macedonians is miserable. The
combination of law wages and expensive prices sustained
by a small rich elite is a clear sign of erosion of the power
to spend of the great majority.
618
by 130% (to 19.3 billion USD) precisely because of this:
speculators converted dollars to Shekels to earn the high
real interest that it offers in terms of dollars.
619
The writing is on the wall: a country which is running a
large trade or current account deficit must balance its
balance of payments with capital inflows (capital account
surplus). If investors lose confidence in the country,
capital inflows will cease (maybe reverse direction)
leading to a depreciation (e.g., Mexico in 1994). For
"investors" read in the last sentence "the international
financial community". The important monthly
"Euromoney" downgraded the credit rating of Macedonia
(to the 151st place!!!) largely on these grounds. Current
account + Capital account = change in gov't reserves.
Today's reserves are sufficient to cover 2-3 months of
imports. This is ample - but this is also temporary. The
danger is imminent and the results could be catastrophic.
Exclaves, Economies of
Cabinda is a member of the Hague based UNPO - the
Unrepresented Nations and Peoples Organization. Among
the dozens of other members are Abkhazia, the Albanians
in Macedonia, Bashkortostan, Gaguzia, and Iraqi
Kurdistan. Some erstwhile members became independent
states - including Estonia, East Timor, Armenia, Georgia,
and Latvia. The Cabindese Government in Exile (in
charge of a little more than a poorly designed Web site
and a few badly trained guerillas) thinks it is a good omen
and a portent of things to come.
620
completely surrounded by territory of another or others"
(OED). Cabinda is an exclave, as are Ceuta, Melilla,
Kaliningrad, and, of course, Gibraltar. But while the latter
- a bone of contention between two EU members, Spain
and the United Kingdom - is constantly in the limelight,
not much is said (or done) about the former four.
CABINDA
621
Yet, even after the coveted independence was achieved,
very little of the oil bonanza trickled back to the
disgruntled Cabindese. They still depend on subsistence
agriculture for a living. Infant mortality is among the
highest in the world and only 3 in 10 people have access
even to rudimentary health services. The average life
expectancy is 47 years and the literacy rate is 42%.
622
sounds desperate and self-delusional. Abandoned by the
international community (Cabinda was once a member of
the Organization of African Unity as an independent
state), bereft of its strategic importance, economically
raped by east and west alike - Cabinda is fast dwindling
and literally dying.
KALININGRAD
623
To quell secessionist stirrings, the Pravoslav Church has
come out unequivocally in favor of a Russian Kaliningrad,
as have all the governments of the region. The investment
climate in Russia itself has improved dramatically since
1998 with a new tax code and other pro-business bits of
legislation enacted by a Putin-awed Duma. Both Poland
and Lithuania - which sandwich Kaliningrad between
them - are slated to join the EU. Kaliningrad's workforce
is highly qualified and polyglot. The city is bristling with
more than 50,000 small and medium enterprises (mostly
trading companies). Its transport infrastructure (inherited
partly from the military) and banks (some Polish and
German) outshine most other provinces in Russia. It is
rich in certain mineral resources: amber, (high grade) oil,
peat, rock salt, brown coal (merely 50 million tons),
timber, and construction materials. Of course, there is an
impressive variety of high value fish (eel and salmon
being the most lucrative).
624
regional government. German Lander (such as Hamburg
and Schleswig-Holstein) have their own representation.
625
camps of would be migrants who survived on the charity
of the locals and on drug trading. Ever since Spain, at the
EU's panicky behest, cordoned off the beach with barbed
wire and fortifications, the camps have dwindled (though
the Red Cross still feeds 1000 people daily in and around
Ceuta alone).
Yet, not only people make use of the age old smuggling
routes through C&M. The Riff area, Morocco's Wild West
and major drug growing zone, smuggles its $3-4 billion a
year in produce to Western Europe using very much the
same infrastructure (a fleet of tiny and capsizing boats).
Child prostitution rings have sprung up. Remittances from
those who made it into the heartland amount to at least
another $1 billion (many say double that). Money
laundering is a thriving activity among both bitter rivals:
the Moslem and Christian Spanish residents of the
exclaves.
626
of every Spaniard go towards subsidizing the energy
needs of these strategically meaningless locations. Spain
also doles out cash (c. $10 million a year) to its national
ferry companies to provide maritime links with C&M and
other overseas territories. In a recent tender not one
foreign or domestic private shipping company presented a
bid. Spain expressed astonishment.
Expectations, Economic
Economies revolve around and are determined by
"anchors": stores of value that assume pivotal roles and
lend character to transactions and economic players alike.
Well into the 19 century, tangible assets such as real estate
627
and commodities constituted the bulk of the exchanges
that occurred in marketplaces, both national and global.
People bought and sold land, buildings, minerals, edibles,
and capital goods. These were regarded not merely as
means of production but also as forms of wealth.
628
(options, futures, indices, swaps, collateralized
instruments, and so on) are flourishing.
629
goods will revert to their original forms and functions:
bare necessities to be utilized and consumed, not
speculated on.
Experts, Foreign
Walter Lippmann
630
contemplate "the yellow smoke that slides along the
street, rubbing its back upon the window-panes."
631
vehicles and satellite cellular phones in the face of the
unemployed and downtrodden they came ostensibly to
help. Occupied mainly by scanning the daily paper and
solving simple crossword puzzles, they disrupt their
onerous routine only to wine and dine venal officials on
mutually fattening expense accounts. They are the
malignancy of Bretton Woods, a cancerous growth of well
intended aid, the hideous face of altruism. Their
organizations are the dumping grounds of the inept and
the unwanted, the professional failures and the
embarrassingly corrupt, the egregiously ignorant and the
narcissistically immature. They tax the resources of their
hosts as all parasites do and give very little in return.
Their advice is often wrong and almost invariably leads to
adversity and woe. They tend to overstep their mandate
and supplant elected offices and their humiliated
occupants. They dictate and intervene and threaten and
determine with the callousness of those who lose no thing
when their "advice" goes awry. In time, they move on
from one political carcass to another, birds of prey with
metal wings and the sated satisfaction of the well fed and
the multi-salaried. Earning in a day what others earn in
two months - they often hold their mission and its objects
in contempt and scorn. They are content to climb the
autistic ladder that is a multilateral institution. The rare
are recruited by the private sector as third rate lobbyists.
632
bureaucracy and foreign supervisors. The "advisors" and
"country managers" and "resident officers" often come
themselves from shrines of good governance and civil
society, the likes of China and India and Saudi Arabia or
worse. They understand the secret language of power and
quid pro quo. What better than a fat and satiated cat to
guard the skinny and famished ones? So, they collaborate
in the most lamentable of manners, eyes closed, ears
plugged, mouth stapled. The bureaucrats author delusional
science fiction, delirious potpourris of wishful thinking
and grotesque projections, the customary backslapping
and mutual admiration. And the politicians pretend to
listen, patiently ignoring the more arcane lingo and
outlandish offers, waiting for the aliens to take off to their
planet and allow them to proceed with plundering and
loot.
633
converting others to the cause, constructing projects,
educating, preaching and teaching and hectoring and, in
this arduous, often derided process, falling in love with
land and people.
634
F
Fimaco
635
Following public charges made by US Treasury Secretary
Robert Rubin as early as March 1999, both Russian and
American media delved deeply over the years into the
affair. Communist Duma Deputy Viktor Ilyukhin jumped
on the bandwagon citing an obscure "trustworthy foreign
source" to substantiate his indictment of Kremlin cronies
and oligarchs contained in an open letter to the Prosecutor
General, Yuri Skuratov.
636
This conclusion was weakly disowned by Eleonora
Mitrofanova, an auditor within the Duma's Audit
Chamber who said that they discovered nothing "strictly
illegal" - though, incongruously, she accused the central
bank of suppressing the Chamber's damning report. The
Chairman of the Chamber of Accounts, Khachim
Karmokov, quoted by PwC, said that "the audits
performed by the Chamber revealed no serious procedural
breaches in the bank's performance".
637
then embroiled in a growing scandal over the
manipulation of treasury bills, known as GKO's and other
debt instruments, the OFZ's - and not to the Ministry of
Finance, the beneficiary of all prior transfers? The central
bank did act as MinFin's agent - but circumstances were
unusual, to say the least.
638
Dubinin and his successor, Gerashchenko, admit that
FIMACO was used to conceal Russia's assets from its
unrelenting creditors, notably the Geneva-based Mr.
Nessim Gaon, whose companies sued Russia for $600
million. Gaon succeeded to freeze Russian accounts in
Switzerland and Luxemburg in 1993. PwC alerted the
IMF to this pernicious practice, but to no avail.
639
Who received these commissions? Was this money
repatriated to the country in the form of dividends?"
The IMF insisted that the PwC reports exonerated all the
participants. It is, therefore, surprising and alarming to
find that the online copies of these documents, previously
made available on the IMF's Web site, were "Removed
September 30, 1999 at the request of
PricewaterhouseCoopers".
640
regarding the sufficiency of the procedures described
below ... The report is based solely on financial and other
information provided by, and discussions with, the
persons set out in the report. The accuracy and
completeness of the information on which the report is
based is the sole responsibility of those persons. ...
PricewaterhouseCoopers have not carried out any
verification work which may be construed to represent
audit procedures ... We have not been provided access to
Ost West Handelsbank (the recipient of a large part of the
$4.8 IMF tranche)."
641
editorial commentary appearing in Le Monde on August
6, 8, and 9 on the content of the PricewaterhouseCoopers
(PWC) audit report relating to the operations of the
Central Bank of Russia and its subsidiary, FIMACO.
642
when they are transferred from the Ministry of Finance to
the central bank - countenanced.
The rot may run even deeper. The Geneva daily "Le
Temps", which has been following the affair relentlessly,
accused, two years ago, Roman Abramovich, a Yeltsin-
era oligarch and a member of the board of directors of
Sibneft, of colluding with Runicom, Sibneft's trading arm,
to misappropriate IMF funds. Swiss prosecutors raided
Runicom's offices just one day after Russian Tax Police
raided Sibneft's Moscow headquarters.
643
Sokolov, who headed the Audit Chamber prior to Sergei
Stepashin, informed the US Senate of $2 billion that
evaporated from the coffers of the central bank in 1995.
DISCLAIMER
Sam Vaknin served in various senior capacities in Mr.
Gaon's firms and advises governments in their
negotiations with the IMF.
Foreign Aid
Yankee Go Home. Nato is Nazo. American trash culture.
The graffiti adorn every wall, the contempt seems to be
universal. America and Americans are perceived to be
uglier than ever before. It borders on hatred and
xenophobia. Are we talking about Serbia in the midst of
its Kosovo baptizing by fire? Not really. America-bashing
seems to be a phenomenon engulfing rich (Czech
Republic) and poor (Macedonia), the lawful (Greece) and
the lawless (Russia), the Western orientated (Bulgaria)
and the devoutly Slavophile (Serbia). Often, America (and
Britain, its Anglo-Saxon sidekick) stand as proxies and
fall guys for this ephemeral ghoul, the West. At other
644
times, the distinctions are finer and France or
Scandinavia, for instance, are excluded from the general
outcry and condemnation.
645
manufacturers. The recipient countries are used as
dumping grounds for surpluses, be they agricultural or
military. A swarm of advisors and do-gooders is in place
to secure American interests and markets, to deflect
adversaries, to intervene in local politics, brutally, if
needed. As a result, American charity, this fabulous beast,
is derided as a new form of American colonialism. Broken
promises and keen trade protectionism only aggravate the
feeling that the West is more interested in photo
opportunities than in business opportunities. It seems to be
less concerned with the welfare of the assisted than with
the expense accounts of the assistants. Rather than where
most needed, grant money and provisions flow in the
direction of waiting TV cameras.
646
The "multi"-lateral institutions (such as the IMF, the
WTO and World Bank) are long arms of the USA and, to
a lesser extent, of Europe. These are rich men's clubs.
Their main aim is to sustain the criminal fool's paradise
that is Central and Eastern Europe and the Balkans. They
turn a blind eye to corrupt politicians who do their bidding
and another blind eye to violations of every right
imaginable - as long as a swampish stability is
maintained. They are the sotto voce juggernauts which, in
the name of free marketry and civil society, prepare the
way for American and Western business. The little good
they do is lost in their partiality, ignorance and
shortsightedness. They are their master's voice.
647
Transition in the post communist countries was coupled
with a hubristic and haughty conviction in the
transforming powers of the Western values, Western
technology, and Western economics. The natives - awe
struck and grateful - were supposed to assimilate these
endowments and thus become honorary Westerners
("white men"). Where osmosis and immitation failed -
bayonets and bombs were called upon. These were later
replaced by soft credits and economic micromanagement
by a host of multilateral institutions.
648
When it dawned upon them that the West is willing to pay
for every phase of self-betterment, for every stage of self-
improvement, for every functioning institution and law
passed - this venal class (the soi-disant "elite" in
government, in industry and academe) embarked on a
gargantuan blackmail plot. The inventors of the most
contorted and impervious bureaucracies ever, have
recreated them. They have transformed the simplest tasks
of reform into tortuous, hellish processes, mired in a
miasma of numerous committees and deluged by cavils,
captious "working" papers and memoranda of stupefying
trumpery. They have stalled and retraced, reversed and
regressed, opined and debated, refused and accepted
grudgingly. The very processes of transformation and
transition - a simulacrum to begin with - acquired an aura
of somnolent lassitude and the nightmarish quality of
ensnarement. And they made the West bribe them into
yielding that which was ostensibly in their very own
interest. Every act of legislation was preceded and
followed by dollops of foreign cash. Every ministry
abolished was conditioned upon more aid. Every court
established, every bloodletting firm privatized, every bank
sold, every system made more efficient, every procedure
simplified, every tender concluded and every foreign
investor spared - had a tariff. "Pay or else ..." was the
overt message - and the West preferred to pay and to
appease, as it has always done.
649
rate economists from third world countries, as I am never
wont of mentioning - collaborated with the US
government, the European Union and the World Bank in
covering up this stark reality. They turned a common
blind eye to the diversion of billions in aid and credits to
mysterious bank accounts in dubious tax havens. They
ignored fake trading deals, itinerant investment houses,
shady investors and shoddy accounting. They expressed
merely polite concern over blatant cronyism and rampant
nepotism. They kept pouring money into the rapidly
growing black hole that Eastern Europe and the Balkan
have become. They pretended not to know and feigned
surprise when confronted with the facts. In their
complicity, they have encouraged the emergence of a
criminal class of unprecedented proportions, hold and
penetration in many of the countries within their remit.
650
The more unstable the region, the more ominous its
rhetoric, the more fractured its geopolitics - the more
money flowed in. It was the right kind of money:
multilateral - not multinational, public - not private,
deliberately ignorant - not judiciously cognizant. It was
the "quantum fund" - capable of "tunnelling" (as the
Czechs called it) - vanishing in one place (the public
purse) and appearing in another (the private wallet)
simultaneously. Even the exception - the never-enforced
sanctions against Yugoslavia - served to enrich its
cankerous ruling class by way of smuggling and
monopolies.
651
promises prosperity it cannot deliver, growth it will not
guarantee and stability it cannot ensure. This
prestidigitation is bound to lead to ever larger bills and to
the attrition of good will of both donor and recipient.
Never before was such a unique historical opportunity so
thoroughly missed. The consequences may well be as
unprecedented.
652
in this reallocation of financial wherewithal by
exclusively catering to the needs of the less risky
segments of the business scene (read: foreign investors).
All more or less true. Yet, the proponents of FDI get their
causes and effects in a tangle. FDI does not foster growth
and stability. It follows both. Foreign investors are
653
attracted to success stories, they are drawn to countries
already growing, politically stable, and with a sizable
purchasing power.
654
Alphabetical Bibliography
655
Does Foreign Direct Investment Accelerate Economic
Growth? - M Carkovic, R Levine - University of
Minnesota, Working Paper, 2002
656
Export Performance and the Role of Foreign Direct
Investment - N Pain, K Wakelin - The Manchester School,
1998
657
Development - JR Markusen, A Venables - 1997 - NBER
658
The Impact of Foreign Direct Investment Inflows on
Regional Labour Markets in Hungary - K Fazekas -
SOCO Project Paper 77c, 2000
659
Vertical foreign direct investment, welfare, and
employment - W Elberfeld, G Gotz, F Stahler - Topics in
Economic Analysis and Policy, 2005
660
transactions were frequently delayed and privatizations
attracted scant interest.
661
to under-report the facts by half - Russia invested abroad
more than $3 billion every single year since 2000. This is
double the figure in 1999 and translates into $300-500
million in annual net outflows of foreign direct
investment.
662
2002 due to the long-deferred privatization of its banking
sector and to the sale to foreign investors of assets
originally privatized to cronies, insiders and communist-
era managers. The Slovenian Business Weekly correctly
expected the country to draw in more than $600 million in
2002 - up 50 percent on 2001.
663
and Hungary ($5 billion). The regional FDI stock comes
to a respectable $100 billion.
664
- including Bulgaria, Croatia, the Czech Republic and
Macedonia - are mostly owned by outside financial
institutions.
665
Kearney and Foreign Policy Magazine's Globalization
Index. The Czech Republic made it in 2002 to the 15th
place (of 62 countries), higher than New Zealand,
Germany, Malaysia, Israel and Spain, for instance.
666
"Russia ... could well be a target for almost as many first-
time investments as the United States ... China, Russia,
Mexico and Poland combined ... are expected to
accumulate about one quarter of all proposed new
investment commitments."
667
fine tradition of precision manufacturing; that the Poles
are considered quick-thinking and innovative; that
Bulgarians have a way with computers; that the Baltic
nations have powerful Scandinavian supporters; and
that Romania has extraordinarily low costs to offer
investors. In fact, rising costs - in comparison to the
Eastern candidate nations - are one of Ireland's main
worries. The question troubling the Irish is: Could
incoming Eastern member states prove so attractive for
foreign investment that the country would find itself
eclipsed?"
Football
668
per year as they miss out on lucrative advertising and
broadcasting deals when they are matched against giants
from Spain, Germany, Italy, or even England.
669
on it. The figure floated was $170,000 - a fortune in
Romanian terms, where the average annual intake is rarely
about $2000.
670
Nor is football-related aggression confined to zealous
nationalists. Slovak fans taunted black English players
Emile Heskey and Ashley Cole with racist slogans in
October last year. The vast majority of the crowd - and the
medical teams on the sidelines - balefully recited
"monkey, monkey" at the top of their lungs for minutes on
end.
671
Both UEFA and FIFA have warned the Azerbaijan
Football Federation Association that it must settle a five
years old simmering dispute or else face the suspension of
all financial aid and, ultimately, expulsion. AFFA's
president Fuad Musaev refuses to go, despite pressure
from the government above and at least nine clubs below.
This resulted in a boycott by said disgruntled of the
national football championship and a feeble attempt to
organize an alternative.
672
the Atlanta Journal-Constitution. Jordan alone has
demanded $1 billion.
673
- reviews from yet another IMF mission, clearing the way
for the release of a tranche of $36 million out of a loan of
$330 million. Bulgaria has also received $130 million in
direct US aid between 2001-3, mainly through the Support
for East European Democracy (SEED) program.
674
US companies cooperated with Angola on the
development of offshore oilfields in the politically
contentious exclave of Cabinda. Guinea and Cameroon
absorbed dollops of development aid. Currently, Angola
receives c. $19 million in development assistance.
The United States has also pledged to cause Iraq to pay its
outstanding debts, mainly to countries in Central and East
Europe, notably to Russia and Bulgaria. Iraq owes the
Russian Federation alone close to $9 billion. Some of the
Russian contracts with the Iraqi oil industry, thought to be
worth dozens of billions of dollars, may even be honored
by the victors, promised the Bush administration. It
reneged on both promises. Debt relief reduced Iraq's debt
by 90% and all Saddam Hussein era contracts were
vitiated.
675
that the 'coalition of the willing' President Bush spoke
of turns out to be a 'coalition of the bought off'
instead'."
But this is nothing new. When Yemen cast its vote against
a November 1990 United Nations Security Council
resolution authorizing the use of force to evict Iraq from
Kuwait - the United states scratched $700 million in aid to
the renegade country over the following decade.
Turkey complains that the USA has still to honor its aid
commitments made prior to the first Gulf War. Hence its
insistence on written guarantees, signed by the president
himself. Similarly, vigorous pledges to the contrary aside,
the Bush administration has allocated a pittance to the
reconstruction of Afghanistan in its budgets - and only
after it is prompted to by an astounded Congress.
676
Yet, the USA, despite all its shortcomings, is the only
game in town. The European Union cannot be thought of
as an alternative benefactor.
677
Despite the acrimony over Iran's not-so-civilian nuclear
program, the EU may soon ink a similar set of treaties
with Iran with which the EU has a balanced trade position
- c. $7 billion of imports versus a little less in exports.
"The Middle East ... has more trade barriers than any
other part of the world. Muslim countries in the region
trade less with one another than do African countries,
and much less than do Asian, Latin American or
European countries. This reflects both high trade
barriers ... and the deep isolation Iran, Iraq and Libya
have brought on themselves through violence and
support for terrorist groups ... 8 of (the region's) 11
largest economies remain outside the WTO."
678
investment in the region declined precipitously from $3
billion in 1999 to half that in 2000. The GCC, on its part,
has been consistently investing $4-5 billion annually in
the EU economies.
Free Zones
679
necessary to put an end to (Ukraine's 11 free economic
and 9 priority) zones (and) liquidate them completely.
(They) have become semi-criminal zones, and this refers
not only to the Donetsk zone. You pull the meat that
Europe doesn't want to eat into these zones and sell it
there without [paying] taxes".
680
processing zones surged from 25 in 1975 to 116 last year.
The number of such havens jumped to 3000 from a mere
79.
681
It has since flopped and has been leased last September
for 30 years to Ital Mak Furnir, an improbable German-
Italian-Macedonian partnership. The only occupant of the
sole building constructed in the zone by the Taiwanese is
rented to the NATO mission in Macedonia - hardly a
business enterprise.
682
smuggled through the special zones, reported UkInform.
Most of it is unfit for human consumption. The
impoverished country lost $56 million in customs duties
on these products in 2001 alone. In the meantime, the
local meat industry is "choking" in the words of Yuri
Melnik, Deputy State Secretary for the Ministry of
Agrarian Policy.
683
why export processing zones (EPZs) have failed to take
off in some countries. While political stability and
investment in the basic infrastructure in ports, airports,
roads, water, sanitation and power supply are necessary
conditions for EPZs, they are not sufficient on their own
to attract FDI. Macroeconomic conditions such as extreme
inflation and high interest rates (are important) ...
Research suggests that zones are most effective when they
form part of an integrated economic strategy that includes
fiscal incentives, investments in infrastructure, technology
and human capital, and the creation of linkages into the
local economy. It is important for EPZs to upgrade their
activities to higher value-added products and services
(requiring a more skilled workforce) and find their niche
in the international production network ... (EPZs strategies
must, therefore, be) continually adapt(ed)."
684
but. Only change and transformation are guaranteed
constants - the rest of it is an elaborate and anxiety-
reducing illusion.
685
Yet, the USA faces enormous social torsion brought about
by the polarization of its politics and by considerable
social and economic tensions and imbalances. The
deterioration in its global image and its growing isolation
contribute to a growing paranoia and jingoism. While
each of these dimensions is nothing new, the combination
is reminiscent of the 1840s-1850s, just prior to the Civil
War.
686
Earth and with it intolerance, prejudice, superstition, as
well as strong sentiments against science and the values of
the Enlightenment. We are on the threshold of the New
Dark Ages.
687
conflicts of interest between a class of professional
managers and the diffuse ownership represented by
(mainly public) shareholders - known as the agent-
principal problem - spell the end of both and the dawn of
a new era.
688
by hackers, criminals, terrorists, and plain whackos. Some
countries - such as China - are trying to suppress political
dissent by disruptively prying into their citizens' lives. We
have already incrementally surrendered large swathes of
our hitherto private domain in exchange for fleeting,
illusory, and usually untenable personal "safety".
689
likely to fragment into urban islands: gated communities,
slums, strips, technology parks and "valleys", belts, and so
on. The various parts will maintain a tenuous relationship
but will gradually grow apart.
690
soaring inflation (known together as stagflation). This is
owing to enormous and unsustainable imbalances in
global savings, debt, and capital and asset markets.
691
Human nature, naturally.
692
from individual and collective memory (biography and
history) and from intergenerational interactions.
693
"visible" and well-scrutinized century. Still, as Barbara
Tuchman pointedly titled her masterwork, it was merely a
Distant Mirror of other centuries. Or, in the words of
Proverbs: "Whatever was, it shall be again".
694
These innovations revolutionized the workplace. They
were coupled with "lean and mean" management theories
and management fads. Re-engineering, downsizing, just in
time inventory and production management, outsourcing -
all emphasized a trimming of the work force. Thus,
whereas once, enterprises were proud of the amount of
employment which they generated - today it is cause for
shame. This psychological shift is no less than
misanthropic.
695
extremely dangerous development. Already people tend to
confuse reality with its representation through media
images. Actors are misperceived to be the characters that
they play in a TV series, wars are fought with video
game-like elegance and sleekness.
696
of a manuscript, its editing and publishing, will be
stripped of all human involvement, barring that of the
author. Granted, the author can correspond with his
audience more easily but this, again, is the lonely,
disembodied kind of "contact".
697
Each of the aforementioned phenomena has a collectivist
aspect or parallel. This duality permeates the experience
of being human. Humans are torn between these two
conflicting instincts and by way of socialization, imitation
and assimilation, they act herd-like, en masse. Weber
analysed the phenomenon of leadership, that individual
which defines the parameters for the behaviour of the
herd, the "software", so to speak. He exercises his
authority through charismatic and bureaucratic
mechanisms.
698
fashions. It is in the root of the confusion which
constantly leads us to culture-wars. In this century culture
wars were waged by religion-like ideologies
(Communism, Nazism, Nationalism and - no comparison
intended - Environmentalism, Capitalism, Feminism and
Multi-Culturalism). These mass ideologies (the
quantitative factor enhanced their religious tint) could not
have existed in an age with no telecommunication and
speedy transport. Yet, the same advantages were available
(in principle, over time, after a fight) to their opponents,
who belonged, usually, to the individualistic camp. A
dissident in Russia uses the same tools to disintegrate the
collective as the apparatchik uses to integrate it.
Ideologies clashed in the technological battlefields and
were toppled by the very technology which made them
possible. This dialectic is interesting because this is the
first time in human history that none of the sides could
claim a monopoly over technology. The economic reasons
cited for the collapse of Communism, for instance, are
secondary: what people were really protesting was lack of
access to technology and to its benefits. Consumption and
Consumerism are by products of the religion of Science.
699
But the principle that unites humans, no matter which
camp they might belong to, when, or where is the
principle of Time.
700
The elders lost their advantage (memory). Being older,
they were naturally less endowed than the young. The
elders were ill-equipped to cope with the kaleidoscopic
quality of today's world and its ever changing terms. More
nimble, as knowledgeable, more vigorous and with a
longer time ahead of them in which they could engage in
trial and error learning - the young prevailed.
701
G
Game Theory
Consider this:
702
employees will rather harm their long term interests than
follow instructions or be subjected to criticism – never
mind how constructive. The employees in CEE regard the
corporate environment as a conflict zone, a zero sum
game (in which the gains by some equal the losses to
others). In the West, the employees participate in the
increase in the firm's value. The difference between these
attitudes is irreconcilable.
703
assume real, though informal, control of the firm. They do
so by defining a new set of strategic goals for the firm,
which call for the institution of an entrepreneurial rather
than a bureaucratic type of management. These cycles of
initiative-consolidation-new initiative-revolution-
consolidation are the dynamos of company growth.
Growth leads to maximization of value. However, the
players don't know or do not fully believe that they are in
the process of maximizing the company's worth. On the
contrary, consciously, the managers say: "Let's maximize
the benefits that we derive from this company, as long as
we are still here." The entrepreneurs-owners say: "We
cannot tolerate this stifling bureaucracy any longer. We
prefer to have a smaller company – but all ours." The
growth cycles forces the entrepreneurs to dilute their
holdings (in order to raise the capital necessary to finance
their initiatives). This dilution (the fracturing of the
ownership structure) is what brings the last cycle to its
end. The holdings of the entrepreneurs are too small to
materialize a coup against the management. The
management then prevails and the entrepreneurs are
neutralized and move on to establish another start-up. The
only thing that they leave behind them is their names and
their heirs.
704
GT deals with interactions between agents, whether
conscious and intelligent – or Dennettic. A Dennettic
Agent (DA) is an agent that acts so as to influence the
future allocation of resources, but does not need to be
either conscious or deliberative to do so. A Game is the
set of acts committed by 1 to n rational DA and one a-
rational (not irrational but devoid of rationality) DA
(nature, a random mechanism). At least 1 DA in a Game
must control the result of the set of acts and the DAs must
be (at least potentially) at conflict, whole or partial. This
is not to say that all the DAs aspire to the same things.
They have different priorities and preferences. They rank
the likely outcomes of their acts differently. They engage
Strategies to obtain their highest ranked outcome. A
Strategy is a vector, which details the acts, with which the
DA will react in response to all the (possible) acts by the
other DAs. An agent is said to be rational if his Strategy
does guarantee the attainment of his most preferred goal.
Nature is involved by assigning probabilities to the
outcomes. An outcome, therefore, is an allocation of
resources resulting from the acts of the agents. An agent is
said to control the situation if its acts matter to others to
the extent that at least one of them is forced to alter at
least one vector (Strategy). The Consequence to the agent
is the value of a function that assigns real numbers to each
of the outcomes. The consequence represents a list of
outcomes, prioritized, ranked. It is also known as an
ordinal utility function. If the function includes relative
numerical importance measures (not only real numbers) –
we call it a Cardinal Utility Function.
705
They can be nonzero-sum (the amount of benefits to all
players can increase or decrease). Games can be
cooperative (where some of the players or all of them
form coalitions) – or non-cooperative (competitive). For
some of the games, the solutions are called Nash
equilibria. They are sets of strategies constructed so that
an agent which adopts them (and, as a result, secures a
certain outcome) will have no incentive to switch over to
other strategies (given the strategies of all other players).
Nash equilibria (solutions) are the most stable (it is where
the system "settles down", to borrow from Chaos Theory)
– but they are not guaranteed to be the most desirable.
Consider the famous "Prisoners' Dilemma" in which both
players play rationally and reach the Nash equilibrium
only to discover that they could have done much better by
collaborating (that is, by playing irrationally). Instead,
they adopt the "Paretto-dominated", or the "Paretto-
optimal", sub-optimal solution. Any outside interference
with the game (for instance, legislation) will be construed
as creating a NEW game, not as pushing the players to
adopt a "Paretto-superior" solution.
706
RELATIVE INTENSITY of a preference – merely its
location in a list. However, techniques are available to
transform the ordinal utility function – into a cardinal one.
707
very ability to communicate, the level of communication
and the order of communication – are important in
cooperative cases. A Nash solution:
708
amount that he would have made on his own. A set of
payments to the players, describing the division of the
coalition's value amongst them, is the "imputation", a
single outcome of a strategy. A strategy is, therefore,
dominant, if: (1) each player is getting more under the
strategy than under any other strategy and (2) the players
in the coalition receive a total payment that does not
exceed the value of the coalition. Rational players are
likely to prefer the dominant strategy and to enforce it.
Thus, the solution to an n-players game is a set of
imputations. No single imputation in the solution must be
dominant (=better). They should all lead to equally
desirable results. On the other hand, all the imputations
outside the solution should be dominated. Some games are
without solution (Lucas, 1967).
709
number of agents in any game is assumed to be finite and
a finite number of steps is mostly incorporated into the
assumptions. Omissions are not treated as acts (though
negative ones). All agents are negligible in their
relationship to others (have no discernible influence on
them) – yet are influenced by them (their strategies are not
– but the specific moves that they select – are). The
comparison of utilities is not the result of any ranking –
because no universal ranking is possible. Actually, no
ranking common to two or n players is possible (rankings
are bound to differ among players). Many of the problems
are linked to the variant of rationality used in GT. It is
comprised of a clarity of preferences on behalf of the
rational agent and relies on the people's tendency to
converge and cluster around the right answer / move.
This, however, is only a tendency. Some of the time,
players select the wrong moves. It would have been much
wiser to assume that there are no pure strategies, that all
of them are mixed. Game Theory would have done well to
borrow mathematical techniques from quantum
mechanics. For instance: strategies could have been
described as wave functions with probability distributions.
The same treatment could be accorded to the cardinal
utility function. Obviously, the highest ranking (smallest
ordinal) preference should have had the biggest
probability attached to it – or could be treated as the
collapse event. But these are more or less known, even
trivial, objections. Some of them cannot be overcome. We
must idealize the world in order to be able to relate to it
scientifically at all. The idealization process entails the
incorporation of gross inaccuracies into the model and the
ignorance of other elements. The surprise is that the
approximation yields results, which tally closely with
reality – in view of its mutilation, affected by the model.
710
There are more serious problems, philosophical in nature.
711
one). Players would do better to avoid Paretto dominated
outcomes by imposing the constraints of such a
mechanism upon their available strategies. Paretto
optimality is defined as efficiency, when there is no state
of things (a different distribution of resources) in which at
least one player is better off – with all the other no worse
off. "Better off" read: "with his preference satisfied". This
definitely could lead to cooperation (to avoid a bad
outcome) – but it cannot be shown to lead to the formation
of morality, however basic. Criminals can achieve their
goals in splendid cooperation and be content, but that does
not make it more moral. Game theory is agent neutral, it is
utilitarianism at its apex. It does not prescribe to the agent
what is "good" – only what is "right". It is the ultimate
proof that effort at reconciling utilitarianism with more
deontological, agent relative, approaches are dubious, in
the best of cases. Teleology, in other words, in no
guarantee of morality.
712
Game Theory pretends that human actions are breakable
into much smaller "molecules" called games. Human acts
within these games are means to achieving ends but the
ends are improbable in their finality. The means are
segments of "strategies": prescient and omniscient
renditions of the possible moves of all the players. Aside
from the fact that it involves mnemic causation (direct and
deterministic influence by past events) and a similar
influence by the utility function (which really pertains to
the future) – it is highly implausible. Additionally, Game
Theory is mired in an internal contradiction: on the one
hand it solemnly teaches us that the psychology of the
players is absolutely of no consequence. On the other, it
hastens to explicitly and axiomatically postulate their
rationality and implicitly (and no less axiomatically) their
benefit-seeking behaviour (though this aspect is much
more muted). This leads to absolutely outlandish results:
irrational behaviour leads to total cooperation, bounded
rationality leads to more realistic patterns of cooperation
and competition (coopetition) and an unmitigated rational
behaviour leads to disaster (also known as Paretto
dominated outcomes).
713
state, the police, the courts, the law) are introduced by the
players. In this sense, they are not really an outside event
which has the effect of altering the game fundamentally.
They are part and parcel of the strategies available to the
players and cannot be arbitrarily ruled out. On the
contrary, their introduction as part of a dominant strategy
will simplify Game theory and make it much more
applicable. In other words: players can choose to compete,
to cooperate and to cooperate in the formation of an
outside agency. There is no logical or mathematical
reason to exclude the latter possibility. The ability to thus
influence the game is a legitimate part of any real life
strategy. Game Theory assumes that the game is a given –
and the players have to optimize their results within it. It
should open itself to the inclusion of game altering or
redefining moves by the players as an integral part of their
strategies. After all, games entail the existence of some
agreement to play and this means that the players accept
some rules (this is the role of the prosecutor in the
Prisoners' Dilemma). If some outside rules (of the game)
are permissible – why not allow the "risk" that all the
players will agree to form an outside, lawfully binding,
arbitration and enforcement agency – as part of the game?
Such an agency will be nothing if not the embodiment, the
materialization of one of the rules, a move in the players'
strategies, leading them to more optimal or superior
outcomes as far as their utility functions are concerned.
Bargaining inevitably leads to an agreement regarding a
decision making procedure. An outside agency, which
enforces cooperation and some moral code, is such a
decision making procedure. It is not an "outside" agency
in the true, physical, sense. It does not "alter" the game
(not to mention its rules). It IS the game, it is a procedure,
a way to resolve conflicts, an integral part of any solution
and imputation, the herald of cooperation, a representative
714
of some of the will of all the players and, therefore, a part
both of their utility functions and of their strategies to
obtain their preferred outcomes. Really, these outside
agencies ARE the desired outcomes. Once Game Theory
digests this observation, it could tackle reality rather than
its own idealized contraptions.
Germany, Economy of
715
The IMF is more optimistic. Growth in 2003 will be 1.75
percent, it predicted last week. Even so, German GDP is
growing at 3 GDP points below trend. The excess
capacity translates to deflationary pressures on prices and
to rising unemployment, currently at over 4 million
people, or almost 10 percent. One of every six adults in
the eastern Lander is out of work.
716
state is overweening and interventionary. Many of the
country's industries are already uncompetitive.
717
massive spending cuts, the government, according to
Business Week, will have to borrow $32 billion this year -
crowding out the private sector.
718
Moreover, interest rates in the eurozone - and the euro's
exchange rate - are bound to come down as fiscal
rectitude is restored and industrial production plummets.
German business confidence largely hinges on the ECB's
inflation-obsessed policies.
719
The welfare state is sacrosanct. Schroeder himself
admitted as much last month. In a speech to the nation, he
taunted the opposition. Voters re-elected him, he boasted,
because he "expressly did not decide to scrap the welfare
state, cut benefits indiscriminately and roll back
employees' rights" - though "some entitlements, rules and
allowances of the German welfare state" must be
reconsidered, he added, incongruously. The opposition
promptly - and somewhat justly - accused him of
"electoral fraud" for hiding the true state of the economy
and making false campaign promises.
720
In all fairness, west Germany's performance is still
impressive. It is being dragged down by the eastern parts
whose productivity, compared to the west's, is one third
lower and unit labor costs one tenth higher.
Unemployment in the east is double the west's, the
infrastructure is decrepit and brain drain is ubiquitous.
721
and Swiss exports and one quarter of Danish, Belgian and
French goods.
Golden Shares
In a rare accord, both the IMF and independent analysts,
have cautioned Bulgaria in early 2002 that its insistence
on keeping golden shares in both its tobacco and telecom
monopolies even after they are privatized - will hinder its
ability to attract foreign investors to these already
unappealing assets. Bulgaria's $300 million arrangement
with the IMF - struck in late 2001 by the new and
youthful Minister of Finance in the Saxe-Coburg
government - was not at risk, though.
722
But, in practice, golden shares serve less noble ends.
723
Poland's Treasury maintains a golden share in LOT, its
national carrier, and is known to have occasionally
exercised it. Lithuania kept a golden share in its telecom.
Even municipalities and regional authorities are emulating
the centre. The city of Tallinn, for instance, owns a golden
share in its water utility.
724
The West, alas, is in no position to preach free marketry in
this case. European firms are notorious for the ingenious
stratagems with which they disenfranchise their
shareholders. Privileged minorities often secure the
majority vote by owning golden shares (this is especially
egregious in the Netherlands and France).
725
cum hotel groups, mining complexes, travel agencies - at
bargain basement prices, injecting much needed capital
and providing access to the EU.
726
central Bank (NBM) to serve as its CEO. Another Greek
bank, Alpha Bank, has bought a controlling stake in
Kreditna Banka, a Macedonian bank with extensive
operations in Kosovo and among NGO's.
727
times in the same period. Greek exports constitute 35% of
all EU exports to Macedonia and 55% of all EU exports to
Albania. About the only places with muted Greek
presence are Bosnia and Kosovo - populated by Moslems
and not by Orthodox coreligionists.
728
the Greek Who's Who in Business. Gener, Atemke,
Attikat (construction), 3E, Delta Dairy (foodstuffs),
Intracom (telecommunications), Elvo and Hyundai Hellas
(motor vehicles), Evroil, BP Oil and Mamidakis (oil
products).
729
Romania and bureaucratic Bulgaria. Others doubt this
exuberance.
730
region. Next were a $1 billion oil pipeline through
Bulgaria and northern Greece and an extension of a
Russian gas pipeline to Albania and Macedonia. The
Egnatia Highway is supposed to connect Turkey, Greece,
Bulgaria, Macedonia, and Albania. Greece is a major
driving force behind REM - a southeast Europe Regional
Electricity trading Market declared in September 1999 in
Thessalonica.
731
Growth (and Government)
It is a maxim of current economic orthodoxy that
governments compete with the private sector on a limited
pool of savings. It is considered equally self-evident that
the private sector is better, more competent, and more
efficient at allocating scarce economic resources and thus
at preventing waste. It is therefore thought economically
sound to reduce the size of government - i.e., minimize its
tax intake and its public borrowing - in order to free
resources for the private sector to allocate productively
and efficiently.
732
bond investors tend to resort to cash. That cash - not
equity or corporate debt - is the veritable substitute for
risk-free securities is a basic tenet of modern investment
portfolio theory.
733
Yet, there is a third role. In our post-Keynesian world, it is
a heresy. It flies in the face of the "Washington
Consensus" propagated by the Bretton-Woods institutions
and by development banks the world over. It is the
government's obligation to foster growth.
734
Yet, this mental picture is a figment of economic
imagination. The bulk of the private sector in these
countries is informal. In many of them, there are no credit
or capital markets to speak of. The government doesn't
borrow from savers through the marketplace - but
internationally, often from multilaterals.
Grundig
735
Yet, the two succumbed to different malaises. Grundig - a
1997 Philips spin-off with plants in Germany, the United
Kingdom, Portugal and Austria - was circled to its dying
breath by corporate suitors, among them Taiwan's Sampo
and Turkey's Beko Elektronik, one of its sub-contractors.
But both pulled out in haste when acquainted with the full
picture - and especially with Grundig's $220 million in
unfunded pension obligations. The biting irony of a
Turkish company taking over a German one was thus
avoided.
736
engineering office Babcock Borsig, stationery maker
Herlitz and airship developer Cargolifter. The Federal
Statistics Office pegs the number of insolvency filings last
year at 84,428.
737
Nordrhein-Westfalen. It competed with 1494 products
from 28 countries and was singled out for its outstanding
"innovation, functionality, formal quality, ergonomic
efficiency and environmental compatibility."
738
employee representatives, there to oppose job cuts and
disinvestment.
739
H
I. OVERVIEW
740
The prophet Muhammad (a cross border trader of goods
and commodities by profession) encouraged the free
movement of goods and the development of markets.
Numerous Moslem scholars railed against hoarding and
harmful speculation (market cornering and manipulation
known as "Gharar"). Moslems were the first to use
promissory notes and assignment, or transfer of debts via
bills of exchange ("Hawala"). Among modern banking
instruments, only floating and, therefore, uncertain,
interest payments ("Riba" and "Jahala"), futures contracts,
and forfeiting are frowned upon. But agile Moslem traders
easily and often circumvent these religious restrictions by
creating "synthetic Murabaha (contracts)" identical to
Western forward and futures contracts. Actually, the only
allowed transfer or trading of debts (as distinct from the
underlying commodities or goods) is under the Hawala.
741
But most Hawaladars are small businesses. Their Hawala
activity is a sideline or moonlighting operation. "Chits"
(verbal agreements) substitute for certain written records.
In bigger operations there are human "memorizers" who
serve as arbiters in case of dispute. The Hawala system
requires unbounded trust. Hawaladars are often members
of the same family, village, clan, or ethnic group. It is a
system older than the West. The ancient Chinese had their
own "Hawala" - "fei qian" (or "flying money"). Arab
traders used it to avoid being robbed on the Silk Road.
Cheating is punished by effective ex-communication and
"loss of honour" - the equivalent of an economic death
sentence. Physical violence is rarer but not unheard of.
Violence sometimes also erupts between money recipients
and robbers who are after the huge quantities of physical
cash sloshing about the system. But these, too, are rare
events, as rare as bank robberies. One result of this
effective social regulation is that commodity traders in
Asia shift hundreds of millions of US dollars per trade
based solely on trust and the verbal commitment of their
counterparts.
742
alternative to morbid and corrupt domestic financial
institutions. It is Western Union without the hi-tech gear
and the exorbitant transfer fees.
743
(Organisation for Economic Co-Operation and
Development (OECD), "Report on Money Laundering
Typologies 1999-2000," Financial Action Task Force,
FATF-XI, February 3, 2000, at
http://www.oecd.org/fatf/pdf/TY2000_en.pdf )
744
Recent anti-terrorist legislation in the US and the UK
allows government agencies to regularly supervise and
inspect businesses that are suspected of being a front for
the ''Hawala'' banking system, makes it a crime to
smuggle more than $10,000 in cash across USA borders,
and empowers the Treasury secretary (and its Financial
Crimes Enforcement Network - FinCEN) to tighten
record-keeping and reporting rules for banks and financial
institutions based in the USA. A new inter-agency Foreign
Terrorist Asset Tracking Center (FTAT) was set up. A
1993 moribund proposed law requiring US-based
Halawadar to register and to report suspicious transactions
may be revived. These relatively radical measures reflect
the belief that the al-Qaida network of Osama bin Laden
uses the Hawala system to raise and move funds across
national borders. A Hawaladar in Pakistan (Dihab Shill)
was identified as the financier in the attacks on the
American embassies in Kenya and Tanzania in 1998.
745
trails. Couriers and "contract memorizers", gold dealers,
commodity merchants, transporters, and moneylenders
can be apprehended and interrogated. Written, physical,
letters are still the favourite mode of communication
among small and medium Hawaladars, who also
invariably resort to extremely detailed single entry
bookkeeping. And the sudden appearance and
disappearance of funds in bank accounts still have to be
explained. Moreover, the sheer scale of the amounts
involved entails the collaboration of off shore banks and
more established financial institutions in the West. Such
flows of funds affect the local money markets in Asia and
are instantaneously reflected in interest rates charged to
frequent borrowers, such as wholesalers. Spending and
consumption patterns change discernibly after such
influxes. Most of the money ends up in prime world banks
behind flimsy business facades. Hackers in Germany
claimed (without providing proof) to have infiltrated
Hawala-related bank accounts.
746
Hawala networks are often used to launder money, or to
evade taxes. Even when employed for legitimate
purposes, to diversify the risk involved in the transfer of
large sums, Hawaladars apply techniques borrowed from
money laundering. Deposits are fragmented and wired to
hundreds of banks the world over ("starburst").
Sometimes, the money ends up in the account of origin
("boomerang").
747
expire in their prime, often inebriated. In the republics of
former Yugoslavia, respiratory and digestive tract diseases
run amok. Stress and pollution conspire to reap a grim
harvest throughout the wastelands of eastern Europe. The
rate of Tuberculosis in Romania exceeds that of sub-
Saharan Africa.
748
Others provided healthcare only through and at the
workplace. But as national output and government
budgets imploded, even this ceased abruptly.
749
But this is hard to achieve when even the token salaries of
healthcare workers go unpaid for months. Interfax
reported on March 9 that 41 of Russia's 89 regions owe
their healthcare force back wages. Unions are bereft of
resources and singularly inefficacious.
750
medical workers are currently being investigated on
suspicion of a variety of offenses such as taking bribes,
using fake medical certificates, and reselling medicine at a
profit. Shevchenko also stated that the State Duma will
soon adopt a law on state regulation of private medical
activities, which he said will put the process of
commercializing medical establishments on a more legal
footing."
751
also conducted by the ILO ("People's Security Survey"),
82 percent of families in Hungary claimed to be unable to
afford even basic care.
752
citizens are forced to foot one third of their health bills in
a country which spends a mere 3 percent of GDP on the
salubrity of its citizens - the equivalent of $100 per year
per capita. Only a small part of this coerced co-financing
is formal and legal.
753
GP's now receive, on a contractual basis, payment per
socially-insured patient treated. They make rent-free use
of clinics and equipment in their workplace. Many of
these doctors now borrow small amounts from willing
banks - a scarcity in Romania - to open their own practice.
754
these go towards staff wages. Little is left for medical
care.
755
is a lucrative proposition. But it could exclude poorer
patients from medical care altogether.
756
The Approved List of Medicines - will be recomposed to
include generic drugs whenever possible and to exclude
expensive brands where generics exist. This should be a
requirement in the law.
757
operate public health care facilities, like clinics, or
hospitals.
758
Divestiture and Build-Own-Operate (BOO) (Texas,
USA)
Free entry
759
This model works mainly in preventive care, family
planning, and reproductive health.
Hospital Management
760
VIII. Sale of public hospital as going concern
761
Consumer Organizations
These groups will shop and tender for the best, most
reasonably priced, and most efficient healthcare services
for their members.
Devolution
762
Healthcare (in Germany)
The Germans, ever the pragmatic sort, call their hospitals
- "houses of the sick" or "houses of those suffering". In
English the word "hospital" derives from Latin and
denotes hosting or hospitality. This may well be the main
difference between the German health system and the
Anglo-Saxon one. While the former is geared to perform a
function - the latter is also concerned with the social and
economic contexts of healthcare.
763
is even more diversified: some providers are federal,
others regional, local, voluntary, or private.
764
Hospital admittance - to both private and public facilities -
is conditioned upon referral by a doctor. This apparently
onerous demand served to virtually eliminate waiting lists
together with the hypochondriacs, factitious disorders, and
impostors that infest hospitals elsewhere.
765
subject to rigorous quality inspections and, too often,
meddlesome micromanagement. Suppliers - like medical
device manufacturers - are less cosseted.
766
physicians. These figures mask a 10 percent contraction of
the private health sector workforce - compared to 5
percent in the public segment. Thus, the average staffing
per bed is one of the lowest in the OECD.
767
were effectively frozen. When this failed, an increasingly
alarmed Bundestag tried a variety of solutions in 1989,
1993, 1996, 1998, 1999, and 2000: sectoral budgets, price
lists for providers, reference prices for medicines, cost
limits on procurement of medical technology, restrictions
on the number of physicians per geographical unit, and,
finally, unpopular co-payment schemes.
768
corporatist approach still stifles the competitive provision
of services.
769
But will this situation last forever?
770
getting the same amount of Denars for their produce and
products when they convert the DMs which they got for
them.
771
This is bad from both the macro-economic vantage point
(that of the economy as a whole) - and from the micro-
economic point of view (that of the single firm).
772
One important way of encouraging people (and firms are
made of people) to do things - is to allay their fears. If
people fear devaluation - a responsible government can
never promise not to devalue its currency. Devaluation is
a very important policy tool. But the government can
INSURE against a devaluation.
773
it has cash. This creates cash flow problems at MAK:
salaries are not paid on time, raw materials cannot be
bought, production stops, MAK loses its traditional
markets - and all in order to avoid the risks of devaluation.
774
This very simple government assistance will have the
following effects:
As time goes by, the private sector may step in and supply
its own insurance against devaluation.
Hospitals
Hospitals are caught in the crossfire of a worldwide
debate. Should healthcare be completely privatized - or
should a segment of it be left in public hands? As the
debate infects countries adhering to the "social model of
775
capitalism" (e.g., Scandinavia and France) and spreads to
countries in transition in Central and Eastern Europe - it is
worthwhile to study the experience of the bellwether in
privatized health care: the USA.
776
have more than 200 beds. According to the American
Hospital Association, the 100 largest hospitals averaged a
mere 581 beds in 1995.
777
In "Our Ailing Public Hospitals - Cure them or Close
Them?" published in "The New England Journal of
Medicine", J.P. Kassirer mentions that public hospitals
provide "culturally competent care". This fashion is the
bane of public medicine. Providers are expected to deliver
to their patients a politically correct package of social
services and child welfare on top of the inanely expensive
- and frequently unpaid for - medical treatment.
778
In some states, one in twenty calls it a day every year.
Many states (e.g., New York) and municipalities (e.g.,
Los Angeles) seriously considered the abolition or
privatization of all public hospitals. In some states, private
hospitals now enjoy almost as much Medicaid business as
public ones. HMO's (Health Maintenance Organizations)
have discovered Medicaid as well.
But public hospitals are partly to blame for this sorry state
of affairs.
779
such as wait times. Financial reporting and network
development are dismal. As even governments are
transformed from "dumb providers" to "smart
purchasers", public hospitals must reconfigure, change
ownership - privatize, lease their facilities long term - or
perish.
780
government hospitals? What are the risk profiles
of these segments?
781
coupled with the vesting of authority with hospitals,
taking it back from local government.
782
pressure to improve continuity of care, expand primary
care capacity, reduce lengths of stay and meet a host of
managed care and budgetary constraints. It will be
impossible for them to do this so long as the physicians
who make the bulk of the clinical decisions practice in
ways that are not aligned with the imperatives of managed
care and capitation. Physicians must adapt their styles of
practice and accept an emphasis on absolute productivity."
783
fees or in the form of revenue sharing (franchise
arrangement).
784
telephones to patients, a business centre for the inpatient
businessmen - these are all profit or loss centers.
785
To control this kind of transformation, medical
information management systems need to be introduced.
These improve both the quality and the quantity of data
available to the management of the hospital and, as a
result, the decision making process.
786
disintermediation is thought to have increased both the
profit margins and the absolute profits of public hospitals.
Hungary, Economy of
The Slovaks, perhaps a trifle prematurely, rejoiced. The
Czech CTK News Agency reported from Prague that the
ethnic Hungarian parties in Slovakia were cautiously
unhappy. Bela Bugar, the chairman of one such party (the
SMK, now in coalition) grumbled, referring to the
Hungarian-Slovak basic treaty:
787
weighty document was signed by the Socialists (MSZP)
and the Union of Free Democrats (SZDSZ).
These very two parties now won the first round of the
elections in Hungary, narrowly defeating the center-right
coalition led by Fidesz (the Hungarian Civic Party) and
the Hungarian Democratic Forum. Of the 185 seats
decided, the Hungarian Socialist Party and the Free
Democrats ended with 98. Another 176 seats are left to a
second round. The parties then cast proportional votes to
determine the composition of the remaining 25.
788
The ruling coalition may have been punished by urbanite
voters - mainly in Budapest - said the center-left daily
"Nepszava". Its open contempt of intellectuals, liberals,
the media, and city-dwellers has often translated into
withheld or truncated budgets and bureaucratic
obstructionism. Zoltan Pokorni, Fidesz's president, said
the rural vote would be crucial in the second round:
"We are very happy with the confidence that has been
expressed by investors. We can guarantee predictability
for the economy."
789
have led to electoral retribution. Orban was accused of
authoritarianism, cronyism, and patronage.
790
The Budapest Stock Exchange has reached its zenith for
the year earlier this month, having risen by a quarter since
January 1. It was buoyed by flows of foreign capital.
Foreign investors disliked the outgoing government for its
heavy handed interventionism and micro-management of
the economy. It was also tainted by nepotism and
cronyism, though not by outright and crass corruption.
791
Orban stands for a prouder, more affluent, Hungary. No
longer the mendicant at the gates of the kingdom of
Brussels, he promotes the interests of his country
fearlessly and does not recoil from tough bargaining and
even conflict. While unwaveringly committed to the
European project, Orban, like Vaclav Klaus in the Czech
Republic, is an unmistakable nationalist.
792
The nation-state may have been grafted on eastern Europe
in the 20th century - but in central Europe it has always
been a natural outgrowth. Yet, in both regions it derives
its vitality from the land. Nationalism in the east has
agrarian, rustic roots. Orban inevitably gravitated towards
the village - the symbol of tradition, wholesomeness,
integrity, forthrightness, honesty, deep-rooted
commitment to the nation, the abode of the nuclear family
- home and hearth. No wonder that the main bones of
contention in the negotiations towards EU accession are
farm subsidies and agricultural policy.
793
is, by definition, unequal and polarized. In post-
communist societies, evenly spread destitution is often
preferred to unevenly spread affluence. Gnawing envy
may have led to electoral retribution.
794
arrangement. Hence, its continued demands to commence
preliminary discussions with Ukraine, Belarus, and
Moldova - the EU's future neighbors following
enlargement - with a view to their ultimate accession.
Russian mobsters love Budapest and not only for its views
and cosmopolitan atmosphere. They can easily obtain a
Hungarian passport posing as "investors" by laundering
the proceeds of their illicit activities. The CIA labels
Hungary a "major transshipment point for Southwest
Asian heroin and cannabis and transit point for South
American cocaine destined for Western Europe". It is also
a "limited producer of precursor chemicals, particularly
for amphetamine and methamphetamine". This is why
Hungary made it into the visa regimes of many a Western
country in the last few months.
795
The abolition of borders within the EU will make
Hungary a "nation of 15 million", he boasts, referring to
Hungarian minorities in neighboring countries (mainly in
Romania and Slovakia). Hungary is the top performer of
the LEGSI index which monitors the stability of countries.
Taxes were cut and much deeper cuts are planned after the
April 2002 elections. Employer participation in social
security contributions was reduced from 33 percent to 29
percent in January.
796
Net external debt is half its level seven years ago - though
gross external debt, at 60 percent of GDP, is high.
External debt growth is currently driven by the private
sector (mainly by multinationals).
797
Hungary reneged on agreements it signed during the
heyday of privatization (1993-7), when it raised more than
$6 billion by selling stakes in its banking, media, and
telecom sectors. The American power utility, AES, sued
both the government and the Hungarian power grid for
breach of contract for refusing to purchase generated
power (admittedly at inflated prices). It grudgingly settled
out of court last December.
798
to privatize Postabank, opting instead to merge it with
other state entities. It has re-nationalized a few motorways
and all future motorways will be financed by the state-
owned Hungarian Development Bank.
799
years ago, more than a fifth of Hungary's population
worked in agriculture.
800
All of these circumstances necessitate closer cooperation,
both economic and political, among the EU states fast-
tracked for membership and other powers in the region.
Ultimately, that could help smooth the EU expansion
process and aid the economies of several riparian states...
801
The World Bank has committed to Hungary $2 billion in
projects since 1991 - mostly for structural and institutional
reforms and macro-economic support. Hungary is a
recipient of Japan's Exim bank's co-financing facilities. As
Hungary's transformation progressed, lending by these
institutions dried up lately and Hungary owes the World
Bank a meager $550 million.
802
I-J
IG Metall
803
Warning strikes have already erupted over the last few
weeks. The main employers' federation, Gesamtmetall,
threatened the striking employees with lockouts.
804
throughout German industry. Net profits in IG Metall's
sectors climbed from 1 billion DM in 1993 (a recession
year) to 55 billion DM in 2000.
805
IG Metal is strict about the universal implementation of
the collective agreements it painstakingly negotiates with
employers. Such agreements typically tackle not only
wage levels but issues like training, reduction in working
time, safeguarding jobs, and equating eastern pay with
western standards. The comprehensiveness and all-
pervasiveness of the collective bargains is Procrustean.
806
They renege on the collective agreements without being
seen to flout the rules.
807
Paradoxically, the higher the pay of its members - the less
strike-prone is the union. Lay-off and strike pay doled out
by the union is a function of the striking member's base
wage. Add to this current expenditures - IG Metall
employs more than 2000 people in its headquarters alone -
and the limits of its postured belligerence become
discernible.
808
droves. IG Metall represents less than 30 percent of
actively employed workers in its industrial sectors.
809
plant level agreement with Volkswagen. This vitiated its
insistence on exclusive industry-wide agreements.
Moreover, the VW deal includes flexible work rules and
pay. Five thousand workers are each to be paid 5000 DM
a month to produce Volkswagen's 5000 model.
810
deflated by almost two fifths since unification. Even the
awesome industry wide agreements cover a mere one
fourth of German firms in the east - and a one half of all
businesses in the western Lander.
811
It, therefore, is probably doomed to share the fate of other
unions - gradual but assured dissipation.
812
criticism relates to the implementation - not to the noble
goals. It also relates to turf occupied by the IMF without
any mandate to do so.
The IMF tries to juggle all these goals in the thinning air
of the global capital markets. It does so through three
types of activities:
Surveillance
813
of grading and evaluating their economies. The last
decade saw the transformation of the IMF into an
unofficial (and, incidentally, non-mandated) country
credit rating agency. Its stamp of approval can mean the
difference between the availability of credits to a given
country - or its absence. At best, a bad review by the IMF
imposes financial penalties on the delinquent country in
the form of higher interest rates and charges payable on its
international borrowings. The Precautionary Agreement is
one such rating device. It serves to boost international
confidence in an economy. Another contraption is the
Monitoring Agreement which sets economic benchmarks
(some say, hurdles) under a shadow economic program
designed by the IMF. Attaining these benchmarks confers
reliability upon the economic policies of the country
monitored.
Financial Assistance
Technical Assistance
814
The last type of activity of the IMF is Technical
Assistance, mainly in the design and implementation of
fiscal and monetary policy and in building the institutions
to see them through successfully (e.g., Central Banks).
The IMF also teaches the uninitiated how to handle and
account for transactions that they are doing with the IMF.
Another branch of this activity is the collection of
statistical data - where the IMF is forced to rely on mostly
inadequate and antiquated systems of data collection and
analysis. Lately, the IMF stepped up its activities in the
training of government and non-government (NGO)
officials. This is in line with the new credo of the World
Bank: without the right, functioning, less corrupt
institutions - no policy will succeed, no matter how right.
815
country received from the IMF are not deducted from its
quota (because, ostensibly, they will be paid back by it to
the IMF). But the IMF holds the local currency of the
country (given to it in exchange for hard currency or
SDRs). These holdings are deducted from the quota
because they are not credit to be repaid but the result of an
exchange transaction.
816
imposes tough guidelines on those unfortunate enough to
require its help: a drastic reduction in inflation, cutting
back imports and enhancing exports. The IMF is funded
by the rich industrialized countries: the USA alone
contributes close to 18% to its resources annually.
Following the 1994-5 crisis in Mexico (in which the IMF
a crucial healing role) - the USA led a round of increases
in the contributions of the well-to-do members (G7) to its
coffers. This became known as the Halifax-I round.
Halifax-II looks all but inevitable, following the costly
turmoil in Southeast Asia. The latter dilapidated the IMF's
resources more than all the previous crises combined.
817
cereal imports and other external contingencies (some of
them arising from previous IMF lending!). This credit is
also available for a period of 3.25 to 5 years.
818
imbalances. It began to use a basket of 5 major currencies.
It began to borrow funds for its purposes - the
contributions did not meet its expanding roles.
819
servicing debt without resorting to rescheduling it. To
these ends, the IMF created the STF (Systemic
Transformation Facility - also used by Macedonia). It was
a temporary outfit which expired in April 1995. It
provided financial assistance to countries which faced
BOP difficulties which arose from a transformation
(transition) from planned economies to market ones. Only
countries with what were judged by the IMF to have been
severe disruptions in trade and payments arrangements
benefited from it. It had to be repaid in 4.5-10 years.
820
They meet annually (in the autumn) and coordinate their
meeting with that of the World Bank.
821
diversion of scarce human and financial resources to
negotiating with the IMF seems to prolong the agony. The
abrogation of responsibility by decision makers poses a
moral hazard: if successful - the credit goes to the
politicians, if failing - the IMF is always to blame. Rage
and other negative feeling which would have normally
brought about real, transparent, corruption-free, efficient
market economy are vented and deflected. The IMF
money encourages corrupt and inefficient spending
because it cannot really be controlled and monitored (at
least not on a real time basis). Also, the more resources
governments have - the more will be lost to corruption
and inefficiency. Zimbabwe is a case in point: following a
dispute regarding an austerity package dictated by the
IMF (the government did not feel like cutting government
spending to that extent) - the country was cut off from
IMF funding. The results were surprising: with less
financing from the IMF (and as a result - from donor
countries, as well) - the government was forced to
rationalize and to restrict its spending. The IMF would not
have achieved these results because its control
mechanisms are flawed: they rely to heavily on local,
official input and they are remote (from Washington).
They are also underfunded.
822
worry, the IMF will bail me out in case of default). This is
the "Moral Hazard": the safety net is fast being
transformed into a licence to gamble. The profits accrue to
the gambler - the losses to the IMF. This does not
encourage prudence or discipline.
823
The medicine is no better than the doctor or, for that
matter, than the disease that it is intended to cure.
824
businesses and either the budget is cruelly cut (austerity
and scaling back of social services) or the budget deficit
increases (because the government spends more than it
collects in taxes). Another bad option (though rarely used)
is to raise taxes or improve the collection mechanisms.
Rising manufacturing costs (fuel and freight are
denominated in foreign currencies and so do many of the
tradable inputs) lead to pricing out of many of the local
firms (their prices become too high for the local markets
to afford). A flood of cheaper imports ensues and the
comparative advantages of the country suffer. Finally, the
creditors take over the national economic policy (which is
reminiscent of darker, colonial times).
825
disapproval of, and provide markets with a clearer view
of a country’s economic policies ... (Other reforms would
be) the inclusion of collective action clauses in sovereign
bond issues and 100 percent debt forgiveness for the
most impoverished countries ..."
I. The Organization
826
In Uruguay - the hapless victim of Argentina's meltdown -
the Fund supported a tripling of an existing loan to $2.2
billion. The IMF praised the government's unpopular
hiking of taxes on salaries and pensions in the midst of a
severe recession. It was the only way Uruguay could
comply with its fiscal targets, it said.
827
training facility, university, rating agency, supervisory
authority, development bank, investment bank, and
executive with sharply increased powers. Many resent this
mission creep or feel threatened by it.
828
expect to be able to fully anticipate them. However, we
can do a better job of reducing the risks of crises by
promoting sound policies and the development of strong
institutions by our member countries, as well as better
risk assessments and investment decisions by market
participants."
829
detected vulnerabilities. This review process covers also
off shore money centers.
830
bullying tactics of the IMF and of its emissaries. The
tone is imperial and impatient."
831
and hosts its headquarters. The recent spate of lending to
Turkey and past excesses in Yeltsin's venal and
mismanaged Russia are attributable to such American
arm-twisting. The appointment, in early 2005, of a neo-
conservative stalwart, Paul Wolfowitz, to head the IMF, is
likely to exacerbate this incestuous relationship.
832
collects economic and financial information, and
discusses with officials the country's economic
developments and policies. On return to headquarters,
the staff prepares a report, which forms the basis for
discussion by the Executive Board. At the conclusion of
the discussion, the Managing Director, as Chairman of
the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's
authorities."
833
budgets, a sustainable public debt, avoidance of moral
hazard, restrained wage and expenditure policies,
preference for the private sector, enhancement of the
financial sector, structural reform, and exchange rate
stability.
834
The principles are commendable - their blind and
doctrinarian implementation in the form of micromanaged
conditionality - are not. The IMF - aware of its fast
eroding public and political support, especially in the
USA - has recently conjured up "country ownership" of
agreed economic programs and "poverty reduction and
growth facilities" - both intended to soothe jangling
nerves. But these public relations exercises are auxiliary
to its main thrust: fiscal rectitude, solvency, debt
repayments.
835
development-related and consumption-enhancing public
spending. Public expenditures are the only functioning
automatic stabilizer.
836
regime of pegged exchange rates exacerbates both the
duration and the degree of disequilibrium in the
international balance of payments of the IMF's members.
837
High interest rates stifle growth. An unrealistic exchange
rate dampens exports. These effects are accounted for in
the IMF's models. But there are other pernicious policy
outcomes which the IMF consistently ignores - at the peril
of the member countries:
838
loss-prone investors, friendly governments, the citizenry -
conveniently shift to Washington the blame for their own
misdeeds and misbehavior.
839
indicated to them that we thought this was excessive
fiscal tightening ... He (Stiglitz) ... focuses on federal
spending levels, barely mentioning provincial levels. As
the authorities themselves indicate in the April 24th 14-
point agreement, having an arrangement on the
provincial level is very, very important ..."
840
the contrary, cross-conditionality - including World Bank
conditions in IMF programs and vice versa - is still rife.
841
IMF programs imply a modicum of certainty where there
is none and are, thus, grossly misleading documents.
842
The World Bank summarized the ten commandments of
the Washington Consensus in its year 2000 Poverty
Report thus:
1. Fiscal discipline;
2. Redirection of public expenditure toward
education, health and infrastructure investment;
3. Tax reform - broadening the tax base and cutting
marginal tax rates;
4. Interest rates that are market determined and
positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization - replacement of quantitative
restrictions with low and uniform tariffs;
7. Openness to foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation - abolition of regulations that impede
entry or restrict competition, except or those
justified on safety, environmental and consumer
protection grounds, and prudential oversight of
financial institutions;
10. Legal security for property rights.
843
American strategic forecasting firm, noted the
schizophrenic behaviour of the IMF. Under fairly similar
circumstances, it chose to lend to Turkey, a crucial US
ally - but not to Argentina. The IMF's new African
poverty reduction initiative carries the fingerprints of the
American administration as well.
844
precisely the responsibility that a lender of last resort
should fulfill."
845
countries serves to bail out stranded lenders - but does
little to foster economic growth and development.
846
This control freakery coupled with micromanagement of
the minutest details of both the economic and social
policies of recipient-countries is counter-productive. The
IMF personnel are poorly qualified to dole out policy
advice on these issues. They compensate for insecurity
with haughtiness. As a result, the IMF's clients are
alienated and angered by its conduct.
847
The IMF is, in a way, a lender of last resort. When a
country seeks IMF financing, its balance of payments is
already ominously stretched, its debt shunned by
investors, and its currency under pressure. Put differently,
the IMF's active clients are effectively illiquid (though
never insolvent in the strict sense of the word). Anne
Krueger's November 2001 proposal to allow countries to
go bankrupt makes, therefore, eminent sense.
848
of the current non-system that deter capital flows to
emerging economies.
849
educated foreigners substitute for the dwindling,
unmotivated, and incompetent output of crumbling
indigenous education systems in the West. As sated and
effete white populations decline and age, immigrants gush
forth like invigorated blood into a sclerotic system.
850
population and colonial immigration coupled with
mercantilism was considered to be the solution.
851
and cheated pensioners and rebellious workers who refuse
to shoulder the inane burden much longer. The only fix is
to import taxable workers from the outside.
I. Labour Replacement
852
Labour is constantly being replaced by technology and
automation. Even very high skilled jobs are partially
supplanted by artificial intelligence, expert systems, smart
agents, software authoring applications, remotely
manipulated devices, and the like. The need for labour
inputs is not constant. It decreases as technological
sophistication and penetration increases. Technology also
influences the composition of the work force and the
profile of skills in demand.
853
the "ideal" and "efficient" market. The size of
unemployment benefits influences the size of the
workforce. A higher or lower pension age coupled with
specific tax incentives or disincentives can render the
most rigorous mathematical model obsolete.
V. International Trade
854
skilled foreign workers in local economic activities - from
afar. Distributed manufacturing, virtual teams (e.g., of
designers or engineers or lawyers or medical doctors),
multinationals - are all part of this growing trend. Many
Indian programmers are employed by American firms
without ever having crossed the ocean or making it into
the immigration statistics.
855
growth. It is easy to point at immigration-free periods of
unparalleled prosperity in the history of nations - or,
conversely, at recessionary times coupled with a flood of
immigrants.
Indices
The quality of Wall Street research has suffered grievous
blows these last two years. Yet, publishers of political and
economic indices largely escaped unscathed. Though their
indicators often influence the pecuniary fate of developing
countries, they are open to little scrutiny and criticism.
856
• Corruption in the judiciary, customs service, and
government bureaucracy;
• Non-tariff barriers to trade, such as import bans
and quotas as well as strict labeling and licensing
requirements;
• The fiscal burden of government, which
encompasses income tax rates, corporate tax rates,
and government expenditures as a percent of
output;
• The rule of law, efficiency within the judiciary,
and the ability to enforce contracts;
• Regulatory burdens on business, including health,
safety, and environmental regulation;
• Restrictions on banks regarding financial services,
such as selling securities and insurance;
• Labor market regulations, such as established
work weeks and mandatory separation pay; and
• Black market activities, including smuggling,
piracy of intellectual property rights, and the
underground provision of labor and other services.
857
by 4.3 percent and is likely to decline again or rise a little
this year. As a result, GDP per capita is wrongly
computed. The trade deficit is not $300 million - but
double that. It has been above $500 for the last few years.
Net foreign direct investment has been closer to $100
million for two years now - rather than the paltry $29
million the report misreports.
858
The fiscal burden of Macedonia is 34 percent of GDP -
not 23 percent as is the impression that section provides. It
has surpassed 30 percent of GDP long ago. Moreover, in
the sub-chapter titled "Fiscal Burden of the Government"
the authors contend that "government expenditures
equaled 23.3 percent of GDP". A mere three lines later
fiscal rectitude sets in and "the government consumes 19
percent of GDP". Which is it?
And so it continues.
859
how inconsequential it is, render the entire opus
suspicious.
Inefficiency (Market)
Even the most devout proponents of free marketry and
hidden hand theories acknowledge the existence of market
failures, market imperfections and inefficiencies in the
allocation of economic resources. Some of these are the
results of structural problems, others of an accumulation
of historical liabilities. But, strikingly, some of the
inefficiencies are the direct outcomes of the activities of
"non bona fide" market participants. These "players"
(individuals, corporations, even larger economic bodies,
such as states) act either irrationally or egotistically (too
rationally).
860
some adopt shadier varieties of behaviour. And there is a
group of parasites – participants in the market who feed
off its very inefficiencies and imperfections and, by their
very actions, enhance them. A vicious cycle ensues: the
body economic gives rise to parasitic agents who thrive on
its imperfections and lead to the amplification of the very
impurities that they prosper on.
861
the various locomotives of the economy, whether
local, national, or global. Risk is being assumed,
traded, diversified out of, avoided, insured against.
It gives rise to visions and hopes and it is the most
efficient "economic natural selection" mechanism.
To be a market participant one must assume risk, it
in an inseparable part of economic activity.
Without it the wheels of commerce and finance,
investments and technological innovation will
immediately grind to a halt. But many operators
are so risk averse that, in effect, they increase the
inefficiency of the market in order to avoid it.
They act as though they are resolute, risk assuming
operators. They make all the right moves, utter all
the right sentences and emit the perfect noises. But
when push comes to shove – they recoil, retreat,
defeated before staging a fight. Thus, they waste
the collective resources of all that the operators
that they get involved with. They are known to
endlessly review projects, often change their
minds, act in fits and starts, have the wrong
priorities (for an efficient economic functioning,
that is), behave in a self defeating manner, be
horrified by any hint of risk, saddled and
surrounded by every conceivable consultant,
glutted by information. They are the stick in the
spinning wheel of the modern marketplace.
862
Enormous amounts of time, efforts, money and
energy are expended by the more "normal" –
because of the "less normal" and the "eccentric".
These operators are likely to regard the
maintaining of their internal emotional balance as
paramount, far over-riding economic
considerations. They will sacrifice economic
advantages and benefits and adversely affect their
utility outcome in the name of principles, to quell
psychological tensions and pressures, as part of
obsessive-compulsive rituals, to maintain a false
grandiose image, to go on living in a land of
fantasy, to resolve a psychodynamic conflict and,
generally, to cope with personal problems which
have nothing to do with the idealized rational
economic player of the theories. If quantified, the
amounts of resources wasted in these coping
manoeuvres is, probably, mind numbing. Many
deals clinched are revoked, many businesses
started end, many detrimental policy decisions
adopted and many potentially beneficial situations
avoided because of these personal upheavals.
863
operators as to how and where to most efficiently
allocate their resources. But this is the passive
speculator. The "active" speculator is really a
market rigger. He corners the market by the
dubious virtue of his reputation and size. He
influences the market (even creates it) rather than
merely exploit its imperfections. Soros and Buffet
have such an influence though their effect is likely
to be considered beneficial by unbiased observers.
Middlemen are a different story because most of
them belong to the active subcategory. This means
that they, on purpose, generate market
inconsistencies, inefficiencies and problems – only
to solve them later at a cost extracted and paid to
them, the perpetrators of the problem. Leaving
ethical questions aside, this is a highly wasteful
process. Middlemen use privileged information
and access – whereas speculators use information
of a more public nature. Speculators normally
work within closely monitored, full disclosure,
transparent markets. Middlemen thrive of
disinformation, misinformation and lack of
information. Middlemen monopolize their
information – speculators share it, willingly or not.
The more information becomes available to more
users – the greater the deterioration in the
resources consumed by brokers of information.
The same process will likely apply to middlemen
of goods and services. We are likely to witness the
death of the car dealer, the classical retail outlet,
the music records shop. For that matter, inventions
like the internet is likely to short-circuit the whole
distribution process in a matter of a few years.
864
6. The last type of market impeders is well known
and is the only one to have been tackled – with
varying degrees of success by governments and by
legislators worldwide. These are the trade
restricting arrangements: monopolies, cartels,
trusts and other illegal organizations. Rivers of
inks were spilled over forests of paper to explain
the pernicious effects of these anti-competitive
practices (see: "Competition Laws"). The short
and the long of it is that competition enhances and
increases efficiency and that, therefore, anything
that restricts competition, weakens and lessens
efficiency.
865
stamped out, cruelly. Freedom to all – is also freedom
from being conned or hassled. Only when the righteous
freely prosper and the less righteous excessively suffer –
only then will we have entered the efficient kingdom of
the free market.
This still does not deal with the "not serious" and the
"personality disordered". What about the inefficient havoc
that they wreak? This, after all, is part of what is known,
in legal parlance as: "force majeure".
Note
866
The first fallacy is to assume that all forms of utility are
reducible to one another or to money terms. Thus, the
values attached to all utilities are expressed in monetary
terms. This is wrong. Some people prefer leisure, or
freedom, or predictability to expected money. This is the
very essence of risk aversion: a trade off between the
utility of predictability (absence or minimization of risk)
and the expected utility of money. In other words, people
have many utility functions running simultaneously - or,
at best, one utility function with many variables and
coefficients. This is why taxi drivers in New York cease
working in a busy day, having reached a pre-determined
income target: the utility function of their money equals
the utility function of their leisure.
867
the learning curve. Humans learn and the more they learn
the more they alter their behaviour. So, to obtain any
meaningful data, one has to observe behaviour in time, to
obtain a sequence of reactions and actions. To isolate,
observe and manipulate environmental variables and
study human interactions. No snapshot can approximate a
video sequence where humans are concerned.
Inflation
In a series of speeches designed to defend his record, Alan
Greenspan, until recently an icon of both the new
economy and stock exchange effervescence, reiterated the
orthodoxy of central banking everywhere. His job, he
repeated disingenuously, was confined to taming prices
and ensuring monetary stability. He could not and, indeed,
would not second guess the market. He consistently
sidestepped the thorny issues of just how destabilizing to
the economy the bursting of asset bubbles is and how his
policies may have contributed to the froth.
868
potential GDP. As long as the gap is negative - i.e., whilst
the economy is drowning in spare capacity - inflation lies
dormant. The gap widens if growth is anemic and below
the economy's potential. Thus, growth can actually be
accompanied by deflation.
869
It is universally accepted that inflation leads to the
misallocation of economic resources by distorting the
price signal. Confronted with a general rise in prices,
people get confused. They are not sure whether to
attribute the surging prices to a real spurt in demand, to
speculation, inflation, or what. They often make the
wrong decisions.
870
banks - expect prices to continue to fall. They defer
consumption. This leads to inextricable and all-pervasive
recessions.
871
Akerloff, William Dickens, and George Perry in "The
Macroeconomics of Low Inflation" (Brookings Papers on
Economic Activity, 1996), inflation allows employers to
cut real wages.
872
adjusted - interest rates. If inflation is naught or less - the
authorities are unable to stimulate the economy by
reducing interest rates below the level of inflation.
This has been the case in Japan in the last few years and is
now emerging as a problem in the USA. The Fed - having
cut rates 11 times in the past 14 months and unless it is
willing to expand the money supply aggressively - may be
at the end of its monetary tether. The Bank of Japan has
recently resorted to unvarnished and assertive monetary
expansion in line with what Paul Krugman calls "credible
promise to be irresponsible".
873
The outcomes of inflation, ironically, resemble the
economic recipe of the "Washington consensus"
propagated by the likes of the rabidly anti-inflationary
IMF. As a long term policy, inflation is unsustainable and
would lead to cataclysmic effects. But, in the short run, as
a "shock absorber" and "automatic stabilizer", low
inflation may be a valuable counter-cyclical instrument.
874
Informal Economy (also: Black or Gray
Economy)
Some call it the "unofficial" or "informal" economy,
others call it the "grey economy" but the old name fits it
best: the "black economy". In the USA "black" means
"profitable, healthy" and this is what the black economy
is. Macedonia should count its blessings for having had a
black economy so strong and thriving to see it through the
transition. If Macedonia had to rely only on its official
economy it would have gone bankrupt long ago.
875
foreign exchange outside the banking system or smuggled
abroad (even through the local banking system).
Experience in other countries shows that circa 15% of the
money "floats" in the recipient country and is used to
finance consumption. This should translate to 1 billion
free floating dollars in the hands of the 2 million citizens
of Macedonia. Billions are transferred to the outside world
(mostly to finance additional transactions, some of it to be
saved in foreign banks away from the long hand of the
state). A trickle of money comes back and is "laundered"
through the opening of small legal businesses.
876
dictates of "we know better" institutions such as the IMF.
It fosters economic activity and employs people. It
encourages labour mobility and international trade. Black
economy, in short, is very positive. With the exception of
illegal activities, it does everything that the official
economy does – and, usually, more efficiently.
877
Thus, if the goals are to encourage employment and
economic growth – the black economy should be
welcomed. This is precisely what it does and, by
definition, it does so more efficiently than the
government. The less tax dollars a government has – the
less damage it does. This is an opinion shares by most
economists in the world today. Lower tax rates are an
admission of this fact and a legalization of parts of the
black economy.
878
market. Mercifully, the black economy is out of the reach
of zealous missionaries such as the IMF. It goes its own
way, unnoticed, unreported, unbeknownst, untamed. It
doesn't pay attention to money supply targets (it is much
bigger than the official money supply figure), or to
macroeconomic stability goals. It plods on: doing business
and helping the country to survive the double scourges of
transition and Western piousness and patronizing. As long
as it is there, Macedonia has a real safety net. The
government is advised to turn a blind eye to it for it is a
blessing in disguise.
Operational Recommendations
879
• Onerous labour market regulations;
• Red tape and bureaucracy (which often leads to
corruption);
• Complexity and unpredictability of the tax system.
880
• All retail outlets and places of business should be
required to install – over a period of 3 years – cash
registers with "fiscal brains". These are cash
registers with an embedded chip. The chips are
built to save a trail (detailed list) of all the
transactions in the place of business. Tax
inspectors can pick the chip at random, download
its contents to the tax computers and use it to issue
tax assessments. The information thus gathered
can also be crossed with and compared to
information from other sources (see: "Databases
and Information Gathering"). This can be done
only after the full implementation of the
recommendations in the section titled "Databases
and Information Gathering". I do not regard it as
an effective measure. While it increases business
costs – it is not likely to prevent cash or otherwise
unreported transactions.
881
• Payments in wholesale markets should be done
through a ZPP counter or branch in the wholesale
market itself. Release of the goods and exiting the
physical location of the wholesale market should
be allowed only against presentation of a ZPP
payment slip.
882
• Currently, checks issued to account-holders by
banks are virtually guaranteed by the issuing
banks. This transforms checks into a kind of cash
and checks are used as cash in the economy. To
prevent this situation, it is recommended that all
checks will be payable to the beneficiary only. The
account-holder will be obliged to furnish the bank
with a monthly list of checks he or she issued and
their details (to whom, date, etc.). Checks should
be valid for 5 working days only.
883
• The issuance of checkbook should be made easy
and convenient. Every branch should issue
checkbooks. All the banks and the post office
should respect and accept each other's checks.
Government Tenders
884
should have unrestricted access to ALL the
registers of all the registrars. Thus, they should be
able to find tax evasion easily (ask for sources of
wealth- how did you build this house and buy a
new car if you are earning 500 DM monthly
according to your tax return?).
Law Enforcement
885
equalized (of course, taking into consideration
tenure, education, rank, etc.).
886
• All manufacturers and sellers of food products
(including soft drinks, sweetmeats and candy,
meat products, snacks) should purchase a licence
from the state and be subjected to periodic and
rigorous inspections.
887
• To impose a VAT system. VAT is one the best
instruments against the informal economy because
it tracks the production process throughout a chain
of value added suppliers and manufacturers.
888
• Filing of tax returns – including for the self-
employed – should be only with the PRO and not
with any other body (such as the ZPP).
Legal Issues
889
• To amend the Law on Tax Administration, the
Law on Personal Income Tax and the Law on
Profits Tax as per the recommendations of the IRS
experts (1997-9).
890
be instituted involving a percentage of the intake
(monetary fines levied, goods confiscated, etc.).
891
transaction of export, to apply the world price of
sugar to customs duties, to demand payment of
customs duties in the first customs terminal, to
demand a forwarder's as well as an importer's
guarantee and to require a certificate of origin. The
same goes for Cooking Oil (which – when it is
imported packaged – is often declared as some
other goods).
Public Campaign
892
• The phrase "Gray Economy" should be replaced
by the more accurate phrases "Black Economy" or
"Criminal Economy".
Infrastructure
In the past, if you were to mention the word
"infrastructure", the only mental association would have
been: "physical". Infrastructure comprised roads,
telephone lines, ports, airports and other very tangible
country spanning things. Many items were added to this
category as time went by, but they all preserved the
"tangibility requirement" - even electricity and means of
communication were measured by their physical
manifestations: lines, poles, distances.
893
An investor can always buy a generator and produce his
own electricity - but he can never enact laws unilaterally.
The country's denizens are bound to encounter the law (or
resort to it) sometime in their lives, even if they never
travel on a road or use a telephone.
894
This is really quite reasonable. If the workforce is not
educated, it will not be keen or qualified to manipulate
data and symbols. It will buy less computers, use the
Internet less, bank less and so on. This, in turn, will
reduce the need for phone lines, office buildings and so
forth. There seems to be an "infrastructure multiplier" at
work here.
895
submitted from the world over. Rarely does a local firm
outbids its better financed, better equipped and better
motivated first world rivals.
896
The interests of the host country are a secondary
consideration.
897
reflect other, unrelated, issues, then they are distorted and,
in turn, distort economic activity.
898
The most famous example are toll roads, often constructed
by the private sector.
899
The country must open its markets to domestic and
foreign competition by de-regulating. It must dismantle
trade barriers : tariffs, quotas, restrictions, anti-investment
regulations, restrictive standardization and so on.
Competition both lowers the costs of infrastructure and
improves its quality, as rival firms strive to supply more
value at a lower price.
Innovation
On 18 June business people across the UK took part in
Living Innovation 2002. The extravaganza included a
national broadcast linkup from the Eden Project in
Cornwall and satellite-televised interviews with successful
innovators.
900
Innovation occurs even in the most backward societies
and in the hardest of times. It is thus, too often, taken for
granted. But the intensity, extent, and practicality of
innovation can be fine-tuned. Appropriate policies, the
right environment, incentives, functional and risk seeking
capital markets, or a skillful and committed Diaspora -
can all enhance and channel innovation.
901
But all these worthy efforts ignore what James O'Toole
called in "Leading Change" - "the ideology of comfort and
the tyranny of custom." The much quoted Austrian
economist, Joseph Schumpeter coined the phrase "creative
destruction". Together with its twin - "disruptive
technologies" - it came to be the mantra of the now
defunct "New Economy".
902
In a new tome titled "The Free-Market Innovation
Machine", William Baumol of Princeton University
claims that only capitalism guarantees growth through a
steady flow of innovation:
903
Very few inventions have forced "established companies
from their dominant market positions" as the "The
Economist" put it recently. Moreover, most novelties are
spawned by established companies. The single, tortured,
and misunderstood inventor working on a shoestring
budget in his garage - is a mythical relic of 18th century
Romanticism.
904
Two good places to study routine innovation are the
design studio and the financial markets.
905
Financial innovation is methodical and product-centric.
The resulting trade in pioneering products, such as all
manner of derivatives, has expanded 20-fold between
1986 and 1999, when annual trading volume exceeded 13
trillion dollar.
906
the "Journal of Applied Corporate Finance" the various
phases of the market-buttressed spiral of financial
innovation thus:
907
management consultant, rendered, in the same tome, the
same lesson more verbosely: "The only sustainable
competitive advantage comes from out-innovating the
competition."
908
As expected, the study found that productivity
performance varies across countries reflecting their ability
to reach and then shift the technological frontier - a direct
outcome of aggregate innovative effort.
909
... Maturing technology can quickly become de-skilled as
automated tools get developed so designers can harness
the technology's power without having to understand its
inner workings. The more that happens, the more
engineers closest to the technology become incapable of
contributing improvements to it. And without such user
input, a technology can quickly ossify."
910
It placed great power in the hands of the end-user, be it an
executive, a household, or an individual. It reversed the
trends of centralization and hierarchical stratification
wrought by the Industrial Revolution. From
microprocessor to micropower - an enormous centrifugal
shift is underway. Power percolates back to the people.
911
"local
plant breeders and growers develop the foods they think
best ... CAMBIA (the institute he founded) has resisted
the lure of exclusive licences and shareholder investment,
because it wants its work to be freely available and widely
used". This may well foretell the shape of things to come.
912
vocation (most of them rock stars who own their labels -
George Michael had to fight Sony to do just that) and very
few actors come close to deriving subsistence level
income from their profession. All these can no longer be
thought of as mostly creative people. Forced to defend
their intellectual property rights and the interests of Big
Money, Madonna, Michael Jackson, Schwarzenegger and
Grisham are businessmen at least as much as they are
artists.
This is the theory. But the facts are tellingly different. The
less the cost of production (brought down by digital
technologies) - the fiercer the battle against piracy. The
bigger the market - the more pressure is applied to clamp
down on samizdat entrepreneurs.
913
Governments, from China to Macedonia, are introducing
intellectual property laws (under pressure from rich world
countries) and enforcing them belatedly. But where one
factory is closed on shore (as has been the case in
mainland China) - two sprout off shore (as is the case in
Hong Kong and in Bulgaria).
But this defies logic: the market today is global, the costs
of production are lower (with the exception of the music
and film industries), the marketing channels more
numerous (half of the income of movie studios emanates
from video cassette sales), the speedy recouping of the
investment virtually guaranteed. Moreover, piracy thrives
in very poor markets in which the population would
anyhow not have paid the legal price. The illegal product
is inferior to the legal copy (it comes with no literature,
warranties or support). So why should the big
manufacturers, publishing houses, record companies,
software companies and fashion houses worry?
914
market, the more sophisticated the sales and marketing
techniques, the bigger the financial stakes - the larger
loomed the issue of intellectual property. It spread from
machinery to designs, processes, books, newspapers, any
printed matter, works of art and music, films (which, at
their beginning were not considered art), software,
software embedded in hardware, processes, business
methods, and even unto genetic material.
915
discretionary differential pricing (as pharmaceutical
companies were forced to do in Brazil and South Africa).
A Macedonian with an average monthly income of 160
USD clearly cannot afford to buy the Encyclopaedia
Encarta Deluxe. In America, 50 USD is the income
generated in 4 hours of an average job. In Macedonian
terms, therefore, the Encarta is 20 times more expensive.
Either the price should be lowered in the Macedonian
market - or an average world price should be fixed which
will reflect an average global purchasing power.
916
are virtually nil. Web pages are hosted free of charge, and
authoring and publishing software tools are incorporated
in most word processors and browser applications. As the
Internet acquires more impressive sound and video
capabilities it will proceed to threaten the monopoly of the
record companies, the movie studios and so on.
917
campaign, the distribution, and the sales that determine
the economic outcome.
918
But they are faced with three inexorable processes which
are likely to render their efforts vain:
Disintermediation
919
obsolete. The internet also provides a venue for the
marketing of niche products and reduces the barriers to
entry previously imposed by the need to engage in costly
marketing ("branding") campaigns and manufacturing
activities.
Market Fragmentation
920
The jury in the trial of ElcomSoft in a federal court in San
Jose, California, are continuing their deliberations today.
They are asked to determine whether the Russian software
development firm has knowingly and intentionally
violated the much decried 1998 Digital Millennium
Copyright Act (DMCA). They have heard testimonies
from Dmitry Sklyarov, the Russian programmer whose
arrest last year at the DefCon hackers' conference in Las
Vegas led to the proceedings and from Vladimir Katalov,
ElcomSoft's general director.
The case deserves all the attention it got and more so. It
involves the most fundamental issues of the digital age:
What constitutes intellectual property? Should the dual
freedoms of speech and research be constrained by
commercial interests? Is innovation fostered by securing
the creators' economic benefits from their creations?
921
Is the Internet covered by national law - an American
statute, for instance - and can such edicts apply
extraterritorially? What if two jurisprudential systems
disagree - which one prevails? Should easily reproducible
digital content enjoy enhanced legal protections, ignoring
previous practices pertaining to other types of intellectual
assets?
922
the Computer Security Institute, and the Association of
Shareware Professionals (ASP). It is also a Microsoft
Independent Software Vendor (ISV) partner. Its software
products consistently win awards and plaudits and have
been sold in more than 80 countries. Its online guestbook
is overflowing with compliments and expressions of
unmitigated support and commiseration.
923
(Sklyarov) wrote a program used to decrypt e-books
encrypted with Adobe's program."
924
CompuLenta, an online resource covering the Russian and
global computer industry, said last year that Sklyarov
"may be contemplating" lawsuits against these media.
But Microsoft may need that hoard. The battle is far from
over. The European Commission, though much weakened
925
by recent European Court of First Instance rulings against
its competition commissioner, Mario Monti, can fine the
company up to one tenth its worldwide turnover if it finds
against it. Microsoft is being investigated by the European
watchdog for anti-competitive practices now threatening
to spread into the high-end server software and digital
media markets.
926
According to the Yugoslav newspaper Danas, Microsoft
Yugoslavia has developed versions of Windows and
Office in Serbian, replete with a spell-checker. There are
c. 1 million computers in Yugoslavia. The company
undertook, last year, to revamp the Yugoslav labyrinthine
health, education, customs and tax systems. It also sent
representatives to a delegation of businessmen that visited
Bosnia-Herzegovina in February.
927
Microsoft's computer network and absconded with
invaluable source codes. These are believed to be now
also in the possession of the FSB, the chief successor to
Russia's notorious KGB.
928
International Trade
A British politician, Richard Cobden once (1857) wrote:
929
This, obviously, has the beneficial effect of increased
employment. Export oriented industries in economies in
transition are labour intensive. The more the country
exports - the more its industries employ. This equation led
some economists to say that a country exports its
unemployment when it exports products. Every product
contains a component of labour. When someone buys an
imported product - he really buys the labour invested in
this product, among other inputs. See the Technical
Appendix for more.
930
Free trade assists the economies of all players. It allows
them to optimize the allocation of their (scarce) economic
resources and, thus, maximize national incomes.
931
environment, heavily isolated by regulations, customs,
duties, quotas, tariffs and discriminating standards - to
completely free trade in minute, well measured steps. The
influence on local industries, the level of employment, the
national foreign exchange reserves, interest rates, and
many other parameters - economic as well as social -
should be gauged regularly to prevent unnecessary
shocks. But these monitoring and fine tuning should not
serve as fig leaf, they should not be an excuse to prevent
or delay the freeing of trade. The country must,
unequivocally, announce its plans and intentions, replete
with timetables and steps to be adopted. And the country
must stick by its plans - and not succumb to the inevitable
and forceful demands of special interest groups.
932
the appropriate legislation is lacking, courts are slow,
ignorant, and indecisive, law enforcement agencies are
immature and uncertain of their authorities and how to
exercise them. Some countries are outright xenophobic.
This is not conducive to foreign investment.
933
The same is true for trading. Japan and Israel are two
prime examples of extremely successful government
involvement in determining national priorities and in
pursuing them (the current slump in Japan
notwithstanding). The all powerful Ministry of Industry
and Trade (MITI) in Japan virtually dictated what should
be done, where, with whom and how for decades. Israel
actively encourages the formation of hi-tech, labour-poor,
high value added industries. But both governments
recognized the limits of their intervention, and the
difference between advice, incentives and coercion.
934
become a (geographical and mental) bridge between East
(Europe) and West (Europe). They adopted the Western
mentality, Western institutions and Western legislation
regarding investments, banking and finance. They
emphasized their roles as transit countries in the best
sense of the word: having a lot to contribute within the
process of transit.
TECHNICAL APPENDIX
Situation I
935
a. An overvalued currency;
b. Low inflation or deflation as prices and wages
decrease to restore competitiveness.
In other words:
936
Following the export transaction, the importing country
will have:
a. An appreciating currency;
b. Deflation or low inflation;
c. Higher unemployment.
Situation II
a. An undervalued currency;
b. High inflation as prices and wages increase (to
restore equitable distribution of income).
937
In other words:
Investors, Classification of
In the not so distant past, there was little difference
between financial and strategic investors. Investors of all
colors sought to safeguard their investment by taking over
as many management functions as they could.
938
Additionally, investments were small and shareholders
few. A firm resembled a household and the number of
people involved – in ownership and in management – was
correspondingly limited. People invested in industries
they were acquainted with first hand.
939
is short term: an "exit strategy" is sought as soon as
feasible. For "exit strategy" read quick profits. The
financial investor is always on the lookout, searching for
willing buyers for his stake. The stock exchange is a
popular exit strategy. The financial investor has little
interest in the company's management. Optimally, his
money buys for him not only a good product and a good
market, but also a good management. But his
interpretation of the rolls and functions of "good
management" are very different to that offered by the
strategic investor. The financial investor is satisfied with a
management team which maximizes value. The price of
his shares is the most important indication of success.
This is "bottom line" short termism which also
characterizes operators in the capital markets. Invested in
so many ventures and companies, the financial investor
has no interest, nor the resources to get seriously involved
in any one of them. Micro-management is left to others -
but, in many cases, so is macro-management. The
financial investor participates in quarterly or annual
general shareholders meetings. This is the extent of its
involvement.
940
balance between financial investors and strategic investors
is shifting in favour of the latter. People understand that
money is abundant and what is in short supply is good
management. Given the ability to create a brand, to
generate profits, to issue new products and to acquire new
clients - money is abundant.
Financial Management
941
3. To timely, regularly and duly prepare and present
to the Board of Directors financial statements and
reports as required by all pertinent laws and
regulations in the territories of the operations of
the firm and as deemed necessary and demanded
from time to time by the Board of Directors of the
Firm.
942
brokers, the banking system and other financial
venues.
943
3. To analyse receivables and collectibles on a
regular and timely basis.
944
4. The provision of corporate guarantees and letters
of comfort to suppliers;
5. The planning and erecting of the various sites,
structures, buildings, premises, factories, etc.;
6. The planning and implementation of line
connections, computer network connections,
protocols, solving issues of compatibility
(hardware and software, etc.);
7. Project planning, implementation and supervision.
945
4. Special events, sponsorships, collaboration with
businesses.
946
promotion ideas which crystallized into a new conception
of the business.
Technology
947
conducted at its sole expense and includes tours of its
facilities abroad.
948
outside investors can resolve the dilemma. Outside
investors are not emotionally involved. They may be less
visionary – but also more experienced.
Iran, Economy of
Iran's porous border with Afghanistan is almost 600 miles
(1000 km) long. No one knows for sure how many
Afghani refugees crossed it in the last 20 years, but well
over 2 million would be a fair estimate. Now that Iran
transformed all newcomers into illegal aliens, thousands
are crossing the border stealthily, joining families and
former neighbors in Mashhad and other cities. Subject to
US-led sanctions, Iran shouldered the multi-billion dollar
burden of feeding, clothing, and employing past refugees
out of its own dwindling resources. The current conflict is
no different. Aid agencies, spearheaded by the World
Food Program, are withdrawing their mountains of
supplies from Iran's border. Where there are no official
refugees, they say, there can be no aid.
949
decision making processes are malignantly politicized and
centralized. Its population (especially the women and its
minorities) are oppressed by a self-serving, inanely
retrograde, clerical establishment. Its reform movement
and rump of free press are hobbled by a vicious judiciary
and a fractured clergy in a fully theocratic country and
terrified by the social costs of a genuine overhaul of the
economy. Khatami (Iran's popular President), for instance,
shows very little interest in matters economic. The
Council of Guardians shot down every legislative effort to
encourage foreign investments by extending property
rights, though it let Iran apply to the WTO (its application
is still blocked by the USA) and accede to the New York
Convention (UN convention on awards granted in foreign
arbitration). Iran is an economic zombie, kept alive with
infusions of rising oil revenues - the serendipitous result
of a global surge in oil prices.
Rumors are that, for its tacit collaboration with the USA
in its anti-terror campaign, Iran will be rewarded with the
long overdue suspension of US sanctions against non-US
investors in Iran's oil industry (under the 1996 Iran/Lybia
Sanctions Act renewed in July this year). The USA will
also waive its resistance to Iranian accession to the WTO.
Last year, Madeleine Albright, the then Secretary of State,
suspended or cancelled a few minor sanctions (mainly
against the importation of luxury goods manufactured in
Iran). This coincided with a politically futile trip by
President Khatami to New York. He then proceeded to
China and negotiated a raft of economic collaboration
agreements with its leadership.
The rumors may be true this time. But the partial lifting of
some of the sanctions would do little to address Iran's
950
fundamental and structural problems and a lot to highlight
the USA's hitherto self-defeating intransigence.
951
including contracts to upgrade oil rigs and increase
production with Japanese and Italian firms only recently
and, prior to that, with French, Italian, and Malaysian
firms regarding its off-shore fields. Daily output is
predicted to go up by 700,000 barrels, which would bring
Iran's total daily production to 4.4 million barrels.
952
substantially raise GDP per capita (less than $1200). The
stable currency (rial) is propped only by a gush of
inflationary petro-dollars (inflation stands at 14%) as well
as by the planned merger of the official (1700 to the $)
and black market (8000 to the $) rates. Iran's multi-billion
dollar "Stabilization Fund" (the storehouse of its excess
oil revenues) may have helped as well.
953
railways, petrochemicals, and upstream oil and gas). The
fostering of a vibrant private sector and the reinvigoration
of a shareholding middle class, coupled with a drastic
reduction in subsidies for food staples and fuel, were
predicted to yield an average GDP growth of 6% and
750,000 new jobs annually. The overriding concept was
diversification away from oil dependence and into other
industries (such as petrochemicals). Free trade zones were
established as a way to circumvent the constant sabotage
by the implacably xenophobic Council of Guardians.
Even Iran's Ali Khamenei (which carries the North
Korean sounding title of "Supreme Leader") called upon
the clergy to refuse to engage in business activities. "This
is what distinguishes our system from other (systems)" -
he exclaimed (in a speech in Isfahan, November 5, 2001).
Yet, it was the very same Supreme Leader - the head of
the clerical pyramid - who publicly signed into law a
series of economic projects just minutes after his afore-
quoted speech.
954
difference. Perhaps September 11 will change all this.
What the atrocity proved is that we are all inter-dependent
and that New York is no further from Afghanistan than is
refugee-flooded Mashhad.
Iraq, Economy of
The Security Council just approved a tough resolution
calling upon Iraq to disarm or face military action. The
decade-old sanctions regime has provided countries such
as Ukraine, Belarus and the Serb part of Bosnia-
Herzegovina with lucrative commercial opportunities.
According to international and Israeli media, they all
illicitly sold arms and materiel - from active carbon filters
to uranium - to the Iraq's thuggish rulers, though Ukraine
still denies it vehemently.
955
sources in the government. Yugoslav, Czech, Polish, and
formerly East German firms are in the same predicament.
956
Russia and Iraq have confirmed in August that they are
negotiating $40-60 billion worth of cooperation
agreements in the oil, agriculture, chemical products,
pharmaceuticals, fertilizers, irrigation, transportation,
railroads and energy sectors. According to the
Washington Post, some of the 67 10-year accords relate to
oil exploration in Iraq's western desert. An Iraqi
delegation, headed by the minister of military industry,
visited Belarus last month in an effort to conclude a
similar economic package. But such contracts are unlikely
to be materialized as long as the sanctions remain intact.
957
its list of accredited suppliers under the oil-for-food
program.
958
certain price for crude, Russia's domestic fields are not
worth developing.
959
But this is a tautology. If America's reliance on Middle
Eastern oil is non-existent - why would it want to risk
lives and squander resources in the region at all? Why
would it drive up the price of oil it consumes with its
belligerent talk and coalition-building? Why would it
fritter away the unprecedented upswell of goodwill that
followed the atrocities in September 2001?
960
America's domestic oil industry. Securing the flow of
Iraqi crude is simply too insignificant to warrant such an
exertion.
961
2000. The Department of Energy's report about Iraq
concludes:
962
with European, Indian, Turkish and Chinese oil
behemoths. It would be years before Iraqi crude in
meaningful quantities hits the markets and then only after
tens of billions of dollars have been literally sunk into the
ground. Not a very convincing business plan.
963
where oil is sometimes just 600 meters deep and swathes
of land are immersed in it. In short: American oil majors
are looking abroad for their long-term survival. Iraq
always featured high on their list.
964
balance of $2.937 trillion as the difference between costs
and sales revenues. Assuming a 50/50 split with the
government and further assuming a production period of
50 years, the company profits per year would run to $29
billion. That huge sum is two-thirds of the $44 billion
total profits earned by the world’s five major oil
companies combined in 2001. If higher assumptions are
used, annual profits might soar to as much as $50 billion
per year."
965
international tendering and invite the United Nations to
oversee Iraq's reconstruction. It should induce other
countries of the world to view Iraq as a preferred
destination of foreign direct investment and trade.
966
humanitarian goods, including $2.4 billion worth of food,
are "ready to be imported into Iraq". The program's
budget is c. $10 billion a year.
967
billion. Iraqi Vice President, Taha Yassin Ramadan,
scathingly criticized Annan yesterday for seeking to
expand the exclusive role of the U.N. in administering the
oil-for-food program. He said the proposal was "based on
a colonialist, racist and despicable illusion that pushes the
despot oppressors in Washington and London towards
eliminating the state of Iraq from existence".
968
Negroponte reiterated Washington's mantra that the
United States "will ensure that Iraq's natural resources,
including its oil, are used entirely for the benefit of the
Iraqi people". But Annan did not sound convinced when
he exhorted the USA and the United Kingdom in the letter
he delivered last week to the Security Council:
969
the populace to last them through August. Even non-
governmental organizations in the field claim that no
shortages are to be expected until May. So, what's the
hurry? - wonder the authorities aloud, as they cower in
their offices, awaiting the next, inevitable, blast.
970
Iraqis were reduced to agonizing, humiliating and
sometimes life-threatening penury.
971
The UN Human Development Index has chronicled the
precipitous decline of Iraq's ranking to its 127th rung. The
New York-based Centre for Economic and Social Rights
says that "Iraqis have been extremely isolated from the
outside world for 12 years. The mental, physical and
educational development of an entire generation has been
affected adversely by the extraordinary trauma of war and
sanctions".
972
products. The United States estimates that the dictator and
his close, clannish circle have secreted away more than $6
billion in illicit commissions on oil sales alone.
973
But the bombed and starved denizens of Iraq may be
holding a different viewpoint. Quoted in The Californian,
Terry Burke and Alan Richards, professors at the
University of California, Santa Cruz, noted that "the
invasion and air attacks are forging intense hatred against
the United States that will undermine any hope of
gracefully replacing Saddam Hussein's dictatorship".
974
often the cause of the former. They were forced to flee
Arab-nationalist Iraq in 1941-1951, following the rise of
Nazism and, later, the establishment of the State of Israel.
975
"It would be a mistake to short-circuit the domestic
political contest by prematurely picking a winner. Under
either of these scenarios, the bulk of Iraqis inside Iraq,
Sunni and Shiite, Arab, Kurd and others, who have been
brutally disenfranchised for over three decades, would
remain voiceless.''
The exile groups are out of touch with local realities and,
as the Washington Times notes, compromised in the eyes
of the Iraqis by their extensive contacts with the CIA and
the USA, their political amateurism and their all-pervasive
venality.
976
homeland by invading forces, regardless of their
provenance. Many bitterly recall the Shiite rebellion in
1991 when a policy reversal of the United States allowed
the dictator to bloodily suppress the uprising.
977
distributing humanitarian aid, and rebuilding
infrastructure."
978
And then there is the hoped-for reversal of the last four
decades of capital flight. Iraqi merchants, traders, military
officers, members of the security services, politicians,
bureaucrats and professionals are thought to have secreted
away, out of the reach of the rapacious regime, some $20-
30 billion. Some of it is bound to come back and inject the
dilapidated economy with much needed liquidity and
impetus.
979
A day earlier, Paul Wolfowitz, the American Deputy
Defense Secretary, prompted the French, Russian and
German governments to write off Iraq's debts to them, so
as to facilitate the recovery of the debtor's $15 to 25
billion a year economy. He echoed U.S. Treasury
Secretary John Snow who suggested, in an interview to
Fox News Channel, that Iraq's debts should be discarded
even as was the dictator who ran them up.
980
era debt, $48.4 billion were accrued in post-Soviet times
and the rest is comprised of various bonds and
obligations.
981
Bank, a twin institution, plumps for a bilateral resolution
of this novel controversy.
Iraq owes the IMF and the World Bank a mere $1.1
billion. But there is an abundance of unpaid high priority
trade credits and bilateral loans. Private banks and
commercial firms come a dismal third. Moreover,
following Nigeria's example, Iraq may choose to ignore
Paris Club creditors and deploy its scarce resources to
curry favor with those willing and able to extend new
financing - namely, private financial intermediaries.
982
now), because the borrower's failure to respond within ten
working days can be taken as agreement."
983
Turkey, Jordan, Morocco, Hungary, India, Bulgaria,
Poland, and Egypt.
984
Nor are such designs unique to sovereign polities.
According to Dow Jones, Hyundai hopes to recover $1.1
billion through a combination of crude oil and
reconstruction projects. During the Clinton administration,
American creditors almost helped themselves to between
$1.3 and $1.7 billion of frozen Iraqi funds with the
assistance of the U.S. Foreign Claims Settlement
Commission. Luckily for the looming new Iraqi
government, the legislation languished in acrimony.
985
fortnight ago the House of Representatives approved a
non-binding amendment to the supplementary budget law
calling upon the administration to exclude French,
Russian, German and Syrian companies from
reconstruction contracts and to bar their access to
information about projects in postbellum Iraq.
986
anti-tank Kornet missile manufacturer, KBP Tula - have
also been fingered for supplying Iraq with sensitive
military technologies.
987
According to Rosbalt, every drop of $1 in oil prices
translates into annual losses to the Russian treasury of $2
billion. Aggregate corporate profits rose in January by one
fifth year on year, mostly on the strength of surging crude
quotes. The Economist Intelligence Unit expects this
year's GDP to grow by 3.8 percent. Foreign exchange
reserves are stable at $54 billion.
988
defrauding the Samara region of $13 million while he was
director of LogoVaz in 1994-5.
989
Russia aspires to be America, not France. Its business
ethos, grasp of realpolitik, nuclear arsenal and evolving
values place it firmly in the Anglo-Saxon camp. Its
dalliance with France and Germany is hardly an
elopement. Had Russia been courted more aggressively by
Secretary of State, Colin Powell and its concerns shown
more respect by the American administration, it would
have tilted differently. It is a lesson to be memorized in
Washington.
990
technological backwardness, of destruction and
accelerated degradation of the infrastructure, and of the
increased environmental damage of short-term palliative
solutions need also be mentioned."
991
program then administered by the UN on behalf of the
Iraqi government and money from Turkish investors.
But not all was rosy in what used to be the "safe zones".
Irrigation projects, electricity, the telephone system,
schools, teacher training, health provision, hospitals,
clinics, roads, and public transport - were (and still are) all
in dire need of cash infusions. This was largely Saddam's
doing. UPI reported in 2002 that Arab employees of the
UN were pressured by Saddam Hussein "to do his
bidding" in the north. Iraq refused to collaborate with UN
authorities to release from its warehouses heavy
equipment destined for the Kurdish parts, reported Radio
Free Europe.
992
US partiality towards Israel. It also generously supported
the families of Palestinian "martyr" suicide bombers with
grants of $25,000 plus another $25,000 per each house
demolished in the Jenin refugee camp by the Israelis.
Smaller amounts were distributed as disability and
recuperation benefits, mostly through the "Arab
Liberation Front", reported the "Daily Telegraph".
993
a mere $53 billion in 2001. The EIU also forecasted a 2
percent drop in GDP in 2002 - but a growth of 6 percent
in 2003 commensurate with a recovery in oil production.
994
UN reports consistently accused Iraq of under-utilizing
the funds at its disposal.
995
cents per barrel have accrued in these illicit accounts since
December 1, 2000.
996
In a letter addressed to the Acting Chairman of the
Security Council's 661 sanctions committee on 1 August
2002, the Executive Director of the Iraq Programme,
Benon Sevan, expressed "grave concern" regarding the
cumulative shortfall in funds and warned of "very serious
consequences on the humanitarian situation in Iraq".
997
port of Banias - in breach of UN Resolution 986 (i.e., the
oil for food program).
998
the rogue state. Egypt allowed more than 90 of its
companies to participate in a commercial fair in Baghdad
in April 2002.
999
According to Stratfor, prior to the war, Iraq still owed
Russia $10-12 billion for Soviet era materiel. But Iraq was
open about its conditioning of future orders on Russian
anti-American assertiveness. Similarly, it had cut wheat
imports from Australia by half due to the latter's
unequivocal support of American policies.
1000
brought on by the war. Iraqi citizens must be holding their
breath.
Israel, Economy of
A Danish firm, SID, as it was canceling an order with an
Israeli supplier, dispatched to it this unusually blunt
message: "When the soldiers of the Israeli army brutalize
the areas of the Palestinians ... we do not feel it is the time
to do business with your country. We hope this ugly war
will end soon." Consumer boycotts of Israeli products are
being touted - often through the Internet - from Belgrade
to Moscow and from Copenhagen to Brussels.
1001
shipment of spare parts for the Merkava tank. Other EU
countries banned the export to Israel of all military gear
that can be used against civilians.
1002
capital adequacy ratio of 9 percent - and misreported it in
2002. Small businesses constitute one fifth of the asset
portfolio and two fifths of the operating profit of Bank
Leumi - Israel's second largest bank. In 2001, bad debt
allowances in the banking sector almost doubled to $1
billion.
1003
Dan Gillerman, the affable then president of the
Federation of Israel's Chambers of Commerce, warned
against raising taxes:
1004
expect higher inflation and accelerated depreciation. The
New Israeli Shekel has depreciated by almost 15 percent
in the last few years.
1005
The IMF urges the Israeli authorities to tighten fiscal and
ease monetary policy. Hitherto - the December 2001
economic package notwithstanding - they have done
exactly the opposite. The IMF blames the shekel's
precipitous depreciation on Bank of Israel's sudden
departure from gradualist policies when it hastily shaved 2
percentage points off interest rates in 2001.
1006
But with all its woes, Israel is still the undisputed regional
economic Gulliver. Its cumulative net capital inflow, in
excess of $110 billion, outweighs its GDP. It has more
foreign exchange reserves per capita than Japan. Its GDP
per capita is a European $16,000.
1007
is at least 40 percent. Half the population subsists on less
than $2 a day - the official poverty line.
1008
the official release of the much-leaked "road map" for
peace in the Middle East propounded by the "Quartet" -
the USA, UK, United Nations and Russia. A series of
disclosures in the Israeli media made it equally evident
that prime minister Ariel Sharon's crew still beg to differ
from substantial portions of the foursome's vision.
Instead, Sharon has come up with his Gaza Withdrawal
First plan and his newfound amity with the post-Arafat
Palestinian Authority.
1009
quarters in the same period due to augmented loan loss
provisions.
1010
In a reversal of decades of tradition, collective wage
agreements will be abolished. The finance ministry is
trying to reduce the spiraling budget deficit - now pegged
at more than 6 percent of GDP - by $2 billion to c. 3.5-4.5
percent of GDP, depending on one's propensity for
optimism.
1011
employees in the business sector, 61,000 were fired since
January 2001.
1012
lost their jobs and GDP declined by two fifths in the first
two years of the intifada.
1013
The current account deficit, prognosticated the EIU in
2003, should fall to 1.7 percent of a GDP growing, in real
terms, by 3.1 percent in 2004 (compared to a rosy
scenario of 0.3 percent in 2003). This proved to be
unrealistic. Exports have sharply plunged to less than $28
billion in 2002, two fifths of it to the USA and a similar
proportion to the European Union.
1014
But visionaries like Stef Wertheimer, an Israeli industrial
tycoon, talk wistfully of a regional "mini" Marshall Plan.
It calls for massive infusions of aid and credit, overseen
by the International Monetary Fund (IMF) and the World
Bank, into the eastern Mediterranean - Jordan, Turkey, the
Palestinian Authority and Israel's minorities - at least until
GDP per capita throughout the region surges fivefold, to
$6,000 per year.
1015
change of heart, Hamas, the militant Palestinian
organization, vowed to compete in future parliamentary
elections and, thus, potentially, to repeat its impressive
showing on the municipal level.
1016
Still, such sentiments aside, in the long-run, Muslims are
the natural allies of the United States in its role as a
budding Asian power, largely supplanting the former
Soviet Union. Thus, the threat of militant Islam is unlikely
to cement a long term American-Israeli confluence of
interests.
1017
Wariness of Israel in both Europe and the Arab world was
heightened in April 2003, when then National
Infrastructure Minister, Yosef Paritzky, saw fit to inform
the Israeli daily, Ha'aretz, about a plan to revive a long
defunct oil pipeline running from Mosul to Haifa, a
northern seaport. This American-blessed joint venture will
reduce Israel's dependence on Russian crude and the cost
of its energy imports. It would also require a regime
change in Syria, whose territory the pipeline crosses.
1018
For well over a decade afterwards, Israel was barred from
direct purchases of American weaponry, securing materiel
through West German intermediaries and from France.
After the Six Day War, French President Charles de
Gaulle imposed an arms embargo on the country. Faced
with Arab intransigence and virulent enmity towards
Israel in the Khartoum Summit in 1967, the USA stepped
in and has since become Israel's largest military supplier
and staunchest geopolitical supporter.
Yet, even this loyal ally, the United States, has come close
to imposing sanctions on Israel on a few occasions.
1019
sanctions combined with European ones may prove
onerous.
1020
cahoots with the lunatic fringes of Christian and Jewish
fundamentalism. Yet, if sanctions cause a recalcitrant
Israeli right to trade occupied land for a hitherto elusive
peace, history may yet judge them to be a blessing in
disguise.
1021
products) fell by 52% to 1996 levels (vs. an overall fall of
28%, though the trend has accelerated in the fourth
quarter). Demand for hi-tech managers and programmers
was down by c. 64%. Manpower attributed these
developments to September 11, global recession, the
collapse in the equity markets, and the 15 months' long
Intifada. Very few foreign investors bothered to attend
Ernst and Young's Journey 2001 October conference.
Even its sponsor, Silicon Bank of California, didn't show
up.
1022
proceeds when they convert their foreign exchange
revenues and by allowing them to discount their products.
1023
According to the Money Tree Survey, conducted by a
leading Israeli accountancy firm, Kesselman & Kesselman
PriceWaterHouseCoopers (PwC) and quoted in Israel's
business daily, "Globes", there is a shift from software,
Internet, and the biomedical sciences back to the hitherto
discredited telecommunications, semiconductors, and
networking fields. Almost no seed money is available -
but despite the Internet's fall from grace, financing of
Internet-related ventures (mainly software and data
maintenance) remained unchanged compared to the third
quarter of 2001 (though more than 70% down on 2000).
The average size of a typical VC investment is down 50%
on 2000 - to $3.6 million (up from $2.8 million in Q3
2001).
1024
approved and selling, no small coup for Israel's
pharmaceutical minions. In 2001, the number of deals
declined - but the average size of the deals increased.
Biotechnology may well Israel's old-new horizon.
Jackson-Vanik Amendment
The State of Israel was in the grip of anti-Soviet jingoism
in the early 1970's. "Let My People Go!" - screamed
umpteen unfurled banners, stickers, and billboards.
Russian dissidents were cast as the latest link in a chain of
Jewish martyrdom. Russian immigrants were welcomed
by sweating ministers on the sizzling tarmac of the
decrepit Lod Airport. Russia imposed exorbitant "diploma
taxes" (reimbursement of educational subsidies) on
emigrating Jews, thus exacerbating the outcry.
1025
privileges to "non-market economy" countries with a
dismal record of human rights - chiefly the right to freely
and inexpensively emigrate.
1026
And, to Senator Henry Jackson, one of the two sponsors
of the bill:
"Dear Scoop,
1027
American Jews - though sympathetic - would like
guarantees from Russia, in view of a rising wave of anti-
Semitism, that Jews in its territory will go unharmed.
They also demand the right of unhindered and
unsupervised self-organization for Jewish communities
and a return of Jewish communal property confiscated by
the Soviet regime.
1028
Senator Joseph Biden, Chairman of the Senate Foreign
Relations Committee, who represents a major poultry
producing state (Delaware) made these statesmanlike
comments following the session:
1029
BusinessWeek. "It undermines trust." Putin called the law
"notorious".
Justice, Distributive
1030
The public outcry against executive pay and compensation
followed disclosures of insider trading, double dealing,
and outright fraud. But even honest and productive
entrepreneurs often earn more money in one year than
Albert Einstein did in his entire life. This strikes many -
especially academics - as unfair. Surely Einstein's
contributions to human knowledge and welfare far exceed
anything ever accomplished by sundry businessmen?
Fortunately, this discrepancy is cause for constructive
jealousy, emulation, and imitation. It can, however, lead
to an orgy of destructive and self-ruinous envy.
1031
argued, though, that all modes of exclusive ownership
aggravate other people's situation. As far as everyone, bar
the entrepreneur, are concerned, exclusivity also prevents
a more advantageous distribution of income and wealth.
1032
It all harks back to scarcity of resources - land, money,
raw materials, manpower, creative brains. Those who can
afford to do so, hoard resources to offset anxiety
regarding future uncertainty. Others wallow in paucity.
The distribution of means is thus skewed. "Distributive
justice" deals with the just allocation of scarce resources.
1033
A succession of societies and cultures discriminated
against the ignorant, criminals, atheists, females,
homosexuals, members of ethnic, religious, or racial
groups, the old, the immigrant, and the poor. Communism
- ostensibly a strict egalitarian idea - foundered because it
failed to reconcile strict equality with economic and
psychological realities within an impatient timetable.
1034
does not eliminate the necessity to negotiate an "exchange
rate". It does not prevent market failures. In other words:
money is not an index. It is merely a medium of exchange
and a store of value. The index - as expressed in terms of
money - is the underlying agreement regarding the values
of resources in terms of other resources (i.e., their relative
values).
1035
month, or fiscal year). In many countries, the law dictates
which portion of one's income must be saved and, by
implication, how much can be consumed. This conflicts
with basic rights like the freedom to make economic
choices.
1036
auction, for resources that best fit that person's life plan,
goals and preferences.
1037
outcome. Robert Nozick "Entitlement Theory" proposed
in 1974 is based on this approach.
1038
K
Kleptocracy
Human vice is the most certain thing after death and taxes,
to paraphrase Benjamin Franklin. The only variety of
economic activity, which will surely survive even a
nuclear holocaust, is bound to be crime. Prostitution,
gambling, drugs and, in general, expressly illegal
activities generate c. 400 billion USD annually to their
perpetrators, thus making crime the third biggest industry
on Earth (after the medical and pharmaceutical
industries).
1039
the scenes through money contributions, outright bribes,
or blackmail) and – through the mechanism of money
laundering – infiltrate slowly the legitimate economy.
1040
always stayed attuned to the market's vibrations and
signals. They changed their product mix and their pricing
to fit fluctuations in demand and supply.
1041
organizations duplicate the state and overtake it, in time.
Schools, clinics, legal assistance, family support, taxation,
the court system, transportation and telecommunication
services, banking and industry – all have a criminal
doppelganger.
To summarize:
1042
the generations in the criminal universities known as jail-
houses and penitentiaries. Roads less travelled, countries
more lenient, passports to be bought, sold, or forged, how
to manuals, classified ads, goods and services on offer and
demand – all feature in this mass media cum educational
(mostly verbal) bulletins. This is the real infrastructure of
crime. As with more mundane occupations, human capital
is what counts.
1043
Moreover, most of the poor economies are also closed
economies. They are the economies of nations
xenophobic, closed to the outside world, with currency
regulations, limitations on foreign ownership, constrained
(instead of free) trade. The vast majority of the populace
of these economic wretches has never been further than
the neighbouring city – let alone outside the borders of
their countries. Freedom of movement is still restricted.
The only ones to have travelled freely – mostly without
the required travel documents – were the criminals. Crime
is international. It involves massive, intricate and
sophisticated operations of export and import, knowledge
of languages, extensive and frequent trips, an intimate
acquaintance with world prices, the international financial
system, demand and supply in various markets, frequent
business negotiations with foreigners and so on. This list
would fit any modern businessman as well. Criminals are
international businessmen. Their connections abroad
coupled with their connections with the various elites
inside their country and coupled with their financial
prowess – made them the first and only true businessmen
of the economies in transition. There simply was no one
else qualified to fulfil this role – and the criminals stepped
in willingly.
1044
opportunities in the Wild East and in the Wild West and
really everywhere else. Morgan, Rockefeller, Pullman,
Vanderbilt – the most ennobled families of latter day
America originated with these rascals. But there is one
important difference between the USA at that time and
Central and Eastern Europe today. A civic culture with
civic values and an aspiration to, ultimately, create a civic
society permeated the popular as well as the high-brow
culture of America. Criminality was regarded as a
shameful stepping stone on the way to an orderly society
of learned, civilized, law-abiding citizens. This cannot be
said about Russia, for instance. The criminal there is, if
anything, admired and emulated. The language of
business in countries in transition is suffused with the
criminal parlance of violence. The next generation is
encouraged to behave similarly because no clear (not to
mention well embedded) alternative is propounded. There
is no – and never was – a civic tradition in these countries,
a Bill of Rights, a veritable Constitution, a modicum of
self rule, a true abolition of classes and nomenclatures.
The future is grim because the past was grim. Used to
being governed by capricious, paranoiac, criminal tyrants
– these nations know no better. The current criminal class
seems to them to be a natural continuation and extension
of generations-long trends. That some criminals are
members of the new political, financial and industrial
elites (and vice versa) – surprises them not.
1045
cronies. Patronage extends to collaborating criminals.
Additionally, the sovereign state is regarded as a means to
extract foreign aid and credits from donors, multilaterals,
and NGOs.
1046
of co-habitation between politicians and criminals. In the
first phase, politicians grope for a new ideological cover
for their opportunism. This is followed by a growing
partnership between the elites and the crime world. A
divergence then occurs. Politicians team up with
legitimacy-seeking, established crime lords. Both groups
benefit from a larger economic pie. They fight against
other, less successful, criminals, who wish to persist in
their old ways. This is low intensity warfare and it
inevitably ends in the triumph of the former over the
latter.
Knowledge
"Knowledge is Power" goes the old German adage. But
power, as any schoolboy knows, always has negative and
positive sides to it. Information exhibits the same duality:
properly provided, it is a positive power of unequalled
strength. Improperly disseminated and presented, it is
nothing short of destructive. The management of the
structure, content, provision and dissemination of
information is, therefore, of paramount importance to a
nation, especially if it is in its infancy (as an independent
state).
1047
all) will be remembered and how. It encompasses not only
the mode of presentation, but also the modules and the
rules of interaction between them (the hermeneutic
principles, the rules of structural interpretation, which is
the result of spatial, syntactic and grammatical
conjunction).
1048
In the economic realm, there are five important axes of
dissemination:
1049
3. From Government to the World – The "World"
here being multilateral institutions, foreign
governments, foreign investors, foreign
competitors and the economic players in general
providing that they are outside the territory of the
information disseminating Government. Again,
any delay, or abstention in the dissemination of
information as well as its distortion
(disinformation and misinformation) will result in
economic outcomes worse that could have been
achieved by a free, prompt, precise and equitable
(=equally available) dissemination of said
information. This is true even where commercial
secrets are involved! It has been proven time and
again that when commercial information is kept
secret – the firm (or Government) that keeps it
hidden is HARMED. The most famous examples
are Apple (which kept its operating system a well-
guarded secret) and IBM (which did not),
Microsoft (which kept its operating system open to
developers of software) and other software
companies (which did not). Recently, Netscape
has decided to provide its source code (the most
important commercial secret of any software
company) free of charge to application developers.
Synergy based on openness seemed to have won
over old habits. A free, unhampered, unbiased
flow of information is a major point of attraction
to foreign investors and a brawny point with the
likes of the IMF and the World Bank. The former,
for instance, lends money more easily to countries,
which maintain a reasonably reliable outflow of
national statistics.
1050
4. From Firms to the World – The virtues of
corporate transparency and of the application of
the properly revealing International Accounting
Standards (IAS, GAAP, or others) need no
evidencing. Today, it is virtually impossible to
raise money, to export, to import, to form joint
ventures, to obtain credits, or to otherwise
collaborate internationally without the existence of
full, unmitigated disclosure. The modern firm (if it
wishes to interact globally) must open itself up
completely and provide timely, full and accurate
information to all. This is a legal must for public
and listed firms the world over (though standards
vary). Transparent accounting practices, clear
ownership structure, available track record and
historical performance records – are sine qua non
in today's financing world.
1051
(some would argue that there is no "necessary
suppression") – constitutes the main edifice of
transparency. The datum or information can be true, but if
it is not perceived to be transparent – it will not be
considered reliable. Think about an anonymous (=non-
transparent) letter versus a signed letter – the latter will be
more readily relied upon (subject to the reliability of the
author, of course).
1052
state explicitly what has been omitted and why
(which is tantamount to including it, in the first
place). A bit of information is embedded in a
context and constantly interacts with it.
Additionally, its various modules and content
elements consistently and constantly interact with
each other. A missing part implies ignorance of
interactions and epiphenomena, which might
crucially alter the interpretation of the information.
Partiality renders information valueless. Needless
to say, that I am talking about RELEVANT parts
of the information. There are many other segments
of it, which are omitted because their influence is
negligible (the idealization process), or because it
is so great that they are common knowledge.
1053
supports it. It is a shorthand version of all the
pertinent data, a stereotype in reverse.
1054
Kosovo, Economy of
Should the United Nations administer Iraq? Is it - as Kofi
Annan, its General Secretary, insists, the best-qualified to
build nations? Or will it act as a bureaucracy out to
perpetuate itself by preventing true transformation and
indigenous rule? Kosovo is a lucrative post for more than
10,000 exorbitantly overpaid international administrators
and perked consultants as well as 40,000 itinerant
peacekeepers.
1055
UNMIK had to spent the first 18 months of its mandate
re-establishing basic services in a land scorched by 78
days of massive bombardment. It also put in place the
rudiments of a municipal administration. A parliament
and presidency followed. Surprisingly resilient, they
survived two - bloodied - elections. The U.N. is planning
to transfer, over the next few months, many of its
"competencies" to the three-party broad coalition in
power. Last month, a transfer council was established to
manage the transition.
1056
economic legislation - it has done more harm than good.
The establishment of workers' councils, for instance,
inhibited the proper management of socially owned
enterprises and rigidified the budding labor market with
dire consequences.
1057
Land ownership is a contentious issue. The privatization
of utilities is a distant dream, despite the creation of the
Kosovo Trust Agency, a convoluted attempt to dispense
of certain assets while skirting the legal no man's land
which is Kosovo.
1058
The roads are potholed and few, the railways derelict.
Fixed line penetration is low, though mobile telephony is
booming. This sorry state was avoidable.
1059
more modern than government in Serbia, Macedonia or
even Bosnia. I think that corruption is not even same at
the level as neighboring countries. Although corruption is
something that can grow very easily, currently it doesn't
seem to be a big obstacle for businesses."
1060
Kosovo teaches us lessons which should be diligently
applied in Iraq. The involvement of a long-term active
military component intended to guarantee basic law and
order is crucial. U.N. administrations are good at
reconstruction, rehabilitation - including humanitarian aid
- and institution-building.
1061
"Kosovo has no oil and one-third of the population of
Baghdad, and it is not interesting for investments ... Iraq
will have an easier time when it comes to political status.
Iraq is, and will remain, a state. It is still not known what
Kosovo's fate will be. Unlike in Kosovo, there will be
both aid and investment in Iraq. The Iraqi people will
decide on the status of their country, whereas the Security
Council, that is to say China and Russia, will decide about
Kosovo."
Kyoto Protocol
The 185 member states of the United Nations Climate
Change Convention met repeatedly since 2003 in order to
contemplate what steps may be needed to implement the
Kyoto protocol, now ratified by more than 130 countries,
including Russia and the European Union. Signatories
1062
have ten years - starting in 2003 - to cut their emissions of
greenhouse gases.
1063
"We must calculate and anticipate the maximum possible
improvement for our own industry so that in a few years
we don't find ourselves purchasing (pollution) quotas.
Russia is currently the world's major supplier of oxygen in
the atmosphere. Other countries are using Russia's
biological resources to develop their industries. The USA
has every possibility to reduce its own emissions but
refuses to do so. It would have been more useful if the
main source of ecological pollution, the United States, had
participated."
1064
It is telling that Romania was unable or unwilling to sell
its emissions to the United Kingdom, Denmark, or the
Netherlands, all three of which host functional emissions-
trading pilot projects. The trading rules are so complex -
certain sectors and gases are excluded and fiendishly
intricate auctions regulate the initial allocation of quotas -
that many potential buyers and sellers prefer to abstain.
1065
According to the Regional Environmental Center for
Central and Eastern Europe, many countries in the region
- including three New Independent States, Ukraine,
Bulgaria, and the Czech Republic - have completed
national climate change action plans. Hungary,
Kazakhstan and Russia are preparing theirs. The BBC
says that Slovenia is working on a program of its own,
though in compliance with the Kyoto requirements.
1066
1067
L
Land Reform
1068
no more. But the agreement enshrined the property rights
of white farmers until 1990 and has, thus, sown the seeds
of the current chaos.
1069
As black population exploded, poverty and repression
combined to give rise to anti-white guerilla movements.
The rest is history. The first post-independence land
reform and resettlement program lasted 17 years, until
1997. It targeted refugees, internally displaced people, and
squatters and its aims were, as Petrunella Chaminuka, a
researcher at SAPES Trust Agrarian Reform Programme
in Zimbabwe, summarizes a 1990 government discussion
paper in the "Workers' Weekly":
1070
commercial interests, the government further exacerbated
the situation by allocating enormous tracts of land to
horticulture, ostrich farming, crocodile farming, ranching
and tourism thus further depleting the anyhow meager
stock of arable acreage.
1071
The government made an election issue out of the much-
heralded reform and the donors delivered far less than
they promised. Acutely aware of this friction, white
farmers declined to offer land for sale.
1072
diatribe his merited crusade for reversing past injustices.
He lashed at the IMF and the World bank, at Britain and
the USA, at white farmers and foreign capital.
Xenophobia - no less that patriotism - is the refuge of the
scoundrel in Africa.
1073
According to "Rural poverty: Commercial farm workers
and Land Reform in Zimbabwe", a paper presented at the
SARPN conference on Land Reform and Poverty
Alleviation in Southern Africa, in June 2001, only about
one third of the most destitute black farm workforce have
been imported as casual and seasonal workers from
neighboring countries.
1074
venal African leadership.
1075
Lebanon, Economy of
1076
war that ended in 1990. The conflict and its aftermath
have plunged Lebanon into a massive usurious public debt
amounting to 180 percent of its gross domestic product, or
$31 billion. Lebanon spends half its budget - about $3
billion - on interest payments.
1077
and departures. But activity in the Port of Beirut dropped,
albeit marginally.
1078
television station owned by Gabriel Murr, a Christian
candidate, was silenced in September 2002 on flimsy legal
grounds.
1079
continuation of American policy will make enemies of all
Arabs and Muslims - 1,400,000,000 Muslims around the
world. Lots of groups will surface, not necessarily al-
Qaida. And they'll be impossible to bring to justice."
1080
Union. In June 2002 it joined the Euro-Mediterranean
Partnership by signing an Association Agreement. It is
thus eligible for free trade in industrial goods by 2010 and
for cuts in tariffs and quotas till then. Lebanon runs a $3
billion trade deficit with the EU.
1081
The phenomenon is so widespread and its social
consequences so damaging that it has acquired the
unflattering nickname workaholism, a combination of the
words "work" and "alcoholism". Family life is disrupted,
intellectual horizons narrow, the consequences to the
workaholic's health are severe: fat, lack of exercise, stress
- all take their lethal toll. Classified as "alpha" types,
workaholics suffer three times as many heart attacks as
their peers.
1082
revolution. True, the bulk of the workforce was still
immobile and affixed to the production floor. But raw
materials and finished products travelled long distances to
faraway markets. Professional services were needed and
the professional manager, the lawyer, the accountant, the
consultant, the trader, the broker - all emerged as both
parasites feeding off the production processes and the
indispensable oil on its cogs.
1083
someone else to continue in an electronic mailbox, for
instance.
1084
But productivity gains made humans redundant. No
amount of retraining could cope with the incredible rate of
technological change. The more technologically advanced
the country - the higher its structural unemployment (i.e.,
the level of unemployment attributable to changes in the
very structure of the market).
1085
instructions what to do, when, with whom and to what
end.
1086
Without workaholics, we would have ended up with
"social" economies, with strong disincentives to work. In
these economies of "collective ownership" people go to
work because they have to. Their main preoccupation is
how to avoid it and to sabotage the workplace. They
harbour negative feelings. Slowly, they wither and die
(professionally) - because no one can live long in hatred
and deceit. Joy is an essential ingredient of survival.
1087
hours a day and, many of them, put in 7 days a week.
More than 80% of the world's population still live this
way. To the majority of people in the developing
countries, work was and is life. They would perceive the
contrast between "work" and "life" to be both artificial
and perplexing. Sure, they dedicate time to their families
and communities. But there is little leisure left to read,
nurture one's hobbies, introspect, or attend classes.
1088
Knowledge is not geography-dependent. It is portable and
cheaply reproduced. The geographical locations of the
participants in the economic interactions of this new age
are transparent and immaterial.
1089
organism. Malignant individualism replaced
communitarianism. Pathological narcissism replaced self-
love and empathy.
1090
Some people enjoy their work so much that it fulfils the
functions normally reserved to leisure time. They are the
workaholics. Others continue to hate work - but feel
disorientated in the new leisure-rich environment. They
are not taught to deal with too much free and unstructured
time, with a lack of clearly delineated framework, without
clear instructions as to what to do, when, with whom, and
to what end.
Liquidity
Large parts of the world today suffer from a severe
liquidity crisis. The famed globalization of the capital
markets seems to confine itself, ever more, to the richer
parts, the more liquid exchanges, the more affluent
geopolitical neighbourhoods. The fad of "emerging
economies" has all but died out. Try telling the
Macedonians about global capital markets: last year, the
whole world invested 8 million USD in their poor
1091
country. Breadwinners earn 300 DM a month on average.
Officially, in excess of one third of the workforce is
unemployed. Small wonder that people do not pay their
bills, employers do not pay salaries, the banking system
has a marked tendency to crash every now and then and
the average real default rate is 50%.
1092
the velocity of money-like products and diminishes their
preponderance, obstructing the expansion of economic
activity. An even more malignant variant is the barter
economy. Goods and services are swapped on a no-cash
basis. It is money that generates new value added (by
facilitating the introduction of new technology, to mention
but one function). In the absence of money, the economy
stagnates, degenerates and, finally, collapses because of
massive mismatches of supply and demand aggregates
and of the types of goods and services on offer and
demanded. Still, this system has the advantages of
keeping the economic patient alive even following a
massive liquidity haemorrhage. In the absence of barter
economy, the economy might have ground to a complete
halt and deteriorated to subsistence agriculture. But barter
is like chemotherapy: it is good for a limited period of
time and the side effects are, at times, worse than the
disease.
1093
A totally different tack is the verification approach. The
person making the payment carries with him a card which
confirms that he is creditworthy and will honour his
obligations. Otherwise, the card also serves as an
insurance policy: an entity, not connected to the
transaction, guarantees the payment for a fee. This entity
is financially viable and strong enough to be fully trusted
by the recipient of the payment.
1094
lost, is the purchase within the limits of the approved
credit and so on. Then, the billing proceeds automatically.
Such devices will virtually eliminate fraud. The credit
card companies will guarantee the payments which will be
subject to residual crime.
1095
1096
M
Macedonia, Economy of
1097
Still, the demand is not driven by households, but by the
economy's corporate behemoths, such as its oil refinery,
Okta, and its largest bank, Stopanska Banka.
1098
exchange reserves equal 3 months of imports. Foreign
investment is flowing in. The budget deficit is likely to be
about 6.5 percent of GDP following a 0.5 percent
financial transactions tax levied as of July 1 and projected
to yield about 2 percent of GDP in added revenues. The
overall tax burden is a reasonable 37 percent, and all
manner of taxes - from the personal income tax to the
corporate profits tax - have actually been reduced lately,
concurrent with the introduction of a 19 percent Value
Added Tax. The revenue side of the budget is hurting, but
the government has a cushion of about 9 billion
Macedonian Denars ($180 million) deposited with the
central bank and about 700 million deutschemarks ($320
million) - the proceeds from the sale of the local telecoms
company to Hungary's MATAV. Moreover, tax collection
in western Macedonia - the fighting zone - has anyhow
always been insubstantial.
1099
Macedonia is on its way to yet another (and much
postponed) donor conference. Donor conferences are
charades. They consist of photo opportunities for donor
and recipient politicians signing agreements sealed long
beforehand. But even as charades go, the existence of an
IMF arrangement with the needy country was hitherto
considered a sine qua non.
1100
received - not least by installing in power one kleptocracy
after another.
1101
Moreover, in a year of early elections (the latest date
bandied about is June 30) - budget discipline is likely to
suffer. For a few scary months last year, Macedonia's
budget deficit reached 9% of GDP (it later settled around
5-6%, saved by a reluctantly introduced "war tax" levied
on all financial transactions). Tax collection is tottering as
more than 26,000 firms (the majority of all active
companies) have become insolvent. Macedonia has almost
double the average private sector credit default rate
among countries in transition.
Macedonia can use all the help it can get. But effective
help is predicated on circumventing Macedonia's
hopelessly crooked politicians and bankers and on the
strict and micromanaged enforcement of good governance
clauses. Alas, the donors are so eager to prevent another
conflagration that they are ignoring these important
caveats. In doing so, they foster further instability. The
lesson learned by Macedonia's unscrupulous decision
makers may well be that conflict, war, and terrorism pay
handsomely.
1102
In the near past, Macedonia seemed to have been bent on
breaking its own record of surrealism. While politicians in
other countries in transition from communism and
socialism strive to be noticed for not stealing, their
Macedonian counterparts, without a single exception, aim
to steal without being noticed.
1103
election victors (the SDSM) and their Western sponsors.
Nothing happened.
1104
To add to Macedonia's precarious standing, its greenhorn
Minister of Foreign Affairs, Antonio Milososki, engaged
in intermittent - and utterly avoidable - spats with its
neighbor and biggest foreign investor, Greece, virtually
guarantee delayed accession to both NATO and the
European Union, the much ballyhooed strategic goals of
the current administration. Milososki adopted a similarly
belligerent and ill-informed stance against Bulgaria,
another flanking polity and the newest member of the
coveted European club.
1105
million impoverished people. Immediately following their
insurgency, the former terrorists of the Albanian National
Liberation - courtesy of Western pressure and the
Albanian voters - occupied crucial ministries with
lucrative opportunities of patronage of which they are
rumored to have availed themselves abundantly.
1106
"The Heritage Foundation" has consistently ranked
Macedonia 95-97 out of 155 countries in terms of
economic freedom. The country is "mostly unfree" it
correctly concludes in its reports, though it cites
sometimes erroneous data. A moderate level of trade
protectionism, low tax rates, moderate inflation, a
moderate burden of the government, moderate barriers to
capital flows and foreign investment, and moderate
interference in the economy are offset by a dysfunctional
banking system, intervention in wages and prices, low
level of protection of property, a high level of regulation,
and a very high level of activity of the black market.
1107
alternately buffeted by floods and droughts. There has
been only one day of rain in all of January 2007.
Both the IMF and the World Bank, who did their best to
obstruct the previous VMRO-DPMNE government in its
last few months in power, promised a speedy return to
business as usual. An hitherto elusive standby
arrangement is likely to be concluded by the end of the
year. World Bank funds, frozen in material breach of its
written contracts with the state, will flow again. The EU
promised development funds if the new government acts
in a "European spirit" - i.e., obeys the diktats of Brussels.
1108
Foreign investment in the country mysteriously wanes and
waxes - some of it laundered money reinvested in
legitimate businesses. The government is doing a great job
of building up the image of Macedonia as an FDI (Foreign
Direct Investment) destination. But public relations and
perceptions management must be followed by palpable
actions and the new government is woefully short on
concrete steps. It talks the talk but hitherto does not walk
the walk.
1109
free trade zones and infrastructure projects (dams, roads,
railways, oil pipeline). A much hyped Vardar Silicone
Valley is in the works.
1110
governor of the central bank, Ljube Trpski, cheerfully
predicted that these handouts will cover the gaping hole in
the balance of payments. Macedonia also stands to receive
7.5 percent of the gold reserves of the former Yugoslavia
of which it was a component. At c. $700 million net,
foreign exchange reserves are at an all-time high.
Both the IMF and the World Bank - who did their best to
obstruct the previous government in its last few months in
power - promised a speedy return to business as usual. An
hitherto elusive standby arrangement is likely to be
concluded by the end of the year. World Bank funds,
frozen in material breach of its written contracts with the
state, will flow again. The EU promised development
funds if the new government acts in a "European spirit" -
i.e., obeys the diktats of Brussels.
1111
But there are real investments, too. The capital's central
heating utility was purchased by a unidentified French
energy outfit, announced the general manager. The
utility's shares are about to be listed in the Athens stock
exchange. The Macedonian construction firm "Granit"
will build a $59 million highway in Ukraine, with which
Macedonia enjoys an unusually cordial relationship, to
American chagrin.
a. 2 million consumers
b. 10 million consumers
c. 20 million consumers
d. 60 million consumers
2 million consumers
WRONG!!!
1112
Through its well developed and growing system of
symmetrical and asymmetrical array of free trade
agreements – Macedonia gives you direct access to well
over 600 million consumers in the region – from Turkey
to Slovenia.
WRONG!!!
a. 700 US dollars
b. 1,100 US dollars
c. 300 DM
d. Almost 2,000 US dollars
1113
Most people answer…
WRONG!!!
a. Exceedingly high
b. Very high
c. Like South Europe
d. Like Africa
Very high.
WRONG!!!
1114
crimes and drug-related crimes are on the rise as
modernization proceeds apace.
WRONG!!!
6. Macedonia is…
a. Investor friendly
b. Investor averse
c. So-so, not different to other countries in transition
d. Investor indifferent
1115
Most people answer…
Investor averse.
WRONG!!!
a. Non existent
b. Poorly developed and protected
c. Like in all other countries in transition
d. Adequately developed and protected
RIGHT!!!
1116
Despite the fact that Macedonia has a fine legislative
infrastructure, its courts and its bureaucrats, its banking
system, its collateral system and its property registrars are
all poorly developed and dysfunctional to varying
degrees.
1117
a. Decrepit and inadequate
b. Like in other poor countries
c. Sufficient but not well maintained
d. Excellent
WRONG!!!
1118
And - with the exception of the skirmishes with a segment
of its Albanian minority in 2001 - Macedonia has never
been involved in any war activities.
• Prosperity
• Growth
• Opportunities
• Achievements
• Happiness
1119
It is a pro-Western, pro-European country aspiring to
become a member of the Euro-Atlantic structures.
Hopefully, it will.
PART ONE
Foreign Investments in the Region
1120
developments in Eastern and Central Europe, which
skipped Macedonia.
1121
outbreak of the Great Depression during the 1930s. We
are just resuming an old trend which was interrupted...
1122
if they inject the Macedonian companies with capital,
new technology and new markets. It is the only way to
join Macedonia with the modern part of the world. Of
course, that process has a ''price'', but in the long run,
Macedonia will gain much more then that. Macedonia
must to prepare STRATEGY how to join in the modern
world.
1123
meaner. In the long run, this is the main contribution of
foreign investment: the transformation of the domestic
sectors.
1124
Citibank, Creditanstalt, ING-Barings, Deutsche Bank,
Bank Austria, Bayerische Vereinesbank and others
opened branch offices in the Czech Republic. Citibank,
ABN Amro, Unicbank and others in Hungary. Citibank,
ABN Amro in Romania. Volks Banken Creditenstalt,
CSOB and others in Slovakia. In Slovenia, Bank Austria,
Societe Generale, Volks Banken and others have opened
shop. Chase Manhattan in Uzbekistan, ING Bank,
Raifeisen Bank, Dresdner Bank, Societe Generale, Xios
Bank, National Bank of Greece and Ionian Bank in
Bulgaria and so on. In Bulgaria, for example, there are a
lot of joint ventures with foreign banks, as well: Post
Bank (Bulgarian Japanese Bank/Nomura) Bulgarian-
American Credit Bank, First Investment Bank (Bulgarian
and EBRD capital), OBB (Bulgarian, American and
EBRD capital), Bayerische Bulgarische Handelsbank
(Bulgarian-German capital), Euro Bank (Bulgarian-Czech
capital) and so on. Even in Albania branch offices of some
foreign (western) banks were opened. The Bank of
Albania was the first joint venture bank in Albania (an
Italian Albanian Bank) and was established in 1992. There
is one other joint venture bank with the Albanian State,
foreign private participation (The Albanian Islamic Bank),
the only wholly private foreign bank (Dardinia Bank) and
the National Bank of Greece.
1125
banks would have been ruined. But, whether this danger is
generally recognized is an open question. The results of a
poll conducted among a group of readers of "The Annual"
show that people still have a tendency to think that "big is
best", regardless of the basic health of the bank.
1126
Nikola: Hungary was the first state in the region that
recognized the danger of a fragile banking system.
Hungary suffered a series of bank collapses, but after that
the Hungarians learned the lesson of the fiasco and put the
other state banks on a strict diet to make them fit for sale.
The Czech Republic and Slovakia resisted the sale of their
main banks longer. But the bad debt problems made the
Czech Republic change its opinion last year, and it sold
one of its 4 biggest banks, IPB, to the Japanese (Nomura).
The other 3 will most likely be sold to strategic investors
by the end of 1998. An American financier said
something about the Czech banks to be remembered:
"Your banks are like ugly brides. You should be happy if
you find a husband for them who only has syphilis."
Slovakia endured similar problems.
1127
to foreign investors. Pivara, Makpetrol, Ohis, Alkaloid,
not to mention the infrastructure firms (such as PTT and
ESM). When foreign investors witnessed the transfer of
these prize assets (mostly) to their managers – they
decided that if you cannot beat the system, join it. So, they
established joint ventures with local firms. Pivara has such
a collaboration with McDonald's and with a German beer
manufacturer, for instance and Ohis has many industrial
alliances. Foreigners started buying up bankrupt
Macedonian firms. The privatization process has
transferred circa 1200 companies to incapable, under-
funded hands. The new owners do not know how to run a
manufacturing firm in the global marketplace. They are
being forced to apply to foreign investors now –
unfortunately, at prices much worse than could have been
obtained before their mismanagement. I am much more
optimistic than you, in this respect. I think that we will see
a wave of foreign takeovers and joint ventures starting this
year.
PART TWO
1128
• In May, The Hungarian company OZD (railroad
manufacturer) was sold to the German firm
Aicher.
1129
South Korean firm Daewoo concluded an
agreement for joint investment with the Ukrainian
car manufacturer Avtorar. They will immediately
invest $300 million plus $1,3 billion after 6 years.
1130
The Holland brewery Heineken launched a tender to
increase its share in the polish brewery Zywiec to 75%, at
a price of $125 million. The Holland giant already
invested $50 million in the factory, and increased its share
from 25% to 32%. Heineken announced that it would like
to keep the company on the stock market, and has no
intention to increase the capital further.
1131
• In March, the Polish BIG bank paid 84 million
dollars to the state, for a special share of 32% in
Gdanski Bank, in which BIG already had 31%. An
Irish company increased its share in the Polish
bank Wielkopolski Bank Kredytowy to 60.2%.
The Austrian Futures & Options Exchange started
to offer derivatives to investors in Hungary. The
well connected Polish bank Kredit Bank bought
the shares of the central bank in the Polish
Investment Bank and in Prosper Bank.
1132
$60 million. A similar share went to the local
Kredit Bank and to the Warta Insurance group.
1133
Last year Poland had a 7% growth rate. From 1990 to the
present, foreign investments in Poland totalled more than
20 billion dollars. The USA has invested 4 billion dollars,
Germany 2,1 billion dollars and so on. Among the top
foreign investors in Poland, Fiat is in the first place with
1,1 billion dollars, and Daewoo Motors on the second
with 1 billion dollars in investments.
1134
investor in the longer term. It is here that Macedonia
failed in projecting to the world an image of a country
friendly to business in general – and to foreign business,
in particular. Investors don't even know that Macedonia
exists, let alone its many advantages.
1135
increased from 8% in 1992 to 15% in 1994. After
two years of receding, in 1997 they reached 12%
(although it was determined to be 16%).
1136
prefer to buy Volkswagen cars than plant machinery. The
result is a stock of capital assets which is depleted and
decrepit – not only in industry. Have a look at the
universities, for instance. This is a vicious circle: a
problematic economy fosters uncertainty. Uncertain
people do not commit themselves to long-term
investments. They prefer to consume or to speculate. The
result is even a more problematic economy. The low
domestic savings rate is linked to the abysmal investment
rate. Even when money does come in, the management
class and the political-economic decision makers do not
know what to do with it. The safest bet is to invest in
infrastructure and in construction. It is much easier and
more familiar to construct a house than to manage a
microchip factory. Lack of management skills, of modern,
flexible, organization, of technology means that even the
available resources are misallocated, that the productivity
rate is bound to deteriorate. Learning from foreigners is an
excellent solution, which Macedonia has yet to adopt. But
Macedonians find it highly embarrassing to admit that
there is something, which they need to learn. When in
need of help and advice they feel inferior and humiliated.
I can tell you this from my experience as a foreign
consultant here.
1137
look at the history of the state and the region, or at the
relations with the neighbors, or at specific recent actual
scenarios of terrorist groups from around the world, where
Macedonia is included as a possible object of
destabilization or worse. Take, as an example, the
publication that was issued in 1996 by the London branch
office of Bankers Trust International PLC - one of the
biggest broker investment institutions in the world with its
head offices in America, a research on the markets of the
ex-Yugoslav republics. The conclusion of the publication
was that Greece will prevent the EU from effectively
assisting Macedonia, until the problem of the disputed
name is solved. A probable scenario is mentioned in
which the Macedonian territory could be a subject to a
dispute between Greece and Turkey (both members of
NATO), as well as Serbia, Bulgaria and Albania. Even in
the recent study of Merrill Lynch, despite the optimistic
estimates, there still exists a small reservation regarding
the political future of Macedonia. The Kosovo events
caused inestimable damage to Macedonia in as much as
foreign investments are concerned. The fact that the
highest Macedonian political officials, in interviews to the
media, are indirectly or directly saying that Kosovo can
destabilize Macedonia, is as damaging as what happens on
Kosovo. If the prime officials of the state are openly
discussing the possibility of ethnic conflict in Macedonia
in their statements, a conflict that could be contracted
from the neighboring countries, if they are asking for
foreign defense forces from the UN and NATO to be
stationed on the territory of Macedonia, I wonder why
should the potential foreign investors think otherwise?
1138
international transfers of capital would invest. But that
does not mean that the level of foreign investments in
Macedonia is a result only of this, and that the situation
could not be far better. This a only a starting point.
1139
Western developed countries (they should not be blamed
for this), and the common unrealistic interpretation and
comments about events in Macedonia, aired by local
authorities under the influence of the daily political
arguments.
1140
Sam: Type the word "Macedonia" in a few word-
processors and you will get a "spelling mistake" sign. I
was once asked at the Prague international airport whether
Macedonia was … part of Belgrade. This is entirely the
fault of the Macedonian authorities. No coherent and
serious promotion, public relations and investment
relations campaigns were ever undertaken. More than 80
new nations were added to the world in the last two
decades. In an age of information glut, sovereignty
inflation and fierce competition on economic resources –
to be unknown is to be dead, politically as well as
financially. In the long term, the survival of Macedonia
depends not on meaningless treaties and conventions. It
depends on its ability to attract foreign capital and thus to
bind its neighbours and the West to it. Money is a strong
incentive to refrain from instability and wars. The bitterest
enemies become the best friends once they have common
economic interests (see the example of France and
Germany). Macedonia should immediately develop a
multi-year plan for fostering and encouraging recognition
among its allies and foes alike. The international media
should be used and economic interests should get
involved. But to leave the situation as is is nothing short
of detrimental.
1141
In the projections for 1998, the government of
Macedonia persistently states that it will do anything to
increase the foreign direct investments in Macedonia.
But it never mentions the indirect and portfolio (through
the stock market) foreign investments. Whether these
two concepts are mutually inclusive , or mutually
exclusive, is not clear.
PART THREE
1142
US dollars, invested 24 million dollars in corporate bonds
in Slovakia, invested 4 billion in Latvia, 15 billion in
bonds of the National Bank of Hungary, 60 million $ in
international bonds issued by Lithuania. In 1996, besides
the issue of municipal bonds of the city of Tallinn, in
Latvia (60 million DM), Nomura invested 50 billion yens
in Romania, 70 million $ in corporate bonds in the Czech
Republic, and in 1997 they invested 500 million $ in
bonds of the City of Moscow, 70 million $ in Slovakia,
450 million dollars in international bonds in Ukraine. In
1998 hitherto, they concluded new investments in The
Czech Republic (the takeover of IPB Bank), and
negotiations in Ukraine and Slovakia are in their final
stages. The same company invested 91,2 million $ in
Pliva-Croatia, 31,1 million $ in VTS-Slovenia, 24,7
million USD in SKB Bank in Slovenia, and in July 1997
453,3 million $ were invested by it in KGHM Polland
Miedrz SA.
1143
risky than Macedonia, naturally against much higher
yields than in low risk countries, or countries with no risk
at all.
Sam: Only in the USA in the last two years 2 trillion USD
of new wealth were created by investing in stocks. The
same pictures repeats itself all over the world. Stock
exchanges the world over have set new records and
generated fabulous amounts of new wealth. Contributions
to pension funds, money pouring in to mutual funds, the
globalization of the capital markets and the resulting
capital mobility – all created a deluge of money frantically
in search of yields. The more mature markets in the West
offer less luring returns because of the lower risks that
you have mentioned and because of correspondingly
lower projected growth rates. New legislation permitted-
even encouraged – the international diversification of
these funds. Once legally allowed, the dam was opened
and a gush of almost 400 billion USD in investments
swept over the emerging economies. Some of these
investments soured and there are periods of remorse.
Sometimes, investors even completely withdraw from a
specific market (as they have done in the Czech Republic
in 1997). But these are temporary fluctuations. The
phenomenon is here to stay: investors and money
managers hedge their investments by spreading them
across political boundaries. High growth rates attract
them. The availability of political risk insurance calms
their nerves. It is a golden era for those countries who
know how to tempt the right suitors. Macedonia,
unfortunately, is not one of them.
1144
or separate firms, specializing in investing in the so called
Emerging Markets. In these departments, 50, 100 or more
account managers and investment officers have an annual
amount of money they should invest in some of the
countries in East and Central Europe, South and Middle
America, Southeast Asia, Russia and the CIS (NIS – New
Independent States) and eventually Africa, depending on
the strategy of the company. The amount can be between
one half and two or more billion German marks. The
companies have established in-house research and
development (analysis) sections within the departments
(or their special firms) which tackle the emerging markets.
The professionals, that are working in these departments,
are usually divided by regions. For example: Romania,
Bulgaria and Croatia, or the Czech Republic, Poland and
Hungary or Russia and the NIS. Alternatively, they are
grouped according to the type of the securities that they
deal with: East and Central European bonds, or shares
issued in the same region, or other more complex
financial instruments. These departments are obliged to
observe everything that happens on their markets, the ones
actually invested in or in which there are plans to invest.
On the basis on this information, they should provide
instructions to the fund and portfolio managers of the
company. The latter, after reaching a final decision, issue
directives to the dealers of the company to sell or to buy
the exact number and type of securities. The dealers of the
company are associated with local brokers and the
operation is thus completed.
1145
houses, by banks and by other private or governmental
institutions and individuals, from all the countries, but
one: guess which.
1146
The first kind of information barrier is much more serious.
That Macedonia is absent from the information cum
investments race is suicide.
1147
Sam: From the very beginning it was clear that no one
knew what is a stock exchange and what to do with it,
once it was established. It was perceived more as a
nuisance than as a tool for the formation and allocation of
domestic and foreign wealth. The privatization was
conducted completely outside it, new shareowners were
not allowed to trade their shares there, the government did
not finance its needs through it. It was relegated to the
margins, devoid of liquidity and basically useless as a
corporate financing arena. This was a major strategic
mistake, which would require many years to reverse. The
stock exchange could have become a source of cheap
credits and equity capital to the struggling, illiquid,
domestic economy. It could have competed with the local,
inefficient, banks. It could have attracted portfolio
investments and even domestic "undeclared" capital. All
this could have been achieved had the right number of
companies been listed, had the supply been varied and of
good quality. But a stock exchange does not go well with
cronyism.
1148
isolation. Foreign capital is also important in preparing the
country to EU entry. Until and unless it finds interest in
Macedonia, the probability of entering EU are very small.
At the moment, this is better, because if Macedonia were
to enter the EU now or in the near future, it would have
become an even bigger base for the supply of raw
materials to that community than it is now. Macedonia
must deeply enmesh itself in the process of globalization,
and to ask for the acquirements from it. In that game
every side has its own "mathematics". The rich can get
richer, and the poor can get less poor. This option is
possible, but if one is not careful, the poorer can get even
more so.
1149
countries conquered, by military means, large swathes of
land with rich raw materials and mineral resources. They
clashed with each other often and the outcomes of these
clashes were eternalized in the form of international
borders. Whole continents were subjected to this
mercantilist behaviour. Raw materials and cheap labour
were "sold" at ridiculous prices by the colony to the
colonizer – and expensive finished goods and services
were imported by it. This led to economic depletion and
social unrest which resulted in two world wars and in the
de-colonization of the world. But a second cycle started in
1989, with the fall of the Berlin Wall. This time no
physical presence is required. Money and other symbols
(information and know-how, technology and science,
cultural imports) do the job. Again, the Western powers
colonize parts of the world for the same reasons: cheap
raw materials, cheap labour, new markets. Yet, this time,
they do it more subtly: through credits, joint ventures, film
festivals and television serials. A reaction is already
developing. I, personally, believe that the countries of
Central and Eastern Europe will rebel (mainly against the
EU), once they understand what is being done to them. A
world of regions and ethnic groups will supplant the world
of nation-states. All over the world, political units are
disintegrating to smaller and smaller ones. Macedonia
should be aware of these trends and should not fall in the
trap of the new form of colonialism without extracting a
hefty price. But it would be able to demand this price only
if it will become an interesting place, economically and
financially. This is the most basic mistake of the
Macedonian national strategy: It strives to join the EU as
soon as possible – without going through the pains of real
reform, the creation of a real market economy and the
sacrifice of special interests of powerful groups.
1150
Nikola: In the meanwhile, the Western countries
understood the East European market to include all the
ex communist countries in Eastern and Central Europe
except Macedonia (and SR Yugoslavia and Albania to a
certain degree). Forgotten, on the financial chart of the
world the name Macedonia almost doesn't appear, more
often marked only with five letters (FYROM).
1151
without any problem, all the companies in Macedonia. For
example, the seven funds of Flemings manage, between
them, 64,99 billion pounds (June 30 1997), equivalent to
188 billion German marks.
1152
intangible. To open the country to foreign investments –
means to lose economic control. A lot of people make
money from imports, for instance. Will they be happy if
local produce replaces imports? A lot of wealth is
transferred from the state to select individuals and
enterprises in the forms of concessions, monopolies,
favourable tax and customs tariffs and "customized"
public tenders. Foreign investors will not put up with this.
They are a noisy lot. They refuse to play the game. They
say what they think and are afraid of no one. Do local
politicians really want this kind of trouble? Until a clear
separation is made – backed by criminal sanctions and
penalties – between money and politics, between
businesses affected by decision making and the decision
makers, the incentives to introduce foreign capital to
Macedonia are few and far between. Foreign investments
will come, with or without government involvement. It is
the negative involvement of the state that must first be
eliminated. Its positive assistance is less important by far.
1153
realize a profit, and thus to invest in another or in the
same country with the same purpose.
1154
(through the stock exchange) of large, prestigious,
investment banks, brokerage firms, funds etc.
1155
Attracting foreign Direct and Indirect Investment must be
declared a national priority and a state of emergency must
ensue. This person must be a widely known, appreciated
and liked figure, well connected and with the legal
authority to cut through red tape, circumvent regulatory
procedures, go around commissions, committees and
bureaucrats. On the other hand, he must not be given too
much power, lest he abuses it. Stringent checks and
balances must be implemented to prevent corruption.
PART FOUR
1156
To prepare several studies regarding Macedonia, in
general and certain companies, in particular, where the
possibilities and the conditions that this market is
offering and is planning to offer are realistically
presented. The big financiers in the world should be
"bombarded" with these publications. All the positive
aspects of investment in this market and, concretely, in
certain projects must be mentioned in them. It must also
be mentioned that these reports are intended only to attract
the interest of the foreign companies in certain projects.
This should be followed by engaging a local legal counsel
in the second phase, and usually by sending
representatives to Macedonia, to consummate the third
phase of engaging a broker, and carrying out the deal.
After the money is invested (and possible even before
that), the research and development departments of the
Western companies will start to independently prepare
reviews, reports and other printed material regarding
Macedonia, in order to realize a profit from the deal, and
to interest other multinationals to invest in the
Macedonian market. This means that the country must
initiate the project and accelerate it. So far, only a couple
of companies have prepared reports about Macedonia.
One of them is Bankers Trust where in November 1997, I
was told that for the time being this famous multinational
company has no intention to invest in Macedonia.
Recently Merrill Lynch issued a research report
concerning Macedonia, but they also have no intention to
invest in Macedonia at least till the year 2000. This is
what the director of Merrill Lynch Frankfurt, Mr.
Wolfgang Eickmann, sincerely told me, in reply to my
questions a year ago. But there are many other large
multinational companies, that are interested to invest in
Macedonia. Unfortunately because of many reasons, and
1157
above all, because of lack of information, the small scope
of the market and bad legal regulations they don't do so.
1158
learn the mentality of the money providers, their
language, their worldview, their hopes and fears.
1159
collusion. Sometimes, you look to me like a nation of
pessimists, waiting for the worst to happen with a
masochistic joy. This is not the way to promote a country.
Let others do the work for you until your mood improves.
Agree to be taught, only the truly wise know that they do
not know.
1160
national economy. We will see to what extent will the
current long-term stagnation in development make the
Macedonian products less competitive, and to what extent
it will affect the (un)employment. The entire lack of
foreign investments is indirectly or directly damaging the
budget and the trade balance of Macedonia.
1161
frequent. Advertising in other kinds of magazines (for
example: magazines of air-carriers) should not be
excluded.
Legal Environment
1162
But Macedonia is an opposite case. In Macedonia, more
laws contain discrimination against foreign investors or
non-standard legal conditions for investment.
1163
without too much bureaucracy (permits, red tape) – is also
very important. Geopolitical stability counts. But, above
all, the investor is concerned about his property and his
ability to "repatriate" it in case of trouble. Will he be able
to buy the necessary amount of foreign exchange? Will he
be able to transfer all of it freely in one day? Is the
collateral given to him by his local partner / borrower
secure and properly registered? Will his rights as a
minority shareholder be fully upheld? Can he get
reasonably quick justice from the courts? Can he enforce
court decisions in his favour? The answers to all these
questions are, unfortunately, still negative.
1164
buying and selling of capital shares- in accordance to
the existing legal regulations."
1165
The creators of the Macedonian stock exchange, Mr.
Andy Wilson and Barry J. Bird from the consultancy ISC
(the first is the former Executive Director of the London
Stock Exchange), also estimated that this article is the
main reason for the absence of foreign capital in
Macedonia in the form of portfolio investments, and for
the stagnation in the development of the stock exchange in
Skopje.
1166
very high, and that will have inevitable negative results on
the saving and on the Macedonian economy.
1167
Nikola: My experience with potential Western investors,
shows that to talk about more serious portfolio
investments under these conditions is almost impossible
and not serious.
1168
Financial Institution to delete this article, as a condition
for further investments.
1169
Saxons type of legislation. The first ones should have
much more facilities and faculties than the second ones.
PART FIVE
1170
In article 90, item 3 of the above mentioned Law, it is
predicated that a domestic party, on the basis of a foreign
exchange deposit of a foreign depositor, may keep foreign
exchange on a foreign exchange account in an authorized
bank for working abroad, if said party has contracted to
keep the foreign exchange in the foreign exchange
account, or to use it for purposes consolidated in the
deposit agreement.
1171
legal entities (although exceptions do occur), in practice
this Manual meant that insiders in the companies (called:
"The Management Team", the establishment) who were in
control of the management could buy the company at a
35%-45% discount, through the so called "frozen foreign
exchange" and buy stock companies according to the
Law. If any foreign company wanted to buy the same
company through the Agency for Privatization it would
have had to pay in cash without such a discount. This
deprived the legal companies of their right to have
received an equal discount of 40% of the price they
should have paid for the Macedonian non-privatized
social enterprises. And this is when Agency for
Privatization and the government of Macedonia were
proclaiming that they would gladly sell to a foreign
investor, but such an investor is nowhere to be found.
1172
hungry. This is why I appreciate your practical
suggestions: the elimination of these parts in the laws that
make foreign investments prohibitive and dangerous. Let
us hope that the incentive – that evidently existed – to
keep them on the books has waned.
1173
separately. Changing the stock exchange model will give
more efficient results, if it is followed by changes in the
laws that I mentioned.
TAX LAWS
1174
laws in Macedonia regarding the taxation of capital,
especially foreign capital, are written as though they
should not be understood. Unintelligible would also
mean ambiguous. It means that they can be interpreted
"either way", at whim, as it suits somebody in a given
moment.
1175
difference between the cost of purchase and the sale's
income.
1176
and less available. The prices fixed by speculators in
themselves constitute important information: corporate
warnings, exciting announcements, major crises – the
speculators know it all and convey these data to us
through the prices that they trade in. Speculators also
carry out invaluable arbitrage transactions. They equate
the prices of the same good, commodity, or securities in
two or more markets by buying (at a rising price) in the
cheaper market and selling (at a declining price) in the
more expensive one.
PART SIX
1177
Nikola: The possibility for certain privileges on the basis
of the invested foreign capital is provided in the Law of
Customs Officials (The Gazette of the Republic of
Macedonia no. 20/93, 1/95, 24/95, 31/95,63/95,40/96 and
15/97) and in the Income Tax Law (Gazette of RM no.
80/93……71/96) which are not sufficiently compared to
the same laws in some other countries in transition.
1178
Some countries, Poland for example, which are very
successful in promoting shareholding and their domestic
companies, introduced tax benefits in the years when their
stock exchanges were forming. They exempted from
taxation the capital gain realized with issuing securities
through brokerage firms. Besides that, countries like
France and Great Britain offered tax benefits for
collective investment programs. The objective of
Macedonia must be to create the most favorable
environment for attracting foreign capital. The means for
achieving this, must not have any negative effect on the
budget income, and should contribute to the global
development of the national economy in the country.
1179
shock was involved, so enormous, that it paralyzed the
elites. Short term thinking is the daughter of insecurity.
People began to seize whatever they could, as though
there will be no tomorrow. The legislation reflected the
total chaos that ensued. I see no policy in the mess that
Macedonian laws are – I see human beings cast into a
totally unknown situation, fearsome and awesome, with
enormous potential and even greater risks.
1180
The question is asked:
1181
a respectable (European …) member of the family of
economic nations. There is nothing to fear. Foreign
investors don't bite and most of them do not even have
horns. This is provincial thinking of the worst kind.
1182
This means that the communities don't nave their own
property – in the form of territory, and if they want to
construct with their own and/or borrowed money (bonds)
they have three negative alternatives:
1183
Israel the situation is very similar to Macedonia. Again, I
think that the problem is not the land, or the construction,
or the laws. I think that the basic isue is that of the
breakdown of trust. In the USA "munis" (municipal
bonds) are issued against future tax receipts or against
future income from specific projects. People believe each
other, they believe the issuing municipalities and, above
all, they believe the financial markets. True,
municipalities here do not own land and hardly have any
tax receipts and this is bad. But no investor – foreign or
domestic – would lend his money to a Macedonian
municipality. They are mismanaged, corrupt, unreliable.
Would you put your money in a construction project
initiated by a municipality, even if the land was owned by
it? Allow me to doubt it. The more realistic approach,
would be to act in partnership with big private firms
within well-defined specific projects with Western
advisory services and auditing involved. These projects
can be financed by issuing municipal bonds, because they
have a projected or even a guaranteed stream of income.
Such future income should go into a "sinking fund" under
the control of a Western auditing firm. Legally, the whole
things has to be tightly wrapped up. Sewage treatment
plants, local toll roads, municipal hospitals, water
treatment facilities, a shopping mall – all are such possible
projects.
1184
of both lawyers, the potential investor will develop or
forget the idea for investing in that country.
FOREIGN INVESTMENTS
1185
confidence in the banking system. It would be the most
effective and fastest way for changing the culture of
savings in Macedonia and to eliminate the fear from the
banks. It would be recommendable to have two branch
offices of this type of banks opened, which would create
competition between them, this being particularly
important at the beginning.
1186
region in war, closed borders, small market etc.). Still,
there is information that in the first 5-6 years of the
existence of Macedonia as an independent state, the
Macedonian negotiators have been setting specific
conditions to the interested Western banks: they were not
allowed to accept savings, so that the Macedonian
population was not likely to have transferred its money
from the Macedonian banks to the foreign ones. Another
prohibition was to ban them from making foreign
exchange transactions, transfers, etc. Besides the already
existing obligations for limited financial placements, in
financing that was more than an unreal request. Subject to
such restrictions and in view of the mentioned problems in
Macedonia, we could ask what will those banks have
done? Our opinion is that equal working terms should be
completely supplied and extra state advantages should be
given to the branch offices of the foreign banks: free
location, unlimited financing, tax benefits for a longer
period, time allowances for realizing the juridical
processes which the bank will conduct in Macedonia until
the law provisions in this field are settled etc.
1187
doubt, the law that regulates the payments of the credit
requirements of the banks must be urgently copied from
the Anglo-Saxon law, because the existing situation in this
field would seriously question the positive implications
from the above mentioned suggestions.
1188
encourage the formation of an equally exuberant stock
exchange.
1189
between the present interest rates in Macedonia and the
interest rates of the banks in the Western countries. This
will eliminate the main problems that high interest rates
generate:
1. Capital Risks;
2. Capital (Credit) Supply.
1190
prefer to fantasize instead of face reality and this is
reflected in the poor quality of the projects for which
finance is sought. Even the concept of collateral is
thwarted. A bank cannot rely on the debtor's cash flow
precisely because the morale of payments is so low. The
debtor might get paid by HIS debtors – and yet he might
not. So, a lender has to rely on real estate as the only
collateral realizable in case of trouble. I share your
optimistic scenario as to what will happen with the
introduction of branches of foreign banks in Macedonia –
but I think that the process will be much longer and will
not happen at all if the government does not reverse its
erroneous monetary policies. A full blown restrictive
monetary policy is now in force, leading to a contraction
of the economy. In the absence of real liquidity, for
instance, no mortgage market will take off. Buyers will
simply be unable to pay the market prices of apartments.
In Israel, the government stepped in and provided
potential buyers with subsidized loans. Here the
government is too poor to do even this. If you ask me, this
– the reduced of money supply – is the heart of the
problem. The economic body is starved almost to death.
Under these conditions it is ridiculous to talk about
investment banking. Equity investments rely mostly on
discounted future streams of income and dividends. These
will not be available unless the Central Bank changes its
policy dramatically.
1191
is a classical case. South Korea was an inspiration for
many Eastern European companies that were diversifying
to many different fields. If you ask the Russian banks like
Unexim why they took control over the key industrial
segments, they will refer to Korea. But now when the
Asian mirror shattered, the Koreans that had politicized
banking system are not suitable as an example. Only one
country in the region learned this lesson: Hungary whose
banks are in foreign hands today and whose companies
must justify it if they want money to invest. This is
improved further by the restored expansion and the
increased productivity.
1192
poor are oft cited examples. The government must also
ensure a competitive environment by fighting monopolies,
opening up the market to foreign and domestic
competition, liberalizing the foreign exchange and
payments regime (gradually and carefully and after the
establishment of a realistic exchange rate). It also means
heavily deregulating and cutting red tape. So, there is no
need to single out a specific sector. The government
should definitely take its hands off the banking sector by
selling it to foreigners or by refraining from politically
dictating whom to lend to and how much. Politicians are
unable to properly manage businesses, they are not skilled
to face the harsh realities of the market. In an ideal world,
politicians should do politics and businessmen should do
business. This not being an ideal world – the two intermix
but this should be minimized even by law. Otherwise,
businessmen will find themselves engaged in lobbying
and in political wheeling and dealing – rather than in
profit maximization.
Nikola: It's clear that in the next few years there will be a
technological revolution in banking in the world
(especially in the biggest banks). The process of
globalization will not skip the banks. That technological
revolution will be available only to the biggest banks with
the highest capitalization, biggest profits, and high quality
staff and management. Investments in technology and
staff training will be similarly sizable. So, the banking
scene will witness the arrival of the so called ''Global
Players". The legal limits to Macedonian banks (It is
possible to invest only 25% in fixed investments) will
constitute a big problem. These limits are very strenuous.
They would be possible in banks with big capitalization,
but to the Macedonian banks, it will, obviously, be
problem. The upper limit has to be 50 percent.
1193
Sam: As you know, banks are merging fervently. Only in
March 1998 there have been financial mergers worth
more than 200 billion USD (including the Citigroup
merger of Citibank and Travelers' Group). There are
undeniable economies of size and competitive advantages
in being big today. To cope with a global world, with
global, around-the-clock, markets – global, around-the-
clock banks are formed by merging and acquiring. The
same trend is evident in manufacturing and in
telecommunications. This is why it is surprising and very
worrying that Macedonia is left out of this reshuffling. It
looks as though the giants of tomorrow do not consider it
to be a viable member of tomorrow's global networks. We
must also not forget the Internet. Once a satisfying
solution will be found to the problem of secrecy over
public computer networks, it will become serious
challenger to the established, old fashioned banks and
financial houses. Already, shares are offered successfully
through it and many off-shore banks have opened "virtual
branches". The dream of "home banking" is about to come
true. The Macedonian banks must be integrated into
international banking alliances – otherwise none of them
will survive. Even if all their capital were to be invested in
technology it would have hardly been sufficient. Their
clients are already complaining that they are not getting
the minimal services that they require. So, technology in
itself is not enough. Training is called for. The staff must
become well acquainted with Western banking. There is a
Macedonian Banking Operations Center (MBOC) in
Skopje and I heard that it has to beg the banks to accept its
(mostly free) services. It provides both training and advice
in all banking matters. The banks would do well to use it
while still available.
1194
Nikola: The macroeconomic policy in Macedonia is
relatively well received by foreign investors. According to
the recent report of Merrill Lynch the stability in
Macedonia will be preserved only if the real economy is
rebuilt. So far this is not happening, judging by the slow
growth and stagnating export incomes.
1195
countries have a higher rate of inflation and, yet, much
more foreign investment. An inflation rate of up to 20%
annually, is not a serious obstacle for foreign investments,
providing that the other mentioned problems are
improved.
1196
Competition, Privatization and other Issues
1197
ranked on the 466th place among all companies in
Europe.
1198
international trade is not a "zero-sum" game. It is not that
what is gained by others is eternally lost to us. Markets
are constantly growing and we can still re-enter them but
the price of penetration increases steeply the more a
country is out of tune with the world.
1199
When we talk about the domestic potential investment
audience, it should be noted that choosing this direction,
the state media should educate and inform the domestic
public. A series of educational programmes on subjects
related to the capital markets, five minutes every day in
the main news and one page in a weekly newspapers
should have been devoted to the current financial events
in the world.
1200
regimes. This is not what makes up capitalism. To
properly judge the performance of their elected
representatives, to understand their place and the place of
their country in this rapidly changing world, people need
to learn economics. No one pays attention to politics in
the West. Politics has become a branch of economics.
Presidents and prime ministers go up and down on the
waves of economic performance. But in Macedonia, time
stands still in this respect as well.
1201
monopolies. After the telecom, railroads would follow,
the lottery, water supply, gas lines, the electrical supply
industry etc. The fiasco of the state in the privatization of
the City Shopping Center should serve as a good basis for
a more serious approach to the next projects.
PART SEVEN
1202
to invest in Macedonian bonds, providing that they are
guaranteed by the state or by a consortium of the prime
banks.
1203
Sam: I hope that your sources are wrong. There is no such
thing as "prolonging the maturity" or "postponing the
payment" without the consent of the holders of the bonds.
If this will be done unilaterally by the government, it will
amount to a default on its obligations. A state which does
not respect its obligations towards its own citizens – is not
very likely to respect its outside obligations, either. Such
an act will mean an abrogation of property rights in the
worst sense of the word.
1204
advising this emission, taking stock of the circumstances
in Kazakhstan, thought that this country did not have an
urgent need to raise money by issuing bonds. The
emission was with a view to establishing its ranking for
future lending from the European bond market and for
attracting foreign investments in the country. That would
be an incentive and opportunity for some of the best
domestic companies to demand and obtain foreign capital
in the form of the sale of bonds in the future.
1205
guarantees and privileges to the capital from the
developed countries.
1206
Nikola: The global approach to the privatization in
Macedonia was commercial, as opposed to the mass
character of the processes of privatization in many other
central and eastern countries. As a result several
inconveniences appeared:
1207
select elite of businessmen long before the Czech
Republic repeated the procedure and Russia perfected it.
Vouchers spread the national wealth equally – but prevent
the formation of ownership and management nuclei.
Management Funds are hotbeds of corruption and
mismanagement. Incestuous relationships characterize
them more than any Western methods of modern
organization. Management and Employee buyouts are
wasteful in the long run. How should something that
nominally belongs to everyone – be sold to the few that
must control it, risk their capital in it and reap the rewards,
if any? No one succeeded to come up with a model which
will be, at once, equitable, workable and implementable.
1208
authorities. It indicates an abyss of trust between the
populace and the various establishments. Unless and until
this more fundamental problem is solved, no accounting
standards will suffice.
1209
and in the USA. Even convincing these institutions to start
seeing Macedonia as an investment opportunity could take
a long time. To reach this stage, this it is necessary to
establish contacts, and to activate the government of
Macedonia on all the fronts mentioned in this dialogue.
Detailed studies of the market and its promotion must be
embarked upon. The foreign institutions will want to
conduct their own analyses, but the existence of
institutions in the country to which they can refer for the
collection of local data and inside information is always
helpful.
Macedonia, Trade
Dialog between Nikola Gruevski (later, Minister of
Finance and Prime Minister of Macedonia and Sam
Vaknin, later Economic Advisor to the Government of
Macedonia)
1210
This, put together, led to an increase in the debts of
Macedonia, and to the rescheduling of its older debts,
though with no built-in strategy for their gradual decrease.
1211
have any natural endowments or relative competitive
advantages to speak of. It is a mystery to this very day.
1212
But if one buys a fancy Mercedes car – it generates no
future income. On the contrary, it generates even more
foreign exchange losses (fuel, etc.).
1213
growing number of welfare recipients, a poorer
budget, and an increase of the outside debt of the
state. This results in low standards and quality of
living.
SV: It would be naive (and I know that you are far from
it) to blame all these dire consequences on a single
economic factor, no matter how important. Moreover,
deficits are symptoms, not the disease. By treating one's
symptoms – one does not achieve healing. The brain drain
– to take one example – is the result of the division of
wealth among corrupts oligarchs and politicians through
bogus "reforms". It is a result of the feeling of the younger
generations that there is no where to advance to – unless
you were born to the right family or are willing to grossly
compromise your moral principles. Corruption, low social
mobility, bad "communist-socialist" mentality,
oppression, dysfunctional institutions, ignorance,
intolerance, lack of foreign investment, geopolitical
complications, (financial) crime – are all as important as
the trade deficit in retarding the growth of Macedonia.
1214
foreign debt of the state without creating conditions for
the founding of more qualitative export companies. The
deficit in the current balance of payments of $216 million
in 1995 increased to $276 million in 1997.
1215
Furthermore, RM is an impressive record-holder in terms
of the rate of unemployment, (the lack of) foreign
investments, and finally, more positively, it is second-
rated in terms of its low inflation rate. Trade deficits are
exhibited by many developed countries, but this is
different and not comparable with RM.
SV: The saying goes: "There are white lies, plain lies and
statistics". Deficit figures are highly misleading. The
important questions are: is the economy on a path of
growth? Is it export oriented (that is, most of its foreign
exchange income is derived from exports? If so, it can
easily service its mounting foreign debt. The larger the
GDP growth – the smaller the share of the projected
deficit. What is the deficit made of? Was the money used
to finance the consumption of luxury goods or to finance
research, development and capital expenditures? Is it part
of an on-going pattern or an aberration? Is the economy
booming? If it is prospering – deficits are a good thing
because they help to prevent inflation. By directing
consumption to imports – inflationary pressures are, in
effect, reduced and "exported". Can the country rely on
unilateral transfers? Israel can rely on billions of dollars
annually from the World Jewery and from the USA.
These transfers amortize a large portion of its deficits. Is
the country open to outside competition and highly
dynamic and mobile? If so, trade deficits are not
necessarily a bad thing. They increase the competitive
pressures and force the local industry to become leaner
and meaner. There is no economic rule that says: "Trade
deficits are inherently bad – low inflation is inherently
good". In the case of Macedonia, for instance, I think that
the low inflation rate is a sign of death – the demise of the
economic body. Macedonia needs to reflate urgently –
before its markets are deflated out of existence.
1216
The problem with Macedonia's balance of payments
deficit is that it is of the wrong kind. It signifies the
collapse of local manufacturing, the death of local
industries. The consumer is rarely faced with a choice. He
has to purchase imports. A lot of people make money
from legal (and less legal) imports in Macedonia.
Smuggling, contraband, piracy of intellectual property, are
rampant. Members of the political elite were given
monopolies over certain types of imports. A sizable part
of the trade deficit goes to Macedonian pockets. There is
simply no interest to encourage local production or
exports. This will hurt the profits of the robbers of the
national wealth (not to mention the profits of certain
customs officials and police officers). Coupled with a
stagnant GDP, high unemployment, foreign handouts and
strangely and suspiciously stable currency – this is a bad
omen.
1217
and equity investments are small (weak financial system).
The ratio of exports to GDP plays an extremely important
role. Countries, which successfully adapted themselves,
after they experienced gaping imbalances of their current
accounts, such as Korea, Israel and Ireland, increased their
exports dramatically, as distinct from Mexico in 1982 and
Chile, which endured hard external crises. Long-term
deficits, as a rule, make foreign investors reluctant to lend
to the state, fearing that the country is insolvent and ready
to default on its borrowing. Fast growing countries can
keep longer-term deficits without increasing their external
debt in relation to their GDP. Unfortunately, in RM that is
not the case. The ratio of exports to GDP represents the
level of openness of an economy.
1218
billion, Nippon Life Insurance (Japan) $64 billion, BP
(Britain) $63 billion. The American car producers led in
the list of Fortune 500. Nine of the ten biggest companies
worldwide were Japanese and six were American. But, 12
of the 20 most profitable were not American, nor
Japanese. Exxon topped the list of the most profitable
with $8,5 billion. Intel was on the 125th place, judging by
its sales, and on the fourth place according to its profits.
1219
countries. A surplus can also be the result of the
elimination of the purchasing power of the population.
When people cut down on consumption – they cut down,
first of all, on imports. It is very easy to maintain a trade
surplus (and low inflation) in a state of economic
depression. Another type of artificial surplus is created
through the introduction of protectionist or anti-
competitive measures. A country can block all imports,
impose levies, customs, duties and quotas on them, deter
foreign investment – and, as a result, have an eye-popping
surplus.
1220
balance, employing one of three methods, there is no
accounting balance left in it. The balance of the balance of
payments is an element of the general economic balance,
which represents the external balance.
1221
and before the exportation of services. This only confirms
the sick situation in the country.
1222
changes – the elite concerns itself with the perpetuation of
tense geopolitical situations. The nation becomes
submissive, obedient and oppressive. Central Planning by
faceless bureaucrats has been replaced by the Central
Planning of Eurocrats, dictates from Moscow – now come
from Washington, Communism is now called IMF-ism.
How convenient it all is!!! How cozy!!! If the economic
policies fail – the minister can blame the IMF. If they
succeed – surely it is the undeniable fruit of his towering
intellect.
The dilemma: Has RM lately paid too high a price for the
stability of its currency, the denar, is getting more
pressing recently. The balance of payments deficit as a
percentage of the GDP according to the data of the
National Bank is as follows: 1994 - 5.5%, 1995 – 5.8%,
1996 – 6.4%, and according to official sources in 1997 it
is pretty high, 8.13%. It seems that the macro-economic
policies of RM in this respect were created only to
maintain currency stability, until the balance of payments
was in its function. RM should lead a more balanced
policy of these two very important parameters: exchange
rate of the domestic currency and balance of payments
deficits. That means that in no case should the unlimited
(or considerable) fluctuation of the exchange rate of the
denar be allowed. Such a phenomenon will become
entrenched and will foster a bigger volatility of the
1223
domestic currency. This will facilitate the conditions for
an extremely unstable economy. Rather, we should create
an atmosphere for a more realistic exchange rate of the
domestic currency with the possibility to control the
average fluctuation instead of the present de-facto fixed
exchange rate. This will create a better export climate in
the short-term. Even the variant of programmed monthly
fluctuation of the domestic currency is already exercised
in some countries, and can be subject to discussion.
Anyhow, a higher instability of the domestic currency will
have, besides the positive consequences, some negative
ones, as well. It is like poisoned medicine which, while
curing one organ harms the other. But if the patient is in a
very difficult condition, the first thing, which should be
done is resuscitation, the better of two evils. A More
flexible domestic currency is a measure of the same
caliber as short-term debts, but it seems that, at this
moment, it should be a less harmful short-term
interventionist measure.
1224
had low inflation, a trade balance surplus and a stable
Ruble rate for two years. Now it has none of these
"achievements". It lost its illusory stability because it was
illusory. No country in the world can maintain an average
of 6% of its GDP in balance of payments deficits year in
and year out and maintain a stable exchange rate. This can
be done only through strangling the economy. The money
supply is draconically curtailed, liquidity is snuffed, cheap
imports are encouraged, inflation remains subdued and
even turns into deflation. With price stability – exchange
rate stability is obtained. But at what a horrible economic
price!!! In a graveyard there is no inflation and the
exchange rate remains eternally stable.
1225
Street will collapse, the IMF and the World Bank will
cease all disbursements, foreign investments will
completely dry and thousands of citizens will want to buy
dollars at any price? Will the government impose
exchange controls? Freeze denar savings? Lose what
remains of the credibility of the banking system?
1226
basic aim should be: matching the money supply with the
money demand (transactions) while realizing the planned
rate of inflation in a given year. At the same time, the
monetary policy should find an optimal relation between
maintaining a more realistic exchange rate together with
reasonable deficits/surpluses as a function of a
dynamically stable economy and in support of exports.
1227
structure. To start to develop the Macedonian economy,
first an act is needed in the direction of changing its
current structure... because a man cannot go ahead with a
view to the stars if he has needles in his shoes.
1228
working conditions, a structure. Such a structure should
include pro-competition policies (antitrust), protection of
intellectual property, encouragement of high value added
activities, training and qualification of manpower,
maintaining transparency and equality as well as the
supremacy of the law, providing functioning institutions
(courts, customs, tax authorities, banks, capital markets,
social security), mass re-education, investment in the
future (for instance, in research and development
activities), fostering good international relations through
treaties and agreements, pursuing peace, actively
encouraging foreign investment and the importation of
know-how and technology, the encouragement of small
businesses - and this is a very partial list.
1229
government representatives, special speedy courts). There
is no need to invent the wheel: there is the accumulated
experience of tens of successful exporting countries to
derive from.
1230
methods that governments use to encourage their exports.
Banks such as Ex-Im Bank in the USA are considered
highly ineffective. So much so that the American Senate
is seriously debating the elimination of organizations
such as OPIC (the Overseas Private Investment
Corporation). They are forced to act indiscriminately both
geographically and sectorally. They are bloated
bureaucracies. Their actions are politically rather than
commercially motivated. They often fall prey to swindlers
and bogus transactions. But, above all, they create a moral
hazard. In other words: traders and exporters take upon
themselves risks that otherwise - without the bank's
support - they would have refrained from. They know that
if they lose money - it is the bank's money, not theirs. This
makes them callous and haphazard. Granted, such banks
make it possible for domestic businesses to conquer new,
potentially dangerous, export markets. But why go into
risky markets in the first place? Just witness how much
money was lost by these "special purpose banks" in
Russia in the space of two weeks. The EBRD alone lost
between 1.5 and 4.7 billion USD of taxpayers money. I
am absolutely against the intervention of the state in what
should be processes powered by pure profit calculus. If an
exporter finds a market appealing enough - he will be
there, with or without such a bank. If he does not - why do
we, the taxpayers, have to hedge his bets and participate
in his losses (while not benefiting from his profits)? There
are only two exceptions. First, the government should
subsidize exports to destinations, which suffer from high
trade protectionism and state subsidies. If Japan
subsidizes its rice heavily - rice exporting countries
should subsidize their exporters and help them penetrate
this market, crooked by illegitimate state intervention as it
is. The second exception is if the country has no
functioning banking system. Even then, the bank should
1231
act strictly under commercial considerations and refuse to
finance non-profitable transactions, no matter how
politically desirable or expedient they are. On the one
hand, in RM, there is a great need for such a bank, as all
the other banks are dysfunctional when it comes to
international trade finance (either because of their shaky
standing in the world or because of ignorance, corruption
and a host of other ills). On the other hand, experience
shows that it might turn into a hotbed of corruption,
exploitation and worse. A way must be found to supervise
such a bank thoroughly and, preferably, with outside
assistance.
1232
of RM, by a speedier settlement of their own claims, will
make long-term and cheaper credits available. This,
indirectly, will influence the process of structural
economic change and start to create an export-oriented
efficient economy. At this moment, financial resources
available in RM, from the banks' point of view, are really
"a cat in a bag". The bank can never be certain that its
financial resources will be recovered. First, the court
mechanism is very slow and inefficient. This means that
even if the bank were able to recover its financial
resources within a year, or more - the principal plus
regular and penalty interest rates would amount to more
than the mortgage value and the bank will not be able to
recover the full amount of the debt. Second, the
realization of a mortgage is a real BINGO in RM. There
are a thousand ways to cheat the bank and the creditors
with the aim of not returning the credit. The system,
instead of protecting the banks, protects the debtors. Thus,
in the long run, the basics of the financial system are
damaged and it boomerangs. The desperate banks lose the
courage to place financial resources because of the
uncertain environment, which doesn't guarantee the
recovery of their financial resources, or the danger that an
eventual devaluation will erode a part of the property's
value, especially of the banks of foreign origin, which
directly invested in foreign currency after increasing their
capital. Slow justice is injustice. Because of that, the
banks choose to impose high active interest rates, as they
will cover the risk of investing in the economy with a
judicial system with the appearance of "Swiss cheese". On
the other hand, high interest rates increase the costs of
production, which realistically diminishes the export
competitiveness of firms' products, casts in doubt new
investment projects, and at worst, casts in doubt the very
survival of the company and its ability to return the
1233
invested money to the bank. This never-ending spiral is
vicious if not nipped in the bud. RM is in the situation
"invest and export or die". To start with, what should be
done is what is written in one of Hitler's biographies: "the
negative appearances should be destroyed in the very
beginning, not to be analyzed later".
1234
exposed to financial products and instruments in the West.
They must innovate and be active partners in the economy
and not just money conduits. They must charge interest
discriminately: good borrowers should pay MUCH LESS
than bad ones. They must share their profits with their
employees and with the public. They must be forthcoming
to the client: ATM machines, simpler procedures, smaller
queues, home banking, information services, capital
markets services. They must get rid of political decision
making, cronyism and corruption – all rampant nowadays.
1235
SV: Hear, hear. Perhaps it is important to explain to the
laymen why. The only reason why a country exports is in
order to receive payments in foreign exchange. Why is
this needed? After all, internally, all the transactions are
concluded using the Macedonian denar. The foreign
exchange is needed in order to finance imports. In other
words: we export ONLY so that we will be able to use the
proceeds to import goods and services. Imports are a good
thing. Different countries have advantages in the
production of different goods and services. It is better to
import a product from a country, which has an advantage
in producing it – then to produce it ourselves. Our
resources can be better employed where WE have a
relative advantage over others.
1236
donors – or a crisis sweeps across it. Its currency
collapses, it freezes its obligations and is doomed to a
prolonged recession and to a shortage of goods and
services that it can no longer import.
1237
general consumption amounted in 1995 to 37% of the
total exports, in 1996 to 47.1% and in 1997 to 44.7%.
From these data it is clear that more than half of the
Macedonian exports is comprised of the export of
materials for re-processing. This is very worrying,
especially considering the fact, that the resources, raw
materials and mines have a limited life-span, which is
about to end soon, and that the price of raw materials
might keep falling in the world markets. These are the
facts. Naked facts. Every idea has to start developing from
facts. The economy, like life, is a drawing where it is not
possible to use an eraser.
1238
industrial hinterland and the fuel in the growth engine of
the industrial and service nations. Colonies are not only
endless sources of raw materials and high-quality-low-pay
workers – they are also superb, reliable markets for
finished products. In this sense, it is a mistake to try to
join the club of prosperous nations at this stage. To do so
is to eternalize the sorry state of Macedonia's economy
and the sorry status of the composition of its exports.
If the state will tell the Banks that they will pay lower
taxes on their income realized through the financing of
projects for the production of finished products or for
export-oriented production (providing that the products
1239
were indeed exported) or for the production of products of
higher quality, it is logical that the managers of the banks
will finance such projects more often.
Also, if the state will explain and promise (by law) to the
manufacturers and to the potential manufacturers of
finished products (especially to those which are on the
import-substitution list) and to the current and potential
manufacturers of products for export and especially to the
manufacturers of high quality products (by international
quality standards) that they will pay less tax or, in certain
cases, will be fully released from this obligation, and on
the other hand will be entitled to receive bank credits and
support from commercial or from state banks (under the
condition that they have a qualitative project by Western
standards), it is most likely that within a few years of the
positive effects of this policy, the trade deficit will
seriously drop or be annulled. All this combined with
additional stimulation of foreign direct and portfolio
investors, make the chances of terminating the agony
much higher.
1240
assume that the state knows better? Why should we
entrust it with our tax money to dispense to banks and to
manufacturers? What does the state know about financing,
international trade and manufacturing – that the market
participants do not know? If a market player (=a bank, an
investor, an exporter) changes its behaviour due to state
intervention – this is not a free market. It is a distorted
imitation, which leads to waste and inefficient use of
scarce economic resources.
1241
in economic warfare. They should act against dumping,
market cornering and other anti-competitive or politically
motivated dimensions of economic activity worldwide.
Governments should never be vegetarian in a carnivorous
world – lest they find themselves preyed upon. But they
should only re-act, not act.
1242
AS FAST AS POSSIBLE, and this is why I suggest these
measures.
1243
there is a danger that these companies will "go to sleep",
but when it will be made clear in advance that their
chance is limited in time, I believe that most of them will
behave otherwise. From most of these companies the
country at this moment doesn't collect taxes, because they
don't work or aren't established. It follows that in the
future the country can eventually produce new income
and in no way losses.
1244
IT'S VERY EASY TO READ THE LESSON HOW THE
MARKET ORIENTED ECONOMY SHOULD LOOK
LIKE AND THEN FOR IT TO FAIL. IT'S DIFFICULT
TO SAVE IT EVEN BY A COUNTRY'S SHORT-TERM
INTERVENTION. Shock therapy didn't present itself as
very successful "medicine" in Eastern and Central Europe.
Before implementing a pure market economy, a pre-
preparatory period must exist, same as helping a child
when it makes the first steps or helping a man when he is
sick.
1245
development and support and the second half will be used
to compensate for the budget expenditures caused by the
tax holidays and stimuli for supporting exports, providing
bonuses, etc. It is understood that this method of financing
budget expenditures would be for a limited period of time
for two reasons: 1) In the short and medium terms, the
financial resources arising from the sale of the state's
companies are limited and can only suffice for a limited
period of 5 to10 years, 2) In the longer run, the economic
reconstruction would require from 10 to 15 years. If
administered as foreseen, there will be a possibility for the
establishment and development of new successful firms
(which today don't exist or have low profitability, which,
on the other hand, translates to low tax receipts), which by
opening new production and export businesses with the
help of the new state policy, will start to gradually fill in
the void in the budget created as a result of export
bonuses, exemptions, relief, etc. (which I have mentioned
above as measures for economic reconstruction). So, for
example, if one company operates today with a profit of
100.000 DM yearly, and with the new state measures (an
easier access to credits for production, exports and tax
holidays on a similar basis) it will increase its business
and make a profit of a half million DM, this means that
the state will receive about five times more financial
resources from taxes.
1246
subject to a trend of privatization... We are on our way to
conclude that RM has a historical chance to reconstruct its
economy, to become export-oriented and with high
quality products and services.
1247
of supply side economy, because I don't think that with
the reduction of taxes, investments will increase, the total
(macro) revenues will increase, and so on. The idea was
much simpler: lower tax rates for those which produce
products for export in order to stimulate the others , which
do not produce or export, or which produce but not
export, or which just started in business, to get them to be
oriented towards export projects. This doesn't mean that a
reduction of the taxes of exporters will increase the
investments, rather that it will motivate potential and
actual producers to think more about exports as a more
profitable business (we agreed that exports are very
important for any country). But all these matters must be
within a pre-defined period (in which the companies must
begin to work), because if this is a long-term standing
opportunity, the exporters can become inefficient, non-
competitive and a problem for the country.
1248
same. This psychology, if one wants to preserve
civilization, is changeable only by the introduction of an
efficient penalty system with multi-level control. For as
long as the state creates a system, which applies to all, but
not to "us and ours", it doesn't stand a chance for success,
no less because RM is small country and most people
succeed to find a way to belong to the group of "ours".
The system, which the state creates, determines the
business etiquette and culture, the mode of thinking, the
environment and the habits, both negatively and
positively. The state first has to make order with a multi-
level control system of penalties, and only many years
after that will follow the spontaneous creation of "moral
shame" associated with the acts that I am talking about.
Maybe the penalty isn't always justified, but it serves to
block a hundred other evil deeds. Who doesn't punish evil,
provokes it. So, first is fear and than shame will join it.
The shame after discovering the act of deceiving the state
is almost not present in RM. Some people perhaps don't
even understand the meaning of these words. This is the
way new habits and customs are created among people,
and also the transformation, from the roots, of the
individual's psychology in view of its responsibilities
towards the state. About the fear and especially about the
system of shame, much can be learned from the Japanese
system, certain parts of which can serve as an interesting
example for RM and for the people who live in the
Balkans. In Japan the court is not a very frequented
institution. In the USA statistically there is one lawyer per
323 citizens. In Britain 723, in Germany 1345, in France
2099, and imagine in Japan 8200 citizens to one lawyer.
In Japan the lawyers are not very rich people. But, to
reach this level, a long evolution, also a tradition, which it
is obvious that the Japanese will not retract, are needed.
We will get back to Japan later.
1249
SV: There is always time for some philosophy in an
economic discourse. I maintain that economics is a branch
of psychology. Your thesis is so nicely put (seriously) that
I have nothing much to add to it. I think, though, that to
guilt and shame one can add a third force: utility. In
general, therefore, I believe that human societies can be
divided to Fear-driven, Shame-driven and Utility (or
agreement)-driven. The first type of societies is
characterized by a constant battle between the state and
other institutions and the individual. Brute force, subtle
force, threats, intimidation, censorship are applied by the
state to its citizens. They react with sabotage, crime,
subterfuge, subversion, dissidence and terror. Shame-
driven societies apply peer pressure and consensus
building mechanisms to their members. The individual is
subjected to a barrage of ethos, myths, conformity, social
do's and don't's, social sanctions, social rewards,
stereotypes and is in a constant trial by his compatriots,
colleagues, peers, suppliers, clients, family, social stratum
and so on. The individual reacts by losing a big part of his
identity and adopting a surrogate identity instead. In due
time this leads to extraordinary cruelty and violence or to
milder forms of sadism. The revolt exists but it is more
disguised and it does not involve open defiance, dissent,
sabotage, or terror. The third category of states is the most
stable, enduring, flexible, adaptive, functional and ideal
for wealth creation. It involves an agreement between the
individual and the state. Both parties acknowledge the
supremacy of individual utility (money, pleasure, comfort,
entertainment) over any other consideration or constraint.
Individual utility supersedes even the utility of the state in
most cases (with a few exceptions, such as taxation or
army service). Both parties retain the right to remedy any
breach of the agreement through predetermined
mechanisms of arbitration. The attitude is businesslike
1250
and game-like. Nothing is sacred, everything is subject to
review. Mutual belief in the good (read: rational)
intentions of the parties prevails. Violations are punished
severely because they constitute not only a breach of
contract but the undermining of sacred trust.
1251
countries removed the restrictions on foreign ownership,
liberalized the transactions through the capital account
and improved the accounting and information standards.
The role of the stock exchanges in collecting and
publishing information is more important to larger firms,
because their shares are traded more often. The high fixed
expenses of issuing securities handicap the smaller
companies. The stock exchanges offer new possibilities
for providing capital and new investments. Unfortunately,
in RM this is not the case, because of many reasons: the
privatization model, lack of political motivation for
attracting foreign investors, unsuitable and fuzzy judicial
system, the absence of state bonds and of branches of the
big western banks, the absence of a central share register,
the absence of a stronger presentation of the possibilities
of the domestic stock exchange and its role, etc. The
privatization model in RM was built on the basis of inside
relationships between shareholders and managers, in most
cases they were the same people. It led into a situation
whereby companies preferred to abandon the stock
exchange and to rely on bank guarantees with high
interest rates coupled with slow or no development. This
state at the micro level created implications at the macro
level. If the companies in a country stagnate or don't
prosper, the question is how is it possible for the
production and the exports to increase on the macro level?
Almost everything that we see as data pertaining to the
macro level is a result of micro units working in unison.
There is only small hope that in the next 2-3 years
companies, which are in the process of privatization or
which still have a diffuse ownership structure, will be
provoked to conceive new big projects and markets. This
means that the new private companies and the privatized
companies with a more centralized structure of ownership
should carry the weight of the reconstruction and be the
1252
first quoted companies, which will try to raise new capital
through the stock exchange in RM. Unfortunately,
according to The Wall Street Journal Europe's – Central
European Economic Review, from a total 15 countries in
transition in Central and Eastern Europe, RM (judging by
the coefficient of private property per GDP) is fourth - but
from the end of the table, with 50 percentage points.
1253
exchange are like an old man with his dog. The old man
walks ahead very slowly and stops from time to time. The
dog runs around him, behind and before him, sneaks and
goes back. It is thought that the stock exchange anticipates
the economic processes at least six months in advance. If
we put to one side two or three big takeovers (a process
which is usually conducted in the world by KHV, apart
from the stock exchange), we will still obtain poor trading
results in the stock exchange in Skopje. If the domestic
companies do not have interest in publishing their
financial results, the state has to find a way to change their
mind (as it was done with the banks, which are obliged to
publish their results in a daily newspaper).
1254
team, a few years ago, noted that RM has superb
geographical conditions for high-quality wine production,
but it is necessary to upgrade the technology of
production, to change the variety of seeds and to improve
the bottling. Despite the fact that competition among wine
producers in the world is great, RM, with small efforts can
find itself in a much higher place in the list as a quality
wine producer. In England there are three big supermarket
chains and one of them is SAINSBURY. Last autumn, I
was able to see Macedonian wine only there, and, though
cheaper than the Bulgarian wine – it was still selling less.
One friend of mine, in London, told me that in the above-
mentioned chain of supermarkets the wine produced by
others in Macedonia used to be sold, but because of the
fact that wine deliveries were never on time and in the
exactly agreed quantities, the English partner decided to
cancel the collaboration.
1255
immediate satisfaction (also known as savings and
investments) and capturing of markets. The weapons of
the weak are socialist: poverty for all, steal from your
employer, increase the information fog and dis-
information, think now, there is no future, no loyalty, hide
your true emotions and so on. The weapons of the strong
are capitalistic: market yourself, believe that you are the
best, improve constantly, think big, think ahead, fight
your competitors on equal terms, honour obligations.
Macedonians still have to make this transition. This is the
ONLY transition that they have to make – because the
only transition is in the mind and the rest follows from it.
1256
industrial processes and no costs involved – the buyer was
willing to pre-finance the whole operation). This is the
power of comfortable habits and hundreds of years of
sabotage, avoidance of all effort and labour and being
someone else's colony (cheap labour and raw materials).
1257
SV: It is essential for a country in the process of
modernization and integration in the global economic
community to decouple itself from the volatile prices of
commodities. One of the main reasons for the recent crisis
in Russia was its over-dependence on energy products.
But I would like to add two recommendations. First,
whenever and wherever possible, the state should strive to
hedge its commodity exposure. In other words, it should
buy futures contracts in the world markets (Chicago
Board of Trade, Chicago Mercantile Exchange). These
contracts are like insurance policies. By paying a small
premium, the future price of the commodity is guaranteed.
True, if the price goes up above the guaranteed price – the
difference is lost. But, if it goes down, the guaranteed
(higher) price is paid to the holder of the contract. In the
last three decades commodities were a one way business:
down. Almost every type of commodity has such
contracts available: pork bellies, lamb cuts, certain species
of tobacco, corn, wheat, rice, currencies, interest rates –
everything. It would be a wise idea to use financial futures
to limit the exposure of Macedonia to variations in
international interest rates or in exchange rates. All this
can be done today. The second recommendation is to
establish an "Exchange Rate Guarantee Corporation". The
state will ensure exporters against foreign exchange
fluctuations. The exporters will pay a premium and will
purchase from the state an insurance contract, which will
guarantee the rate of the foreign exchange that they are
going to receive in terms of denars. This will enable them
to price their products with an element of certainty. In
most economically advanced countries in the world, such
mechanisms do exist. Gradually, the state will be able to
pass on this function (of insuring exporters against
currency exchange fluctuations) to entrepreneurs in the
private sector.
1258
NG: A few months ago we have discussed attracting
foreign investments to RM. One of the most important
measures, for attaining a suitable balanced state in RM,
should be directed at attracting foreign commercial
investments in RM.
1259
against domestic firms because many joint ventures with
foreigners involve domestic firms and they will benefit
from these special courts as well. Secondly, anyhow
foreign investors are "discriminated" in the tax code, in
the company law and so on. They are given special
incentives (example: tax holidays) – isn't this
discrimination? It is legitimate to discriminate in favour of
a good thing.
1260
reduce investment risk, will offer new credits and
financial resources to the domestic companies according
to standardized methods and evaluation of the credit
applications, will revive domestic savings, will introduce
new methods of work and behavior, etc – is inevitable. I
will not continue with this subject, because we explored it
in detail in our first dialogue.
1261
the same work that, anyhow, I am doing voluntarily. I am
doing it now not only because I fell in love with
Macedonia (and I did). I am doing it because I am a great
believer in the future of this country. Having lived in five
other countries in CEE I am saying it openly: no place like
Macedonia. I prefer it to any other country in this region.
And if I do – why not other foreigners?
1262
SV: To this I would add the bad image of the Macedonian
industry. It is world notorious for its unreliability.
Promises are not kept, contracts not honoured, schedules
ignored, the quality of the products is shoddy. The
managers are ignorant (possess no minimal knowledge of
finances or marketing), ill-qualified, selected arbitrarily.
There is usually no identifiable center of command and
control. The whole structure of a typical Macedonian (big)
firm is diffuse, "magla-fied". No foreigner wants to do
business under these conditions. The placement of
Macedonian products abroad is also influenced by the
domestic conditions in Macedonia which prevent foreign
investment (political meddling in business, no protection
of property rights because of an inefficient court system
and so on). The trend today is that most exports are done
through multinationals, which open branch offices or
factories in the country of export. Thus, for instance, the
Japanese carmakers manufacture most of the cars that
they sell in the USA inside the USA. Multinational food
companies open branches and import food from the host
country – and so do big retail chains (like Marks and
Spencer, Tasco and others). So, today THERE IS NO
DIFFERENCE BETWEEN EXPORTS AND FOREIGN
INVESTMENTS. One is the mirror image of the other. If
Intel opens a factory in the Czech Republic or a research
facility in Israel – the products are then exported to the
USA. EXPORTS ARE THE CHRONOLOGICAL END
1263
RESULT of the FOREIGN INVESTMENT PROCESS.
Most of the exports of the Vysehrad Three (Poland,
Hungary, the Czech Republic) are the products of
multinationals, not of domestic firms. Most domestic
firms tend to concentrate on domestic markets. Like
everything else, exporting has become a global specialty,
which requires expertise and experience.
1264
SV: "We drink less with our jaws and more with our
brain". This is the best summary of what is marketing that
I ever heard. I wish Macedonian managers would
understand this. Marketing is a branch of mass
psychology. Throwing money at advertising is not
everything there is to it.
1265
• Upon request from its clients, it should provide
services: preparation of studies, analyses, project
plans, strategies and the financing of marketing
projects proposed by the clients;
1266
suggestion of the consumers, the manufacturer may obtain
a bigger market share and from this the national economy
will derive undoubted benefits. Recently data were
published which demonstrated the physical growth of
production. Even if we accept these data without any
deeper analysis, the question regarding the financial
results of the production appears, or about the feasibility
of the production and of the employment of the assets.
1267
The second pertinent point has to do with images. A
product evokes in us a host of related images, every time
we consider buying it or we consume it. These images
determine the objective properties of the product. This is
the mistake of managers, which deride marketing and
advertising. Products have no OBJECTIVE qualities –
only subjective ones formed in the consumer by layer
upon layer of data, memories, associations, fears, images,
sound bites. The VHS standard in VCRs prevailed over
the Beta standard DESPITE the fact that it was
technologically inferior. MS-Windows is far inferior to
the Macintosh operating system – but who is the market
leader? Quality counts to a certain extent, of course. But
packaging, labeling, positioning, imaging – are as
important, usually more so.
1268
Macedonian exporters should be stimulated to obtain a
higher quality of the working organization and its
products, or ISO 9001/2/3 standards of quality and ISO
standard certificates for product quality. The data that
only 20 Macedonian companies own this standard (and
not for all processes and products, but for one, two or
three of all the products which are produced by one
company) says that the situation is unsatisfactory and
worrying. Many Macedonian companies lose markets
because of lack of ISO 9001 or 9002 certificates. In
today's world of competition one of the most important
things, which separates the leading companies from the
rest, is quality. Even companies, which are renowned for
their qualitative products or services, must work on
getting better in everything they do with an aim to remain
on top. This is quality management. Quality means the
fulfillment of all the agreed demands, not more nor less,
which satisfy the clients. But, to reach work quality it is
not enough only for the company to implement an internal
system of standards. In the chain of consumers, buyers,
partners, distributors, etc. there must be present a certain
quality of work. The European Union issued many
directives, which made exporting to it extremely hard
without having the above-mentioned certificates. For
trading within the Union these certificates used to be only
a good recommendation, but not a prerequisite for the
external traders, more and more they became a condition.
The quality standard ISO 9000 is also needed for export
destinations in the USA and for many other countries,
including even the Arab countries. This means that in the
future it will be more difficult to export even to the poorer
countries without having this certificate. The quality is not
something, which can be guaranteed by controlling the
work of others and uncovering their mistakes. The key is
in preventing the mistakes, above all by securing the right
1269
finish of the work. The systems for quality control should
cover everything that we do, or do not do, and which can
influence the quality of the product or the service quality,
which we forward to our clients. Implementation of the
quality standards system represents a documented way of
introducing control of the quality. ISO 9001, above all,
requests management responsibility and expects it to
come up with a policy for quality and to make sure that
everyone in the organization understands it. Also, the
managers should obtain enough financial resources and
trained personnel for doing the job, to appoint a quality
coordinator for the system and to check the system in real
time for quality to make sure that it is still adequate and
efficient. In the other 19 of a total of 20 points of the
Agreement it is mentioned that the quality system should
be fully documented, to satisfy the requests and
expectations of the clients, etc. A review of the
Agreement with the confirmation that the order is fully
understandable and that we are capable to fulfill it
precisely anytime is also a point in it. I will only mention,
not analyze, all the other points: the control of the design
(projection), control of the documents, ordering, control
of the product ordered from the seller, identification of the
product, control of the process, inspection and testing,
control of the inspection's measurements and testing of the
equipment, the situation during the inspection and testing,
control of defective products, corrective and preventive
measures, operations, warehousing, packing, storing and
delivering, control of quality reports, internal quality
check-ups, training, service and statistical techniques. To
achieve such work and organizational standards, the
company needs to employ specialists, whose job it is to
prepare the companies to receive a certificate from an
independent and juridical body of certification, which, on
the other hand, will confirm that the company operates
1270
according to the world standard. In the Macedonian
Chamber of Commerce there is a register of specialists,
which are trained, noted and recommended by the very
well known English house Bywater, which has provided
the training and comments through the exactly defined
standards. This will provide a certain preparation for the
time when the representative of the one of the many
companies, which issue this kind of licenses, will try to
find errors in the system and abstain from granting the
license (the money, which is paid in advance, is lost, in
such a case). Well known world institutions, which grant
ISO 9000 certificates are: BSI – England, Lloyds –
England, Bureau Veritas, OQS – Austria, TUF – Germany
and others. A big problem is that the preparation and the
check-ups needed in order to receive the above mentioned
certificate, require an investment of between 8.000 and
25.000 DM (depending on how big the company is) with a
validity of three years. Within this price are not included
the costs, which the company will, probably, have to
commit to for an increase in the level of technical
equipment (computers and so on), and are a variable
depending on the firm's developmental level. It is
important to mention that the company, which issues the
certificate, makes regular inspections of the company,
which receives the certificate, and if it discovers a breach
of the agreement, it has, according to the Agreement, the
right immediately to revoke the license without
reimbursing the expenses that the company incurred.
1271
There are even higher standards for quality than ISO
9000, such as TQM (Total Quality Management), which I
noticed during my visit to the Toyota factory in Japan. But
it seems that RM is in too premature a stage for such type
of certificate (TQM).
1272
for using credit financing (stimulation both of the users
and of the banks). For a start, the state can cover the basic
costs for obtaining quality certificates to the 20 to 40 most
strategic Macedonian companies, elected according to
predetermined criteria for qualifying. With this the
process of economic reconstruction in the export sector
will be much quicker. This represents the state's
investment, which will be returned very soon, through
increased exports (and production), increased inflows of
foreign currency and finally bigger income to the budget
from the companies, which will increase their production
and their exports. I am convinced that if RM will ask for
it, it will receive non-returnable help from some foreign
funds for this purpose, with a big part of the financial
resources obtained on this basis. If RM plans to become a
member of the EU and to increase the trade exchanges
with it, it has to achieve higher standards of operations
and production. This means that, basically, this should be
a concern of the producers and the managers of the
national economy have to find the way to speed up this
process.
1273
But there is an uglier side to "quality standards". This is
the side of protectionism. Countries use quality, health,
environmental and other standards to protect domestic
producers from foreign competition. Shielding them from
competition is costly because it is economically
inefficient. It is always better to buy cheaper imports than
to manufacture the same products locally and expensively
(the relative advantage theorem). But it is politically
popular because it saves jobs and makes some people
richer. Crazy health, safety and environmental regulations
mix with unearthly and outlandish demands for purity and
performance to protect rich countries from their poorer
brethren. It is virtually impossible to sell agricultural
produce or textiles to the EU or textiles to the USA –
unless the exports are regulated in special agreements and
treaties. It is totally impossible to export to Japan and very
difficult to export to China. But the same produce (wine,
meat) or textiles – refused under the quality or health
pretext when it emanates from Macedonia - are often sold
in the very same markets under Italian or German or
South East Asian labels. This only serves to expose the
amount of hypocrisy with which quality standards are
applied in order to block free trade. To this there is only a
political solution and small countries are too insignificant
to influence market giants like the EU. But they can and
should operate through the mechanism of the WTO and
the various international commercial arbitration courts
available even to small countries. The advantage of puny
trade players like Macedonia is that their nuisance value is
higher than the potential damage that their negligible
produce can inflict if given free access to the target
markets. In most cases, they will be given exemptions and
preferred treatment on condition that they do not rock the
boat of international trade. Shut up and export as much as
1274
you like – is the warning-cum-promise. Macedonia should
take advantage of its nuisance value.
1275
Beside the export-oriented policies, great care to secure
the substitution of imported goods is needed, in order to
prevent the outflow of foreign exchange, through the
provision of cheaper credits, tax holidays (especially for
higher quality goods), projects from the governmental
agencies and eventually through duty protection.
1276
I think that the policies of the state should also be directed
at limiting the imports, but by more sensitive measures
and at the same time more useful, for instance, by
determining high standards for the quality of the imported
products. The quality standards should be determined in
advance and be compatible with the EU standards. This
policy would be implemented especially regarding the
import of agricultural products and consumer goods.
1277
– or will generate outflows of foreign exchange in
the future for further consumption.
1278
j. Act fearlessly against other countries that violate
the acceptable principles of international trade.
Impose duties and quotas or quality and health
requirements on their products as well.
NG: This way and only to a certain extent, not only will
the domestic production be protected and the outflows of
foreign exchange decrease, but the Macedonians will also
be able to buy goods with a better and verified quality,
though understandably more expensive than the domestic
ones. Protecting the agricultural sector is not unknown
either to the USA, or to the EU. The latter absorbed
negative energy from the USA's 1988 Trade Act
concerning the issue of trading agricultural produce within
the Union, especially from France. Even though the USA
claimed that it will cancel the subvention of agricultural
produce, protectionism and even measures of "economic
revenge" are present.
1279
it is needed to implement retaliatory duties against
countries which block the import of Macedonian products
for consumption and otherwise.
1280
At the same time, the efforts of RM to enter in the World
Trade Organization should be more vigorous. But, until
such time it is possible to take advantage with regards to
certain limitations, which are not obligatory for non-
members of that organization. The membership in WTO
guarantees a mutual respect of the issued rules of the
game between the trading countries.
1281
one economically powerful country, as for example is the
case with the Czech Republic and Germany, or Japan and
some other countries in the south-east Asian region.
1282
example, the involvement of the Minister of Agriculture
in the sale of Macedonian wines in the Slovenian market,
should be a positive example for further dealings. I think
that with bilateral contacts at the highest level, RM will be
able to significantly increase its exports and to contribute
to the opening of new markets in the long run and to the
attraction of foreign investments. Of course these
measures are not economically healthy, nor are they the
ultimate solution. The Macedonian economic situation is
not very healthy , so they can be used more pervasively in
the short and medium term. Such an idea should not be
understood that domestic economic entities should rely on
the government for help, on the contrary, it should be only
an additional effort on the way to achieving quicker
economic prosperity.
1283
economic power. This is the case of the Czech Republic
and used to be the case of Israel, Cuba and dozens of other
countries. The lessons show clearly that this is a good
strategy as an interim measure. A small country can attach
itself, economically, to a bigger one, ONLY if it uses the
time that it thus buys to get rid of this dependence. While
closely and overwhelmingly collaborating (usually, not
only economically but also politically) with the bigger
power – the small country should fervently and
ceaselessly develop alternatives: other markets.
Otherwise, it will end up like Cuba did. It sank into abject
poverty when its main "sponsor" (USSR) became
economically defunct. "Sponsor-Client" or "satellite"
relationships are good as a stopgap measure or in times of
emergency. There is no such thing as "pure" economics.
In the global arena, economics is a reflection of political
and geopolitical realities. Ask Saddam Hussein. There is a
political price to pay for attaching oneself to a global
power. Many will find this price unacceptable. Germany
allows itself to publicly humiliate and chastise the Czechs
(regarding the Sudetenland Germans issue) precisely
because it is economically dependent. The wish of
Macedonia to join the EU has always hampered its ability
to negotiate freely with Greece.
1284
b. That it will not be overwhelmed by the size,
importance, wealth, history, experience, or
personality of the other participants;
g. That the rules of the club will not conflict with its
rules, the mentality of its people, its ethos, its
political structure or any other important
component of its identity.
1285
embodied in the WTO charter. Most Economists regard
regional clubs with horror because they consider them to
be obstructions on the way to completely liberalized trade.
Regional clubs tend to encourage trade between the
members at the expense of trading with external partners.
This is bad and counterproductive economically. But
reality is that everyone (including the mighty USA) is
engaged in initiating, constructing or becoming a member
of a regional trade club. If you can't beat them – join
them. Like the first option its is a good stopgap,
temporary measure until the country's accounts get
balanced and it gets fully integrated into the global
economy.
1286
built and which from last year became very evident, and if
we connect all of it with certain illusions of the South East
Asian countries, I still maintain that the current crisis
cannot cast a shadow over the past successes of Japan and
even of the countries from that region, which are enduring
the recent crisis on a higher developmental phase than
tens years ago, which for example is not the case with
RM. Of course, it is not right to compare RM Japan in its
condition today, but let's talk about: WHEN JAPAN WAS
RM, or let's compare Japan's past to Macedonia's past and
PRESENT.
1287
The four bigger and the few smaller islands on which
Japan exists represent 0.3% of the planet's earth surface,
and the Japanese population is 2.4% of the total
population of the planet. Within the years following its
opening to the world, Japan went from being a poor
agricultural county to full industrialization. For them to
start and to develop the industry on the basis of the
European and American technology was imperative. At
that time the Japanese government invited people from
different countries, experts from different areas. So, in the
period 1880-1910 the establishment of the most important
science institutions, which started to conduct research, to
transfer and develop western technology, started. The
construction of a complete travel infrastructure started.
Governmental intervention and planning were big at that
time. Prior the second world war, Japan became one of
the most advanced countries in the world even though it
depended heavily on imports, which means that it had to
export and with the foreign currency earned, to import.
Unfortunately, in 1936 the controlled economy begun, the
economy which was prepared for war, from which Japan
emerged totally destroyed (as a result of mass
bombarding), territorially and humanly damaged and
above all suffering the consequences of the nuclear bomb.
It was tortuously difficult to find work for 7.2 million ex
soldiers plus 13 million unemployed workers, students
and others from factories, faculties etc. The real income in
1946 had been 30% of the average one in the period 1934-
1936 and the inflation was 200% in the period August
1946 - March 1947. Everything that was built before had
been destroyed and Japan started its development anew.
1288
crisis, which is incomparable with the Macedonian one)
and where is RM? What is the Japanese secret of success,
even taking into consideration the so called "bubble
economy"? For the bubble economy to have existed, the
system which inflated the bubble should have been
formed, though at the end the bubble blew-up (as it
happened in Asia last year) and crisis prevailed. The
Macedonian bubble, unfortunately, still is just a sad drop.
Kuzuhide Okada, a professor in Senshu University, says
that the Japanese economy is principally a market
economy, but from the very beginning the government
understood that somebody should have led the policies to
direct or control the operations of the firms, which acted
in the specific foreign markets, as well as in their own,
domestic one. This is related to the Japanese high level of
dependence on the outside (which characterizes RM as
well). This is the reason why I began to study the past of
this geographically remote country. The government's
active policies supported development very strongly. That
was not a classical socialist way of planning, even though
some similarities can be found. I think that for a country
to reach the state of wholly free market economy, a period
of governmental policies to direct and control the
economy and raise it to a higher level is needed. I have the
impression that in certain portions of the trade laws and
their practice RM is more liberal than England, Germany
or USA. I am not very convinced that it is useful to the
nation. The system which Japanese built after the second
world war meant strong fiscal, legislative, political and
monetary support of exports (not to forget that the yen-
dollar exchange rate during the period of development
reached 300 yens to the dollar, with the latter falling in
value during the period of crisis period) and on the other
hand import restrictions. The Japanese motto was "to
export or to die". The Japanese success was that it
1289
developed the exports mostly, in certain decades even
three times faster than its competitors (the USA and
Germany). In comparison with the above mentioned
period, in the later years the Japanese government
drastically reduced its involvement (but it would seem
that not enough). The elimination of all governmental
management and regulation, however, is not possible.
Beside other activities, the Japanese government directly
provides public works projects, through which and
through the fiscal policies, the government still dominates
the determination of the economic trends. Untimely
deregulation, a badly structured financial system, and a
certain conservatism in the management model (which is
transforming itself according to western standards) are the
main reasons for the current crisis, which however deeper
it goes, will not be in a position comparable to the
Macedonian crisis. This says that when one economy is in
crisis, and especially when that crisis is during a low
developmental phase of the economy and industry, the
state should help in the construction of a regular strategy
and in putting it into an appropriate framework. When the
strategy starts to be implemented and the economy gets
better by many parameters, the state should provide a self-
withdrawal system from the body economic, because it
can be transformed into an obstacle for further
development. Today RM is in situation that requires a
strategic change in the economy, and this cannot be
realized spontaneously, the state should help, very
carefully, not to allow an adverse effect to happen.
1290
somewhat), a long term surplus in the trade balance, the
second place in the world by GDP per capita (above
$36.000), bigger than the USA's or Germany's (above
$28.000), a country which almost one third of its exports
(one way or the other) are placed ion the very sensitive
markets of North America and 22% in Western Europe,
transforming itself at the same time to a regional leader,
and into a country with an unemployment rate which in
the past few years increased from 2.7% to 4.1% (close to
the American rate). Only 25 years ago its income per
capita was less than one half of the American one. To
reach a situation of having an advantage of 25% over the
USA is an amazing feat. In the period 1900-1987 Japan
with an annual average economic increase of 3.1%
digested the biggest increase of the real income per capita.
Beside this, from a sizable importer of expertise
transformed itself into a big exporter. For example in
1989 about 100 thousand professionals left Japan (more
than half went to the USA) and it accepted 65 thousand
from other countries (90% from the undeveloped Asian
countries). Besides the stable political constellation, the
Japanese built a separate strategy for car exports to the
USA and Europe. However criticized, as much as it relied
on dumping, it helped Japanese firms a lot.
1291
A closer look reveals the ten categories of products with
at least 2% of the exports in 1989:
1. Cars (17.8%);
2. Office equipment (AOP processing machines)
(7.2%);
3. Precision machinery (4.8%);
4. Steel (4.4%);
5. Car spare parts (3.8%);
6. Self-regulated instruments (integral movement,
etc.) (3.1%);
7. Internal Combustion Engines (excluding aircraft
engines) (2.2%);
8. VCRs (2.2%);
9. Telecommunications equipment (2.1%); and
10. Organic pharmaceutics (2.0%).
1292
markets or can be provided only at a prohibitively
extravagant price. This includes health, defense,
education, prisons, police and welfare. There is no
question then that governments should step in to fill the
void. Another class of cases where the state is called to
intervene is when the market fails. Markets can – and do –
fail for a myriad of reasons. Speculative bubbles are
market failures. Lack of investments, research and
development, qualified and trained labour, patents and
other intellectual property, work ethic, economic crime
and corruption, anti-competitive behaviour are all market
failures or lead to them. The government then is called to
intervene, to regulate, to investigate, to imprison, to
stimulate, to direct – and legitimately so. There is simply
no one else to do the job. But industrial policy (which is
what Japan has engaged in) is more of a mixed bag. Some
countries have done very nicely without it (Estonia, for
instance). Others have botched it to the point of self
destruction (the USSR). Yet others regarded it as a
"starter" (Israel, which adopted the Japanese path of
government directives – but now has almost no
involvement in the micro-economy). Japan simply did not
know how to say to its industrialists and bankers: "enough
is enough". As a result, Japan is in the worst financial
mess in human history. It will recover, but at the cost of a
recession which will erase many of its achievements.
1293
detrimental. Without the proper spine, even the best
runner collapses ultimately.
1294
markets. In short: industrial policy should prepare
the CONDITIONS for an industrial and export-led
expansion of the economy, but not for its
financing.
1295
technological knowledge in the world, registering
thousands of patents and licenses. Their business
philosophy - to be the biggest imitators, compilers or
innovators in the world, brought them big success. Their
patents mostly are the result of the mistakes and
weaknesses of their competitors. Japanese patents look the
same as the Japanese do: small and efficient.
1296
From the Macedonian point of view the Japanese crisis
starts from such a higher level of the economy than
Macedonia's, that it will make us uncomfortable to
confirm "yes, your economy isn't doing well". The
philosophy of the weaker and the smaller towards the
stronger and bigger is still to regard it as bigger and
stronger even when it is wounded.
1297
areas (the philosophy is to know a little about everything)
the Macedonian educational system doesn't produce a big
number of well specialized professionals in specific areas.
Even the bigger number of those very rare professionals,
formed along these lines, do not encounter understanding
and support and they leave RM very soon.
1298
high school their parents think more about how will they
find a way to help their children to register in the faculty
and less about how much they will be ready for it, and
such a practice I believe is not accidental and is not the
parent's or future students' guilt at all. Passing the exams
in the best part of the cases is based on the parents'
connections or on friendships. High grades go to the
regiment of students who bought or who copied the
professor's new book, to the students who learned the
material by heart without a depth analysis and
understanding. Students go through the tortuous process
of overcoming the low level of professionalism and low
authority of certain professors (not all). This all
transforms some exams into "impenetrable barriers". It
trains the students to be corrupt in the years when they
have to practice by themselves to form their own thinking
and to defend themselves with open and impartial
discussions. Of course this is not relevant to all the
professors and the faculties, but unfortunately it is
relevant to the bigger part of them.
1299
From this point of view, it would be a big handicap for
RM or one idea for faster national prosperity.
1300
one centimeter in their professional development and do
not speak English or German at all. It is interesting that
they still survive very well, a result of timely political
acquiescence and support, which not only insured their
continued successful and cushioned business existence,
but also, in this or that way, made it much better.
1301
foreign investors will provide new markets for the
domestic firms and will exercise a strong influence for
changing certain negative habits and standards of the
work of the Macedonian management.
1302
are not worth the material they are made of. There is a
crying and desperate need for qualified, trained, skilled
and properly educated manpower.
1303
holes. In the same way. Again and again. Persistently and
stubbornly. Without deriving any lessons. This becomes
comic. Even a bear in the circus can learn to ride a
bicycle...
Maritime Piracy
The rumors concerning the demise of maritime piracy
back in the 19th century were a tad premature. The
scourge has so resurged that the International Maritime
Board (IMB), founded by the International Chamber of
Commerce (ICC) in 1981, is forced to broadcast daily
piracy reports to all shipping companies by satellite from
its Kuala Lumpur Piracy Reporting Center, established in
1992 and partly funded by maritime insurers. The reports
carry this alarming disclaimer:
1304
On July 8, 2002 seven pirates, armed with long knives
attacked an officer of a cargo ship berthed in Chittagong
port in Bangladesh, snatched his gold chain and watch and
dislocated his arm. This was the third such attack since the
ship dropped anchor in this minacious port.
1305
higher than 1999 and four times the 1991 figure. Piracy
rose 40 percent between 1998 and 1999 alone.
1306
with the business cycles of the host economies. The Asian
crisis, triggered by the freefall of the Thai baht in 1997-8,
gave a boost to East Asian maritime robbers. So did the
debt crises of Latin America a decade earlier. Drug
transporters - armed with light aircraft and high speed
motorboats - sometimes double as pirates during the dry
season of crop growth.
1307
Many issuing authorities are either careless or venal or
both. The IMB accused the Coast Guard Office of Puerto
Rico for issuing 500 such "suspicious" certificates. The
Chinese customs and navy - especially along the southern
coast - have often been decried for working hand in glove
with pirates.
1308
members of British trained Indonesian anti-piracy squads
are still roaming the Malacca Straits.
1309
"The Global Mars has probably been given a new name
and repainted. Armed with false registration papers and
bills of lading, the pirates - or more likely the mafia
bosses pulling the strings - will then try to dispose of their
booty. The vessel has probably put in to a port where the
false identity of vessel and cargo may escape detection.
Even when identified, the gangs have been known to bribe
local officials to allow them to sell the cargo and leave the
port."
1310
The Greek government has gunboats patrolling the 2
miles wide Corfu Channel, where yachts frequently fall
prey to Albanian pirates. Brazil has imposed an unpopular
anti-piracy inspection fee on berthing vessels and used the
proceeds to finance a SWAT team to protect ships and
their crews while in port. Both India and Thailand have
similar units.
1311
India and Iran - two emerging "pirates safe harbor"
destinations - have also tightened up sentencing and port
inspections. In the Alondra Rainbow hijacking, the Indian
Navy captured the Indonesian culprits in a cinematic
chase off Goa. They were later sentenced severely under
both the Indian Penal Code and international law. Even
the junta in Myanmar has taken tentative steps against
compatriots with piratical predilections.
1312
accounted for up to one fifth of its GDP. They often lasted
for months. Historical re-enactments, sports events, chess
tournaments, are all manifestations of Man's insatiable
desire to be someone else, somewhere else - and to learn
from the experience.
1313
Bulgaria. A unit of Norrath's currency is traded on
exchange markets at USD 0.0107, higher than the Yen
and the Lira. The economy is characterized by extreme
inequality, yet life there is quite attractive to many."
1314
island, but in late 1997 bands of counterfeiters found a
bug that allowed them to reproduce gold pieces more or
less at will.
1315
trades are 10 percent bigger than the film industry - and
half as lucrative as the home video market. They are fast
closing on music retail sales.
1316
As real-life actors and pop idols are - ever so gradually -
replaced by electronic avatars, video games will come to
occupy the driver seat in a host of hitherto disparate
industries. Movies may first be released as video games -
rather than conversely. Original music written for the
games will be published as "sound tracks".
1317
transition countries in Southeast Europe have made
progress in the development of professional independent
media". The Media Sustainability Index (MSI) for 2004
begs to differ: "...(F)ully sustainable media have yet to be
achieved in any of the countries.
1318
- satellites, video cassette recorders, cable TV, regional
and local "stealth" TV stations and, in the not so distant
future, Internet broadband and HDTV.
1319
The intrigue-inclined postulate that this visual effluence is
intended to numb its hapless recipients and render them
oblivious to the insufferable drudgery of their dreary,
crime-infested, corruption-laden and, in general, rather
doomed, lives. It is instigated by unscrupulous politicians,
they whisper, eyes darting nervously. It is a form of state-
sponsored drug, also known as escapism.
1320
Many scholars and media observers believe that the battle
has already been lost.
1321
jeep in a deserted street of Kyiv. Prosecutors suspect that
he was forced to take his life at gunpoint.
1322
during the forthcoming, closely-contested, heated and
sensitive parliamentary elections.
1323
channel. The bulk of the television tax in Macedonia ends
up in the coffers of the somnolent and bloated state
channel which caters to a mere one quarter of the viewers.
The independent media - both print and electronic - face
unfair competition in attracting scarce advertising
revenues.
1324
included leading managers and active political figures.
The consortium's general director is none else than
Yevgeni Kiselev, the erstwhile general manager of TV6.
TV6 was taken off the air by the Kremlin in 2001 - as was
Russia's most popular independent station, NTV. Quoted
by Radio Free Europe Radio Liberty, the Editor in Chief
of the Ekho Moskvy radio station commented that this
"completes the redistribution of television property in
Russia from one oligarch who was not loyal to the
authorities to others that are".
1325
successor of the shuttered independent Russian TV
station, was renewed only recently for another five years -
after many delays and public statements casting doubts on
the outcome. This form of subtle pressure to self-
discipline is common.
1326
Russian-language broadcasts, they noted ruefully, account
for a crippling 97 percent of airtime.
1327
independent media outlets have been closed in
Kazakhstan over the past month.
1328
individuals to shape the country's strategy the way they
like, (while) filling their pockets with illegally earned
money ... (Freedom of the press) implies the ability of
journalists and their groups to freely, openly, and
fearlessly define their position on key problems of the
development of the country and society, to criticize
actions of the authorities (and to make sure that the
authorities react properly)."
1329
mass media outlets to 25 percent within 6 months. Anti-
government deputies claimed that the state controls 90
percent of all the media in the vast country. Their
colleagues from the coalition cited a figure of 10 percent.
1330
the previous location of the station and are broadcasting
virulent nationalistic propaganda with the financial and
political backing of the extremist MIEP - the Hungarian
Justice and Life Party.
1331
these are the Polish exceptions that only highlight the
regional rule.
1332
But the media in the post-Communist territories may be
simply reaping what they sowed.
1333
The mercenaries often work in 'business-sponsored
media outlets'. These are TV stations, daily papers and
periodicals owned by the oligarchs of malignant
capitalism and used by them to rubbish their opponents
and flagrantly and unabashedly further their business
interests. This phenomenon used to be most pronounced
in Russia, where virtually all the media was once
identified with mafia-like interests - before it was taken
over by the newly authoritarian state."
1334
The typical salary in the large metropolises is now more
than $600 per month - four times the meager national
average. Some 20 percent of the workforce in Moscow
earns more than $1700 a month, comparable to many
members of the European Union. Real average wages
across Russia have surpassed the pre-1998 level in May.
1335
In a recent study by sociologists from the Russian
Academy of Sciences' Institute of Philosophy, more than
half of all Russians self-flatteringly considered themselves
middle class. This is delusional. Even the optimistic
research firm Premier-TGI pegs the number at 19 percent
at most.
1336
class is Russia's most important engine of wealth
formation and investment, far outweighing foreign capital.
1337
To start with, Russia's new middle class is a distinct
minority.
1338
is self-serving. It has no ethos, or distinct morality, no
narrative, or ideology. The Russian middle class is at a
Hobbesian and primordial stage.
1339
is, the amount of money that Russians say that they need
in order to stay out of poverty has been steadily falling
over the past five years. It is even below the objective
poverty line. For the time being, at least, these curious
Russian attitudes, along with the existence of the non-
monetary virtual economy, have insulated the country
against political upheaval."
1340
still rampant, though abating. They trust in equity and
avoid debt. Some of them have criminal roots or a
criminal mindset - or are former members of Russia's
shady security services.
1341
Interview granted to The St. Petersburg Times in March
2006
1342
with 1 offspring. They are more likely to care for a pet
and they increasingly own the apartments that they live in.
Summer and vacation homes abound as do modern
appliances, Scandinavian furniture, and cars.
1343
and the Absent Middle Class in Central East Europe", a
middle class that is in the minority is an oxymoron:
1344
Granted, this muted, subterranean, interaction is not
entirely deleterious. It is the social role of the rich to
generate demand by provoking in the poor jealousy and
attempts at emulation. The wealthy are the trendsetters,
the early adopters, the pioneers, the buzz leaders. They are
the engine that engenders social and economic mobility.
1345
with western Europe, according to a survey published in
the last two years by Expert magazine, the majority of its
members are nationalistic, authoritarian and xenophobic.
Their self-interested economic liberalism is coupled with
social and political intolerance. But two thirds of them
support some kind of welfare state.
1346
property, a functioning financial system comprised of
both banks and capital markets and the just and expedient
application of the rule of law.
1347
a multiple of the average income, consume, and share the
Judeo-Protestant ethos and values of capitalism.
1348
of the world's GNP in 2001 - merely double sub-Saharan
Africa's.
But the real figures are way higher. At least one fifth of
the Saudi and Egyptian labor forces go unemployed. Only
one tenth of Saudi women have ever worked. The region's
population has almost doubled in the last quarter century,
to 300 million people. Close to two fifths of the denizens
of the Arab world are minors.
1349
laborers to make room for indigenous idlers reluctant to
take on these vacated - mostly menial - jobs. About one
million, typically Western, expat experts remain
untouched.
1350
Indeed, Jewish Israel and secular Turkey aside, 8 of the 11
largest economies of the Middle East have yet to join the
World Trade Organization. Only two decades ago, one of
every seven dollars in global export revenues and one
twentieth of the world's foreign direct investment flowed
to Arab pockets.
1351
The "Arab Human Development Report 2002", published
in June 2002 by the United Nations Development
Program (UNDP), was composed entirely by Arab
scholars. It charts the predictably dismal landscape: one in
five inhabitants survives on less than $2 a day; annual
growth in income per capita over the last 20 years, at 0.5
percent, exceeded only sub-Saharan Africa's; one in six is
unemployed.
1352
The war with Iraq changed all that. This was the fervent
hope of intellectuals throughout the region, even those
viscerally opposed to America's high-handed hegemony.
But this may well be only another false dawn in many.
The inevitable massive postwar damage to the area's
fragile economies will spawn added oppression rather
than enhance democracy.
1353
political openness and participatory democracy. The mock
presidential elections in Egypt in 2005 are a case in point.
1354
implosion is likely to affect even increasingly attractive or
resurgent destinations such as Israel, Turkey, Iraq and
Iran.
1355
Nor will these battered nations be saved by geopolitical
benefactors.
The economies of the Middle East are off the radar screen
of the Bush administration, accuses Edward Gresser of the
Progressive Policy Institute in a recently published report
titled "Blank Spot on the Map: How Trade Policy is
Working Against the War on Terror".
1356
problems. No external shock - not even war in Iraq -
comes close to having the same pernicious and prolonged
effects.
1357
economy. They are ineligible for education, medical
treatment, or social benefits and services.
1358
There are three categories of Western parvenus in the
Wild East: the hustlers, the bureaucrats and the
corporates.
1359
egregious looting of the state by pliant and cooperating
bigwigs.
1360
estimated that the allied forces expended well over $40
million a month on purchases in the Balkans during the
bombing of Serbia. This is a meager percentage of the
total cost of the war (c. $34 billion) - but it constituted a
major boost to the regional economy. Macedonia's GDP at
the time was less than $3 billion.
1361
half of which by American oil firms - he may feel
vulnerable to Russian attentions.
1362
committed by American GI's - forced the Japanese
government to pour billions of dollars in public works into
the local economy to compensate for the loss.
1363
60,000 US military personnel were deployed at any given
time in more than 100 countries. These figures exclude
permanent stationary forces, replete with their dependants,
stationed in Germany, Italy, Bosnia-Herzegovina,
Kosovo, South Korea, Japan, Saudi Arabia and dozens of
other places.
1364
The New York Times obliquely noted on December 15,
2001, that:
Mittelstand
1365
than 10 percent. German woes are compounded by a
global recession, the evaporation of entire industries (such
as telecoms) and a sharp, universal decline in investments.
1366
all companies found access to bank credits restricted in
2002. In the 12 months to March 2002, German banks
approved 7 percent fewer new credits. Listed banks
reduced lending by a debilitating one sixth.
1367
more harrowing. In 2001, 386,000 startups were
liquidated and 455,000 formed to yield 69,000 new firms.
1368
governments and tax rates went down across the board.
One must look elsewhere for the causes of the inexorable
deterioration of the country's SMEs.
1369
materials, hungry, growing consumer markets in the new
members - promise to resuscitate the German industrial
sector.
1370
having become far less competitive than they used to be in
the 1970s.
1371
departments. Think tanks and scholarly institutes devote
increasing resources to the SME phenomenon. There is
even an Oscar award for Mittelstand excellence.
Mobility
The mobile office is a long established reality. Today's
laptops are as powerful as most desktops and have as
much memory and as many accessories. One can
communicate through them, using faxing and electronic
mail software. They can be connected to both mobile and
fixed phones. A person can carry his whole office, his
home, his life with him. This is the "Turtle Syndrome".
Ensconced in virtual shells, we move about, conducting
our lives, attending to our businesses, absorbing,
processing, creating and emitting information in endless
streams of data and voice.
1372
Sectors, which will adapt to this sweeping, potent, trend,
will survive. Those, that lag behind are doomed.
Naturally, not all types of human activities and
endeavours are amenable to the changes needed to endow
them with the blessings of increased mobility. It is
difficult to engage in manufacturing on the move. Fixed
assets are required. Still, the manufacturing process itself
can be (and is) distributed. Components are manufactured
in different locations and assembled in another. Fleets of
trucks and trains by land, ships in sea-lanes and air
cruising planes shift them around in a "just in time"
fashion. Through the back door, mobility reappears.
Additionally, the exchange of data and its processing (=its
transformation to knowledge) has, by now, become an
integral and predominant part of all human activities,
industrial manufacturing included.
1373
choose to (flexitime). The workplace comes to them, via
modem, via phone, via satellite. When they travel – and
they travel often – they take their office with them. These
are a virtual office and a virtual home, of course. But the
revolution lies in the realization that both office and home
were always virtual. Witness the growing divorce rates,
on the one hand – and the growing networking (internet
and intranet) of the workplace, on the other. People today
can and do collaborate in teams regardless of time
differences or geographical disparities. Not only distance,
but also time barriers are being gradually dismantled. The
Berlin Wall of spatial and temporal separation is being
torn down with a vengeance.
1374
regular banking. The functions of banks might be
polarized: low level functions, on the one hand (e.g.,
check clearing) and high level functions, on the other
(e.g., investment banking and private banking).
1375
In the last two decades, major retailers tried their hand in
banking activities – not too successfully. Money is as
specific a commodity as any and necessitates the
availability of both expertise and vast historical databases.
The true value added by banks to the economy is precisely
in the accumulation and preservation of these data: the
financial history, credit worthiness and consumption
predilections of each and every one of us. Thus it would
have made sense for the banks to relegate the low-level,
low margin activities to outside agents in return for
sharing the banks' information with them. A typical
collaboration involves a retail outlet and a bank. The retail
outlet invoices the customers, collects the money, charges
the credit card, collects the slips and deposits them in the
bank. This is work normally done by bank clerks and
tellers. The bank, on the other hand, guarantees the
payment. The retail outlet pays the bank (and the credit
card issuing company) a commission against this
guarantee. It does not charge the bank for the work that it
does – which saves the bank a lot of money. This
asymmetry of payments is a result, on the one hand, of the
abundance of cheap transaction processing venues
(computerized and human) in the world (some banks do
their processing overnight in developing countries, such
as India). On the other hand, information (especially the
information provided by the bank) is scarce and valuable.
1376
Until recently, the information was available only
verbally. The credit card companies and the banks
operated big call centres. The retail outlet would call in,
provide the details of the client and the card, wait for an
authorization (which took from 3-5 minutes per
transaction) and only then proceed with the sale. This was
time consuming, nerve wrecking, expensive and counter-
productive. Hence the development of EFTPOS
(Electronic Fund Transfer through Points of Sale).
1377
cases, technology allows us to make the world revolve
around us, around our requirements, our money and our
plans. Technology is only the way that we respond to
deep-seated psychological needs. It is really the need to
grow up, to mature, to finally feel at ease in this world of
ours that drives this meshing of old social establishments.
1378
Money Laundering
If you shop with a major bank, chances are that all the
transactions in your account are scrutinized by AML (Anti
Money Laundering) software. Billions of dollars are being
invested in these applications. They are supposed to track
suspicious transfers, deposits, and withdrawals based on
overall statistical patterns. Bank directors, exposed, under
the Patriot Act, to personal liability for money laundering
in their establishments, swear by it as a legal shield and
the holy grail of the on-going war against financial crime
and the finances of terrorism.
1379
Hawaladars continue plying their paperless and trust-
based trade - the transfer of billions of US dollars around
the world. American and Swiss banks collaborate with
dubious correspondent banks in off shore centres.
Multinationals shift money through tax free territories in
what is euphemistically known as "tax planning". Internet
gambling outfits and casinos serve as fronts for narco-
dollars. British Bureaux de Change launder up to 2.6
billion British pounds annually.
1380
masks the fact that the bulk of money laundered is the
result of tax evasion, tax avoidance, and outright tax
fraud, such as the "VAT carousel scheme" in the EU
(moving goods among businesses in various jurisdictions
to capitalize on differences in VAT rates). Tax-related
laundering nets between 10-20 billion US dollars annually
from France and Russia alone. The confluence of criminal
and tax averse funds in money laundering networks serves
to obscure the sources of both.
The System
1381
paper trail - or too much of it. The accounts are invariably
liquidated and all traces erased.
Why is It a Problem?
Regulation
1382
The least important trend is the tightening of financial
regulations and the establishment or enhancement of
compulsory (as opposed to industry or voluntary)
regulatory and enforcement agencies.
1383
The Treasury Department established Operation Green
Quest, an investigative team charged with monitoring
charities, NGO's, credit card fraud, cash smuggling,
counterfeiting, and the Hawala networks. This is not
without precedent. Previous teams tackled drug money,
the biggest money laundering venue ever, BCCI (Bank of
Credit and Commerce International), and ... Al Capone.
The more veteran, New-York based, El-Dorado anti
money laundering Task Force (established in 1992) will
lend a hand and share information.
1384
laundering "Islamic charities" (of which it is proud) on its
territory.
1385
the same disgraceful extent in today's financial
environment. And Osama bin Laden would not have been
able to wire funds to US accounts from the Sudanese Al
Shamal Bank, the "correspondent" of 33 American banks.
1386
totally digital, amenable to identity theft and fake
identities - this is the ideal vehicle for money launderers.
This nascent platform is way too small to accommodate
the enormous amounts of cash laundered daily - but in ten
years time, it may. The problem is likely to be
exacerbated by the introduction of smart cards, electronic
purses, and payment-enabled mobile phones.
1387
commercial relationships cemented in honour and blood -
are another wave of the future. The Hawala and Chinese
networks in Asia, the Black Market Peso Exchange
(BMPE) in Latin America, other evolving courier systems
in Eastern Europe (mainly in Russia, Ukraine, and
Albania) and in Western Europe (mainly in France and
Spain).
Moral Hazard
Risk transfer is the gist of modern economies. Citizens
pay taxes to ever expanding governments in return for a
variety of "safety nets" and state-sponsored insurance
schemes. Taxes can, therefore, be safely described as
insurance premiums paid by the citizenry. Firms extract
from consumers a markup above their costs to compensate
them for their business risks.
1388
trading liquidity, issuer insolvency, and market volatility
risks.
1389
safety net. Conversely, the IMF's refusal to assist Russia
in 1998 and Argentina in 2002 - should reduce moral
hazard.
1390
interest rates cuts. The Fed - and its mythical Chairman,
Alan Greenspan - stand accused of bailing out the bloated
stock market by engaging in an uncontrolled spree of
interest rates reductions.
1391
Still, it can be convincingly argued that the problem of
moral hazard is most acute in the private sector.
Sovereigns can always inflate their way out of domestic
debt. Private foreign creditors implicitly assume
multilateral bailouts and endless rescheduling when
lending to TBTF or TITF ("too big or too important to
fail") countries. The debt of many sovereign borrowers,
therefore, is immune to terminal default.
1392
They end up charging borrowers the wrong interest rates
or, more common, financing risky projects.
1393
The defrauded depositors of BCCI are still chasing the
assets of the defunct bank as well as litigating against the
Bank of England for allegedly having failed to supervise
it. Discipline imposed by depositors and creditors often
results in a "run on the bank" - or in bankruptcy. The
presumed ability of stakeholders to discipline risky
enterprises, hazardous financial institutions, and profligate
sovereigns is fallacious.
1394
Putin dismantled Yukos, the indigenous oil giant and
confiscated its assets, in stark contravention of the
property rights of its shareholders.
1395
is shown to be larger the higher the interest rate subsidy
offered by the (World) Bank."
1396
lend more daringly. Governments would like to maintain
the stability of their financial systems.
1397
the Fall 1999 issue of "The Independent Review" - is still
debated and debatable. With governments, central banks,
or the IMF as lenders and insurer of last resort - there is
little counterparty risk. Or so investors and bondholders
believed until Argentina thumbed its nose at them in
2003-5 and got away with it.
1398
fraudulent claims, deductibles, and incentives to reduce
claims are all effective. The residual cost of moral hazard
is spread among the insured in the form of higher
premiums. No reason not to emulate these stalwart risk
traders. They bet their existence of their ability to
minimize moral hazard - and hitherto, most of them have
been successful.
1399
economic relations. Ironically, dehumanizing totalitarian
regimes, such as fascism and communism, were the first
to grasp the emerging prominence of scarce and expensive
human capital among other means of production. What
makes humans a scarce natural resource is their mortality.
1400
more than 60 years to recoup his investment (assuming
capital gains tax of 35 percent).
1401
Traditional cost-benefit analysis falters because it
implicitly assumes that we possess perfect knowledge
regarding the world 200 years hence - and, insanely, that
we will survive to enjoy ad infinitum the interest on
capital we invest today. From our exalted and privileged
position in the present, the dismal science appears to
suggest, we judge the future distribution of income and
wealth and the efficiency of various opportunity-cost
calculations. In the abovementioned example, we ask
ourselves whether we prefer to spend $10 billion now -
due to our "pure impatience" to consume - or to defer
present expenditures so as to consume more 200 years
hence!
1402
But a closer look exposes an underlying conviction of
perdurability.
1403
insurance premiums - safeguard the rich scions' sustained
affection and treatment. Still, parents are supposed to love
their issue equally. Hence the equal allotment of bequests.
The Buyers
The Banks
1404
1. The government provides a last resort guarantee to
the commercial banks. This guarantee can be used
ONLY AFTER the banks have exhausted all other
legal means of materializing a collateral or seizing
the assets of a delinquent debtor in default.
1405
BUYERS and is registered solely to their names.
The Banks have a lien of the property, as per
above.
1406
3. The Buyers go on repaying the mortgage loans to
the Banks.
1407
crime, terrorism and disease, of being backward and
violent, of refusing to fit in.
1408
of) petro-powered sheikhs, Palestinian terrorists, Iranian
ayatollahs, mass immigration and then the attacks of
September 11th, executed if not planned by western-based
Muslims and succored by an odious regime in
Afghanistan ... Muslims tend to come from poor, rural
areas; most are ill-educated, many are brown. They often
encounter xenophobia and discrimination, sometimes
made worse by racist politicians. They speak the language
of the wider society either poorly or not at all, so they find
it hard to get jobs. Their children struggle at school. They
huddle in poor districts, often in state-supplied housing ...
They tend to withdraw into their own world, (forming a)
self-sufficient, self-contained community."
1409
There is a tacit confluence of interests between national
governments, exporters and Islamic organizations. All
three want Turks in Germany to remain as Turkish as
possible. The more nostalgic and homebound the
expatriate - the larger and more frequent his remittances,
the higher his consumption of Turkish goods and services
and the more prone he is to resort to religion as a
determinant of his besieged and fracturing identity.
1410
Between 2-3 million Muslims in France - half their
number - are eligible to vote. Another million - one out of
two - cast ballots in Britain. These numbers count at the
polls and are not offset by the concerted efforts of a potent
Jewish lobby - there are barely a million Jews in Western
Europe.
1411
Moreover, the Muslims have been playing an important
economic role in the continent since the early 1960s.
Europe's postwar miracle was founded on these cheap,
plentiful and oft-replenished Gastarbeiter - "guest
workers". Objective studies have consistently shown that
immigrants contribute more to their host economies - as
consumers, investors and workers - than they ever claw
back in social services and public goods. This is
especially true in Europe, where an ageing population of
early retirees has been relying on the uninterrupted flow
of pension contributions by younger laborers, many of
them immigrants.
1412
minister suggested, in a visit to Berlin two years ago, that
Islam is an inherently inferior civilization.
1413
Britain's Commission for Racial Equality which caters
mainly to the needs of Muslims, was formed 37 years ago.
Its Foreign Office has never wavered from its pro-Arab
bias. Germany established a Central Council for Muslims.
Both anti-Americanism and the more veteran anti-Israeli
streak helped sustain Europe's empathy with Muslim
refugees and "freedom fighters" throughout the 1960s, 70s
and 80s.
1414
1415
N
Narcissism, Corporate
The perpetrators of the recent spate of financial frauds in
the USA acted with callous disregard for both their
employees and shareholders - not to mention other
stakeholders. Psychologists have often remote-diagnosed
them as "malignant, pathological narcissists".
1416
Reality is, naturally, quite different and this gives rise to a
"grandiosity gap". The demands of the false self are never
satisfied by the narcissist's accomplishments, standing,
wealth, clout, sexual prowess, or knowledge. The
narcissist's grandiosity and sense of entitlement are
equally incommensurate with his achievements.
1417
funds - as did Robert Maxwell a generation earlier in
Britain.
1418
power, aggression, money, or social status. Narcissistic
women are likely to emphasise body, looks, charm,
sexuality, feminine "traits", homemaking, children and
childrearing.
1419
and penalized accordingly. He feels wronged, baffled,
injured, the victim of bias, discrimination and injustice.
He rebels and rages.
1420
Narcissistic immunity is the (erroneous) feeling,
harboured by the narcissist, that he is impervious to the
consequences of his actions, that he will never be effected
by the results of his own decisions, opinions, beliefs,
deeds and misdeeds, acts, inaction, or membership of
certain groups, that he is above reproach and punishment,
that, magically, he is protected and will miraculously be
saved at the last moment. Hence the audacity, simplicity,
and transparency of some of the fraud and corporate
looting in the 1990's. Narcissists rarely bother to cover
their traces, so great is their disdain and conviction that
they are above mortal laws and wherewithal.
1421
fosters in him a false sense of "nothing can happen to me,
because I am not here, I am not available to be punished,
hence I am immune to punishment".
1422
By virtue of their standing in the community, their
charisma, or their ability to find the willing scapegoats,
they do get exempted many times. Having recurrently
"got away with it" - they develop a theory of personal
immunity, founded upon some kind of societal and even
cosmic "order" in which certain people are above
punishment.
1423
nuisance but it also validates his suspicion that he is being
persecuted. It proves to him that strong forces are arrayed
against him.
1424
self-esteem and fostering narcissism is often blurred by
educators and parents.
1425
Individuals in less advantaged nations .. are too busy
trying (to survive) ... to be arrogant and grandiose".
1426
others it is tainted with paranoia. In collectivist societies,
it may be projected onto the collective, in individualistic
societies, it is an individual's trait.
1427
determinant. The resilience of a country is measured by its
inflows of foreign investment and by the balance of its
current account - not by the number of its tanks and
brigades.
1428
maintain long-term, sustained branding campaigns
supported by proper advertising. Only recently did a few
pioneering polities hire the services of nation branding
experts. None has in place the equivalent of a corporate
"brand manager".
1429
I. Identify what needs and whose needs can the country
meet and satisfy. What preference groups (of investors,
for instance) or even market niches (e.g., stem cell
scientists) should be targeted to optimize economic
outcomes?
1430
II. Targeting - Concentrate on those "clients" you can
serve most effectively, to whom you are most valuable
and thus can "charge" the most for your offerings
1431
In a marketing mix, the first and foremost element is the
product. No amount of savvy promotion and blitz
advertising can disguise the shortcomings of an inferior
offering.
1432
1. Natural Endowments
3. Risk Mitigation
4. Economic Prowess
1433
It is important to understand that the "products" and brand
name of a country are not God-given, unalterable
quantities. They can and should be tailored to optimize the
results of the marketing and branding campaigns.
1434
But, first, we should see how the price mechanism comes
into play in the global marketplace of sovereigns and their
offerings.
1435
be substantial, sophisticated, forward-looking, pleasant,
welcoming and so forth.
1436
What can be done to overcome such negative factor
endowments?
1437
The vast increase in the world's population - matched by
the exponential rise in purchasing power - created a global
marketplace of unprecedented wealth and a corresponding
hunger for goods and services. The triumph of liberal
capitalism compounded this beneficial effect.
1438
what they have to offer, circumventing brokers and agents
of all kinds (disintermediation). Still, they should not fail
to cultivate more traditional marketing channels such as
investment banks, travel agents, multilateral
organizations, or trade associations.
1439
Advertising is a different ballgame. There is no substitute
for a continued presence in the media. The right mix of
paid ads and sponsored promotions of products, services,
and ideas can work miracles for a country's image as a
preferred destination.
Why is that?
1440
and uniform demands. Catering to these tastes and
demands makes or breaks the external sector of a
country's economy.
1441
Yet, even governments are bottom-line orientated
nowadays. How should a country translate its intangible
assets into dollars and cents (or euros)?
1442
Marketing intermediaries are at least as crucial to the
country's success as its sales force. They are trusted links
to investors, tourists, businessmen, and other "clients".
They constitute repositories of expertise as well as venues
of communication, both formal and informal. Though
usually decried by populist and ignorant politicians, their
role in smoothing the workings of the marketplace is
crucial. Countries should nurture and cultivate brokers
and go-betweens.
1443
VII. Marketing Implementation, Evaluation, and
Control
1444
This document includes all the government's managerial
objectives and (numerical) goals. It is actually a
breakdown of the aforementioned pro-forma financial
statements into monthly and quarterly figures of "sales"
(in terms of foreign direct investment, income from
tourism, trade figures, etc.) and profitability.
1445
customer loyalty surveys should form an integral part of
any marketing drive.
2. Profitability control
3. Efficiency control
1446
4. Strategic control
5. Marketing audit
1447
"... (I)t covers all aspects of the marketing climate
(unlike a functional audit, which analyzes one
marketing activity), looking at both macro-environment
factors (demographic, economic, ecological,
technological, political, and cultural) and micro- or task-
environment factors (markets, customers, competitors,
distributors, dealers, suppliers, facilitators, and publics).
The audit includes analyses of the company's marketing
strategy, marketing organization, marketing systems,
and marketing productivity. It must be systematic in
order to provide concrete conclusions based on these
analyses. To ensure objectivity, a marketing audit is best
done by a person, department, or organization that is
independent of the company or marketing program.
Marketing audits should be done not only when the
value of a company's current marketing plan is in
question; they must be done periodically in order to
isolate and solve problems before they arise."
1448
goods and services to satisfy needs. Nation branding is
tantamount to casting the country as the superior if not
exclusive answer to those needs it can cater to or even
create.
1449
negotiators (though some of them seek quality rather than
price advantage).
1450
It is here that branding has an often decisive role. The
more costly, infrequent, and risky the purchase, the higher
the consumer's emotional involvement in the buying task.
The more differentiated the country's brand, the less the
anxiety provoked by the need to commit resources
irrevocably.
1451
Only when wealth was detached from the land, was this
solidarity broken. Land – being a scarce, non-reproducible
resource – fostered a scarce, non-reproducible social elite.
Money, on the other hand, could be multiplied, replicated,
redistributed, reshuffled, made and lost. It was democratic
in the truest sense of a word, otherwise worn thin. With
meritocracy in the ascendance, aristocracy was in descent.
People made money because they were clever, daring,
fortunate, visionary – but not because they were born to
the right family or married into one. Money, the greatest
of social equalizers, wedded the old elite. Blood mixed
and social classes were thus blurred. The aristocracy of
capital (and, later, of entrepreneurship) – to which anyone
with the right qualifications could belong – trounced the
aristocracy of blood and heritage. For some, this was a sad
moment. For others, a triumphant one.
1452
graduated, cautious, all accommodating but also
inexorable and all pervasive – characterizes Capitalism.
The Capitalist Religion, with its temples (shopping malls
and banks), clergy (bankers, financiers, bureaucrats) and
rituals – was created by the New Rich. It had multiple
aims: to bestow some divine or historic importance and
meaning upon processes which might have otherwise been
perceived as chaotic or threatening. To serve as an
ideology in the Althusserian sense (hiding the discordant,
the disagreeable and the ugly while accentuating the
concordant, conformist and appealing). To provide a
historical process framework, to prevent feelings of
aimlessness and vacuity, to motivate its adherents and to
perpetuate itself and so on.
1453
Eastern European (and, to a lesser extent, the Central
European) versions of Socialism suffered from this
inherent poisonous seed of deceit. So did Fascism. It is no
wonder that these two sister ideologies fought it out in the
first half of the twentieth century. Both prescribed the
unabashed, unmitigated, unrestrained, forced transfer of
wealth from one elite to another. The proletariat enjoyed
almost none of the loot.
1454
substitute. People accumulate it as a way to compensate
themselves for past hurts and deficiencies. They attach
great emotional significance to the amount and
availability of their money. They regress: they play with
toys (fancy cars, watches, laptops). They fight over
property, territory and privileges in a Jungian archetypal
manner. Perhaps this is the most important lesson of all:
the New Rich are children, aspiring to become adults.
Having been deprived of love and possessions in their
childhood – they turn to money and to what it can buy as a
(albeit poor because never fulfilling) substitute. And as
children are – they can be cruel, insensitive, unable to
delay the satisfaction of their urges and desires. In many
countries (the emerging markets) they are the only
capitalists to be found. There, they spun off a malignant,
pathological, form of crony capitalism. As time passes,
these immature New Rich will become tomorrow's Old
Rich and a new class will emerge, the New Rich of the
future. This is the only hope – however inadequate and
meagre – that developing countries have.
1455
and corruption. They are the non-governmental
organizations, or NGO's.
1456
discussing the inner workings of the organization -
proposals, debates, opinions - until they have become
officially voted into its Mandate. Thus, dissenting views
rarely get an open hearing.
1457
to increase the market share of firms they own. Conflicts
of interest and unethical behavior abound.
1458
well be a ploy to fend off imports based on cheap labor
and the competition they wreak on well-ensconced
domestic industries and their political stooges.
1459
shamed by overzealous NGO's) - multinationals engage in
preemptive sacking. More than 50,000 children in
Bangladesh were let go in 1993 by German garment
factories in anticipation of the American never-legislated
Child Labor Deterrence Act.
1460
"Suppose that in the remorseless search for profit,
multinationals pay sweatshop wages to their workers in
developing countries. Regulation forcing them to pay
higher wages is demanded... The NGOs, the reformed
multinationals and enlightened rich-country governments
propose tough rules on third-world factory wages, backed
up by trade barriers to keep out imports from countries
that do not comply. Shoppers in the West pay more - but
willingly, because they know it is in a good cause. The
NGOs declare another victory. The companies, having
shafted their third-world competition and protected their
domestic markets, count their bigger profits (higher wage
costs notwithstanding). And the third-world workers
displaced from locally owned factories explain to their
children why the West's new deal for the victims of
capitalism requires them to starve."
1461
NGO's chase disasters with a relish. More than 200 of
them opened shop in the aftermath of the Kosovo refugee
crisis in 1999-2000. Another 50 supplanted them during
the civil unrest in Macedonia a year later. Floods,
elections, earthquakes, wars - constitute the cornucopia
that feed the NGO's.
1462
Remember NATO? Human rights organizations, like
Amnesty, are now attempting to incorporate in their ever-
expanding remit "economic and social rights" - such as
the rights to food, housing, fair wages, potable water,
sanitation, and health provision. How insolvent countries
are supposed to provide such munificence is conveniently
overlooked.
1463
the Earth worked hard four years ago to instigate a
consumer boycott against Exxon Mobil - for not investing
in renewable energy resources and for ignoring global
warming. No one - including other shareholders -
understood their demands. But it went down well with the
media, with a few celebrities, and with contributors.
1464
NGO activists have joined the armed - though mostly
peaceful - rebels of the Chiapas region in Mexico.
Norwegian NGO's sent members to forcibly board
whaling ships. In the USA, anti-abortion activists have
murdered doctors. In Britain, animal rights zealots have
both assassinated experimental scientists and wrecked
property.
1465
sensitive and somewhat less ostentatious. But then they
wouldn't be NGO's, would they?
1466
with the furthering of any agenda and more preoccupied
with the well-being of their constituents, the people.
1467
blankets, and medical supplies intended for the refugees.
1468
governments. What kind of dangers this elicits? Do you
think they are a pest that need control? What kind of
control would that be?
1469
Q. It seems that many values carried by NGO are
typically modern and Western. What kind of problems
this creates in more traditional and culturally different
countries?
Nuclear Waste
On May 11, 2005, Romania will host a two-day exercise
simulating a nuclear accident. It will be conducted at the
Cernavoda nuclear power plant. But the real radiological
emergency is already at hand and unfolding.
1470
This emulates a similar scheme floated five years ago in
Russia. The Atomic Energy Ministry planned to import
20,000 tons of nuclear waste to earn $21 billion in the
process.
1471
Getting rid of nuclear waste and dismantling nuclear
facilities - both military and peacetime - do not come
cheap.
1472
spent nuclear fuel. NTI provided the $5 million needed to
accomplish the cleanup.
1473
Similar sentiments are expressed by groups in Russia,
Romania, Bulgaria, Yugoslavia, Ukraine, the Czech
Republic, Poland and elsewhere. Being "environmentally
correct" is so important that Tanjug, the Yugoslav news
agency, in its relentless campaign against NATO,
implausibly accused Germany of storing its waste in the
mines of Kosovo.
1474
But getting the waste to Russia often requires permission
from other, a lot less forthcoming, countries such as
Moldova, Ukraine and Romania. By the beginning of
2003, according to the Bulgarian reactor's management,
the old storage pits were exhausted and the plant had to
close down.
1475
O
1476
collapsed even as millions lost their jobs and their
purchasing power. Unemployment affects one fifth of the
population in Poland, one third in Macedonia and three
fifths in Kosovo, for instance.
1477
breaches of delivery schedules and quantities. But they
have little choice. Ukraine is one of Turkmenistan's major
export clients, for instance. Nor are these exchanges post-
communist phenomena. Canadian firms, led by AECL -
Atomic Energy of Canada Limited - were forced to accept
Romanian goods for their nuclear reactors throughout the
late 1980s.
1478
exchange, thus removing the difficulties and risks in a
trade financing and paving the way for a successful deal
that otherwise would fail. Countertrade also provides a
means to preserve foreign exchange reserves by
eliminating the use of hard currency."
1479
Non-cash transactions are an integral part of the informal
sector of the economy, estimated to constitute at least one
third of the region's total gross domestic product. They are
impossible to track, let alone tax. They are conducive to
capital flight and offshore stashing of export proceeds.
Technically, barter deals are a kind of non-tariff barrier as
they interfere with the free market by binding specific
buyers to given sellers. Hence the recent Russian-Chinese
agreement to ban non-cash transactions in their border
areas.
1480
foundation of the price mechanism and the optimal
allocation of scarce economic resources.
Oil, Price of
How is the price of oil determined and how important it is
to the global economy?
Hedging
In other words:
1481
contract) - one makes a profit on the options contract that
is similar to the loss on the forward contract.
1482
costs of the oil (importing, processing and
distribution) + a fixed percentage (usually 15%).
This is called a COST PLUS basis pricing method.
1483
f. Oil reserves throughout the world are at a record
high. This tends to depress demand for newly
produced oil. NEGATIVE.
1484
Oligarchs (Chubais)
Anatoly Chubais, head of Russia's electricity monopoly,
survived an assassination attempt on March 17, 2005. A
roadside charge, followed by a hail of automatic gunfire,
failed to remove him from the scene.
1485
Moreover, often, practice and preaching were far apart. In
a bout of puzzling honesty, Chubais admitted, in an
interview to the Russian business daily Kommersant, later
published also by the Los Angeles Times, to defrauding
multilateral lending organizations and their Western
masters. He said: "In such situations, the authorities have
to (lie). We ought to. The financial institutions
understand, despite the fact that we conned them out of
$20 billion, that we had no other way out."
1486
Yet, Chubais' checkered past and even more checkered
friends render him automatically suspect. Everything he
says makes incontrovertible economic sense. Power
generation, the national and regional grids, the pricing
structure, the cost of fossil fuels - all require nothing short
of an agonizing transformation.
1487
A - just - complaint Chubais penned regarding inflated
pricing and predatory business practices of
Mezhregiongaz, Russia's natural gas monopoly, led to an
audit order by Kremlin-appointed Alexei Miller. This
could weaken Putin's St. Petersburg pals and strengthen
guess who.
1488
Chubais is a man for all audiences. On the one hand, in
the penumbral corridors of power, he presses for a
vertiginous hike of electricity prices to enable him to
attract investors for his plan to invest $50 billion over the
next decade in modernizing the network.
1489
answered in a deadpan tone: 'I have agreed that they can
keep their jobs.' With that, Westman recalled, Russia's
President nearly fell off his chair laughing."
1490
In 2002, the World Economic Forum rates Russia 64th out
of 80 countries in growth competitiveness. Russia made it
to the abysmal 135th place out of 156 nations on the 2003
Index of World Economic Freedom, compiled by the
Washington-based Heritage Foundation and The Wall
Street Journal. Nor is GDP growth a proxy for
productivity growth, as Aslund erroneously states.
1491
trade, rising oil prices and a process of streamlining
induced by the implosion of the economy in 1998. The
discipline imposed by vocal minority shareholders - both
foreign and domestic - and punitive capital markets has
also helped.
"It looks like those people just forgot that they are
management, not a group of bandits (who) captured the
company. And this management is hired and can be fired,
and completely forgot about it. And such is (an)
absolutely inappropriate, vulgar, and boorish attitude ...
(Chubais intends to create a power monopoly) in the sense
of might, in the sense of control, (an) economic and
political one."
1492
Oligopolies
The Wall Street Journal has recently published an elegiac
list:
1493
than they could have in a perfect competition free market
with multiple participants. Worse still, oligopolies are
going global.
1494
Sweezy theory of the Kinked Demand Curve. If it were to
raise prices, its rivals may not follow suit, thus
undermining its market share. Stackleberg's amendments
to Cournot's Competition model, on the other hand,
demonstrate the advantages to a price setter of being a
first mover.
1495
Monopolies and oligopolies, went the contestability
theory, also refrain from restricting output, lest their
market share be snatched by new entrants. In other words,
even monopolists behave as though their market was fully
competitive, their production and pricing decisions and
actions constrained by the "ghosts" of potential and
threatening newcomers.
1496
And a dominant position in one market can be leveraged
into another, connected or derivative, market.
1497
economies of scale and of scope, excess profits due to the
ability to set prices in a less competitive market - allow
firms in an oligopoly to invest heavily in research and
development. A new drug costs c. $800 million to develop
and get approved, according to Joseph DiMasi of Tufts
University's Center for the Study of Drug Development,
quoted in The wall Street Journal.
1498
Cola. Yet, it has been the scene of ferocious price
competition for decades.
1499
"Productive Differentiation in Successive Vertical
Oligopolies", that authors studied:
1500
new generations and classes of products. Only firms with
a dominant market share have both the incentive and the
wherewithal to invest in R&D and in subsequent branding
and marketing.
1501
barrels per day (bpd), reversing a December 2004 decision
to cut production by 1 million bpd.
1502
Far from it. As North American and North Sea production
decline, the importance of Gulf producers soars. OPEC's
eleven countries - Algeria, Indonesia, Iran, Iraq
(suspended in 1990, following its invasion of Kuwait),
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United
Arab Emirates and Venezuela - control one third to two
fifths of global oil output and three quarters of the far
more important residual demand - traded between net
consumers and net exporters. Residual demand is set to
double by 2010.
And OPEC counts among its ranks some of its most astute
players in the oil markets. Example: Ali al-Naimi, the
Saudi oil minister. Al-Naimi is widely credited with
engineering the tripling of oil prices to more than $30 a
barrel between 1998 and 1999. As the informal boss of the
state-owned Saudi oil behemoth, Aramco, he had
introduced postwar output cuts. The oil market is so
volatile that even marginal production shifts affect prices
disproportionately. Al-Naimi is a master of such fine
tuning.
1503
the same, it looms menacing over the organization's
future.
1504
America announced its intention to pull out its troops
stationed in Saudi Arabia. As this major producer is thrust
into the role of the "bad guy", it acquires incentives to
team up with other "pariahs" such as France and,
potentially, Russia. Controlling the oil taps is a sure way
to render the USA less unilateral and more
accommodating.
Organ Trafficking
A kidney fetches $2700 in Turkey. According to the
October 2002 issue of the Journal of the American
Medical Association, this is a high price. An Indian or
Iraqi kidney enriches its former owner by a mere $1000.
Wealthy clients later pay for the rare organ up to
$150,000.
1505
kidney. An auction of a human kidney on eBay in
February 2000 drew a bid of $100,000 before the
company put a stop to it. Another auction in September
1999 drew $5.7 million - though, probably, merely as a
prank.
1506
pocket couples. American authorities are scrutinizing a
two year old Moldovan harvesting operation based in the
United States.
1507
doctors have recently visited impoverished Macedonia,
Bulgaria, Kosovo and Yugoslavia to discuss with local
businessmen and doctors the setting up of kidney
transplant clinics.
1508
a life), but prohibit organ harvesting from brain-dead
bodies.
1509
Russian, Moldovan, Ukrainian and Romanian.
1510
P-Q
Pakistan, Economy of
1511
There was cause for this optimism.
1512
Yet, tax revenues are still less than 17% of GDP and less
than 1.5% of all taxpayers bother to file tax returns of any
kind. In other words, these largely cosmetic measures
failed to tackle the systemic failure that passes for
Pakistan's economy. Reform - both economic and political
- was still sluggish and half-hearted, Pakistan's current
account deficits ballooned (to $3 billion in 1999), the
geopolitical neighbourhood roughened, and the world
economy dived. Pakistan's imminent economic collapse
looked inevitable.
1513
Consider this:
1514
ostensibly public goods - from bus services to schools,
from clinics to policing, from public toilettes to farming -
are affordably provided by domestic, small time,
entrepreneurs often aided by NGO's.
1515
Pharmaceuticals ( in Central and East Europe)
In early October 2006, New Jersey-based Barr
Pharmaceuticals Inc. has acquired 73% of Pliva
Pharmaceuticals, Croatia's and, arguably, the Balkans'
largest pharmaceutical company. Pliva, established in the
1920s, specializes in generic drugs. Barr paid almost 3
billion US dollars for its acquisition.
1516
chemicals, coatings and cosmetics. It is locally renowned
for its research and development, heavy investment in
quality control and high wages.
1517
its version of the drug annually - but booked $27 million
of orders on the first day.
1518
(renamed Pliva Pharma Nordic). Other target countries
included Germany, France, the United Kingdom and the
Czech Republic. In 2002, the first drug developed in-
house by Pliva was registered in the European Union.
1519
Producers are forced by Czech healthcare providers,
health authorities and domestic insurance companies to
trim their prices. Even so, the entire health care system in
the Czech republic - especially public hospitals - is close
to insolvency. The Prague Tribune reported how AVEL -
the Association of Drug Distributors - decided to sue
debtor hospitals. Among the litigants, pharmaceutical
distributors Aliance Unichem, Phoenix, Purus, and Gehe,
which account for 70% of the market, and are owed c. $25
million. This illiquidity and coercive differential pricing
encourage the use of cheap generics.
1520
subcontracting production to cheaper locales, divesting
non-core activities and catering to the marketing and
distribution needs in central and east Europe of American
and west European drug multinationals.
(Over)Population
The latest census in Ukraine revealed an apocalyptic drop
of 10% in its population - from 52.5 million a decade ago
to a mere 47.5 million last year. Demographers predict a
precipitous decline of one third in Russia's impoverished,
inebriated, disillusioned, and ageing citizenry. Births in
many countries in the rich, industrialized, West are below
the replacement rate. These bastions of conspicuous
affluence are shriveling.
1521
successes in places as diverse as Thailand, China, and
western Africa.
1522
diseases every year - 90% of them in the developing
countries.
There are too many of us. We are way too numerous. The
population load is unsustainable. We, the survivors, would
be better off if others were to perish. Should population
growth continue unabated - we are all doomed.
Doomed to what?
1523
About 1% of the population suffer from the perniciously
debilitating and all-pervasive mental health disorder,
schizophrenia. At the beginning of the 20th century, there
were 16.5 million schizophrenics - nowadays there are 64
million. Their impact on friends, family, and colleagues is
exponential - and incalculable. This is not a merely
quantitative leap. It is a qualitative phase transition.
Or this:
1524
No one can vouchsafe for a "critical mass" of humans, a
threshold beyond which the species will implode and
vanish.
Examples:
1525
Genetic engineering will likely intermesh with these to
produce "enhanced" or "designed" progeny to
specifications.
1526
national. People are from this or that city, or district, or
village. And they aspire to become citizens of Europe and
the great experiment of the European Union. They are
only hesitantly and tentatively Macedonians, or
Moldovans, or Belarusians, or Kazakhs, or Yugoslavs.
1527
massive investments in outdated technologies - the
cellular phone, the Internet, cable TV, and the satellite
become shortcuts to prosperity.
1528
innovation that follows. Remittances, returning
expatriates, thriving and networked Diasporas would do
more to uplift the countries of origin than any amount of
oft-misallocated multilateral aid.
Pricing, Differential
1529
Last April, the World Health Organization (WHO), the
World Trade Organization (WTO), the Norwegian
Foreign Ministry, and the US-based Global Health
Council held a 3-days workshop about "Pricing and
Financing of Essential Drugs" in poor countries. Not
surprisingly, the conclusion was:
1530
authorities. Brazilians and South Africans, for instance,
pay a fraction of the price paid in the West for their anti-
retroviral AIDS medication.
1531
"essential high-tech products" as well. The Health GAP
Coalition commented on the report:
1532
"Under the program, the world's six largest publishers of
biomedical journals have agreed to three-tiered pricing.
For countries in the lowest tier (GNP per capita below
$1k), online subscriptions are free of charge. For countries
in the middle tier (GNP per capita between $1k and $3k),
online subscriptions will be discounted by an amount to
be decided this June. Countries in the top tier pay full
price.
1533
Scholarship newsletter, Lai Ting-ming of the Taipei
Times criticized, on March 26, "western publishers for
selling textbooks to third world students at first world
prices. There is a 'textbook pricing crisis' in developing
countries, which is most commonly solved by illicit
photocopying."
1534
and selling of goods and services in markets where prices
are free to move in response to supply and demand
conditions."
1535
good pays the same price. Thus prices depend on the
amount of the good purchased, but not on who does the
purchasing. A common example of this sort of pricing is
volume discounts.
1536
The key issue is whether the output of goods and services
is increased or decreased by differential pricing."
1537
mostly - influenced by other considerations such as:
transportation costs, disparate tax and customs regimes,
cost of employment, differences in property rights and
royalties, local safety and health standards, price controls,
quality of internal distribution systems, the size of the
order, the size of the market, and so on.
1538
Hal Varian studied this problem. His conclusions:
1539
pricing (actually, non-linear pricing) - showing different
prices to different users on the same book.
Private Armies
In July 2002 Christopher Deliso recounted in antiwar.com
that Dutch Radio, based on reports leaked by a Dutch
military analysis firm, accused the US government of
aiding and abetting terrorists in Macedonia. Not for the
1540
first time, the Americans were rumored to have hired the
services of MPRI (Military Professional Resources, Inc.)
to train and assist the rebels of the NLA, the Albanian
National Liberation Army, which skirmished for months
with the Macedonian police and military throughout last
year.
1541
- as well as the destabilization and disintegration of many
states. The Big Powers are either much reduced (Russia),
militarily over-stretched (Europe), their armies ill-
prepared for rapid deployment and low intensity warfare
(everyone), or lost interest in many erstwhile "hot spots"
(USA). Besieged by overwhelming civil strife, rebellions,
and invasions - many countries, political parties,
politicians, corporations, and businessmen seek refuge
and protection.
More than 5 million soldiers were let go all over the world
between 1987-1994, according to Henry Sanchez of
Rutgers University. Professional soldiers, suddenly
unemployed in a hostile civilian environment, resorted to
mercenariness. A few became rogue freelancers. The role
of the Frenchman Bob Denard in the takeover of the
Comoros Islands is now mythical. So is the failed coup in
Seychelles in 1981, perpetrated by Colonel "Mad" Mike
Hoare, a British ex-paratrooper.
1542
logistical support in more than 50 countries, starting in
Saudi Arabia in 1975, where it won a controversial $77
million contract to train oilfield guards.
1543
through Gurkha International. The oil-rich region of
Cabinda is air-patrolled by AirScan - Airborne
Surveillance and Security Services.
1544
Nor are these small ensembles. MPRI - now in its 14th
year - employs over 800 people, most of them former high
level US military personnel. It draws on a database of
12,500 freelancers "former defense, law enforcement, and
other professionals, from which the company can identify
every skill produced in the armed forces and public safety
sectors". Many of its clients work under the US
government's Foreign Military Sales program and abide
by the GSA (General Services Administration) tariffs.
1545
infiltrated by criminals on the run, terrorists in disguise,
sadistic psychopaths, and intelligence officers.
1546
maintain lobbyists in Washington and function, partly, as
rent seekers.
1547
prerogative of states and a hallmark of often hard-gained
sovereignty. Many do not take kindly to the encroachment
of morally-neutral private sector replacements upon these
hallowed grounds.
1548
"When citizens of Papua New Guinea learned that their
government signed a $27 million contract with EO
(should be Sandline - SV) to train the Army to fight a
secessionist rebel uprising it set off five days of rioting
and protests. Even the Army commander (later convicted
on unrelated corruption charges - SV) refused to work
with the South African firm.
1549
This incestuous setup led to the false assertions that
Sandline - and EO before it - looted the mineral wealth of
countries such as Sierra Leone and Angola. That many
PMC's render security services to mining firms - both
statal and private - adds to the confusion.
Isenberg concurs:
1550
PMC's have embarked on a concerted effort to alter their
penumbral image. MPRI - its Web site replete with
literary quotes lifted from the works of Marcel Proust and
other renowned soldiers of fortune - has contracted with
Enterprise Strategies and Solutions under the Department
of Defence's Mentor-Protégé program. MPRI explains:
1551
In the Winter 2002 issue of "Harvard International
Review", Sean Creehan summed up this shift in public
perceptions:
1552
the defence we cannot afford publicly". Thus, transport
planes, ships, trucks, training, and accommodation - may
all be on long term leases from private firms. The
equipment will be leased to other customers during down
time, reports the BBC.
1553
profession (as opposed to a hobby), a vocation (as
opposed to an avocation)? To qualify as a profession, the
act must bear the following hallmarks:
1554
tendency is education: this is a part of the human survival
kit. By educating oneself, by studying a profession, by
learning more about the world – one better one's chances
to survive. Out of this set of human, almost deterministic
activities, a group of overriding trends emerges:
1555
Better medicine will lead to a polarization of the age
structure of society: there will be more older people and
more younger people. Gradually, as birth rates fall and
contraception becomes widespread, a reverse pyramid will
be formed: most people will be middle aged and old. This
offers a clear view of professions which will be required
in the future: Professionals to take care of older and
younger people (which have very similar needs): nurses,
paramedics, nannies, entertainers, leisure time
professionals, companions, specialized equipment
manufacturers, operators of homes for the very old or for
the very young, pension planners, manufacturers of
specialized medical and paramedical needs and products
for both age groups, legal and accounting specialists in
pension and inheritance laws and tax planning. Virtually
every industry and field of human activity will have to
adapt themselves to these demographic changes. Age-
related expertise will develop in each one of them. This
applies to the arts (mainly music and cinema) as well as to
the crafts, to industry as well as to agriculture, to
infrastructure as well as to government. Human society
will be enormously influenced by these shifts.
1556
and all removed family (blood) connections. Gradually,
the family shed more and more layers. People began to be
called by family names only 250 years ago. The nuclear
family was an invention of the 19th century, when the
industrial revolution and modern methods of transport and
communication broke families apart. Even this relatively
small units came under a debilitating attack in the last 50
years and the nuclear family underwent a nuclear
implosion, it disintegrated. Today, the basic unit of
society, its cell, its atom, is the individual.
1557
forms of government, of marriage, of economy, of
management, of residence, of production, even of trying
to predict the future. It was the wisest of all men, King
Solomon, who said: "There is nothing new under the sun".
True, but it is getting stronger.
It took yet another 4500 years before the dawn of the next
Revolution: the Industrial one. Its main achievement was
to separate the raw materials and the means of production
from the land. It also created the need to have an educated
workforce. This Revolution brought in its wake the
formation of cities (which supplied workers to mega-
factories), mass education systems and leisure.
1558
Contrary to common opinion, the service oriented society
was - and still is - an inseparable part of the industrial
world.
1559
(2) This is the first time in human history that raw
materials, production processes, finished products and
marketing and distribution channels are one and the same.
Let us examine the example of the sales of products (e.g.,
software) through the Internet:
1560
All of us are exposed to radio, television, computers,
cellular phones, the Internet. These products and services
are becoming cheaper and more available and accessible
by the month. The new Revolution is all- pervasive and
all-encompassing.
1561
on innovation, creativity, improvisation and the
entrepreneurial spirit.
1562
The shift from industry to the information technology and
knowledge industries - is a shift from dealing with reality
to dealing with symbols. The techniques used to
manipulate symbols are the very same - no matter what
the symbols are. If a country is successful at developing
trained operators of symbols - they will know how to
manipulate, operate and transform any kind of symbol.
Public Goods
"We must not believe the many, who say that only free
people ought to be educated, but we should rather
believe the philosophers who say that only the educated
are free."
-- Epictetus (AD 55?-135?), Greek Stoic philosopher
1563
I. Public Goods, Private Goods
1564
the market transactions. As Musgrave pointed out (1969),
externalities are the other face of nonrivalry.
1565
From Pickhardt, Michael's paper titled "Fifty Years after
Samuelson's 'The Pure Theory of Public Expenditure':
What Are We Left With?":
1566
endogenous technological change) emphasizes these
"natural" qualities of technology.
1567
largesse it is no longer the case. It is being transformed
into a nonpure public good.
1568
Nor is strict nonrivalry possible - at least not
simultaneously, as Musgrave observed (1959, 1969). Our
world is finite - and so is everything in it. The economic
fundament of scarcity applies universally - and public
goods are not exempt. There are only so many people who
can attend a concert in the park, only so many ships can
be guided by a lighthouse, only so many people defended
by the army and police. This is called "crowding" and
amounts to the exclusion of potential beneficiaries (the
theories of "jurisdictions" and "clubs" deal with this
problem).
1569
Bibliography
1570
Public Procurement
In every national budget, there is a part called "Public
Procurement". This is the portion of the budget allocated
to purchasing services and goods for the various
ministries, authorities and other arms of the executive
branch. It was the famous management consultant,
Parkinson, who once wrote that government officials are
likely to approve a multi-billion dollar nuclear power
plant much more speedily that they are likely to authorize
a hundred dollar expenditure on a bicycle parking device.
This is because everyone came across 100 dollar
situations in real life - but precious few had the fortune to
expend with billions of USD.
1571
years only, the burgeoning defence sector in Israel saw
two such big scandals: the developer of Israel's missiles
was involved in one (and currently is serving a jail
sentence) and Israel's military attache to Washington was
implicated - though, never convicted - in yet another.
1572
activities of political parties. This was rampantly abundant
in Italy and has its place in France. The USA, which was
considered to be immune from such behaviours - has
proven to be less so, lately, with the Bill Clinton alleged
election financing transgressions.
1573
The second problem is the supervision, auditing and
control of actual spending. This has two dimensions:
1574
guarded secret ("to protect commercial interests and
secrets").
1575
highly effective in reducing procurement - related
irregularities and crimes. Another such institutions the
Israeli State Reviser. What is common to both these
organs of the state is that they have very broad authority.
They possess (by law) judicial and criminal prosecution
powers and they exercise it without any hesitation. They
have the legal obligation to review the operations and
financial transactions of all the other organs of the
executive branch. Their teams select, each year, the
organs to be reviewed and audited. They collect all
pertinent documents and correspondence. They cross the
information that they receive from elsewhere. They ask
very embarrassing questions and they do it under the
threat of perjury prosecutions. They summon witnesses
and they publish damning reports which, in many cases,
lead to criminal prosecutions.
1576
decision making process and in the order of priorities.
They have the propensity to alter both quite often.
1577
In Japan, the Ministry of Finance still scrutinizes (and has
to authorize) the smallest expense, using an army of
clerks. These clerks became so powerful that they have
the theoretical potential to secure and extort benefits
stemming from the very position that they hold. Many of
them suspiciously join companies and organizations
which they supervised or to which they awarded contracts
- immediately after they leave their previous, government,
positions. The Ministry of Finance is subject to a major
reform in the reform-bent government of Prime Minister
Hashimoto. The Japanese establishment finally realized
that too much supervision, control, auditing and
prosecution powers might be a Pyrrhic victory: it might
encourage corruption - rather than discourage it.
1578
their departmental budgets. This means that they get a
small fraction of the end of the fiscal year difference
between their budget allowances and what they actually
spent. This is very useful in certain segments of
government activity - but could prove very problematic in
others. Imagine health officials saving on medicines, or
others saving on road maintenance or educational
consumables. This, naturally, will not do.
1579
Everyone likes to complain about the deterioration of
services provided by the Government and about how it
obstructs the development of the Private Sector.
1580
Yet, even after one decade of privatizing the public sector,
the figures are still alarming. We measure the involvement
of the public sector in the national economy as a
percentage of the Gross Domestic Product (GDP). In the
European Union it accounts for 42% to 59% of the GDP.
1581
Needless to mention the difference between these initially
identical twins: one had an enormous public sector with
central economic planning (East Germany and North
Korea) - the other has a well developed private sector
(West Germany and South Korea).
Privatization
1582
Ministry of Finance (even if they are assisted by outside
experts, the final decision at what price to sell is theirs) -
there is room for big mistakes or even for corruption. This
way, a select, tiny group of well-connected businessmen
(or former managers of the firm, who led it to its sorry
state) will buy the privatized firm at a fraction of its true
value and thus deprive the people of what is rightfully
theirs.
1583
utilizes "national natural resources" or that its continued
operations are a matter of national security or social
interest.
De-Regulation
1584
(3) Adopting free trade policies is a way of de-regulating
the markets. When custom tariffs are reduced and other,
non-tariff, trade barriers are lowered - this fosters foreign
competition.
Securitization
The same is done with car loans and with many other
forms of credits yielding regular streams of income to the
creditor. This way, the creditor spreads his risks among
many bondholders.
1585
The public sector - and especially public utilities which
have a stable stream of income - can sell their future
income to the markets. This is done by issuing bonds to
the public and selling them through the stock exchange.
Another way is to sell these bonds directly to institutional
investors, such as pension funds.
Hidden Assets
Examples abound:
1586
revenues from the sale of these intangible assets amount
to billions of USD.
1587
R
Religion
1588
Foreigners are banned from entering the city, which
probably explains the dearth of FDI.
1589
tourism and services. Religion is wisely not allowed to
disrupt the city's economic pulse.
Even the Vatican, with its less than 1000 "citizens", is not
a religious monoculture. With revenues and expenditures
almost balanced at $200 million p.a. - it derives most of
its income from tourism (admission fees), and the sale of
postage stamps, coins, and publications. One should not
underestimate the attractions of the Vatican. In 2000,
more than 2 million young people attended the misnamed
six day fest, "World Youth Day". Donations from
Catholic congregations the world over come next. Despite
"full disclosure" reports published since the early 1980's,
no one knows how much the Vatican earns on its
legendary investment portfolio (until the late 1980's, the
Holy See was heavily involved in the decidedly unholy
Italian banking and financial scene).
1590
Scene of the Winter Olympics this year, the city attained
notoriety with what came perilously close to bribing
International Olympic Committee officials to make the
right choice. Despite the omnipresent, near omnipotent,
and always flush Church of Jesus Christ of the Latter-day
Saints (Mormon), alcohol is now easier to buy. But this,
according to "The Economist", may not be the only sin.
The city is also the capital of junk financing in the form of
a vehicle known as "Industrial Loan Corporations" (ILC).
These lend to "less qualitative" firms at usurious interest
rates while enjoying FDIC insurance and no supervision
(technically, they are not banks). Such "assets" are
rumored to exceed $90 billion (up from $2 in 1994). ILC's
in Salt Lake City are managed by the likes of Merrill
Lynch, General Electric and Pitney Bowes.
1591
1998-9 and its exports (and wages) dropped precipitously
ever since. The technology bust and a series of mergers
and acquisitions fostered a glut of office space. But
overall, getting rid of religion as the only source of
economic activity turned out to have been prescient.
Risk
Risk transfer is the gist of modern economies. Citizens
pay taxes to ever expanding governments in return for a
variety of "safety nets" and state-sponsored insurance
schemes. Taxes can, therefore, be safely described as
insurance premiums paid by the citizenry. Firms extract
from consumers a markup above their costs to compensate
them for their business risks.
1592
expect above "normal" - that is, risk-free - returns on their
investments in stocks. These are supposed to offset
trading liquidity, issuer insolvency, and market volatility
risks.
1593
standardized goods, metals, and so on. "Transformer"
companies - collaborating with insurance firms -
specialize in converting derivative contracts (mainly
credit default swaps) into insurance policies. This is all
part of the famous Keynes-Hicks hypothesis.
1594
risk transfer markets to disperse risks, making them less
vulnerable to particular regional, sectoral, or market
shocks. Greater inter-dependence, however, raises
challenges for market participants and the authorities: in
tracking the distribution of risks in the economy,
managing associated counterparty exposures, and
ensuring that regulatory, accounting, and tax differences
do not distort behavior in undesirable ways."
1595
toll. According to "The Economist", in the wake of the
atrocity, insurance companies slashed their coverage to
$50 million per airline per event. EU governments had to
step in and provide unlimited insurance for a month. The
total damage, now pegged at $60 billion - constitutes one
quarter of the capitalization of the entire global
reinsurance market.
1596
But terrorism and war are, gratefully, still rarities. Even
before September 11, insurance companies were in the
throes of a frantic effort to reassert themselves in the face
of stiff competition offered by the capital markets as well
as by financial intermediaries - such as banks and
brokerage houses.
1597
The funds yielded by an insurance policy, though, are
encumbered and contingent. It takes an insurance event to
"release" them. Equity capital is usually made
immediately and unconditionally available for any
business purpose. Insurance companies are moving
resolutely to erase this distinction between on and off
balance sheet types of capital. They want to transform
"contingent equity" to "real equity".
1598
certain categories, such as the US property and casualty
market, according to an August 2000 article written by
Albert Beer of America Re. ART is also common in the
public and not for profit sectors.
1599
The Air Transport Association and Marsh, an insurer, are
in the process of establishing Equitime, a captive, backed
by the US government as an insurer of last resort. With an
initial capital of $300 million, it will offer up to $1.5
billion per airline for passenger and third party war and
terror risks.
1600
(CBOT). Options were also traded, between 1997 and
1999, on the Bermuda Commodities Exchange (BCE).
Some risks and losses offset each others and are aptly
termed "natural hedges". Enron pioneered the use of such
computer applications in the late 1990's - to little gain it
would seem. There is no reason why insurance companies
1601
wouldn't insure such risk portfolios - rather than one risk
at a time. "Multi-line" or "multi-trigger" policies are a first
step in this direction.
1602
dealers publish significantly different prepayment
forecasts and option-adjusted spreads on mortgage-backed
securities ... (the solutions are) more capital per asset and
less leverage."
1603
Romania, Economy of
Romanians like to compare their country to the heart of
Europe. If so, Europe has been in a continuous state of
cardiac arrest. Romania is still so backward and corrupt
that even venerable foreign leaders get entangled in its
sleaze.
1604
together with another paragon of rectitude and capitalism,
Bulgaria).
1605
This is equal to the World Bank's investments in
Romania's transportation and finance combined and 25%
more than it invested in agriculture. Evidently, Romania
has failed to come up with viable economic policies on its
own.
1606
- mainly due to a cut of 3% in state salaries and in energy
subsidies ("not nearly enough", retorted the IMF).
Relationships with the IMF are stormy. Five years ago, for
example, the IMF mission left Bucharest without waiting
for a Romanian letter of intent - though it promised to
return soon and to release the second tranche of the stand-
by arrangement on time, the next month.
1607
Tax revenues (and payments for heating and electricity)
have deteriorated sharply. The agricultural sector -
composed of inefficient smallholders - has not been
touched. Close to 100,000 homeless children roam the
streets. Romania's external environment has worsened
perceptibly as all its trade partners were hit by a global
recession between 2000-2005.
1608
Romanian President, Ion Iliescu, contested his homeland's
geography. In April 2003, at a joint press conference with
Bulgaria's President Parvanov, he cast both countries as
"central-south European" rather than the derogatory
"Balkan". Both joined NATO in 2004 and the European
Union in January 2007 - though the former organisation
expressed reservations after embarrassing leaks of
classified military data in both Bucharest and Sofia.
1609
Romania's Social Democratic government led by Prime
Minister Adrian Nastase was elected in January 2001 and
immediately embarked on a revamp of the country's
obsolete armed forces. The NATO-compatible Romanian
army in 2005 comprised 112,000 mostly professional elite
soldiers and 28,000 civilians - a shadow of its former
bloated self. The Ministry of National Defense was further
depleted by the transfer of the soon to be completely
privatized armaments industry to the Ministry of Industry
and Resources.
1610
200,000 people were employed in the sector. Romania
even has its own materiel trade fair - Expomil.
1611
(promoted by the Offset Law) - allow indigenous makers
to leap into NATO's lean and mean, hi-tech 21st century.
Eurocopter and DaimlerChrysler, for instance, serve as
strategic partners to Romanian production facilities.
1612
service Securitate permeate the upper echelons of the
country's defense establishment.
1613
likes of Yemen, Mozambique, and Madagascar - started
coughing up - though not Syria which owes $12 billion
for weapons purchases two decades ago. But the result of
these Herculean efforts is meager. Russia expects to get
back an extra $100 million a year. By comparison, in
1999 alone Russia received $800 million from India.
1614
Russia. Five enterprises will change hands and thus
eliminate Armenia's $94 million outstanding debt to
Russia.
1615
Russia would have to forgo at least 90% of the debt owed
it by the likes of Angola, Ethiopia, Guinea, Mali,
Mozambique, Somalia, Tanzania, and Zambia. Russian
debts amount to between one third and two thirds of these
countries' foreign debt. Moreover, its hopes to offset
money owed it by countries within the framework of the
Paris Club against its own debts to the Club were dashed
in 2001. Hence its incentive to distort the data.
1616
through Poland and Slovakia. Gazprom has been trying to
coerce Ukraine for years now to turn over control of the
major transit pipelines and giant underground storage
tanks to Russian safe hands. Various joint ownership
schemes were floated - the latest one, in 1999, was for a
pipeline to Bulgaria and Turkey to be built at Ukrainian
expense but co-owned by Gazprom.
Russia, Economy of
Contrary to recent impressions, Russia's Western
(American-German) orientation is at least as old as
Gorbachev's reign. It was vigorously pursued by Yeltsin.
Still, 2002 marks the year in which Russia became merely
another satellite of the United States - though one armed
with an ageing nuclear arsenal.
1617
Russia's economy has revived remarkably after the 1998
crisis, but it is still addicted to Western investments, aid
and credits. Encircled by NATO to its West and US troops
stationed in its central Asian hinterland, Russia's
capitulation is complete. In the aftermath of conflicts to be
engineered by the United States in Afghanistan, Iraq,
North Korea, Iran, Syria and, potentially, Cuba - Russia
may feel threatened geopolitically as well as
economically. Both Iran and Iraq, for instance, are large
trading partners and leading export destinations of the
Russian Federation.
1618
Reforms - of the military, Russia's decrepit utilities,
dilapidated infrastructure and housing, inflated and venal
bureaucracy, corrupt judiciary and civil service, choking
monopolies and pernicious banking sector - depend on the
price of oil. Russia benefited mightily from the surge in
the value of the "black gold". But the windfall has helped
mask pressing problems and allowed timid legislators and
officials to postpone much needed - and fiercely resisted -
changes.
1619
Thus, falling oil prices - though detrimental to Russia's
ability to repay its external debt and balance its budget -
are a blessing in disguise. Such declines will force the
hand of the Putin administration to engage in some serious
structural reform - even in the face of parliamentary
elections in 2003 and presidential ones the year after.
1620
above $20 and foreign exchange reserves the highest since
1991. Russia even prepaid some of its debt mountain this
year. But if its export proceeds were to decline by 40
percent in the forthcoming 3-4 years, Russia will, yet
again, be forced to reschedule or default. Every $1 dollar
decline in Ural crude prices translates to more than $1
billion lost income to the government.
1621
liberalization and opening up to competition - all
agonizing moves. Russian industry and agriculture are not
up to the task. It took a massive devaluation and a
debilitating financial crisis in 1998 to resurrect consumer
appetite for indigenous goods.
1622
voice in matters provincial. Devolution - a pet Putin
project - is more about accepting an unsavory reality than
about re-defining the Russian state.
1623
appreciate authority more than individualism. Russia - a
ramshackle amalgamation of competing turfs - is still ill-
suited for capitalism or for liberal democracy, though far
less than it was only ten years ago.
1624
Russia could not resist the temptation of playing once
more the Leninist game of "inter-imperialist
contradictions". It has long masterfully exploited chinks in
NATO's armor to further its own economic, if not
geopolitical, goals. Its convenient geographic sprawl - part
Europe, part Asia - allows it to pose as both a continental
power and a global one with interests akin to those of the
United States. Hence the verve with which it delved into
the war against terrorism, recasting internal oppression
and meddling abroad as its elements.
1625
borders, America's presence in central Asia and the
Caucasus, Russia's "near abroad" - are traumatic reversals
of fortune.
1626
hitherto, all Russia received were expression of sympathy,
claimed Valeri Fyodorov, director of Political Friends, an
independent Russian think-tank, in an interview in the
Canadian daily, National Post.
1627
Still, Europe is a captive of geography and history. It has
few feasible alternatives to Russian gas, for instance. As
the recent $7 billion investment by British Petroleum
proves, Russia - and, by extension, central and east
Europe - is Europe's growth zone and natural economic
hinterland.
1628
with America's. China, for instance, is as much Russia's
potential adversary as it is the United State's.
1629
The last years of Yeltsin have been so traumatic that the
bickering cogs and wheels of Russia's establishment
united behind the only vote-getter they could lay their
hands on: Putin, an obscure politician and former KGB
officer. To a large extent, he proved to be an agreeable
puppet, concerned mostly with self-preservation and the
imaginary projection of illusory power.
1630
remains to be seen. The smart money says he would. But
if the last three years have taught us anything it is that the
smart money is often disastrously wrong.
1631
Despite this astounding turnaround - foreign investors are
still shy. The complex tariff and customs regulations, the
erratic tax administration, the poor storage and transport
infrastructure, the vast distances to markets, the endemic
lawlessness, the venal bureaucracy, and, above all, the
questionable legal status of the ownership of agricultural
land - all serve to keep them at bay.
1632
The main problem nowadays is not lack of knowledge,
management, or new capital - it is an unsustainable
mountain of debts. Even with a lenient "Law on the
Financial Recovery of Agricultural Enterprises" currently
being passed through the Duma - only 30% of farms are
expected to survive. The law calls for rescheduling current
debt payments over ten years.
1633
"... farms in Moscow Province are more productive than
farms in equivalent locations in Ryazan Provinces, while
farms closer to the central city of either province do better
than farms near the borders of that province."
1634
Whether the re-emergent center will be able to impose its
will on the recalcitrant agricultural regions, still remains
to be seen.
Russia, Devolution in
A centerpiece of President's Putin overhaul of Russia is
the reversion to the Kremlin of the power to appoint
governors, hitherto voted into office. The popularly
elected sort - admittedly a motley and venal crew - seem
to have provoked his ire as far too independent and,
therefore, impudent.
1635
(the Jewish oblast), rebellious republics (Chechnya), and
disaffected districts - all intermittently connected with
decrepit lines of transport and communications.
1636
Nadezhda Bikalova of the IMF notes ("Intergovernmental
Fiscal Relations in Russia") that when the USSR
imploded, the ratio of budgetary income per person
between the richest and the poorest region was 11.6. It has
since climbed to 30. All the regions were put in charge of
implementing social policies as early as 1994 - but only a
few (the net "donors" to the federal budget, or food
exporters to other regions) were granted taxing privileges.
1637
Samara, Tyumen, Sverdlovsk, Tatarstan, Perm, Nizhny-
Novgorod, Irkutsk, Krasnoyarsk, and St. Petersburg
(Putin's lair). As a result, by early 1997, Moscow attracted
over 50% of all FDI and domestic investment and St.
Petersburg - another 10%.
1638
in 1997). Many regions cut red tape, introduced
transparent bookkeeping, lured foreign investors with tax
breaks, and liberalized land ownership.
1639
The regions are still allowed to tax the property of
organizations, sales, real estate, roads, transportation, and
gambling enterprises, and regional license fees (all tax
rates are set by the center, though). Municipal taxes
include the land tax, individual property, inheritance, and
gift taxes, advertising tax, and license fees.
1640
Putin then resorted to another stratagem. He established,
in 2000, by decree, a bureaucratic layer between centre
and regions: seven administrative mega-regions whose
role is to make sure that federal laws are both adopted and
enforced at the local level. The presidential envoys report
back to the Kremlin but, otherwise, are fairly harmless -
and useless. They did succeed, however, in forcing local
elections upon the likes of Ingushetiya - and to organize
all federal workers in regional federal collegiums,
subordinated to the Kremlin.
1641
The East-West Institute reports that arrears have increased
10% in January 2002 alone - to 33 billion rubles (c. $1
billion). The Finance Ministry considered to declare seven
regions bankrupt. Yet another committee, headed by
Deputy Head of the Presidential Administration, Dimitri
Kozak, was on the verge of establishing an external
administration for insolvent regions. The recent housing
reform - which would force Russians to pay market prices
for their apartments and would subsidize the poor directly
(rather than through the regional and municipal
authorities) - is likely to further weaken regional balance
sheets.
1642
and safe institutions, propagated by entrenched interest
groups.
1643
The pension fund of the Russian oil giant, Lukoil, a
minority shareholder in TV-6 (owned by a discredited and
self-exiled Yeltsin-era oligarch, Boris Berezovsky),
forced, in February 2002, the closure of this television
station on legal grounds. Thus was fired the opening shot
in the re-politicization of the lucrative (and economically
pivotal) energy sector in Russia.
1644
camerilla), Gazprom CEO Alexei Miller and Rosneft
CEO Sergei Bogdanchikov, are at each others' throats.
A few examples:
1645
reduce their dependence on Russian oil transportation
infrastructure. These efforts largely failed (though a new
$4 billion pipeline from Kazakhstan to the Black Sea
through Russian territory is in the works, having been
inaugurated in early 2002). Russia is now on a charm
offensive.
1646
potent long arms of the Kremlin and the security services
and implement their policies faithfully.
1647
Gazprom defied Putin, for instance, by brawling over
natural gas contracts with Turkmenistan, one of the only
remaining Central Asian allies of a geopolitically-
dilapidated Russia. With 1.45 million bpd (barrels-per-
day) in combined output, Rosneft is emerging as a more
reliable - and equally weighty - policy tool.
1648
Commercial activity is more focused and often channeled
through American diplomatic missions. The watershed
year was, again, 2002.
1649
This gold rush is the result of Russia's prominence as an
oil producer, second only to Saudi Arabia. Russia dumps
on the world markets c. 4.5 million barrels daily (about
10% of the global trade in oil). It is the world's largest
exporter of natural gas (and has the largest known natural
gas reserves). It is also the world's second largest energy
consumer. In 1992, it produced 8 million bpd and
consumed half as much. In 2001, it produced 7 million
bpd and consumed 2 million bpd.
1650
In early 2002, Russia halved export duties on fuel oil.
Export duties on lighter energy products, including gas,
were cut in January 2002. As opposed to previous years,
no new export quotas were set since then. Clearly, Russia
is worried about its surplus and wishes to amortize it
through enhanced exports.
1651
not a member) and its decision to cut oil production by
only 150,000 bpd in the first quarter of 2002 (having
increased it by more than 400,000 bpd in 2001). It cannot
afford a larger cut and it can increase its production to
compensate for almost any price drop.
1652
their Western accomplices) - is offering "complementary
vocational training" in the framework of its Banking
School. It is somewhat ironic that the institution suspected
of abusing billions of US dollars in IMF funds by
"parking" them in obscure off-shore havens - seeks to
better the corrupt banking system in Russia.
I. The Banks
1653
corporate bond issues are as large as $100 million (with
18-months maturity) and the corporate bond market may
quintuple to $10 billion in a year or two, reports "The
Economist", quoting Renaissance Capital, a Russian
investment bank.
1654
Moreover, the opaque, overly-bureaucratic, and oligarch-
friendly Central Bank is at loggerheads with would be
reformers and gets its way more often than not. It supports
a minimum capital requirement of less than $5 million.
Government sources have gone as high as $200 million.
The government retaliates with thinly-veiled threats in the
form of inane proposals to replace the Bank with newly-
created "independent" institutions.
1655
regard this surge as a speculative bubble inflated by the
high level of oil prices.
1656
Perhaps the best judges of Russia's officially minuscule
economy (smaller than the Netherlands' and less than
three times Israel's) - are the Russians. When the author of
this article suggested that Russia's 1998 chaos was
serendipitous (in "Argumenti i Fakti" dated October 28,
1998), he was derided by Western analysts but supported
by Russian ones. In hindsight, the Russians were right.
They may be right today as well when they claim that
Russia has never been better.
1657
The strategic forecasting firm also predicts the emergence
of a thriving mortgage finance market (there is almost
none now). One of the reasons is a belated November
2001 pension reform which allows the investment of
retirement funds in debt instruments - such as mortgages.
A similar virtuous cycle transpired in Kazakhstan. Last
year the Central Bank allowed individuals to invest up to
$75,000 outside Russia.
Putin doesn't. Last year, riding the tidal wave of the fight
against terror, he formed the Financial Monitoring
Committee (KFM). Ostensibly, its role is to fight money
1658
laundering and other financial crimes, aided by brand new
laws and a small army of trained and tenacious
accountants under the aegis of the Ministry of Finance.
Russians, the skeptics that they are, still keep most of their
savings (c. $40-50 billion) in foreign exchange
(predominantly US dollars), stuffed in mattresses and
other exotic places. Prices are often quoted in dollars and
ATM's spew forth both dollars and rubles. This
predilection for the greenback was aided greatly by the
1659
Central Bank's panicky advice (reported by Moscow
Times) to ditch all European currencies prior to January 1,
2002. The result is a cautious and hitherto minor
diversification to euros. Banks are reporting increased
demand for the new currency - a multiple of the demand
for all former European currencies combined. But this is
still a drop in the dollar ocean.
1660
issued by Russian Standard Bank. There is also $5 million
loan to Probusiness Bank.
1661
has a rich tradition of obstructionism, venality, political
interference, and patronage.
1662
Russia, Oil Sector of
1663
value of its oil inventories is stripped, the company's
profits last year are down by a quarter compared to 2001.
1664
Russia is already flooded with c. 170 million barrels of
unsold oil, in no small measure due to an ongoing conflict
between private producers and the country's state-owned
pipeline monopoly, Transneft. LUKoil foresees an
increase of yet another 130 million barrels by November,
according to the New York Times.
1665
embarked on the Russian joint venture. The analyst
predicted "restructuring and capital expenditure reduction
initiatives shortly ... the company (is expected) to
redeploy proceeds and cash flow towards share buybacks
and dividend increases." These seem less likely now. BP
is also involved in other costly projects in Georgia,
Ukraine and the countries of the Caspian Basin.
1666
assessment that the Caspian is over-rated and that black
gold is to be found in the Far East. Russia's low cost of
production and its enormous reserves make it as attractive
as the Gulf once was.
1667
LUKoil and its subsidiaries also extract and sell natural
gas.
1668
Vedomosti, LUKoil expressed interest in purchasing the
Greek state-owned oil company Hellenic Petroleum.
1669
The exception is, yet again, LUKoil. A $3.7 billion
exploration and development contract it concluded was
recently cancelled unilaterally by the irate Iraqis.
1670
Last year, LUKoil won a government tender in Cyprus to
develop a network of gas stations. According to Prime-
TASS, the company already controls one quarter of the
Cypriot market. Alekperov announced that LUKoil
intends to branch into oil storage and transportation in this
would-be new member of the European Union. It also
owns and operates 80 pump stations in Bulgaria and has
invested half a billion dollars there.
1671
early 1980's, and, in a glutted market, Israel resorted to
importing 99 percent of the 280,000 barrels it consumes
daily.
1672
heavily invested in US gas stations and refineries in
anticipation of these inevitable developments. As if to
underline these, the Financial Times reported, on October
3, a purchase of 300,000 barrels of oil from the Russian
Tyumen Oil company.
The deal with Israel will allow Russia to peddle its oil in
the Asian market, a major export target and a monopoly of
the Gulf producers. Russia is in the throes of constructing
several pipelines to Asia through its eastern territories and
Pacific coastline - but completion dates are uncertain.
1673
millennial geopolitical developments, anti-Semitic
conspiracy theorists are having a field day.
1674
Israel away from its automatic support of US goals by
dangling the oiled carrot of a joint pipeline.
1675
of international law - expressed their hope yesterday for a
swift victory of the hitherto much-decried coalition forces.
But this may be too little and way too late, as far as the
United States is concerned. The two prostrates are firmly
included in the victors' grey list - if not yet in their black
one. The friction is not merely the outcome of
sanctimonious hectoring about human rights from the
Chechen-bashing Russians. It runs deeper and it turns on
more than a dime.
1676
Ironically, it is America's aggressive stance towards Iraq
that drives the likes of Iran and North Korea back into the
arms - and nuclear technologies - of the Russian
Federation. Russia is positioning itself to become an
indispensable channel of communication and intermediary
between the USA and what the State Department calls
"rogue states".
1677
Though vehemently denied by all parties, South Korea
floated last week, in an interview Ra granted to the
Financial Times, the idea of supplying Pyongyang with
Russian natural gas from Siberia or Sakhalin through a
dedicated pipeline, as a way to solve the wayward
regime's energy problems.
1678
nuclear power stations on its side of the border and supply
North Korea with electricity.
1679
Rosneft and Japan, would cost $5.2 billion and
circumvent China, running 3,800 kilometers to the
Russian Far East city of Nakhodka on the Sea of Japan ...
The Russian Energy Ministry eventually recommended
that the Japanese and Chinese proposals be combined into
one project, a third option to build the (1.6 million barrel a
day) pipeline to Daqing and then extend it to Nakhodka."
1680
(between Russia and China led to a) volume (of) close to
$12 billion last year. This year the volume of bilateral
trade grew 37 percent for the first two months and
exceeded $2 billion."
1681
emphasizing Asia over Europe. It is building new bridges
and forming new alliances, both commercial and strategic.
1682
America's, Russia's, and China's. Iran is another. Russia
would seek to lend its support to the highest bidder
(which, at the moment, is the USA).
1683
shareholders - namely the oligarchs Roman Abramovich
and Boris Berezovsky. Minority stock owners are to be
made a "fair offer" backed by a valuation produced by "an
internationally recognized bank".
1684
available to Western corporate suitors. It also cements
Russia's dependence on energy. Oil accounts for close to
one third of the vast country's gross domestic product and
one half of its exports.
1685
Furthermore, with a parliamentary vote by yearend and
presidential elections looming next March, Putin, like
president Boris Yeltsin before him, may be discovering
the charms of abundant campaign finance and mogul
sponsorship in the provinces. Yukos contributes heavily to
political outfits, such as the Communist Party, the Union
of the Right Forces (SPS), and the Apple (Yabloko) party.
1686
mere $100 million in the heyday of Yeltsin the corrupt, in
1995-6. Asia Times reported, based on Moscow "banking
sources", that Yukos has hitherto refrained from going
public in New York due to Kremlin pressure. The firms
have been hitherto closely held with the free floats of
Yukos and Sibneft equal to less than one quarter and one
seventh of their capital, respectively.
1687
The YukosSibneft merger is in the worst of Russian
traditions: self-dealing, self-serving and murky. This
offspring of political meddling, egregious profit taking,
insider trading, backstabbing and xenophobia it is unlikely
to produce another Shell or BP. It is the venomous fruit of
a poisoned tree.
1688
unsupervised slush funds) - were all standard perks even
in the 1970's and 1980's. Thus, when communism was
replaced by criminal anarchy, KGB personnel (as well as
mobsters) were the best suited to act as entrepreneurs in
the new environment. They were well traveled, well
connected, well capitalized, polyglot, possessed of
management skills, disciplined, armed to the teeth, and
ruthless. Far from being sidetracked, the security services
rode the gravy train. But never more so than now.
A. The Military
1689
Conscripts, in what resembles slave labour, are "rented
out" by their commanders to economic enterprises
(especially in the provinces). A host of such "trading"
companies owned by bureaucrats in the Ministry of
Defense was shut down last June by the incoming
Minister of Defense (Sergei Ivanov), a close pal of Putin.
But if restructuring is to proceed apace, the successful
absorption of former soldiers in the economy (requiring
pensions, housing, start up capital, employment) - if
necessary with the help of foreign capital - is bound to
become a priority sooner or later.
But this may be too late and too little - the much truncated
and disorientated armed forces have been "privatized" and
commandeered for personal gain by regional bosses in
cahoots with the command structure and with organized
crime. Ex-soldiers feature prominently in extortion,
protection, and other anti-private sector rackets.
1690
Orders placed with Russia's defense manufacturers by the
destitute Russian armed forces are down to a trickle.
Though the procurement budget was increased by 50%
last year, to c. $2.2 billion (or 4% of the USA's) and
further increased this year to 79 billion rubles ($2.7
billion) - whatever money is available goes towards
R&D, arms modernization, and maintaining the inflated
nuclear arsenal and the personal gear of front line soldiers
in the interminable Chechen war. The Russian daily
"Kommersant" quotes Former Armed Forces weapons
chief, General Anatoly Sitnov, as claiming that $16
billion should be allocated for arms purchases if all the
existing needs are to be satisfied.
1691
most advanced weaponry is being made available through
these outfits.
NOTE:
1692
The KGB was succeeded by a host of agencies. The FSB
inherited its internal security directorates. The SVR
inherited the KGB's foreign intelligence directorates.
1693
The co-operation with crime lords against corrupt (read:
unco-operative) bureaucrats became institutional and all-
pervasive under Yeltsin. The KGB is alleged to have spun
off a series of "ghost" departments to deal with global
drug dealing, weapons smuggling and sales, white
slavery, money counterfeiting, and nuclear material.
1694
next big fount of revenue) becomes clear: industrial and
economic espionage. Russian scholars are already ordered
(as of last May) to submit written reports about all their
encounters with foreign colleagues.
1695
S
Scams
The syntax is tortured, the grammar mutilated, but the
message - sent by snail mail, telex, fax, or e-mail - is
coherent: an African bigwig or his heirs wish to transfer
funds amassed in years of graft and venality to a safe bank
account in the West. They seek the recipient's permission
to make use of his or her inconspicuous services for a
percentage of the loot - usually many millions of dollars.
A fee is required to expedite the proceedings, or to pay
taxes, or to bribe officials - they plausibly explain. A
recent (2005) variant involves payment with expertly
forged postal money orders for goods exported to a transit
address.
1696
"Wired" quotes statistics presented at the International
Conference on Advance Fee (419) Frauds in New York on
Sept. 17, 2002:
1697
The "419 Coalition" is more succinct and a lot more
pessimistic:
1698
acknowledges that "Nigerian organized crime rings
running fraud schemes through the mail and phone lines
are now so large, they represent a serious financial threat
to the country".
1699
accompanied by demand for "samples" and various
transaction "fees and charges".
1700
The more heightened public awareness grows with over-
exposure and the tighter the net of international
cooperation against the scam, the wilder the stories it
spawns. Letters have surfaced recently signed by dying
refugees, tsunami victims, survivors of the September 11
attacks, and serendipitous US commandos on mission in
Afghanistan.
1701
Champion", proffered this insightful apologia on behalf of
the ruthless and merciless 419 gangs. It is worth quoting
at length:
1702
one of the rare crimes where prey and perpetrator may
well deserve each other.
The Shoppers
1703
and financial institutions (usually, in the West). This time,
they reverse their text: "We have an excellent client, a
good borrower. Are you willing to lend to it?" An
informal process of tendering ensues. Sometimes it ends
in a transaction and the shopper collects a small
commission (between one quarter of a percentage point
and two percentage points - depending on the amount).
Mostly it doesn't -and the Flying Dutchman resumes his
wanderings looking for more venal gulosity and less legal
probity.
The Con-Men
1704
comparison upfront costs. The con-men pocket these
"expenses" and vanish. Sometimes, they even empty the
accounts of their entire balance as they evaporate.
The Launderers
1705
disparate economic activities and show not the slightest
interest in the putative yields on their investments, the
maturity of their assets, the quality of their newly acquired
businesses, their history, or real value. Never the
sedulous, they pay exorbitantly for all manner of
prestidigital endeavours. The future prospects and other
normal investment criteria are beyond them. All they are
after is a mirage of lapidarity.
The Investors
1706
Intoxicated by this pecuniary nectar, the fortunate, those
privy to the secret, try to raise more capital by hunting for
financial instruments they can convert to cash in Western
banks. A bank guarantee, a promissory note, a confirmed
letter of credit, a note or a bond guaranteed by the Central
Bank - all will do as deposited collateral against which a
credit line is established and cash is drawn. The cash is
then invested in a new cycle of inebriation to yield
fantastic profits.
1707
issuer is still debated. In some cases it is clearly so. If
something goes horribly (and rarely, admittedly) wrong
with these transactions - the local bank stands to suffer,
too.
Scandals, Financial
Tulipmania - this is the name coined for the first pyramid
investment scheme in history.
1708
The bubble burst in 1637. In a matter of a few days, the
price of tulip bulbs was slashed by 96%!
1709
The Ministers of Finance, the Governors of the Central
Bank assisted the banks in these criminal pursuits. This
specific pyramid scheme - arguably, the longest in history
- lasted 7 years.
1710
fictitious losses. All would have been well had the Islamic
banks stuck to healthier business practices.
1711
But, then, most of the investors in pyramids know that
pyramids are scams, not schemes. They stand warned by
the collapse of other pyramid schemes, sometimes in the
same place and at the same time. Still, they are attracted
again and again as butterflies are to the fire and with the
same results.
1712
The second type of financial scandals is normally
connected to the laundering of capital generated in the
"black economy", namely: the income not reported to the
tax authorities. Such money passes through banking
channels, changes ownership a few times, so that its track
is covered and the identities of the owners of the money
are concealed. Money generated by drug dealings, illicit
arm trade and the less exotic form of tax evasion is thus
"laundered".
1713
authority, misuse or misplacement of funds. Where no
light shines, a lot of creepy creatures tend to develop.
1714
Some banks would subject the review of credit
applications to social considerations. They would lend to
certain sectors of the economy, regardless of their
financial viability. They would lend to the needy, to the
affluent, to urban renewal programs, to small businesses -
and all in the name of social causes which, however
justified - cannot justify giving loans.
1715
Financial mismanagement can also be the result of lax or
flawed financial controls. The internal audit department in
every financing institution - and the external audit
exercised by the appropriate supervision authorities are
responsible to counter the natural human propensity for
gambling. The must help the financial organization re-
orient itself in accordance with objective and objectively
analysed data. If they fail to do this - the financial
institution would tend to behave like a ship without
navigation tools. Financial audit regulations (the most
famous of which are the American FASBs) trail way
behind the development of the modern financial
marketplace. Still, their judicious and careful
implementation could be of invaluable assistance in
steering away from financial scandals.
Scarcity
1716
Malthusian concept of scarcity. Our infinite wants, the
finiteness of our resources and the bad job we too often
make of allocating them efficiently and optimally - lead to
mismatches between supply and demand. We are forever
forced to choose between opportunities, between
alternative uses of resources, painfully mindful of their
costs.
1717
rather than scarce. The anthropologist Marshall Sahlins
discovered that primitive peoples he has studied had no
concept of "scarcity" - only of "satiety". He called them
the first "affluent societies".
1718
Operations research, mathematical modeling, transparent
decision making, free trade, and professional management
- help better allocate these increased resources to yield
optimal results.
1719
Such ease of replication gives rise to network effects and
awards first movers with a monopolistic or oligopolistic
position. Oligopolies are better placed to invest excess
profits in expensive research and development in order to
achieve product differentiation. Indeed, such firms justify
charging money for their "new economy" products with
the huge sunken costs they incur - the initial expenditures
and investments in research and development, machine
tools, plant, and branding.
1720
programmers, servers are all scarce to start with - in the
old economy sense.
1721
goods are worth little in terms of revenues and that people
are badly disposed to react to zero marginal costs.
1722
goods. "Limited editions" of works of art and books are
prime examples of this stratagem.
Science, Financing of
In the United States, Congress approved, In February
2003, increases in the 2003 budgets of both the National
Institutes of Health and National Science Foundation.
America is not alone in - vainly - trying to compensate for
imploding capital markets and risk-averse financiers.
1723
these firms. Investments surged by 36 percent in 2001 to
$18 billion.
1724
This friction is inevitable because the interaction between
technology and science is complex and ill-understood.
Some technological advances spawn new scientific fields
- the steel industry gave birth to metallurgy, computers to
computer science and the transistor to solid state physics.
The discoveries of science also lead, though usually
circuitously, to technological breakthroughs - consider the
examples of semiconductors and biotechnology.
1725
The majority of 501 corporations surveyed by the
Department of Finance and Revenue Canada in 1995-6
reported that government funding improved their internal
cash flow - an important consideration in the decision to
undertake research and development. Most beneficiaries
claimed the tax incentives for seven years and recorded
employment growth.
1726
extra years of schooling and wider access to university do
not necessarily translate to enhanced growth (though
technological innovation clearly does).
1727
Still, all forms of science funding - both public and private
- are lacking.
1728
This would be the corporate equivalent of the Bayh-Dole
Act of 1980. The statute made both academic institutions
and researchers the owners of inventions or discoveries
financed by government agencies. This unleashed a wave
of unprecedented self-financing entrepreneurship.
1729
public purse enrich entrepreneurs? On the other hand,
profit-driven investors seek temporary monopolies in the
form of intellectual property rights. Why would they share
this cornucopia with others, as pure scientists are
compelled to do?
1730
His experience is varied. As a staff attorney, he
investigated and prosecuted cases enforcing the federal
securities laws. As a branch chief, he supervised the work
of several staff attorneys. As a Senior Trial Counsel, he
was responsible for litigating about thirty enforcement
cases at any one time in federal court. As Senior Counsel,
he made the final recommendations on which cases the
office would investigate and prosecute, or decline.
1731
SEC rules and regulations remind me of an old farmhouse
that has been altered and adapted, sometimes for
convenience, other times for necessity. But it has never
been just plain pulled down and rebuilt despite incredible
changes around it. To the uninitiated, the house is
rambling with hidden passages, dark corners, low ceilings,
folklore and horror stories, and accumulations of tons of
antique rubbish that sometimes no one – not even some
SEC Commissioners – can wade through.
Wandering from room to room in this farmhouse are the
SEC staff. Regretfully, I found that many are ignorant or
indifferent to their mission, or scornful of investors'
plight, too addicted to their petty specializations in their
detailed job descriptions, and way too prone to follow
only the well-trodden path.
They are stunned by the rapidity, multiplicity, immensity
and intelligence behind the scams. Their tools of research,
investigation and prosecution are confusingly changed
periodically when Congress passes some new "reform"
legislation, or a new Chairman or new Enforcement
Director issues some memo edict on a "new approach".
Staff attorneys typically bring investors only bad news
and are numbed by the latters' emotional reactions, in a
kind of "shell shock". The SEC lost one quarter of its staff
in the last two years. The turnover of its 1200 attorneys, at
14%, is nearly double the government's average.
1732
One SEC official was quoted as saying "We are losing our
future – the people who would have had the experience to
move into the senior ranks". Those that stay behind and
rise in the ranks are often the least inspired. At the SEC
enforcement division, one is often confronted with the
"evil of banality".
1733
violators from enjoying the fruits of their misconduct. But
because this is a civil and not a criminal remedy, the SEC
has a unique rule where defendants can consent to an
injunction without "admitting or denying the allegations
of the complaint". This leads to what are called "waivers",
and I submit that "waivers" are the fundamental flaw in
U.S. securities laws enforcement.
In a nutshell, here is the problem. A "fraudster"
commits a fraud. The Commission sues for an injunction.
The fraudster consents to the injunction as per above. The
Court then orders the fraudster to "disgorge" his "ill gotten
gains" from the scam, usually within 30 days and with
interest.
In most cases, the fraudster doesn't pay it all and the
Commission moves to hold him in civil contempt for
disobeying the Court's order. The fraudster claims to the
Court that it is impossible for him to comply because the
money is gone and he is "without the financial means to
pay". The Commission then issues a "waiver" and that's
the way many cases end. Thus both sides can put the case
behind them. The fraudster agrees to the re-opening of the
case if he turns out to have lied.
1734
pay the disgorgement. So the waivers are based on an
assumption of credibility that has no basis in experience
and possibly none in fact.
Moreover, the Division of Enforcement has no
mechanism in place to check if the fraudster has, indeed,
lied. After the waiver, the files of the case get stored. The
case is closed. I don't know if there's even a central place
where the records of waivers are kept.
1735
pay". Again, if the fraudster lied, the Commission can ask
the Court to revisit the issue.
1736
I'd keep the civil remedies. In an ongoing fraud, with no
time to make out a criminal case, the Commission staff
can seek a Temporary Restraining Order and an asset
freeze. This more closely resembles the original intent of
Congress in the 1930s. But after the dust settles, the
investing public deserves to demand criminal
accountability for the fraud, not just waivers.
Q. Is the SEC - or at least its current head - in hock to
special interests, e.g., the accounting industry?
A. "In hock to special interests" is too explicit a statement
about US practice. It makes a good slogan for a Marxist
law school professor, but reality is far subtler.
1737
The Chairman's tenure normally overlaps with a specific
President's term in office, even when, as with President
Bush the elder following President Reagan, the same party
remains in power. SEC jobs lend themselves to lucrative
post-Commission employment. This explains the dearth of
"loyal opposition". Alumni pride themselves on their
connections following their departure.
The Chairman is no more and no less "in hock" than any
leading member of a US political party. Still, I faulted
Chairman Pitt, and became the first former member of
SEC management to call for his resignation, in an Op/Ed
item in the Miami Herald. In my view, he was
impermissibly indulgent of his former law clients at the
expense of SEC enforcement.
1738
input in professional self-regulating and regulatory bodies,
such as the recently established accountants board?
1739
certified public accountants, and the remaining three must
not be and cannot have been CPAs. Lawyers are the
likeliest to be appointed to these other seats. The
Chairmanship may be held by one of the CPA members,
provided that he or she has not been engaged as a
practicing CPA for five years, meaning, ab initio, that he
or she will be behind the practice curb at a time when
change is rapid.
1740
Under Act Section 103, the Board shall: (1) register public
accounting firms; (2) establish "auditing, quality control,
ethics, independence, and other standards relating to the
preparation of audit reports for issuers;" (3) inspect
accounting firms; and (4) investigate and discipline firms
to enforce compliance with the Act, the Rules,
professional standards and the federal securities
laws. This is a sea change in the US.
1741
auditor on a foreign subsidiary of a U.S. company - to
registration with the Board.
Under Act Section 108, the SEC now decides what are
"generally" accepted accounting principles. Registered
public accounting firms are barred from providing certain
non-audit services to an issuer they audit. Thus, the split,
first proposed by the head of Arthur Anderson in 1974, is
now the law.
1742
Act Section 209, Consideration by Appropriate State
Regulatory Authorities, "throws a bone" to the states. It
requires state regulators to make an independent
determination whether Board standards apply to small and
mid-size non-registered accounting firms. No one can
seriously doubt the outcome of these determinations. But
we now pretend that we still have real state regulation of
the accounting profession, just as we pretend that we have
state regulation of the securities markets through "blue
sky laws". The reality is that the states will be confined
hence to the initial admission of persons to the accounting
profession. Like the "blue sky laws", it will be a revenue
source, but the states will be completely junior to the
Board and the SEC.
1743
counterattack arguments arising out of the Central Bank
case. As I maintained in the American Journal of Trial
Advocacy, the real significance of the Supreme Court
decision in Central Bank was that the remedial sanctions
of the federal securities laws should be narrowly
construed.
1744
Q. Does the SEC collaborate with other financial
regulators and law enforcement agencies internationally?
Does it share information with other US law enforcement
agencies? Is there interagency rivalry and does it hamper
investigations? Can you give us an example?
1745
decrepit, its industry obsolete, its agriculture shattered to
inefficient smithereens, its international trade
criminalized. It is destitute. The average monthly salary is
50-70 US dollars. The foreign exchange reserves are
depleted by years of collapsing exports, customs evasion,
and theft.
1746
in the Balkan in the 1990's. This is more than
Yugoslavia's whole GDP.
1747
SMEs - agriculture or industry? And should state owned
firms be privatized or shut down?
1748
Kragujevac) was prepared for privatization, half its
workforce (14,000 workers) were made redundant. Of
these, 9000 joined a bogus retraining scheme, a form of
covert unemployment insurance plan. Getting the citizens
of Yugoslavia to willingly give up their insular,
protective, and self-delusional economy is an uphill
struggle.
1749
still being subsidized and shielded from the vagaries of
the free market. Salaries in the public sector are frozen by
decree, heavily politicized boards of directors are
appointed from high up (e.g., recently in the Oil Industry
of Serbia), the media is subservient, agricultural crops
(such as the sunflower harvest) are purchased by the state
(subject to antiquated and harmful dual pricing), turf wars
cyclically erupt between Kostunica and Djindjic and
among their cronies - the more it changes, the more it
stays the same. In the "new" Serbia, the Prime Minister
felt free to instruct (private!) meat producers to reduce
their retail prices by 10-15%. All of them promptly (and
very publicly) "agreed" with him. And this, from the same
people who started off by eliminating artificial price
disparities (a strategy dubbed "shock therapy" by its
opponents).
1750
taxes on financial transactions are expected to be
abolished soon. The currency (the dinar) has stabilized
and foreign currency reserves - though still frighteningly
inadequate - climbed to 1 billion US dollars by mid year.
For the first time in a decade, people trust their
government sufficiently to save in foreign exchange
accounts. Real wages increased by 20% in the year to July
(and real income by 11%), albeit from a much reduced
base. The bulk of this impressive rise is attributed to
climbing productivity.
1751
Yugoslav October 2000 revolution failed. No consensus
in favour of free markets, privatization, and free trade has
emerged. Old Milosevic-era hands are staging a comeback
and gaining in popularity, although almost imperceptibly.
The window of opportunity has already shut abroad and
may be doing so domestically as well.
1752
were confiscated in a similar incident in fall 2001, eight
Kyrgyz traders committed suicide.
1753
EWI claims that Russian banks in the region (such as
DalOVK, Primsotsbank, and Regiobank) are already
offering money transfer services to China. DalOVK alone
transfers $1 million a month - a fortune in local terms. But
even these figures may be a serious under-estimate. The
trade between Khabarovsk Territory in Russia and
Heilongjiang Province in China - most of it in shuttle
form - was $1.5 billion in 2001. The bulk of it was one
way, from China to Russia.
1754
more than one quarter of Turkey's official exports.
1755
cameras, or hair dryers. But the 1998 financial crisis and
sub-standard wares offered by unscrupulous Indian traders
put a stop to this particular venue.
1756
vice-premier Viktor Khristenko, but shuttle traders also
operate in the United Arab Emirates, Syria, Israel,
Pakistan, India, China, Poland, Hungary, and Italy.
1757
Still, it may no longer be needed now that Poland acceded
to the EU. Shuttle trade thrives on poverty. It arbitrates
between inefficient markets. It satisfies unrequited
demand for goods. The single market ought to rid Europe
of all these distortions - and, thus, most probably of this
makeshift though resilient solution, the shuttle trader.
Skoda
Skoda Auto, the Czech-based carmaker, is completing its
transformation from manufacturer of smoke-belching,
low-budget, communist-era clunkers to producer of
upscale, affordable, BMW-alikes. "Skoda" means in
Czech pity or shame - an apt moniker for the company's
erstwhile products.
1758
The domestic market accounted for three quarters of
Skoda's sales in 1989. It now exports 80 percent of its
production to more than 70 countries and constitutes one
seventh of all Czech exports. Skoda Auto is a true
multinational, with assembly plants in Bosnia, Poland,
and India. A deal negotiated by Volkswagen to establish
yet another workshop in Macedonia fell through in 1997-
8.
1759
series of statutes which led to the expulsion of 3 million
Germans from Czechoslovakia after the war. Germany
and Austria demand their revocation. The Czech Republic
refuses to discuss the issue.
1760
Not all is doom. Even as Western markets wither,
increasing purchasing power in central and eastern Europe
presents luring opportunities. Volkswagen's sales in
Russia, for instance, shot up by 24 percent this year.
According to Prime-TASS, Skoda increased its Russian
sales by 41 percent in the nine months to September 2002.
Slovakia, Economy of
Only four months ago, delirious Slovaks celebrated a gold
medal, having thrashed the Russian team in the Ice
Hockey World Championship. President Rudolph
Schuster hastened to publicly draw some lessons: "You
are a very good example for Slovakia because it's bad
when people are dividing (into groups). We need to unite
one with the other."
1761
ever thinner ice. This, in no small measure, is due to
Schuster's blatant partisanship. Three months ago, quoted
by the BBC, he exhorted his countrymen to vote for the
ruling center-left coalition in a high turnout in today's and
tomorrow's parliamentary elections. Slovakia gained in
prestige during the current administration's reign from
1998, he explained his unseemly advice. The country's EU
accession is at stake.
1762
warning to the ardently pro-NATO and pro-EU Slovaks to
"vote with widely open eyes". Austrian prime minister
Wolfgang Schussel, notorious for his co-habitation, in a
now defunct coalition, with Jorg Haider and his ultra-
rightist party, cajoled the Slovaks to re-elect Mikulas
Dzurinda, the prime minister.
1763
shockingly, none of his cronies was ever brought to
justice.
1764
mid-2003 fuelled by price deregulation and adjustment to
EU levels. Spiraling budget deficits recently compelled
the central bank to issue a warning to the government.
1765
venality, and misrule. It will take more than one elections
to restore it to a semblance of good governance.
Slovenia, Economy of
The most exciting event in Slovenia in December 2001
was when a group of young army recruits spat on the
national flag and sang the anthem of the now defunct
former Yugoslavia. They were sent to a military
psychiatrist for observation. Indeed, economically
speaking, a preference for any other part of the late
Federation over Slovenia would indicate mental
deformity.
1766
cleanups. The latter praises its monetary targeting, the
managed float of its tolar, and the lack of major (budget
and current account) imbalances. This, despite erratic
monetary management by the Bank of Slovenia, which,
together with the introduction of VAT, the oil price shock,
and a totally CPI-indexed financial environment, led to
escalating inflation (c. 9% annually in 2001, up from an
average of 6% - it is now down to 3.8% year on year in
July 2004).
1767
Austrians, and Germans are invested in Slovenian banks,
insurance companies, and industry.
1768
years of existence (though it had adopted 14 Yugoslav tax
treaties to complement them).
1769
demarcation of the hotly disputed (in Slovenia) border
between the two as a prelude to the introduction of the
Schengen agreement. Overtures are made to post-
Milosevic Yugoslavia. Slovene legislation is eagerly
copied by Macedonia. Gradually, albeit reluctantly,
Slovenia comes to be regarded as a role model by its
southern neighbors who strive to emulate its success.
Slush Funds
According to David McClintick ("Swordfish: A True
Story of Ambition, Savagery, and Betrayal"), in the late
1980's, the FBI and DEA set up dummy corporations to
deal in drugs. They funneled into these corporate fronts
money from drug-related asset seizures.
1770
face - would have fostered inflation. So, the country's
president, Nazarbaev, kept the funds abroad "for use in
the event of either an economic crisis or a threat to
Kazakhstan's security".
1771
Slush funds infect every corner of the globe, not only the
more obscure and venal ones. Every secret service - from
the Mossad to the CIA - operates outside the stated state
budget. Slush funds are used to launder money, shower
cronies with patronage, and bribe decision makers. In
some countries, setting them up is a criminal offense, as
per the 1990 Convention on Laundering, Search, Seizure,
and Confiscation of the Proceeds from Crime. Other
jurisdictions are more forgiving.
1772
But even is the most orderly and lawful administration,
funds are liable to be mislaid. "The Economist" reported
recently about a $10 billion class-action suit filed by
native-Americans against the US government. The funds,
supposed to be managed in trust since 1880 on behalf of
half a million beneficiaries, were "either lost or stolen"
according to officials.
1773
overseas slush fund intended to finance the gathering of
information, influence-peddling, and propaganda
operations. Taiwan footed the bills trips by Congressional
aides and funded academic research and think tank
conferences.
1774
and many of his colleagues - often in posh hotel suites.
But this was no exception. According to Asahi Shimbun,
more than half of the 60 divisions of the ministry
maintained similar funds. The police and the ministry are
investigating. One arrest has been made. The ministry's
accounting division has discovered these corrupt practices
twenty years before but kept mum.
1775
and mid-level bureaucrats. Secret, mainly party, funds
seem to be involved in the majority of these lurid affairs.
1776
received fat, tax-free, "pensions" from the illegal accounts
opened in 1987 - a total of more than $20 million.
1777
involved do not appear on the balance sheet. They do not
necessarily have to consist of money, but can also take
the form of stocks and shares or other economically
valuable goods (works of art, jewels, yachts, etc.) It is
enough that they can be used without any particular
difficulty or that they can be transferred to a third party.
1778
But slush funds are overwhelmingly used to bribe corrupt
politicians. The fight against corruption has been titled
against the recipients of illicit corporate largesse. But to
succeed, well-meaning international bodies, such as the
OECD's FATF, must attack with equal zeal those who
bribe. Every corrupt transaction is between a venal
politician and an avaricious businessman. Pursuing the
one while ignoring the other is self-defeating.
1779
vast rooms in his mansion. As electricity supply was
intermittent at best, his was a curious choice. He used to
sit among these relics of his cupidity, fondling and
counting them insatiably.
1780
or relief when committing the theft." The good book
proceeds to say that " ... (T)he individual may hoard the
stolen objects ...".
Small Business
Everyone is talking about small businesses. In 1993, when
it was allowed in Macedonia, more than 90,000 new firms
were registered by individuals. Now, less than three years
later, official figures show that only 40,000 of them still
pay their dues and present annual financial statements.
These firms are called "active" - but this is a
misrepresentation. Only a very small fraction really does
business and produces income.
1781
Virtually every Western country has a "Small Business
Administration" (SBA).
1782
A new business goes through phases in the business cycle
(very similar to the stages of human life).
Once the idea has been shaped to its final form by the
team of entrepreneurs and experts - the proper legal entity
should be formed. A bewildering array of possibilities
arises:
1783
A partnership? A corporation - and if so, a stock or a non-
stock company? A research and development (RND)
entity? A foreign company or a local entity? And so on.
1784
finances, marketing, investing in the firm's future through
the development of new products, services, or even whole
new business lines. That is quite a lot and very few people
are properly trained to do the job successfully.
1785
necessary permits and licences without having to go to
each office separately.
1786
He will be employed by the "One Stop Shop" and his role
will be to ease life for the novice businessman. He will
transform the person to a businessman.
Sovereign Debt
In a little noticed speech, given in January 2003 at an IMF
conference in Washington, Glenn Hubbard, then
Chairman of President Bush's Council of Economic
Advisers, delineated a compromise between the United
States and the International Monetary Fund regarding a
much mooted proposal to allow countries to go bankrupt.
1787
In conformity with the spirit of proposals put forth by the
Bank of England and the Bank of Canada, Hubbard
insisted that multilateral financing should be stringently
conditioned on improvements in public sector governance
and the legal and regulatory frameworks, especially the
protection of investor and creditor rights. He rejected,
though, suggestions to strictly limit official financing by
international financing institutions.
1788
order and obtains supplemental funding. Such an
approach makes eminent sense.
1789
By streamlining and elucidating the outcomes of financial
crises, an international bankruptcy court, or arbitration
mechanism, will, probably, enhance the willingness of
veteran creditors to lend to developing countries and even
help attract new funding. The creditworthiness of lenders
increases as procedures related to collateral, default and
collection are clarified. It is the murkiness and arm-
twisting of the current non-system that deter capital flows
to emerging economies.
1790
in joint venture with Merrill Lynch and Aetna, pioneered
the private trading of sovereign obligations of emerging
market economies, including those in default. In
conjunction with private merchant banks, such as Singer
Friedlander in the United Kingdom, he conjured up
liquidity where there was none and captured the
imagination of businesses on both sides of the Atlantic.
1791
Ecuadorian paper, for instance. JP Morgan Chase's EMBI
Global index is up 19 percent since September 2002.
1792
As Nazibrola Lordkipanidze and Glenn C. W. Ames
observe in their paper, "Hedging Emerging Market Debt",
the terms of individual Brady packages vary. Individual
countries have issued as few as one, and as many as eight
different bonds, each of which can vary with respect to
maturity, fixed or floating coupons, amortization
schedules, and the degree to which principal and interest
payments are collateralized.
1793
also conducts institutional sales and trading operations in
high yield and distressed debt. AIG Trading, of the AIG
group, maintains a full-fledged emerging markets team. It
boasts of "senior level contacts within many central
banks, allowing us to provide rare insight".
1794
owned by Credit Lyonnais and the rest by Arab banks,
including the Iraqi Rafidain, is an aggressive buyer of
Iraqi and other Middle Eastern debt.
1795
Signs of trouble abound from Turkey to Bolivia and from
Paraguay to Africa. Nigerian President Olusegun
Obasanjo said last July that paying civil servants was
more important than avoiding default on the country's $30
billion debt. Its Supreme Court ruled in April 2002 that it
is unconstitutional to pay down the external debt before
all other government expenses. Nor would that be the first
time Nigeria reneges. The Paris Club of creditor countries
has been rescheduling its debts repeatedly.
1796
financial affairs in order and obtains supplemental
funding. Such an approach makes eminent sense.
1797
Sevastiyanov, President of the Russian aerospace
contractor RSC-Energia, said: "We're starting to design
this new transportation system to support the International
Space Station (ISS) once it's complete." A space tug,
dubbed Parom, will tow the Clipper to the ISS.
1798
Still, many civilian satellites are not much more than
stripped military bodices. Commercial operators and
Rosaviakosmos (Russia's NASA) report to the newly re-
established (June 2001) Russian Military Space Forces.
Technology gained in collaborative efforts with the West
is immediately transferred to the military.
1799
hitherto dormant European RLV (Reusable Launch
Vehicle) project.
But America and Europe are not the only ones queuing at
Russia's doorstep.
1800
commercially irresistible. Russia - unlike the US - places
no restrictions on the types of load launched to space with
its rockets.
1801
There is simply too much industry [in Russia] chasing
too few legitimate dollars, rubles or euros. [Downsizing]
and restructuring must be a major part of any initiative
that seeks to stop Russian missile firms from selling
'excess production' to those who should not have them."
1802
launching pad. It reluctantly rents out Baikonur, its main
site, to Russia for an $115 million a year. Russia pays late,
reports accidents even later, and pollutes the area
frequently. Baikonur is only one of a few civilian launch
sites (Kapustin Yar, Plesetsk). It is supposed to be
abandoned by Russia in favor of Svobodny, a new (1997)
site.
1803
potato developed in space and named after Kazakhstan's
first astronaut, the eponymous Tokhtar Aubakirov.
1804
knowledge. The alternative is proliferation of missile
technologies and military applications of technology
transferred within collaborative efforts on civilian projects
with Western partners. The West can save itself a lot of
money and heartache by being generous early on.
Steel Industry
The recent steel spat between the USA and, among others,
the EU, is a classic case of suicidal protectionism.
American steel producers ended up imposing quotas and
tariffs on manufacturers they have only recently
purchased in central and eastern Europe.
1805
The administration has already backtracked. It promised
to consider more than 1000 requests to exclude up to $1
billion in steel imports from the tariffs. The gaffe-prone
US Treasury Secretary, Paul O'Neill, said that this is done
in order to reduce the "shrillness" of the conversation.
More likely, it is aimed to prevent the emergence of an
anti-American trade coalition.
1806
Non-American firms were slow to react to the American
takeover of the European steel industry. The only notable
acquisition was by LNM, the world's fourth-largest
steelmaker. It purchased the Romanian Sidex, a loss
leader with 28,000 workers. Its bid was backed by
Britain's prime minister, Tony Blair, in a now-notorious
letter to the Romanian government.
1807
after Russia and Turkey. The BBC reported that the Polish
press quoted Polish experts in Brussels as:
1808
Makstil, and Balkanstil. The paper noted that the USA has
exempted developing countries, members of the WTO,
with less than 3 percent of the American market.
1809
massive investments enthusiastically promoted by
multilateral financial institutions such as the EBRD.
1810
state issued bonds to guarantee the rest. HK will now be
consolidated with other crumbling steel assets to form a
holding company, Polskie Huty Stali.
Stock Options
Aligning the interests of management and shareholders in
the West by issuing stock options to the former - has
failed miserably. Options are frequently re-priced in line
with the decline in share prices, thus denuding them of
1811
their main incentive. In other cases, fast eroding stock
options motivated managers to manipulate the price of the
underlying stock through various illegal and borderline
practices. Stock options now constitute c. 60 percent of
the pay of Fortune 500 executives.
1812
Towers Perrin, a leading global management consultancy,
spot a trend.
1813
Ed Burmeister of Baker McKenzie delineates two
interlocking trends in the bulletin "Global Labour,
Employment, and Employee Benefits":
1814
"Often the companies provide international staff with a
24-hour loan facility whereby they can direct a designated
stock broker in the U.S. to give them a loan sufficient to
exercise their options. The broker then immediately sells
enough shares to pay off the loan and transaction fees and
deposits the remaining shares in the employee's account."
1815
Dramatic increases have occurred elsewhere as well. In
Argentina - 40 percent of all firms offered LTI last year
(compared to 20 percent in 1997). In Belgium, the swing
was even more impressive - from 25 percent to 75
percent.
1816
Perks such as cars, death and disability insurance, medical
benefits, training, and relocation and housing loans have
become the norm in the leading EU candidates - Poland,
Hungary, Czech Republic, the Baltic States, and Slovenia.
Such habits are spreading even as far as Kazakhstan,
where most workers enjoy supplementary medical
benefits. But progress is by no means uniform. In some
countries, such as Croatia, supplemental coverage extends
to less than one quarter of the work force.
1817
owned by the managers. This model proved popular in
countries as diverse as Croatia, Macedonia, Poland,
Romania, Slovakia, and Slovenia.
1818
Egypt encouraged the establishment of almost 150
Employee Shareholder Associations.
1819
"... The employees own their firms. Typically, prospective
members work for a probationary period, must apply to
join the cooperative and are screened by a membership
committee. Labor cooperatives vary in the percentage of
their employees who are members. A common guideline
is to take no more members than the cooperative can
guarantee to employ on a full-time basis. Members make
a capital contribution in kind or in cash, sometimes
through payroll withholdings. This is the member's
account value, which will be refunded (with or without
interest), at the time of separation from the enterprise.
1820
Employee ownership of firms is a controversial issue with
strange bedfellows on both sides of the raging debate.
Thus, the idea has been fiercely resisted in the past by
both employers and unions. There is no social consensus
regarding the voting rights of stocks owned by employees,
their voluntary or compulsory nature, their tax treatment,
their relationship to retirement accounts, the desired
length of holding period, the role of the unions and the
state, employee representation on the board of directors
and so on.
1821
them financially and technologically. Whether reality
lives up to theory, is an altogether different question.
1822
A Stock Option Plan is an organized program for
employees of a corporation allowing them to buy its
shares. Sometimes the employer gives the employees
subsidized loans to enable them to invest in the shares or
even matches their purchases: for every share bought by
an employee, the employer awards him with another one,
free of charge. In many companies, employees are offered
the opportunity to buy the shares of the company at a
discount (which translates to an immediate paper profit).
1823
was legally regarded as a privilege granted to an employee
of the company that allowed him to purchase, for a special
price, shares of its capital stock (subject to conditions of
the Internal Revenue - the American income tax - code).
To qualify, the option plan must be approved by the
shareholders, the options must not be transferable (i.e.,
cannot be sold in the stock exchange or privately - at least
for a certain period of time).
1824
concessions or other work rules related concessions in
return for ownership privileges - but only if the company
is otherwise liable to close down ("marginal facility").
Switzerland, Economy of
1825
In a series of referenda in 2003-5, Swiss citizens
transformed their country forever, economically aligning
it with the European Union and opening it up to work
migration. It was an uncharacteristic response to
increasingly worrisome times.
1826
as the state-owned Ruag group - besieged by anti-war
protesters, saw their profits slashed.
1827
This was only the latest in a series of upsets suffered by
the ailing banking industry.
1828
Boston, Frank Quattrone, from being charged with
obstructing justice and destruction of evidence. Many
mid-size and large Swiss firms are exiting the tainted
capital markets altogether.
1829
computer peripherals manufacturer, Logitech, are showing
record sales and surging profits.
1830
landlocked domain to a financial cum engineering global
empire. It will emerge, as it always does, invigorated and
ready for new challenges.
Syria, Economy of
Well into the 1980's, Syria - which could have been the
Switzerland of the Middle East - was derided as its North
Korea. Belligerent, steeped in paranoia and xenophobia,
and socialist to boot - it revolved around the personality
cult of the current president's late father, Hafiz al-Assad.
1831
Applying firms must still be at least 51% owned by
Syrians. A January 2002 cabinet decision to allow foreign
owned banks to operate in Syria still awaits the habitually-
glacial presidential approval.
1832
that the banks saw almost no activity. He cited problems
in Syria's economic and financial environment, as well as
the lack of a financial reform law. In a positive step,
Syrian media reported in mid-February that one of
France's largest commercial banks, Societe Generale was
looking to set a up a network in Syria through the bank in
France and its Lebanese affiliate, Societe Generale de
Banque au Liban.
This " palace coup" did not go down well with old,
Ba'athist, hands and with entrenched economic interests -
some of them criminal - in both Syria and Lebanon.
Resentment and dejection are mounting and may yet lead
to open confrontation. To placate them, the Syrian
government has decided not to pursue the privatization of
state companies and their numerous sinecures.
1833
Group, IFC Senior Investment Officer, Bassel Hamwi is
quoted as saying:
1834
Bank) visiting delegation.
1835
General Syrian Insurance Agency and the General Postal
Savings Establishment. These provide the entire range of
banking services - but in a cumbersome, costly, and
maddeningly inefficient manner.
1836
Digest. The latest developments may have made them
happier - though, probably, in the Syrian tradition, only
incrementally so.
1837
Structures within Syria's military and secret services,
acting through business fronts, have been implicated in
arms trafficking from Syria to Iraq, including, according
to the pro-Israeli Forward magazine and the Israeli daily,
Ha'aretz, anti-aircraft missiles, rockets and Scud missile
guidance systems, tank transporters and antitank missiles
from Russia, Yugoslavia, Ukraine, Belarus and Bulgaria.
1838
It is also indispensable to any lasting Middle East
settlement. The administration torpedoed the Syria
Accountability Act, a Congressional attempt to impose
sanctions on Damascus. According to the official Syrian
news agency SANA, Tony Blair called al-Assad to inform
him "that Britain disagrees completely with those who
promote the targeting of Syria".
1839
Syria, itself a fledgling oil producer, re-exported some of
the Iraqi crude and much of its own output through a
pipeline leading from Kirkuk directly to the port of
Banias. It reaped between $500 million to $1 billion
annually from such arbitrage. Syria extracts about 400,000
barrels of crude per day and c. 8 billion cubic meters of
natural gas a year.
1840
Nor is Syria as isolated as the United States and Israel
might wish it were.
1841
As Richard Murphy, US Assistant Secretary of State for
Near Eastern Affairs from 1983 to 1989, recently told the
Daily Telegraph:
1842
T
Taxation
To tax or not to tax - this question could have never been
asked twenty years ago.
1843
legally (low income populations, children, the elderly) - or
avoid paying taxes illegally. But there is no way of
preventing a tax evader from enjoying tax money paid by
others.
1844
between the citizen and his government (on top of the one
related to the collection of taxes).
1845
• Facilitated the establishment of big, inefficient
bureaucracies for the collection of taxes and data
related to income and economic activity;
• Forced every member of society to - directly or
indirectly - pay for professional services related to
his tax obligations, or, at least to consume his own
resources (time, money and energy) in
communicating with authorities dealing with tax
collection.
1846
was really a shift from taxes on income to taxes on
consumption. This proved to be a much more efficient
measure - albeit with grave social consequences. The
same pattern was repeated: the powerful few were
provided with legal loopholes. VAT rules around the
world allow businesses to offset VAT that they paid from
VAT that they were supposed to pay to the authorities.
Many of them ended up receiving VAT funds paid the
poorer population, to which these tax breaks were,
obviously, not available.
1847
other. They wriggled their way around controversial
subjects and the result was that every loophole cutting
measure brought in its wake a growing host of others. The
situation looked hopeless.
1848
Technology (and Development)
In many countries in transition cellular phones are more
ubiquitous than the fixed-line kind. Teledensity is
vanishingly low throughout swathes of Central and
Eastern Europe (CEE). Broadband and e-commerce are
distant rumors (ISDN is available in theory but not so in
practice - DSL and ADSL are not available at all). Rare
phone lines - especially in urban centers - are still being
multiplexed and shared by 4-8 subscribers, greatly
reducing both quality and usability. Terrestrial television
competes ferociously with satellite TV, though cable
penetration is low. Internet access is prohibitively
expensive and intermittent. Many technologies rely on
network effects (i.e., a critical mass of users). CEE is far
from reaching this elusive point.
1849
exclusively with Asia and Latin America, his typology is
applicable to post-Communist Europe.
I. An Overview
1850
IT firm, finances IT programs at the Armenian State
Engineering University.
1851
EU's average of $1215). There were only 2.5 Internet
users per 1000 inhabitants in Romania and Bulgaria -
compared to 56.4 in Westward-looking Slovenia.
1852
despite plans by regional operators to offer DSL, FWA
(Fixed Wireless Access), cable TV and leased-line
broadband access (already offered in the Czech Republic
by cable networks) and despite a regulatory welcome in
all three CE candidates (Hungary, Poland, and the Czech
Republic).
1853
Hitherto domestic operators - from the Greek OTE to the
Russian MTS - are becoming regional. Multinationals,
such as the British Vodafone and the French Orange -
have entered the regional fray. Some CEE markets are as
saturated (and customers as savvy and demanding) as
many advanced Western European ones. A host of value
added services (VAS) is thrust upon the - sometimes
reluctant - users, leading naturally to WAP (recently
introduced throughout much of CEE), 2.5G, and 3G (wi-fi
or wireless Internet) services.
1854
through 2005 (that's 30,000 new users a day!). Internet
related revenues will reach $10 billion by 2005 (five times
today's $1.8 billion - but only one seventh the Internet
market in Western Europe).
1855
Software developers in CEE countries tried to establish
local versions of "Silicon Valley", or the flourishing
software industry in India. Russian entrepreneurs
developed anti virus software, Yugoslavs offered web
design services, electronic media flourished in the Czech
Republic and so on. But, as hard reality set in, most of
these talents left for Western Europe, the USA, Canada,
and Australia - where technology firms snatched them
eagerly. Central and Eastern Europe is a major net
exporter of engineers, programmers, systems analysts,
Web designers, and concepts analysts.
1856
Eastern Europe inert and dependent, apart from their
traditional conservatism. Many - especially older mid- and
high-level managers and engineers - feel threatened by
technology. Technology makes people redundant.
1857
exceptions that prove the depressing rule. They usually
respond to erratic local demand. Few have expanded
internationally. Even fewer engage in research and
development.
1858
monopolistic practices. Widespread copyright violation,
software piracy, and hacking are both status symbols and
political declarations of sorts. Admittedly, the
dissemination of illicit intellectual products may have
served to level the playing field. But now it is hindering
entrepreneurship and holding back development.
1859
a detrimental effect on education and computers at home
can harm learning".
1860
enhanced productivity. Put simply, the same number of
people can do more, faster, and more cheaply with
computers than without them. Yet reality begs to differ.
1861
adopting new ones, of shedding redundant manpower, of
searching for new employees to replace the unqualified or
unqualifiable, of installing new hardware, software and of
training new people in all levels of the corporation are
enormous. They must never exceed the added benefits of
the newly introduced technology in the long run.
1862
critical change in the form of an IT shock wave. The
introduction of IT into an ill-prepared market or
corporation can be and often is counter-productive and
growth-retarding.
1863
have just entered it while northern Europe, some parts of
Asia, and North America are in the vanguard.
1864
The Internet was not exempt from this phase which is at
its death throes. It was born into utter anarchy in the form
of ad hoc computer networks, local networks, and
networks spun by organizations (mainly universities and
organs of the government such as DARPA, a part of the
defence establishment in the USA).
1865
the name of capitalist ideology (another religion, really)
they demand "privatization" of the medium.
The end result is the same: the private sector takes over
the medium from "below" (makes offers to the owners or
operators of the medium that they cannot possibly refuse)
- or from "above" (successful lobbying in the corridors of
power leads to the legislated privatization of the medium).
1866
A new Communications Act was legislated in the USA in
1934. It was meant to transform radio frequencies into a
national resource to be sold to the private sector which
will use it to transmit radio signals to receivers. In other
words: the radio was passed on to private and commercial
hands. Public radio was doomed to be marginalized.
1867
It is characterized by enhanced legislation. Legislators, on
all levels, discover the medium and lurch at it
passionately. Resources which were considered "free",
suddenly are transformed to "national treasures not to be
dispensed with cheaply, casually and with frivolity".
1868
Servers merge to form hyper-servers run on
supercomputers or computer farms. The number of ISPs is
considerably diminished.
Telecoms
Telecommunications is the most important physical
infrastructure in the modern world. It is more important
than roads because it can replace them. It is more
important than office buildings because it allows for the
formation of virtual offices. It is more crucial than legal
1869
and institutional systems because it surpasses national
borders and undermines and subverts fossilized political
structures.
These are precisely the reasons why regimes all over the
world - in other words, politicians - strove to maintain
unmitigated control of the PTT services in their countries
and to block foreign and domestic competition. National
telecommunication service providers and carriers became
monopolistic monsters, operating highly inefficiently,
charging exorbitant prices, employing far too many
people at unreasonably high salaries and serving to boost
the political fortunes of ministers and the like.
1870
telecoms giants and to deregulate this industry. The
deadline is 2003 with a few exceptions (Latvia has until
2013 to do so). There is a new realizations that
telecommunications is too important an industry to be left
to the devices of politicians - or to the flawed
management of state organs.
1871
allows providers and carriers of international phone calls
and of local phone calls (until now separated by
regulation) to enter each other markets and compete. The
result was a major spate of mergers and acquisitions as
companies scrambled to offer combined, international and
local, services.
1872
numbers, business dedicated lines, maintenance, fixing
problems, times between faults, troubleshooting, hotlines,
meter reading, detailed and allocated accounts and so on.
The average wait for a new phone has been reduced in
Israel and in Hungary, to take two notable examples, from
months to days.
1873
immeasurable. Monopolies must be dismantled - and the
sooner, the better. The transfer of part of a monopoly from
domestic to foreign hands does not alter its economically
cancerous nature. Monopolies are guilty of over or under
optimal investments, of overcharging clients, of distorting
the allocation of economic resources, of market rigging,
corruption and other criminal activities, of providing poor
service, of selecting the wrong technologies. Only the
threat of competition - actual and fierce - can change all
that. Even so, long after competition is introduced,
monopolies seem to continue to control their markets.
British Telecom still controls 72% of its markets - despite
more than a decade of competition.
1874
telecommunications sector to be a matter of national
strategic importance (again, to a very limited extent, it is).
Slovakia has introduced a law in 1995 to actively prohibit
the privatization of its PTT.
1875
Theme Parks
War - especially coupled with a globally sluggish
economy - has a contradictory effect on the consumption
of entertainment. Disposable incomes plummet curtailing
the sales of medium to big ticket items such as cruises and
resort vacations. But people - besieged by anxiety and bad
news - also wish to be diverted. As the conflict rages, they
stay indoors and tune in. Home entertainment booms. But
once physical insecurity abates, consumers go out in full
force mobbing movie theatres and theme parks, making
up for lost time and frayed nerves.
1876
Futuroscope. Germany has Phantasialand. Italy sports
Gardaland. Spain joins the continent's minimal offerings
with Port Aventura and Terra Mitica. The Dutch De
Efteling spent the last decade "Americanizing" its
facilities.
1877
In Asia, theme parks are considered the magic pill. Japan
has Disney World and the Tokyo DisneySea Park. Disney
is slated to open a giant franchise in Hong Kong in 2005.
Mainland China is eyeing the experiment favorably.
Universal Studios countered by inaugurating a themed
playground in Osaka in 2001 and by embarking on three
feasibility studies in China.
1878
The profitability of theme parks frequently balances losses
spawned by more glamorous bits of entertainment groups.
Amusement grounds - themed or not - are astoundingly
immune to geopolitical upheavals. Attendance in Disney's
US parks declined by only c. 5 percent during the 1991
Gulf War. Even September 11 failed to dent it
measurably.
But these are the exceptions that prove the rule. Europe is
staid and serious. It prefers indigenous high-brow culture
to American low-brow imports. Or so the French would
have us all believe.
1879
Torture
On January 16, 2003, the European Court of Human
Rights agreed - more than two years after the applications
have been filed - to hear six cases filed by Chechens
against Russia. The claimants accuse the Russian military
of torture and indiscriminate killings. The Court has ruled
in the past against the Russian Federation and awarded
assorted plaintiffs thousands of euros per case in
compensation.
1880
apartheid regime in South Africa ... forced labor,
genocide, extrajudicial killing, torture, sexual assault, and
unlawful detention".
1881
Export licensing is universally minimal and non-intrusive
and completely ignores the technical specifications of the
goods (for instance, whether they could be lethal, or
merely inflict pain).
1882
are not alone. Other suppliers are found in Germany (8),
France (5), China (3), Taiwan (3), South Africa (2), Spain
(2), the UK (2) and South Korea (1).
1883
United States are founts of such useful knowledge and its
propagators.
Trade, International
In August 2002, the WTO sided with the EU against the
US and authorized the former to impose 100 percent
duties on a list of American products. This would cost
American manufacturers more than $4 billion - ten times
the the highest punitive award ever granted by the WTO.
1884
though. The US has already tentatively acted to remove
the illegal subvention.
He says:
1885
First, the leading global, 'sole superpower', role played by
the US which enables it to pursue its self-interest while
being largely oblivious to other constraints. Second, since
the US economy is much more dependent on its own
'home market' than on exports, the US is less sensitive to
what other players in other markets think of its positions.
1886
A lot depends on collaboration between the EU and the
USA.
1887
global trade interests) and those which are of a 'routine' or
day-to-day caretaking importance (certain trade remedy
cases, minor health concerns).
1888
aired. Moreover, EU decision makers understand that,
come enlargement, the EU would not be able to keep the
same level of protection.
1889
base their restrictions on objectively established norms.
Failure to respect such norms can lead to a WTO violation
and risk retaliatory measures. Problems arise when clear-
cut objective norms cannot be easily obtained. These are
the cases you tend to hear about most."
Israel was the first (and so far the only) Middle Eastern
country to enjoy full free trade for its industrial products
with the EU. Its first free trade agreement was concluded
in 1975. It is a well documented fact that the opportunity
given to Israeli industry to reach economies of scale
through free access to the large European market was the
most important factor in allowing certain industry sectors
to attain the dominant market share they enjoy today.
Trade Unions
The AFL-CIO (the result of a merger, exactly 50 years
ago, between the American Federation of Labour and the
Congress of Industrial Organizations) is America's largest
1890
trade unions umbrella organization. When it splintered in
July 2005, it merited barely a mention in the international
media. Thus far have fallen the fortunes of organized
labor.
1891
economic policies at the end of March 2002, less than
1000 people turned up. Restrictions imposed by the often
violent authorities coupled with sabotage by pro-
government unions assured the dismal flop.
1892
The murder of a - second - government advisor on labor
legislation in March 2002 has stiffened the Italian
authorities' resolve to amend, however marginally,
provisions pertaining to the reinstatement of "unfairly
sacked" employees. Two small trade unions - CISL and
UIL - have signed an agreement with the government in
June 2002, ditching a common front with CGIL, by far the
largest syndicate with 5.4 million members. CGIL called
for regional strikes through July 11, 2002 followed by a
general strike in September and October 2002. It also
challenged the amendments to the law in the
Constitutional Court. All these initiatives petered out.
1893
strikes are the result of performance-related wage gaps
opening up among workers following botched
privatizations (e.g., the railways, the post office).
Bellicose, fogeyish, trade unions leverage the discontent
bred by mismanagement to their advantage.
1894
The failure of trade unions the world over to modernize
only exacerbates this inexorable decline. The structure of
a traditional trade union often reflected the configuration
of the enterprise it had to tackle - hierarchical, centralized,
top-down. But rigorously stratified corporations went the
way of central planning.
1895
contingent workers employed together with their terms
and conditions ... Departure from the enterprise model
was most apparent within unions that organize freelance
workers. The latter are mobile workers and unions adapt
to their mobility by reliance on non-enterprise forms of
representation. Amongst agency and fixed-term contract
workers, however, there is more emphasis on integration
of the needs of these workers in the dominant, enterprise
model of union representation. In part, this reflects the
fact that agency and contract workers can develop a
long-term employment relationship ..."
1896
Unions have always tried to sway legislation by lobbying,
making political contributions, and endorsing political
candidates - as they have this past week Gerhard
Schroeder who is up for re-election in Germany come
September. The unions' ability to mobilize the vote makes
them a formidable force even in relatively non-unionized
countries, such as the USA.
1897
management decision making. German-style
institutionalized consultations with employees regarding
labor matters and crucial business decisions are already
enshrined in EU directives.
1898
union activists and representatives of international
financial institutions. The IMF's much vaunted poverty
reduction strategy which calls for consultations with all
social stakeholders, trade unions included, as a
precondition for new lending, was derided by the Rwanda
representative. Quoted in the ILO's December 2001 issue
of the "World of Work", he complained:
1899
Even the ILO joined the chorus accusing the IMF of
violating the ILO's core conventions by arguing against
collective bargaining and the provision of social
protection. The delegates also demanded a labor-related
input in all WTO deliberations.
1900
though, is a response to the perceived threat of
"transnational capital".
1901
Social democracy was conceived in the 19th century as a
benign alternative to the revolutionary belligerence of
Marx and Engels. It sparred with communism - the
virulent and authoritarian species of socialism that
Marxism has mutated into. European history between
1946-1989 was not a clash of diametrically opposed
ideologies - but an internecine war between two
competing interpretations of the same doctrine.
1902
liberal today than France, Germany and even Britain - let
alone the nations of Scandinavia.
1903
Yet, deep underneath, transition - perhaps because it was
so thoroughly botched - taught us unforgettable lessons
about markets and the way they work, namely that
"objective", "mechanical" capitalism is a mirage.
1904
formulas - but mainly a state of mind. It is an all-
encompassing, holistic, worldview, a set of values, a code
of conduct, a list of goals, aspirations, fantasies and
preferences and a catalog of moral do's and don'ts. This is
where transition, micromanaged by these "experts" failed.
1905
services. This omnipresence runs against the grain of
Anglo-Saxon liberalism.
1906
"The core idea that economic structure determines
everything has been especially pernicious ... The idea
that ... rights have a deeper moral underpinning is an
illusion. Morality itself is an illusion., just another
weapon of the ruling class. As Gyorgy Lukasc put it,
'Communist ethics makes it the highest duty to act
wickedly ... This is the greatest sacrifice revolution asks
from us.' Human agency is null: we are mere dupes of
'the system', until we repudiate it outright. What goes for
ethics also goes for history, literature, the rest of the
humanities and the social sciences. The 'late Marxist'
sees them all ... not as subjects for disinterested
intellectual inquiry but as forms of social control."
1907
European "capitalism" is really a hybrid of the socialist
and liberal teachings of the 19th century. It emphasizes
consensus, community, solidarity, equality, stability and
continuity. It places these values above profitability,
entrepreneurship, competition, individualism, mobility,
size, litigation and the use of force. Europeans firmly
believe that the workings of the market should be
tampered with and that it is the responsibility of the state
to see to it that no one gets left behind or trampled upon.
1908
Question: What have been the most successful
approaches to attracting direct foreign investments:
offering prospective investors tax breaks and similar
benefits, or improving the overall investment climate of
the country?
1909
an investment panic, but at the same time they negatively
affect investor's confidence)?
Short term and long term capital flows are two disparate
phenomena with very little in common. The former is
speculative and technical in nature and has very little to
do with fundamental realities. The latter is investment
oriented and committed to the increasing of the welfare
and wealth of its new domicile. It is, therefore, wrong to
talk about "global capital flows". There are investments
(including even long term portfolio investments and
venture capital) – and there is speculative, "hot" money.
While "hot money" is very useful as a lubricant on the
wheels of liquid capital markets in rich countries – it can
be destructive in less liquid, immature economies or in
economies in transition.
1910
Question: What approach has been most useful in best
serving the needs of small businesses: through private
business support firms, business associations, or by
government agencies?
1911
it is based on the ability to ultimately compromise and
reach a consensus.
1912
By providing them with the conditions to work and
exercise their entrepreneurial skills. By establishing day
care centres for their children. By providing microcredits
(women have proven to be inordinately reliable
borrowers). By giving them tax credits. By allowing or
encouraging flexitime or part time work or work from
home. By recognizing the home as the domicile of
business (especially through the appropriate tax laws). By
equalizing their legal rights and their pay. By protecting
them from sexual or gender harassment.
All social (or public) goods carry social costs and bring on
negative externalities (such as environmental damage).
Embedded in every public good there is a moral hazard -
others bear a disproportionate part of the costs while the
perpetrators go "free". This is why accurate statistics,
forecasting and cost benefit analysis systems are a must. I
am not talking only about cost coverage calculations but
also about finding ways to impose on the users of
1913
transport infrastructure the real costs of their actions. This
is known today as "user pays" charging schemes. But to
do so, the state needs to know what ARE these costs. This
is one way of forcing the private sector to participate in
the financing of infrastructure.
1914
to the state without compensation. All the income during
the operating period goes to the contractors. If the period
of concession is sufficiently long - the contractors have an
interest to observe high standards of quality in order to
minimize maintenance costs. The state (sometimes
through "golden shares") maintains a say in certain
operational aspects (such as tariffs of usage).
1915
protected by custodian banks and trustees. Most of these
bonds are backed by long term letters of credit and the
interest income is tax free. State Route 91, the Riverside
Freeway in California, was fully financed by municipal
bonds. Munis have caught on with many countries,
including countries in transition.
1916
Trust
Economics acquired its dismal reputation by pretending to
be an exact science rather than a branch of mass
psychology. In truth it is a narrative struggling to describe
the aggregate behavior of humans. It seeks to cloak its
uncertainties and shifting fashions with mathematical
formulae and elaborate econometric computerized
models.
1917
To transact, people have to maintain faith in a relevant
economic horizon and in the immutability of the
economic playing field or "envelope". Put less obscurely,
a few hidden assumptions underlie the continued
economic activity of market players.
1918
Market players assume that other players are (generally)
rational, that they have intentions, that they intend to
maximize their benefits and that they are likely to act on
their intentions in a legal (or rule-based), rational manner.
1919
When trust breaks down - often the result of an external or
internal systemic shock - people react expectedly. The
number of voluntary interactions and transactions
decreases sharply. With a collapsed investment horizon,
individuals and firms become corrupt in an effort to
shortcut their way into economic benefits, not knowing
how long will the system survive. Criminal activity
increases.
1920
all get eroded. As a result, little is invested in the future, in
the acquisition of skills, in long term savings. Short-
termism and bottom line mentality rule.
Turkey, Economy of
On November 15, 2002 Horst Kohler, the Managing
Director of the IMF, acknowledged that, despite a "strong
implementation" of the IMF program, Turkey's financing
gap may have increased by up to an additional $10 billion.
He tenuously and untenably attributed this massive failure
of the IMF to the September 11 events. He intended to
recommend to the Fund a new (the fourth since 1998)
stand-by arrangement to be negotiated in Ankara in
December. Many regarded this as an American-inspired
prize in recognition of Turkey's pivotal role in the anti-
terror global coalition.
1921
the pernicious role in state affairs (and in criminal affairs)
of its military, police, and bloated bureaucracy, and its
rising Islamist sentiment were relegated to the backburner.
The Copenhagen criteria for the commencement of
membership talks with Turkey have been effectively
suspended.
1922
investors fled its collapsing capital markets and drew $5
billion, c. 25% of Turkey's foreign exchange reserves, on
February 19th alone. Important privatizations failed to
attract a single bidder. The stock exchange rose by a
dizzying 650% until March 2000 and then crushed by
63% in a few days and the current account worsened by
3% of GDP. Yields on one month treasury bills shot up to
144%, overnight inter-bank rates touched 9000% briefly.
1923
And government bond auctions continue to end with
crippling yields (a real interest rate of 18% - or more than
90% nominally in October).
1924
More than a million Turks work abroad and their
remittances are of crucial importance to the foreign
exchange reserves of the country and to its economy.
More than 40% of the government's budget is used to
defray the domestic debt. This leads to consistent fiscal
deficits of 10% of GDP (though the budget sports a
primary surplus). Turkey has consistently been on the
verge of hyperinflation, with double digit inflation the
norm (though recently it dropped below 40%).
IFI's like the IMF and the World Bank are bound to play
an inordinate and much resented role in Turkey's affairs in
1925
the foreseeable future. The World Bank, for instance, has
pledged in excess of $5 billion and disbursed more than
$2 billion. But most of this money goes towards disaster
relief or support of IMF programs - and not to long term
development projects. Ordinary Turks do not benefit from
the World Bank's activities and believe, however
erroneously, that they directly harmed by the IMF
policies. Should Turkey also find itself the victim of US
geopolitics, a wave of xenophobia and a backlash against
liberalism and market economy might well ensue.
1926
If true, Turkish refusal to be used by U.S. troops as a
launching pad for a second, northern, Iraqi front - was
nothing short of suicidal.
1927
Poor's is contemplating a lowering of Turkey's country
rating, currently below investment grade at B1. Fitch went
ahead and reduced Turkey's rank to B minus with a
negative outlook to boot - akin to destitute and near-
default Moldova.
1928
aims to raise revenues by $5 billion and cut expenditure
by $3 billion.
1929
Israeli land use, hydrological and agricultural experts
roam the Texas-sized country. The parties - with a
combined gross domestic product of $300 billion - have
inked close to thirty agreements and protocols since 1991.
Everything, from double taxation to joint development
and manufacturing of missiles, has been covered.
1930
The American-Israel Public Action Committee (AIPAC),
the Jewish Institute for National Security Affairs (JINSA)
and, more generally, the almighty Jewish lobby in
Washington, often support Turkish causes on the Hill.
Three years ago, for example, Jews helped quash a
resolution commemorating the Armenian genocide
perpetrated by Turkish forces during the first world war.
1931
Jewish state. In an effort to differentiate themselves, both
polities were early adopters of economic trends such as
deregulation, equities, venture capital, entrepreneurship,
privatization and hi-tech.
1932
They also decry the way Israel manhandles the Palestinian
uprising. Flag-burning demonstrations are common
occurrences in Ankara and Istanbul. Suleyman Demirel,
Turkey's former president, nearly paid with his life for the
entente cordiale when a deranged pharmacist tried to
assassinate him in 1996.
1933
Turkey continues to ignore the Arab world at its peril.
Regional conflicts fail to respect international borders - as
the country is discovering, faced with the damaging Iraqi
spillover. Until 1998, Syria, another restive neighbor,
actively aided and abetted the rebellious Kurds. It may yet
resume its meddling if Israel, its bitter enemy, is neutered
through a peace accord. The dispute over precious water
sources is embedded in Turkish-Syrian topography and is,
therefore, permanent.
1934
sized, mostly Asiatic, regional powers and that their future
- geopolitical and military, if not economic - lies in the
Middle East, not in the Midwest. Turkey could then serve
as a goodwill mediator between erstwhile enemies and
Israel as a regional engine of growth.
1935
Turkey's disdain for everything Arab, its diversion of the
Tigris, Asi and Euphrates rivers, its arms race, its
suppression of the Kurds and its military-tainted
democracy have led it, more than once, to the verge of
open warfare. Such a conflict may not be containable. In
1995, Syria granted Greece the right to use its air bases
and air space, thus explicitly dragging NATO and the
European Union into the fray.
1936
U-V-W
Ukraine, Economy of
Reading the Western media, one would think that
Ukraine's main products are grotesquely corrupt
politicians, grey hued, drab, and polluted cities, and
mysteriously deceased investigative journalists and
erstwhile state functionaries.
1937
From December 2001 onwards, the Legsi (the Lehman
Brothers Eurasia Group Stability Index) kept warning
against a deterioration in Ukraine's social stability, owing
to fiercely resisted austerity measures.
1938
At any rate, following its blatant intervention in the
political machinations which led to the Orange Revolution
in October-November 2004, anti-American sentiments are
running higher than usual in the eastern, Russophile parts
of the country.
1939
resulted in hyperinflation in 1993. Inflation has still not
been subdued and has topped 26% as late as 2000.
1940
Inevitably, Ukraine is socially and politically strained. Its
western parts are fiercely nationalistic and West oriented.
Its eastern parts lean more towards Russia and are USSR-
nostalgic. But this apparent schism is no bad thing. It
provides Ukrainians with a secure foothold in both worlds
- and no one seriously considers secession.
1941
stance (Ukraine had small budget deficits, excluding
privatization receipts, in 1999-2001), become a WTO
member, and create a legal environment conducive to
private enterprise and entrepreneurship.
In 2000 the economy grew for the first time (by 6%).
Growth was export driven and industrial output increased
by 13%. The global recession has hurt Ukraine's export
prospects but even so, it grew by 4-5% in 2001. It
continued to expand by 2-4% each year in 2002-2004.
1942
With a labour cost of 30 cents per hour, Ukraine attracts
the interest of manufacturers in the US, in Central Europe,
and even in Russia. Strong import growth may swing it
back to a current account deficit (in a surplus of c. 5% of
GDP in 2001, as it has been in the previous 2 years).
Fiscal shenanigans ahead of the March 2002 and October
2004 elections (and the horse trading which inevitably
followed) had ratcheted up the predicted inflation rate of
9-12% - but the appreciation of the hryvna is set to
continue.
1943
"Cypriot") investors - each holding 17% of the total stock
of FDI (c. $4.5 billion in early 2002).
1944
Ukraine has gone so low in the world that its fortunes can
only improve. It is poised for a modest economic
comeback as its mediating geographic position between
centre and east comes into play with EU enlargement.
Kuchma was eased out by the very oligarchs he nurtured.
They now constitute an element in a broad based coalition
for reform. Having sated their appetite for loot they now
seek respectability and access to capital markets and
credits in the West. They want a functioning country and a
larger cake. Kuchma is a figurehead of a disfigured past.
In the long run, a Putin style robotic reformer is likely to
succeed him. When it happens, Ukraine may yet become
the region's first economic tiger.
1945
million in fresh funds. Debt repayments amounted to $1.6
billion in both 2003 and 2004. Ukraine is even
considering a bond issue.
1946
certificate protocol. Simultaneously, Ukrainian officials
held talks with their European Union counterparts to
integrate the two space programs. Ukraine has expertise in
launch vehicles, satellites and payloads. And Volkswagen
inked a letter of intent in 2003 regarding the assembly of
its Passat, Golf, Bora and Polo models in Ukraine.
1947
There were good news from the East as well.
1948
In the worst of Stalinist traditions, the former Deputy
Prime Minister for Agriculture Leonid Kozachenko, a
reformer, was promptly arrested by Kuchma's security
apparatus for "bribery and tax evasion". Grain merchants,
foreign investors and multinationals included, were placed
under official scrutiny.
"We hope that this effort to turn back the clock to Soviet-
style management of Ukraine's critical sector will soon
disappear and allow Ukraine's dramatic march to
productivity and prosperity to resume."
1949
Russian coaxing, Ukraine hasn't even joined the Eurasian
Economic Community, a pet project of the Russia-
dominated Commonwealth of Independent States.
1950
Ukraine's criminalized economy. As the 2004 presidential
elections neared, the oligarchs augmented their war chests
abroad. Kuchma failed to postpone the elections to 2006
or 2007. The opposition aggressively opposed such
chicanery. Despite the Orange Revolution, or maybe
because of it, Ukraine may be in for a bumpy ride ahead.
1951
mature and are ripe to be part of the labour force.
Until they find their first job – these new
participants are unemployed.
1952
their place in the economy. New professions,
connected to new technologies, emerge. Some
workers can be retrained but even this takes time
(in which they might, technically, be defined as
unemployed). Others cannot be retrained and they
join the ranks of the long term unemployed,
swelling structural unemployment.
1953
4. Skill Acquisition Failure – People who failed to
acquire the minimum education necessary to
participate in today's workforce (secondary high
school) are doomed to be permanently
unemployed or part time employed. School
dropouts form a large part of the structural
unemployment in many countries. In countries
which are in the process of shifting from one
economic system to another, even those with the
right formal education are made redundant and
useless by the new paradigm. Think about a
professor of economy who studied and taught
Marxist economy from the wrong textbooks – he
is quite useless in a capitalist market economy and
might find himself unemployed despite his high
education.
1954
stopped looking for work). A second, more philosophical
issue, is that, as opposed to frictional unemployment,
which is a welcome sign, structural unemployment is not
and must be fiercely fought by the state. But Economy
give Politics a legitimacy to ignore structural
unemployment as a part of life.
1955
And what about Macedonia? It is one of a group of
countries in transition that suffered an unprecedented
series of external shocks separation from a Federation, the
loss of virtually all export markets, economic siege,
monetary instability, a collapse of the financial system,
and, lately, interethnic tensions. Small wonder that it
endured an outlandish (official) rate of unemployment
(more than one third of the active workforce). Granted,
the real unemployment rate is probably lower (many
workers in the black economy go unreported) – still, these
are daunting figures.
1956
that in anything else, not educated in the new ways of the
markets – they led themselves and their workers (=their
voters) to the unemployment swamp. This unfortunate
condition was avoidable.
1957
entails 2-3 as much in economic (GDP) growth.
Macedonia has to grow by 10% and more annually to
reduce the level of unemployment to 15% in 5 years
(taking additions to the workforce into account). This is
doable: Macedonia starts from such a low base that it
would take little effort to achieve this kind of growth (to
add 300 million USD to the GDP annually=3 months
exports at today's rate).
1958
new, disruptive technologies, the collapse of non-
capitalistic modes of production, the evaporation of non-
market economies, mass migration (between 7.5% - in
France - and 15% - in Switzerland - of European
populations), and a debilitating brain drain - altered the
patterns of employment and unemployment irreversibly
and globally.
1959
Official global unemployment increased by 20 million
people (to 160 million) between the nadir of the Asian
crisis in 1997 and 2001. The situation has much
deteriorated since. The ILO estimates that the world
economy has to run (i.e., continue to expand as it has done
in the roaring 1990's) - in order to stay put (i.e., absorb
500 million workers likely to be added to the global
labour force until 2010). How can this be achieved with
China unwinding its state sector (which employs 13% of
its workforce) - is not clear. Add to this stubbornly high
birth rates (esp. in Africa) and a steady decline in
government hiring al over the world - and the picture may
be grimmer than advertised.
1960
The average unemployment rate in Central and Eastern
Europe is 14% - but it is double that (more than 30%)
among the young (compared to 15% for West European
youths). The average is misleading, though. In Georgia
the rate is 70% - in the Czech Republic 16%.
1961
Workers keep moving, as they always have, among firms
and between sectors. But they are still reluctant to
relocate, let alone emigrate. The subjective perception of
job insecurity is high, even after the most prosperous
decade in recent history. Witness the sparse movement of
labour among members of the EU, despite the existence,
on paper, of a single labour market. Still, rising systemic
unemployment everywhere serves to increase both the
efficiency and productivity of workers and to moderate
their wage claims.
1962
Both types of bargaining - centralized and decentralized -
tend to moderate wage demands. Centralized bargaining
forces union leaders to consider the welfare of the entire
workforce. Either of the pure models seems preferable to
a hybrid system. The worst results are obtained with
national bargaining for specific industries. Hybrid-
bargaining Europe saw its unemployment soar from 3 to
11% in the last 25 years. Pure-bargaining USA maintained
a low unemployment rate of 5-6% during the same quarter
century.
Other studies (e.g., the 1994 OECD one year study, the
more substantial DiTella-MacCullouch study) seem to
support these findings. The transition from a rigid to a
flexible labour market does not yield immediate results
1963
because it increases labour force participation. But the
unemployment rate is favorably affected later.
1964
Many countries (USA, UK, France) introduced "training
wages" - actually, minimum wage exemptions for the
young. But even this sub-minimum wages still represent a
high percentage of mean youth earnings (53% in the USA
and 72% in France) and thus have an inhibiting effect on
youth employment.
1965
period, its economy grew by an enviable 5% a year, real
wages skyrocketed (by 17%), and its inflation dropped to
7% (from 16%).
1966
to an increase in the bargaining power of the remaining
workers and to commensurate increases in real wages.
1967
among stakeholders (shareholders, management, workers,
government, banks, other creditors, suppliers, etc.).
1968
by corresponding increases in minimum social benefits.
Working hours, hiring, firing and collective bargaining
were all incorporated in a deregulated labour market.
1969
The Dutch model sought to counter all these rigidities. In
a report about "The Politics of Unemployment" dated
April 1997, "The Economist" admiringly enumerated
these steps:
1970
Firms promptly abused the law and restructured
themselves at the government's expense.
1971
inspectors were supposed to embark on sampling raids
and penalize the non-compliers, if need be by closing
down the offending business. The results were dismal.
1972
Copious research demonstrates that, to be effective,
unemployment benefits should not exceed short-term
sickness benefits (as they do in Canada, Denmark, and the
Netherlands). Optimally, they should be lower (as they are
in Greece, Germany and Hungary). Where sickness
benefits are earnings-related, unemployment benefits
should be flat (as is the case in Bulgaria and Italy). In
Australia and New Zealand, both sickness benefits and
unemployment benefits are means tested. Unemployment
benefits should not be higher than 40% of one's net
average monthly wage (the "replacement rate").
1973
A third approach involves the formation of private
unemployment, disability, and life, or health insurance
and savings plans to supplement or even replace the
benefits offered by the relevant state agencies.
1974
Workers are encouraged to respond promptly and
positively to employment signals, even if it means
relocating. In many countries, a worker is obliged to
accept any job on offer in a radius of 100 km from the
worker's place of residence on pain of losing his or her
unemployment benefits. Many governments (e.g., Israel,
Yugoslavia, Russia, Canada, Australia) offer the
relocating worker financial and logistical assistance as
well as monetary and non-monetary incentives.
1975
A favorite of post-communist countries in transition, early
retirement was liberally applied in order to get rid of
"technologically-redundant" workers and thus trim under-
employment.
1976
from deflationary Japan to racially imbalanced South
Africa - to this very day. Such workers are usually paid a
salary equal to their unemployment benefits (Workfare).
1977
unemployed are taught how to prepare a professional bio,
a business plan, a marketing plan, feasibility studies,
credit applications and interview skills.
1978
Wages and unemployment benefits are perceived as
complementary economic stabilizers. Many countries
instituted an "Incomes Policy" intended to ensure that
employers, pressurized by unions, do not raise wages and
prices. In Sweden, for instance, both labour and
management organizations are responsible to maintain
price stability. The government can intervene in the
negotiations and even threaten a wage freeze, or wage
AND price controls. In Holland the courts can set wages.
1979
In Denmark, a worker can take a special leave. He
receives 80% of the maximum unemployment benefits as
well as uninterrupted continuity in his social security
rights. But he has to use the time for job training, a
sabbatical, further education, a parental leave, to take old
people (old parents or other relatives), or the terminally
ill. This is also the case in Belgium (though only for up to
2 months). These activities are thought of as substitutes
for social outlays.
1980
normal unemployment. Thus, a simple balanced budget
could be actually contractionary. A simple deficit may,
actually, be a surplus on a full employment basis and
government policies can be contractionary despite
positive borrowing.
1981
of rich countries encourage innovative credit schemes
(such as micro-credits) and facilities (such as business
incubators), tax credits, and preference to small businesses
in government procurement.
Unification, German
The May 22, 2005 elections in North Rhine-Westphalia
(with 18 million inhabitants, Germany's most populous
state) are expected to determine the fate of Chancellor
Gerhard Schroeder, his party, the Social Democrats, SPD
(which ruled the state in the last four decades), and his
coalition with the Greens. The SPD-Greens are projected
to lose to the uninspiring coalition of Christian Democrats
(CDU) and Free Democrats. The state is buffeted by the
crumbling of traditional industries such as mining and
heavy industry
1982
eccentric Munich-based publisher-millionaire, garnered
13 percent of the votes in the 1998 bellwether elections in
Saxony-Anhalt. These usually precede nationwide
parliamentary elections to the Bundestag by 5 months.
1983
Inevitably, the voters trounced the nationally-ruling CDU.
With 22 percent of the votes, they came almost equal with
the PDS - the former (and reformed) vicious communists.
The minority SPD-Greens government of Saxony-Anhalt
(with tacit PDS support) was unaffected, though people
rated its performance 0.2 on a scale of -5 to +5. Only the
racist DVU benefited, as it linked mass unemployment to
the ubiquity of foreigners, the self-enrichment of an old-
new elite of turncoats, and an all-pervasive social crisis.
The "Magdeburg Model" of compassionate reform the
eastern way - failed.
1984
salaries are lower, unemployment is (much) higher, and
the "blossoming landscape" promised by the CDU has
shriveled - but the railway to Berlin was being re-opened
and the town is full of shopping malls and glittering
banks, observed "The Economist".
1985
billion are transfers from the federal government and the
European Union. Saxony-Anhalt, at 25 percent, has
double the rate of investment in the Lander of West
Germany (though its investment rate declined to 20% by
2004). Only 60 percent of its 8 billion euros strong
budget relies on tax revenues - the rest comes from
transfers. Transfers - mainly social benefits - constitute
almost half the state's operating expenditures.
1986
" 'Different credit ratings for the states and the federal
government make no sense' ... He said there is no risk to
the government in guaranteeing the states as they are
'too big' and 'too public' to default on payments. Eichel
(the German minister of finance) is concerned that
centralized bond sales could cause the government's
borrowing costs to rise ... The government is reluctant to
act as guarantor for states on interest and debt
repayments (said Deputy Finance Minister of Germany
Karl Diller)."
This could be one of the goodies the SPD has in store for
the eastern states, under the umbrella of its "Towards the
Future" economic program. Schroeder unrealistically
promises to equalize wage levels between east and west
by 2007. Investors in the eastern parts will be entitled to
even more generous incentives. Job creation schemes
(worth 10 billion euros annually) will abound.
1987
performance was rife. The CDU succeeded to shift the
emphasis from unilateral transfers to the east (a whopping
trillion euros since 1990) to the formation of new
businesses, the promotion of R&D in universities, and the
enhancement of business-critical infrastructure.
1988
Unification, German and Korean
In July-August 2002, the north and south rumps of an
erstwhile unified Korea have agreed to reconvene, at
North Korea's rare request, cabinet-level talks severed the
year before. Only 6 weeks before that, on June 29, 2002
vessels of these two countries clashed to lethal effect in
the Yellow Sea - an incident for which the North now,
startlingly, expressed its regrets.
1989
in early August 2002. The North even requested talks with
the US-led United Command it so decries.
1990
The authors believe that unification will affect South
Korea's "composition of output, the distribution of
income, and the rate of economic growth". Should capital
flow in from the rest of the world, the won is likely to
appreciate and the "nontraded goods sectors could expand
at the expense of the traded goods sectors".
1991
first four months of 2002 - including $51 million in "non-
trade" items, such a food grants.
The historical irony is that the North, until 1950, has been
the industrial powerhouse of the united Korea. Mining,
heavy industry, and science were all concentrated in the
north. The south was home to agriculture and light,
family-owned, industry. Despite American carpet
bombing which pulverized its manufacturing base, the
North grew faster than the south throughout the 1950's
and 1960's - albeit partly thanks to Chinese and Russian
monetary infusions.
1992
North Korea's foreign trade is a measly $2 billion - the
South trades almost $300 billion in goods and services.
After China and Japan, South Korea is the North's largest
trading partner.
1993
Unemployment, at 17.8 percent in June, 2002 is the
highest since 1990. The tax base is shrinking as the dreary
region is drained of its populace. Three years ago,
Germany has extended federal aid to the east - financed
by a much-resented 5 percent surtax - by another 20 years.
1994
sometimes overlooked that in the case of East Germany
about one-third of the economic production was delivered
by a private and cooperative sector ... Furthermore, in
contrast to the ... isolation (of North Korea), (East
Germany) participated actively and with a certain degree
of success in international economic exchanges."
1995
"At unification, many western companies viewed the East
as a new export market, a consumer land. Instead of
investing in production sites there, they funneled goods
and services to a consumption-starved public armed with
a cash windfall from the currency exchange."
1996
The practice of property restitution impeded the
assignment of clear property rights and, as a result,
hampered investment. Privatization was further hobbled
by the refusal to write off enterprise debt outright.
1997
Help and support from the international community -
Korea's neighbours, the Asian Development Bank, the
IMF, the World Bank, the West - would be indispensable.
It is here that unification may blunder.
United Nations
In March 2005, an increasingly isolationist United States
appointed an outspoken critic of the United Nations, John
Bolton, to serve as its Ambassador there.
1998
"I think the U.N. has been in gradual decline for many
years. It failed to act spectacularly in Rwanda and did
nothing about Slobodan Milosevic's brutal regime. Iraq is
the latest in a long line of failures."
1999
constant since 1995. The workforce was cut by 11
percent, to 9000 employees, since 1997:
2000
It has since repaid the bulk of these even as it reduced its
share of the United Nations' finances. It now contributes
22 percent of the regular budget, down from 25 percent
and 25-27 percent of the costs of the U.N. peacekeeping
forces, down from 30-31 percent.
2001
the U.N.'s Children's Fund (UNICEF) to pay for
sanitation, healthcare and potable water schemes in Iraq as
well as for micronutrients, vitamins and medicines for its
malnourished and disease-stricken populace.
2002
gauntlet and published a joint statement at a July 1999
meeting with United Nations bigwigs.
2003
left of their Marxism, they still ascribe American behavior
to the irreconcilable contradictions inherent in capitalism.
2004
The article clearly identifies America's (capitalistic)
economy and its (liberal, pluralistic, religious and
democratic) values as its competitive mainstays and
founts of strength. "US unique commercial expansion
spirit (combined with the) the puritan's 'concept of
mission' (are its fortes)", gushes the anonymous author.
2005
mainly with "protecting American commercial monopoly
or advantageous position". America entered the first world
war only when "its free trade position was challenged",
opines the red-top.
2006
Spain in Latin America and later with the Soviet Union all
over the world. The Marshall Plan was a ploy to make
Europe dependent on US largesse. The Old Continent,
sneers the paper, is nothing more than "US little partner".
2007
As it summarizes Nye's teachings, the tone of the piece is
avuncular and conciliatory, not enraged or patronizing:
2008
democratic one, or the US strategic goal of a unipolar
world". China has been encouraged by dissent in the
West. It shows that the "multipolar international
community" is an "inevitable" momentum of history.
2009
Ironically, it could never have made it even this far
without its ostensible foe. Thousands of bright Chinese
students train in the United states. American technologies,
management, knowledge, capital and marketing permeate
Beijing's economic fabric. Bilateral trade is flourishing.
China enjoys the biggest share of the world's - in large
part American - foreign direct investment flows. Should
the United states disintegrate tomorrow - China would
assuredly follow.
2010
A top executive is asked how profitable will his firm be
this quarter. He winks, he grins - this is interpreted by
Wall Street to mean that profits will go up. The share
price surges: no one wants to sell it, everyone want to buy
it. The result: a sharp rise in its price. Why?
2011
The value of a stock (a bond, a firm, real estate, or any
asset) is the sum of the income (cash flow) that a
reasonable investor would expect to get in the future,
discounted at the appropriate rate. The discounting
reflects the fact that money received in the future has
lower (discounted) purchasing power than money
received now. Moreover, we can invest money received
now and get interest on it (which should normally equal
the discount). Put differently: the discount reflects the loss
in purchasing power of money deferred or the interest lost
by not being able to invest the money right away. This is
the time value of money.
2012
how freely can one buy and sell it and at which quantities
sought or sold do prices become rigid.
2013
datum. Professionals resort to sensitivity tests which
neutralize the changes that betas undergo with time.
2014
The number of periods (normally, years) selected for the
calculation is called the "price to earnings (P/E) multiple".
The multiple denotes by how much we multiply the (after
tax) earnings of the firm to obtain its value. It depends on
the industry (growth or dying), the country (stable or
geopolitically perilous), on the ownership structure
(family or public), on the management in place
(committed or mobile), on the product (new or old
technology) and a myriad of other factors. It is almost
impossible to objectively quantify or formulate this
process of analysis and decision making. In
telecommunications, the range of numbers used for
valuing stocks of a private firm is between 7 and 10, for
instance. If the company is in the public domain, the
number can shoot up to 20 times net earnings.
2015
environments and therefore applicable to multinationals or
to national, export-orientated firms.
Where:
2016
of debt (MINUS sign) and the proceeds from new debt
and preferred stocks (PLUS sign). If its borrowings are
sufficient to pay the dividends to the holders of preference
shares and to service its debt - its debt to capital ratio is
sound.
2017
lingo) - although no one seems to agree on what this
means.
Estimates are that 100 billion USD are spent annually (by
both government and taxpayers) to comply with the tax, to
administer it and to enforce it.
2018
Income taxes encourage debt financing over equity
financing. After all, retained earnings are taxed - while
interest expenses are deductible.
2019
another. This adds to the confusion of the taxpayer (and of
the retailer) and makes the tax more expensive to collect
than it should have been.
2020
the USA uses this method since 1976. Experience shows
that this method yields more predictable tax revenues and
is less susceptible to business or industry cycles.
2021
0.32%, in Belgium - 1.09% and, on average, 0.68%. In
short, VAT does not cost much more than income taxes to
collect.
2022
companies - are the costs less than 20%. These figures do
not include compliance costs (=costs borne by businesses
which comply with the tax law).
2023
labour and capital. Ultimately, shareholders of the
taxpaying businesses pay the price - but most of them try
to move it on to the consumer, which is where the
inequity begins. A rich consumer will pay the same tax as
his poorer counterpart - but the tax will constitute a
smaller part of his income. This is the best definition yet
found for regressivity.
2024
was a parameter more stable than income - VAT made for
a more stable and predictable tax.
2025
It is universally thought, that the best method to
"compensate" the poor for their regressive plight is to
directly transfer money to them from the budget or to give
them vouchers (or tax credits) which they can use to get
discounts in education, medical treatment, etc. These
measures will, at least, not distort economic decisions.
And we, the less lucky taxpayers, will know how much
we are paying for - and to whom.
2026
tax receipt means money begotten from the tax
authorities.
2027
Research begs to differ. It demonstrates the resilience of
consumers, who maintain their consumption levels in the
face of mounting price pressures. They even reduce
savings to do so. We say that their consumption is rigid,
inelastic. Also, people do not save because it "pays better"
to save than to consume. They don't save because the
relative return on savings is higher on savings than on
consumption. They save because they are goal oriented.
They want to buy something: a car, a house, higher
education for their children.
2028
also found no connection between VAT and changes in
corporate (profit) and income taxes.
2029
Despite a raging debate in economic literature, it seems
safe to say the following:
Vodka
Vodka is a crucial component in Russian life. And in
Russian death. Alcohol-related accidents and cardiac
arrests have already decimated Russian life expectancy by
well over a decade during the last decade alone.
2030
SPI's latest press release consists of the detailed history of
this harrowing tale. The brand Stolichnaya, as well as 42
others, were privatized in 1992. The firm quotes a
document, bearing the official seal of the maligned
ministry, which states unambiguously: "VAO
Sojuzplodoimport has the right to export Russian vodka to
the USA under the following trademarks: Stolichnaya,
Stolichnaya Cristall, Pertsovka, Limonnnaya, Privet,
Privet Orange (Apelsinovaya), Russian and Okhotnichya."
2031
Putin himself set up a committee for the repatriation of
these and other consumer brands to the state. He craves
the beneficial effects the alcohol sector's tax revenues
could have on the federal budget - and on its powers of
patronage. A central state-owned brand-holding and
distribution company was set up less than two years ago.
Ever since then, the alcohol sector has been subjected to
relentless state interference. SPI is not the most egregious
case either.
The courts have lately been good to SPI, coming out with
a spate of decisions against the government's conduct in
this convoluted affair. But on February 1, the firm
suffered a setback, when a Moscow court ruled against it
and ordered 43 of its brands, the prized Stolichnaya
included, returned to the government (i.e., re-
nationalized).
2032
SPI is doing its best to placate the authorities. It is
rumored to have offered last month to use its ample funds
to supplement the federal budget. It has indicated last
September that it is on the prowl for additional
acquisitions in Russia - a bizarre statement for a firm
claiming to have been victimized. "The Moscow Times"
reported that it is planning to sign a $500,000 sponsorship
agreement with the Russian Olympic Committee.
2033
by Rosspirtprom, a government agency. Kryshtal signed
distribution contracts for "Stolichnaya" with distilleries
backed by the Russian ministry of agriculture.
The vodka wars are sad reminders of the long way ahead
of Russia. Its legal system is rickety - different courts
upheld government decisions and SPI's position almost
simultaneously. Russia's bureaucrats - even when right -
are abusive, venal, and obstructive. Russia's
"entrepreneurs" are a penumbral lot, more enamored with
off-shore tax havens than with proper management. The
rule of law and private property rights are still fantasies.
The WTO - and the respectability it lends - are as far as
ever.
Vojvodina, Economy of
In October 2005, Parliamentary Assembly of Europe
members tabled a draft resolution castigating the human
rights situation in the province of Vojvodina. As EU
accession looms larger for Serbia and Montenegro, such
2034
resolutions are bound to proliferate. Vojvodina is widely
regarded as a test case and the touchstone of Serbia's post-
Milosevic reforms.
2035
Vojvodina's denizens - pro-Western, highly educated,
intellectuals, members of the free professions, and globe-
trotting businessmen - were horrified by the barbarity of
Yugoslavia's tortured demise. They now act as the self-
appointed conscience of Serbia and Montenegro.
2036
Djindjic's DOS umbrella grouping of reformist parties,
quoted by Radio Free Europe/Radio Liberty, uttered this
veiled admonition:
2037
Then Serbian Minister of Agriculture, Forestry and Water
Management, Dragan Veselinov, offered to subsidize
sugar beet, soybean, and sunflower crops and to buy
280,000 tons of wheat in 2003. But these belated pre-
election bribes did not soothe jangled nerves.
2038
water, natural gas, the railway to Budapest, river cargo
transport, and telecommunications infrastructure were
rendered idle by the decimation of its bridges.
2039
He elaborated: "During the Milosevic era they wouldn't let
us have our schools, media, they banned the official use of
the language. The situation has now improved, the Law on
national communities has been passed which needs to
continue its implementation more and more."
Volatility
Volatility is considered the most accurate measure of risk
and, by extension, of return, its flip side. The higher the
volatility, the higher the risk - and the reward. That
volatility increases in the transition from bull to bear
markets seems to support this pet theory. But how to
account for surging volatility in plummeting bourses? At
the depths of the bear phase, volatility and risk increase
while returns evaporate - even taking short-selling into
account.
2040
have increased, but the volatility of volatility itself. The
markets, it seems, now have an added dimension of risk."
2041
should better use historical data or current market prices -
which include expectations - to estimate volatility and to
price options correctly.
2042
constraints. No wonder that traders use Black-Scholes as a
heuristic rather than a price-setting formula.
2043
increase in the money supply, for instance, axes interest
rates and causes the currency to depreciate. The rational
outcome should have been a panic sale of obligations
denominated in the collapsing currency. But the
devaluation is so excessive that people reasonably expect
a rebound - i.e., an appreciation of the currency - and
purchase bonds rather than dispose of them.
2044
fears, and mass disagreement as to the preferred mode of
reaction to public and private information - yields price
fluctuations.
But most market players follow the trend. They sell when
the VIX is high and, thus, portends a declining market. A
bullish consensus is indicated by low volatility. Thus, low
VIX readings signal the time to buy. Whether this is more
than superstition or a mere gut reaction remains to be
seen.
2045
War
2046
Defense contractors and service industries, concentrated
across the southern USA stand to undoubtedly benefit
after a lean decade following the unwinding of the Cold
War. GDP may grow by 0.6 percent this year based on
$50 billion in war-related expenditures, project DRI-
WEFA for MSN's Money Central.
2047
published by the Board of Governors of the Federal
Reserve system in November 1996, the authors, Jon Faust
and John Irons, sweepingly dismiss "political effects on
the economy". "If they exist" - they add - "they are small
and difficult to measure with confidence."
2048
reality, changes in military expenditures lag changes in
GDP. Surprisingly, mathematical analysis reveals that
GDP growth does not respond measurably to unexpected
surges in military spending. Rather, military budgets swell
when GDP suddenly increases.
2049
Consumers and investors are inclined to postpone big-
ticket decisions in times of uncertainty. Hence the adverse
reaction of the capital markets to the recent crisis over
Iraqi disarmament. With the exception of the Gulf War
and the Cuban Missile Crisis, the Dow Jones Industrial
Average has always crumbled in the face of hostilities,
only to skyrocket when the situation stabilized and
certainty was restored.
2050
It affected both sides of the Atlantic. This, despite the fact
that the economy was in bad shape long before Saddam's
antics. Interest rates stood at about 8 percent, inflation was
running at double the current rate and President George
Bush Sr. raised taxes rather than lower them, as his son
has done.
2051
belief in the demise of pre-1990s economics is alive and
well.
Consider inflation.
2052
continuous interactions which determines inventory
planning, the level of wages and pricing. The purported
connection between the money supply and output was
largely discounted as unproven.
2053
itself to these constraints. The business cycle is a
symptom of this process of adaptation.
2054
(known as "inflation") is also the outcome of mass
psychology. Households and firms compensate for the
aforementioned high degree of uncertainty (that is, of risk)
by raising the prices they charge. Market signals are thus
garbled by psychological noise and uncertainty increases.
It is a vicious cycle: inflation brought on by uncertainty
only serves to enhance it.
2055
stagflation - zero or negative growth, coupled with
inflation.
2056
Various studies have shown that the revolutions in
knowledge, communications and transportation
technologies have shortened both the cycle and every
stage in it. This is attributed to the more rapid
dissemination and all-pervasive character of contemporary
information.
All asset bubbles burst in the end. This is the fifth phase.
It signifies the termination of the bull part of the cycle.
2057
Asset prices collapse precipitously. There are no buyers -
only sellers. Firms find it impossible to raise money
because their obligations (commercial paper and bonds)
are not in demand. A credit crunch ensues. Investment
halts.
2058
A monetary deflation - whether systemic or specific to
certain industries - is pernicious. Due to reversed
expectations (that prices will continue to go down), people
postpone their consumption and spending. Real interest
rates skyrocket because in an environment of negative
inflation, even a zero interest rate is high in real terms.
This is known as a "liquidity trap".
2059
Because the recessionary economy is just recovering from
deflation - there aren't usually many things to buy. A lot
of money chasing few goods - this is the recipe for
inflation. Back to phase one.
But the various phases of the cycle are not only affected
by psychology - they affect it.
2060
Measures number 2C, 4, 6A, 6B, 7, 9, 11A, 11B below
are applicable to such a situation.
1B-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 7, 8,
9, 11C, 11D, 11E, 11F.
1A-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 6E,
7, 8, 9, 10, 11C, 11D, 11E, 11F, 12, 13.
2061
1G. Limitations are placed on cash and credit card travel
allowances in foreign exchange
1H. Transfers between external accounts require approval
of the central bank
2. Banking Regime
5. Import Controls
2062
Increase customs tariffs and duties on all imports (and
introduce countervailing measures under GATT/WTO
rules).
2063
according to the number of members of the household)
Deductions from salaries are used to purchase the bonds
Financial transactions tax is imposed to finance the war
effort
Increases in VAT, excise, and other consumption taxes
are introduced in order to finance the war effort
9. Budgeting
Freeze on wages
Freeze on hiring in public administration
Freeze on indexation of pensions and other state
obligations
Freeze on public expenditures and public procurement
Freeze on interest payments
Freeze on repayment of internal debt
2064
11E. Hiring a trading firm (not through a public tender)
11F. Discrete market purchases
War Reparations
As its disintegration in 1992 has proven, Czechoslovakia
may have been merely an artificial multi-ethnic chimera.
But it was also an industrial and military powerhouse. In
the fateful 1930's, its - mainly heavy - industry was the
7th largest in the world. Even the Germans were awed by
its well equipped and well trained army.
2065
The Germans - a hostile and restless lot - demanded to
have an autonomy, which Czechoslovakia refused to grant
them. It feared that the Germans will secede and join
Hitler's emerging "Great Reich". Such calamity would
have deprived Czechoslovakia of important industrial and
mineral assets and of its rail links to northern Europe. The
Sudeten was also a formidable natural barrier against an
imminent German invasion.
2066
Britain and France bullied Czechoslovakia by annulling
their mutual defense pacts. Bonnet, France's Minister of
Foreign Affairs advised the Czechoslovaks not to be
"unreasonable". Otherwise, he warned, France will
"consider herself released from her bonds". Halifax, the
British Foreign Minister, enlightened his Ambassador in
Paris about the "importance of putting the greatest
possible pressure on Dr. Benes (Czechoslovakia's
president) without delay".
2067
since England would not march.
Four - If under these circumstances the war starts, France
will not take part; i.e., she will not fulfill her treaty
obligations."
2068
the process. A few German males were subjected to
forced labour.
2069
Another, US-based group, is contemplating a similar
move, according to "Forward Magazine". A lawsuit was
filed by Sudeten Germans located in Germany against the
German authorities for failing to act to countermand the
Benes Decrees.
2070
confiscated bank accounts, annulled insurance policies,
land, property, artifacts, and compensation for slave
labour and wrongful deaths.
2071
workers is even recognized for the purpose of
accumulating pension benefits. A tiny group of mothers
receive symbolic child rearing benefits. The State of Israel
support the vast majority of these crippled and
traumatized people from funds it allocates under its
Invalids and Nazi Prosecution Law.
2072
than $250 a month. Germany claims that since it has
provided 12 west European governments with "global
compensation" funds between 1959 and 1964, their
subjects are not eligible either.
2073
Responsibility and Future." The Foundation has $5 billion
to distribute to slave laborers and their descendants.
2074
Surprisingly, calls for the restitution of Jewish real-estate,
property, bank accounts, insurance policies, and art works
confiscated by the Nazis and their collaborators are fairly
recent. The International Committee on Restitution took
until 1999 to appeal to the Austrian government to restore
assets to their rightful Jewish owners.
2075
survivors of waves of ethnic cleansing have recently
lodged claims with post-communist governments.
Macedonians from the Aegean part of Greece, recently
repatriated Kosovars, Serbs expelled from Croatia, Croats
exiled from Serbia, Hungarians everywhere - are all
studying the Jewish example and its precedents
thoroughly.
2076
order. A society which can face the ugly episodes in its
own history, and agree a way to repudiate them, is also a
society capable of setting moral standards for itself, of
constraining its own worst instincts, and of aspiring to a
better future."
Water
Growing up in Israel in the 1960's, we were always urged
to conserve precious water. Rainfall was rare and meager,
the sun scorching, our only sweet water lake under
constant threat by the Syrians. Israelis were being shot at
hauling water cisterns or irrigating their parched fields.
Water was a matter of life and death - literally.
2077
$600 billion will be needed by 2010 just to augment
existing reserves and to improve water grade levels.
2078
Mexico seems to have accumulated a daunting debt of 1.5
million acre-feet between 1994-2002 - the result of a
decade long drought. Each acre-foot is c. 1.2 million
liters. Mexico's reservoirs are less than 25 percent full.
Some of the water, though, has been used to transform its
borderland into a major producer of fresh vegetables for
the American market - at the expense of Texas farmers.
2079
More than 11,000 people died in a cholera epidemic
induced by polluted water in Latin America in the 1990's.
Every year, according to the World Bank, the amount of
water polluted equals the quantity of water consumed. In
many parts of the world, notably in Africa, people walk
for hours to obtain their contaminated daily water rations.
2080
A long running dispute is simmering between India and
Bangladesh regarding this dwindling lifeline, recent
progress in negotiations notwithstanding. This is
reminiscent of a low intensity conflict that has been
brewing along the banks of the Nile between an assertive
Egypt and the encroaching Sudan and Ethiopia since the
Nile Basin Initiative has been signed in 1993.
2081
"The argument over Syria's water rights to the Sea of
Galilee is now the only real stumbling-block to a peace
treaty between Syria and Israel. Negotiations broke
down last January, after the two sides appeared to agree
on everything save the future of a sliver of territory on
the north-east coast of the sea. Israel had insisted on
keeping control of that, since the Sea of Galilee supplies
more than 40% of its drinking water."
2082
Nor are these phenomena confined to the poor precincts of
our planet. The people of Catalonia in Spain are thirsty.
They contemplate diverting water from the river Rhone in
France to Barcelona. A five years old government plan to
redistribute water from rain-drenched regions to the arid
60 percent of Spain meets with stiff domestic resistance.
The Ogallala aquifer in the USA, its largest, has been
depleted to near oblivion. The BBC estimates that it lost
the equivalent of 18 Colorado rivers by 2000.
All the lakes around Mexico City have dried and it is now
sinking into the cavernous remains of its withered
reservoirs. Soil subsidence is a major problem in cities
around the world, from Bangkok to Venice. According to
"The Economist", the town of Cochabamba in Bolivia,
once a florid valley is now a dust bowl. Some of its
residents receive water only a few hours every two or
three days. A World Bank financed project attempts to
pipe the precious liquid from mountain rivers near the
city.
2083
often get their way by threatening to throttle their richer
neighbors, Kazakhstan and Uzbekistan - and by actually
cutting them off from the nourishing rivers that traverse
their territories. This extortion resulted in inordinately
cheap supplies of gas, coal, and agricultural products.
2084
succeeded to amass c. 200,000 acre-feet worth c. $200
million.
2085
• Military Tool (state actors): where water
resources, or water systems themselves, are used
by a nation or state as a weapon during a military
action.
• Political Tool (state and non-state actors): where
water resources, or water systems themselves, are
used by a nation, state, or non-state actor for a
political goal.
• Terrorism (non-state actors): where water
resources, or water systems, are either targets or
tools of violence or coercion by non-state actors.
• Military Target (state actors): where water
resource systems are targets of military actions by
nations or states.
• Development Disputes (state and non-state
actors): where water resources or water systems
are a major source of contention and dispute in the
context of economic and social development."
2086
antagonism between the two countries; and, most
important, the downstream country must be militarily
much stronger than the upstream country."
Who is right?
2087
traded electronically in the USA. Private utilities and
water markets are the next logical step.
2088
"As probably every country has its Amazons, if we go far
back in Czech mythology, to a collection of Old Czech
Legends, we come across a very interesting legend about
the Dévín castle (which literally means 'The Girls'
Castle'). It describes a bloody story about a rebellion of
women, who started a vengeful war against men. As the
story goes, they were not only capable warriors, they had
no mercy and would not hesitate to kill their fathers and
brothers. Under the leadership of mighty Vlasta, the 'girls'
lived in their castle, 'Dévín', where they underwent a
severe military training. They led the war very
successfully, and one day Vlasta came up with an shrewd
plan, how to take hostage a famous nobleman, Ctirad. She
chose the lovely Sárka from the body (sic!) of her troops
and had her tied up to a tree by a road with a horn and a
jar of a mead out of her reach, but in her sight. In this
state, Sárka was waiting for Ctirad to find her. When he
actually really appeared and saw her, she told him a sad
story of how the women from Dévín punished her for not
following their ideology by tying her to the tree,
mockingly putting a jar and a horn (so that she would be
always reminded that she is thirsty and helpless) near by.
Ctirad, enchanted by the beautiful woman, believed the
lure and untied her, and when she handed him the mead,
he willingly drunk it. When he was drunk already, she let
him blow the horn, which was a signal for the Dévín
warriors to capture him. He was then tortured in many
horrible ways, at the end of which, his body was woven
into a wooden wheel and displayed. This event mobilized
the army, which soon afterwards destroyed Dévín. (Very
significantly, this legend is the only account of radical
feminism in Czech Lands.)"
"The Vissicitudes of Czech Feminism" by Petra
Hanáková
2089
"We myself... and many others are not in search of global
sisterhood at all, and it is only when we give up expecting
it that we can get anywhere. It is each other's very
'otherness' that motivates us, and the things we find in
common take on greater meaning within the context of
otherness. There is so much to learn by comparing the
ways in which we are different, and which the same
elements of women's experience are global, and which
aren't, and wondering why, and what it means."
Jirina Siklová
2090
This is merely the latest in an uninterrupted tradition of
victimization.
2091
The Angel Coalition rejects this counsel: "Legalization of
prostitution would ruin this country. Russian women have
suffered enough exploitation. They do not deserve to
become the (prostitutes) of the world." According to the
Vienna-based International Organization for Migration,
more than half a million women from east Europe serve as
sex workers in the West.
2092
indeed, encouraged. Amenities such as day care centers,
kindergarten, daylong schools and abortion clinics were
common, except in Poland.
2093
deprecatingly as "underslippers". But male prominence
and statal patriarchy prevailed.
2094
and given equal government representation by law,
women nevertheless carried the greater burden of
domestic duties and were not given decision-making
positions. Women's involvement in politics and political
parties has decreased drastically in the last decade. Most
Slovak women agree with the official myth that they are
'equal' to men, making it difficult for them to seek help
with issues such as protection against domestic violence,
employment discrimination, and inadequate health care.
2095
so much to learn by comparing the ways in which we are
different, and which the same elements of women's
experience are global, and which aren't, and wondering
why, and what it means."
2096
According to the February 2000 issue of the UNESCO
Courier, 14 million of the 26 million jobs that vanished in
eastern Europe since 1989 were women's. Unemployment
among women is 5 percentage points higher than among
men. Two years ago, the inter-gender gap in pay in Russia
was 24 percent. It was over 15 percent in both Poland and
Hungary.
2097
The very ethos of society has adversely changed.
Resurgent nostalgic nationalism, neo traditionalism and
religious revival seek to confine them to home and hearth.
Negative demographic trends - declining life expectancy
and birth rate, numerous abortions, late marriage, a high
divorce rate and an increasing suicide rate - provoke a
nagging sensation of "we are a dying nation" and the
inevitable re-emphasis of the woman's reproductive
functions. Hence the fierce debates about the morality of
abortion in Catholic Poland, in Lithuania, Slovenia and
even in the agnostic Czech Republic.
2098
The costs of public goods, mainly health and education,
have been transferred from state to households either
officially, once services have been commercialized, or
surreptitiously and insidiously (e.g., patients required to
purchase their own food, bed sheets and medication when
hospitalized).
2099
As far as women as concerned, the brave, new world of
liberal democracy is old, patriarchal, discriminatory and
iniquitous. This may yet prove to be transition's worst
failure.
Work Ethic
2100
Brutal layoffs and downsizing traumatized the workforce
and produced in the typical workplace a culture of
obsequiousness, blind obeisance, the suppression of
independent thought and speech, and avoidance of
initiative and innovation. Many offices and shop floors
now resemble prisons.
2101
5. The depersonalization of manufacturing - the
intermediated divorce between the artisan/worker and his
client - contributed a lot to the indifference and alienation
of the common industrial worker, the veritable
"anonymous cog in the machine".
Not only was the link between worker and product broken
- but the bond between artisan and client was severed as
well. Few employees know their customers or patrons first
hand. It is hard to empathize with and care about a
statistic, a buyer whom you have never met and never
likely to encounter. It is easy in such circumstances to feel
immune to the consequences of one's negligence and
apathy at work. It is impossible to be proud of what you
do and to be committed to your work - if you never set
eyes on either the final product or the customer! Charlie
Chaplin's masterpiece, "Modern Times" captured this
estrangement brilliantly.
2102
8. The decline of the professional guilds on the one hand
and the trade unions on the other hand greatly reduced
worker self-discipline, pride, and peer-regulated quality
control. Quality is monitored by third parties or
compromised by being subjected to Procrustean financial
constraints and concerns.
2103
This uncertainty is further exacerbated by the pandemic
eruption of mental health disorders - 15% of the
population are severely pathologized according to the
latest studies. Antisocial behaviors - from outright crime
to pernicious passive-aggressive sabotage - once rare in
the workplace, are now abundant.
2104
dissipation. No one seems to care about anything. Why
should the client or employer expect a different treatment?
Work, Future of
A US Department of Labor report published, aptly, on
Labor Day 1999, summed up the conventional wisdom
regarding the future of this all-pervasive pastime we call
"work". Agriculture will stabilize, service sector jobs will
mushroom, employment in the manufacturing sector will
be squeezed by "just in time" inventory and production
systems and by labor-intensive imports. An ageing
population and life-prolonging medicines will prop up the
healthcare sector.
2105
Yet, the much touted growth in services may partly be a
statistical illusion. As manufacturing firms and
households contracted out - or outsourced - hitherto
internal functions, their employment shrank while
boosting the job figures of their suppliers. From claims
and wage processing to take-away restaurants and daycare
centers, this shift from self-reliance to core competencies
spawned off a thriving service sector. This trend was
further enhanced by the integration of women in the
workforce.
2106
result, work-from-home and flextime are burgeoning.
Increasingly - with the advent of Internet-enabled PDA's,
laptops, beepers, and wireless access to e-mail and the
Web - so does work-on-the-move: in cars, in trains,
everywhere. Work has become ubiquitous.
This harks back to the past. Even at the end of the 19th
century - at the height of the Industrial Revolution - more
than half the population still worked from home. Farmers,
medical doctors, blacksmiths, small time retailers - lived
and slogged in combined business and domestic units. A
steady career in an organisation is a recent invention, as
William Bridges pointed out in his book "Job Shift".
"The job - the kind that you had, or hoped to get - became
a central fixture of life in industrial countries. Its
importance was great because it served many needs. For
managers and efficiency experts, job assignments were
the key to assembly-line manufacturing. For union
organizers, jobs protected the rights of workers. For
political reformers, standardized civil service positions
were the essence of good government. Jobs provided an
identity to immigrants and recently urbanized farm
workers. They provided a sense of security for individuals
and an organizing principle for society."
2107
brand-orientated, assignment-centered careers
characterize another tenth of the workforce. Temporary
and contract work work - mainly in services - account for
the rest. It is a trichotomous landscape which supplanted
the homogeneous labor universe of only two decades ago.
2108
mothers are working. The propensity to hold a job is
strongest among single mothers.
2109
2008 will still be in traditional, labor-intensive, sectors
such as retail or trucking. One in two jobs - and two in
three new ones - are in small companies, with less than
100 workers. Even behemoths, like General Motors, now
resemble networks of small, autonomous, businesses and
profit and loss centers.
2110
some jobs - and employment in some states - are far more
stable than others. Transformation across all professions
took place among workers younger than 32 and workers
with long tenure.
2111
(10) Work gradually encroaches on family life and leisure
time. In 1969, couples aged 25-54 toiled a combined 56
hours a week. By 2000, they were spending 67 hours at
work - or 70 hours if they were childless. This increasing
absence has probably contributed to the disintegration of
the nuclear family, the emergence of alternative family
systems, and the loosening of community ties.
2112
responsibilities for performance or for health and safety
are not clearly defined, or involve organisations other than
the employer.
2113
A recent tome by Kevin Phillips - "Wealth and
Democracy: A Political History of the American Rich" -
claims:
2114
insecurity coupled with job hopping and personal
branding will transform most elite workers into free - but
anxious - agents trapped in a process of perpetual re-
education.
2115
future decision of a World Trade Organization appeals
panel, widely expected to uphold an earlier preliminary
ruling that U.S.-imposed steel tariffs flouted international
trade law.
2116
Alarmed by a looming and unrealistic deadline on May
31, 2003 the Chairman of the Dispute Settlement Body
(DSB), Peter Balas, proposed to first concentrate on a
framework document, followed by a draft text. But, as
James Wolfensohn, the former President of the World
Bank, observed, with everyone preoccupied with
Baghdad, Doha - arguably far more crucial to the global
economy - is sidelined.
2117
it insists on preferential market access for the group's non-
agricultural goods.
2118
Canada, New Zealand, Australia and Brazil) - of a bold
initiative to cut subsidies down to 5 percent of production,
to slash tariffs to 25 percent and to abolish all export-
related aid.
2119
the USA and were settled by inconclusive short-term
agreements.
2120
XYZ
Yugoslavia
Precisely two years ago, in March 2003, the West killed
Serbia's Prime Minister since January 2001, Zoran
Djindjic. By forcing him, at times against his better
judgment, to surrender one more war criminal, to pursue
yet another mobster, to eliminate the remaining subsidies
that rendered tolerable the drab and destitute lives of
Serbs - the West cast Djindjic as its lackey.
2121
In a belated attempt to emulate his erstwhile ally and
current archival, the ubiquitously popular Milosevic-lite
Vojislav Kostunica, Djindjic demanded a final settlement
of the Kosovo gaping wound and courted the hitherto
hostile Orthodox Church. But this turnaround was deemed
by his countrymen to be merely his latest cynical ploy to
revive his sagging political fortunes.
2122
control of the tormented country and Kostunica re-
emerged in due time to capture the Serb presidency and
then appoint a reformer to the premiership.
2123
But the economy, despite growing at an annual rate of
more than 3 percent since 1999, is still less than half its
already depressed 1989 level of about $2700 in gross
domestic product per capita. Serbia endured a decade of
war, sanctions, civil wars, international pariah status,
bombing, and refugees.
2124
"The civil, in particular commercial, procedure should be
strengthened to facilitate the speedy conduct of the trials;
Judgments of superior courts should be made binding on
inferior courts; A larger number of judges need to be
trained and the current case-load per judge should be
reduced; Banking legislation should be enhanced with
respect to loan loss provisioning and establishment of the
legal lending limit; Repayment history (should be used)
for the purpose of the calculation of loan loss provisions;
Increase the legal lending limit, where transactions are
backed up by quality collateral; Allow investors the right
to re-sell the right to use of land; (Provide) option for
subdivision of the land use obtained; Allow buyer to
collateralize the 'irrevocable right of use' after transfer."
2125
Djindjic curbed petrol smuggling by permitting only the
importation of crude oil and by obliging importers to
refine locally. Illegal construction was demolished in
accordance with stricter new statutes, incurring the wrath
of many penumbral figures, collectively decried as "the
construction mafia".
2126
war from within to mirror the war from without. The
result is a moral quagmire of depravity and perfidy."
2127
THE AUTHOR
Curriculum Vitae
2128
1982 to 1985
Senior positions with the Nessim D. Gaon Group of
Companies in Geneva, Paris and New-York (NOGA and
APROFIM SA):
– Chief Analyst of Edible Commodities in the Group's
Headquarters in Switzerland
– Manager of the Research and Analysis Division
– Manager of the Data Processing Division
– Project Manager of the Nigerian Computerized Census
– Vice President in charge of RND and Advanced
Technologies
– Vice President in charge of Sovereign Debt Financing
1985 to 1986
Represented Canadian Venture Capital Funds in Israel.
1986 to 1987
General Manager of IPE Ltd. in London. The firm
financed international multi-lateral countertrade and
leasing transactions.
1988 to 1990
Co-founder and Director of "Mikbats-Tesuah", a portfolio
management firm based in Tel-Aviv.
Activities included large-scale portfolio management,
underwriting, forex trading and general financial advisory
services.
2129
1990 to Present
Freelance consultant to many of Israel's Blue-Chip firms,
mainly on issues related to the capital markets in Israel,
Canada, the UK and the USA.
Consultant to foreign RND ventures and to governments
on macro-economic matters.
Freelance journalist and analyst for various media in the
USA.
1990 to 1995
President of the Israel chapter of the Professors World
Peace Academy (PWPA) and (briefly) Israel
representative of the "Washington Times".
1993 to 1994
Co-owner and Director of many business enterprises:
– The Omega and Energy Air-Conditioning Concern
– AVP Financial Consultants
– Handiman Legal Services – Total annual turnover of the
group: 10 million USD.
Co-owner, Director and Finance Manager of COSTI Ltd.
– Israel's largest computerized information vendor and
developer. Raised funds through a series of private
placements locally in the USA, Canada and London.
1993 to 1996
Publisher and Editor of a Capital Markets Newsletter
distributed by subscription only to dozens of subscribers
countrywide.
2130
In a legal precedent in 1995 – studied in business schools
and law faculties across Israel – was tried for his role in
an attempted takeover of Israel's Agriculture Bank.
Was interned in the State School of Prison Wardens.
Managed the Central School Library, wrote, published
and lectured on various occasions.
Managed the Internet and International News Department
of an Israeli mass media group, "Ha-Tikshoret and
Namer".
Assistant in the Law Faculty in Tel-Aviv University (to
Prof. S.G. Shoham).
1996 to 1999
Financial consultant to leading businesses in Macedonia,
Russia and the Czech Republic.
Economic commentator in "Nova Makedonija",
"Dnevnik", "Makedonija Denes", "Izvestia", "Argumenti i
Fakti", "The Middle East Times", "The New Presence",
"Central Europe Review", and other periodicals, and in
the economic programs on various channels of
Macedonian Television.
Chief Lecturer in Macedonia in courses organized by the
Agency of Privatization, by the Stock Exchange, and by
the Ministry of Trade.
1999 to 2002
Economic Advisor to the Government of the Republic of
Macedonia and to the Ministry of Finance.
2131
2001 to 2003
Senior Business Correspondent for United Press
International (UPI).
Web and Journalistic Activities
Author of extensive Web sites in:
– Psychology ("Malignant Self Love") – An Open
Directory Cool Site,
– Philosophy ("Philosophical Musings"),
– Economics and Geopolitics ("World in Conflict and
Transition").
Owner of the Narcissistic Abuse Study List and the
Abusive Relationships Newsletter (more than 6000
members).
Owner of the Economies in Conflict and Transition Study
List, the Toxic Relationships Study List, and the Link and
Factoid Study List.
Editor of mental health disorders and Central and Eastern
Europe categories in various Web directories (Open
Directory, Search Europe, Mentalhelp.net).
Editor of the Personality Disorders, Narcissistic
Personality Disorder, the Verbal and Emotional Abuse,
and the Spousal (Domestic) Abuse and Violence topics on
Suite 101 and Bellaonline.
Columnist and commentator in "The New Presence",
United Press International (UPI), InternetContent,
eBookWeb, PopMatters, "Global Politician", eBookNet,
and "Central Europe Review".
2132
Publications and Awards
"Managing Investment Portfolios in States of
Uncertainty", Limon Publishers, Tel-Aviv, 1988
"The Gambling Industry", Limon Publishers, Tel-Aviv,
1990
"Requesting My Loved One – Short Stories", Yedioth
Aharonot, Tel-Aviv, 1997
"The Suffering of Being Kafka" (electronic book of
Hebrew and English Short Fiction), Prague and Skopje,
1998-2004
"The Macedonian Economy at a Crossroads – On the Way
to a Healthier Economy" (dialogues with Nikola
Gruevski), Skopje, 1998
"The Exporters' Pocketbook", Ministry of Trade, Republic
of Macedonia, Skopje, 1999
"Malignant Self Love – Narcissism Revisited", Narcissus
Publications, Prague and Skopje, 1999-2007
The Narcissism Series (e-books regarding relationships
with abusive narcissists), Skopje, 1999-2007
"After the Rain – How the West Lost the East", Narcissus
Publications in association with Central Europe
Review/CEENMI, Prague and Skopje, 2000
Winner of numerous awards, among them Israel's Council
of Culture and Art Prize for Maiden Prose (1997), The
Rotary Club Award for Social Studies (1976), and the
Bilateral Relations Studies Award of the American
Embassy in Israel (1978).
2133
Hundreds of professional articles in all fields of finances
and the economy, and numerous articles dealing with
geopolitical and political economic issues published in
both print and Web periodicals in many countries.
Many appearances in the electronic media on subjects in
philosophy and the sciences, and concerning economic
matters.
Write to Me:
palma@unet.com.mk
narcissisticabuse-owner@yahoogroups.com
My Web Sites:
Economy/Politics: http://ceeandbalkan.tripod.com/
Psychology: http://www.narcissistic-abuse.com/
Philosophy: http://philosophos.tripod.com/
Poetry: http://samvak.tripod.com/contents.html
Fiction: http://samvak.tripod.com/sipurim.html
2134