Russia's Vodka Wars

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


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.

Vodka is also big business. The brand "Stolichnaya" sells $2 billion a year
worldwide. Hence the interminable and inordinately bitter battle between the
Russian ministry of agriculture and SPI Spirits. The latter, still partly owned
by the state, is the on and off owner of the haloed brand "Stolichnaya", James
Bond's favorite.

SPI's PR firm, Burson-Marsteller, posits this commercial conflict as a classic
case of the violation of the property rights of hapless foreign shareholders by
the avaricious and ruthless functionaries of an unreformed evil empire. They
question Russia's readiness to accede to the WTO and its respect for the law.

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."

The privatization was completed in 1997 when the old SPI was sold to the new SPI
Spirits. The new SPI claims to have assumed $40 million in debt and invested
another $20 million to rebuild the company into "one of the world's leading
vodka producers". Yet, the Russian government, as heavy handed as ever, clearly
is unhappy with SPI.

It says the privatization deal was dubious and that SPI paid only $300,000 (or
maybe as little as $61,000 claim other sources) for the multi-billion dollar
brands, including "Stolichnaya", "Moskovskaya", and "Russkaya". The government
values the brands at a far more reasonable $400 million. Other appraisers came
up with a figure of $1.4 billion.

The government, in a bout of new-found legal rectitude, also insists that the
seller of the brands, the defunct (state-owned) SPI, was not their legal owner.
It also questions the mysterious shareholders of the new SPI - including a
holding company in tax-lenient Delaware. SPI's trademarks portfolio is
represented by an Australian law firm, Mallesons Stephen Jaques.

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 Observer" mentions that SPI currently runs most of its business from
inscrutable Cyprus, a favorite destination for Russian money launderers, tycoon
tax evaders, and mobsters. SPI's German distributor, Plodimex, is increasingly
less active - as three new off shore distribution entities (in Cyprus, the Dutch
Antilles, and Gibraltar) are increasingly more so.

The FSB ordered Kaliningrad customs to prohibit bulk exports of Stolichnaya.
Cases of the drink are routinely confiscated. Criminal charges were brought
against directors and managers in the firm. The Deputy Minister of Agriculture
is discrediting SPI in meetings with its distributors and business partners
abroad. He is also accused by the firm of obstructing the court-mandated
registration of its trademarks.

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).

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.

Summit Communications, a country image specialist, placed this on its Web site
in November last year:

"One example of a savvy Russian company that has managed to do well in the West
by finding the right partner is the Soyuzplodimport company (see also p. 14).
Soyuzplodimport, or SPI, has the exclusive rights to export Stolichnaya, which
vodka lovers in the U.S. fondly refer to as 'Stoli'. Some 50% of the company's
export turnover comes from the United States, thanks mostly to its strategic
alliance with Allied-Domecq for U.S. distribution.

'I'm not sure that all Americans know where Russia is on the map, but most of
them know what Stolichnaya is,' muses Andrey Skurikhin, general director of SPI.
'I want the quality of Stolichnaya in America to create an image of Russia that
is pure, strong and honest, just like the vodka. At SPI, we feel that we are
like ambassadors and we will try to do everything to create a more objective and
positive image of Russia in the U.S.' "

SPI's troubles may prove to be contagious. Allied Domecq, its British
distributor in America and Mexico, now faces competition from Kryshtal
International, a subsidiary of the troubled Kristal distillery, 51% owned by
Rosspirtprom, a government agency. Kryshtal signed distribution contracts for
"Stolichnaya" with distilleries backed by the Russian ministry of agriculture.

Allied and Miller Brewing have announced a $50 million investment in product
launch and marketing campaigns only two years ago. "Stolichnaya" (nicknamed
"Stoli" in the States) sells 1 million 12-bottle cases a year in the USA
(compared to Absolut's 3 million cases).

The trouble started almost immediately with the first foreign investments in
SPI. As early as 1991, Vneshposyltorg, a government foreign trade agency, tried
to export Stolichnaya in Greece. This led to court action by the Greeks. Vodka
wars also erupted between the newly- registered Russian firm "Smirnov" and Grand
Metropolitan over the brand "Smirnoff".

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.

The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

The edited version of this article was published by Central Europe
Review:

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...


Games People Play

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia



Games and role-playing are as ancient as Mankind. Rome's state-sponsored
lethal public games may have accounted for up to one fifth of its GDP. They
often lasted for months. Historical re-enactments, sports events, chess -
are all manifestations of Man's insatiable desire to be someone else,
somewhere else - and to learn from the experience.

Last week, Jeff Harrow, in his influential and eponymous "Harrow Technology
Report", analyzed the economics of Massively Multiplayer Online Role Playing
Games (MMORPG). These are 3-D games which take place in comprehensively and
minutely constructed environments - a medieval kingdom being the favorite.
"Gamers" use action figures known as avatars to represent themselves. These
animated figurines walk, talk, emote, and are surprisingly versatile.

Harrow quoted this passage from Internetnews.com regarding Sony's (actually,
Verant's) "EverQuest". It is a massive MMORPG with almost half a million
users - each paying c. $13 a month:

"(Norrath, EverQuest's ersatz world is) ... the 77th largest economy in the
[real] world!  [It] has a gross national product per capita of $2,266,
making its economy larger than either the Chinese or Indian economy and
roughly comparable to Russia's economy".

In his above quoted paper, "Virtual Worlds: A First-Hand Account of Market
and Society on the Cyberian Frontier", Professor Edward Castronova, from
California State University at Fullerton, notes that:

"The nominal hourly wage (in Norrath) is about USD 3.42 per hour, and the
labors of the people produce a GNP per capita somewhere between that of
Russia and 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."

Players - in contravention of the game's rules - also trade in EverQuest
paraphernalia and characters offline. The online auction Web site, eBay, is
flooded with them and people pay real money - sometimes up to a thousand
dollars - for avatars and their possessions. Auxiliary and surrogate
industries sprang around EverQuest and its ilk. There are, for instance,
"macroing" programs that emulate the actions of a real-life player - a
no-no.

Nor is EverQuest the largest. The Korean MMORPG "Lineage" boasts a
staggering 2.5 million subscribers.

The economies of these immersive faux realms suffer from very real woes,
though. In its May 28 issue, "The New Yorker" recounted the story of
Britannia, one of the nether kingdoms of the Internet:

"The kingdom, which is stuck somewhere between the sixth and the twelfth
centuries, has a single unit of currency, a gold piece that looks a little
like a biscuit. A network of servers is supposed to keep track of all the
gold, just as it keeps track of everything else on the island, but in late
1997 bands of counterfeiters found a bug that allowed them to reproduce gold
pieces more or less at will.

The fantastic wealth they produced for themselves was, of course, entirely
imaginary, and yet it led, in textbook fashion, to hyperinflation. At the
worst point in the crisis, Britannia's monetary system virtually collapsed,
and players all over the kingdom were reduced to bartering."

Britannia - run by Ultima Online - has 250,000 "denizens", each charged c.
$10 a month. An average Britannian spends 13 hours a week in the simulated
demesne. For many, this constitutes their main social interaction.
Psychologists warn against the addictive qualities of this recreation.

Others regard these diversions as colossal - though inadvertent - social
experiments. If so, they bode ill - they are all infested with virtual
crime, counterfeiting, hoarding, xenophobia, racism, and all manner of
perversions.

Subscriptions are not the only mode of payment. Early multi-user dungeons
(MUD) - another type of MMORPG - used to charge by the hour. Some users were
said to run bills of hundreds of dollars a month.

MMORPG's require massive upfront investments - so hitherto, they constitute
a tiny fraction of the booming video and PC gaming businesses. With combined
annual revenues of c. $9 billion, these 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.

As games become graphically-lavish  and more interactive, their popularity
will increase. Offline and online single-player and multi-player video
gaming may be converging. Both Sony and Microsoft intend to Internet-enable
their game consoles later this year. The currently clandestine universe of
geeks and eccentrics - online, multi-player, games - may yet become a mass
phenomena.

Moreover, MMORPG can be greatly enhanced - and expensive downtime greatly
reduced - with distributed computing - the sharing of idle resources
worldwide to perform calculations within ad hoc self-assembling computer
networks. Such collaboration forms the core of, arguably, the new
architecture of the Internet known as "The Grid". Companies such as IBM and
Butterfly are already developing the requisite technologies.

According to an IBM-Butterfly press release:

"The Butterfly Grid T could enable online video game providers to support a
massive number of players (a few millions) (simultaneously) within the same
game by allocating computing resources to the most populated areas and most
popular games."

The differences between video games and other forms of entertainment may be
eroding. Hollywood films are actually a form of MMORPG's - simultaneously
watched by thousands worldwide. Video games are interactive - while movies
are passive but even this distinction may fall prey to Web films and
interactive TV.

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".

Gamers will move seamlessly from their PDA to their PC, to their home cinema
system, and back to their Interactive TV. Game consoles - already
computational marvels - may finally succeed where PC's failed: to transform
the face of entertainment.

Jeff Harrow aptly concludes:

" ... History teaches me that games tend to drive the mass adoption of
technologies that then become commonplace and find their way into
"business."  Examples include color monitors, higher-resolution and
hardware-accelerated graphics, sound cards, and more. And in the case of
these MMORPG games, I believe that they will eventually morph into effective
virtual business venues for meetings, trade shows, and more. Don't ignore
what's behind (and ahead for) these "games," just because they're games..."

This is the continuation of my series about the Bretton-Woods
institutions, the IMF and the world Bank.

Previous instalments are here:

http://samvak.tripod.com/pp148.html

http://samvak.tripod.com/pp152.html


The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

The edited version of this article was published by Central Europe
Review:

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...


Also Read:

The IMF - Kill or Cure?

http://samvak.tripod.com/nm044.html

The IMF Deconstructed - A Dialog

http://samvak.tripod.com/pp10.html

Russian Roulette

http://samvak.tripod.com/pp2.html

The Washington Consensus - I. The IMF

http://samvak.tripod.com/pp148.html

Bosnia - An Economy in Search of a State

http://samvak.tripod.com/nm108.html



Washington and Sarajevo - A Case Study

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia


The internecine war lasted three years, from 1992 to 1995. It displaced
more than one quarter of the population. Of 4.4 million people, at least
250,000 are missing and at 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.

The damages are unimaginable. The costs of ruined infrastructure,
devastated crops, demolished real estate - amount to tens of billions of
dollars in a country whose GDP, at $4 billion, or $1000 per capita, is
one half of its pre-war level. Industrial production ceased altogether
during the years of fighting.

The international community has poured well over $5 billion into
Bosnia-Herzegovina since the Dayton Accords were signed on November 21,
1995. The World Bank accounts for one fifth of this inordinate amount.
This is more than $1000 per every citizen. What do donors and creditors
have to show for it?

Not much. To start with, most of the money went to support the
peacekeeping force and UN administration in BiH and to repay its
bilateral and multilateral public debt. An international force of 21,000
soldiers - known as SFOR - succeeded a 60,000 strong IFOR in 1996.
Additionally, the two mutually-hostile entities which comprise the
unprecedented entity that is BiH spend between one quarter and one third
of their meager budgets on defense.

It seems that most of the cash flows - domestic and foreign - of this
turbulent "republic" go towards keeping its constituents from each
other's throats. The rest is brazenly stolen by vast networks of
patronage, crime, and money laundering.

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.

But there are signs of renewal. Refugees are returning, albeit
hesitatingly. One hundreds thousand of them came back last year, double
the number in 2000. Volkswagen decided to reinstate the assembly of its
popular "Golf IV" model in Sarajevo - subject to customs privileges and
an effective, republic-wide, customs system. Production of the "Beatle"
in the much-tortured city was halted during the war.

BiH completed free trade agreements with all the republics of former
Yugoslavia. Yet, vast swathes of the economy subsist on international
aid and consist of catering to expats and peacekeepers. Like Kosovo,
Afghanistan, the Palestinian Authority, and others charmed spots, BiH is
addicted to other people's money.

The new International High representative, BiH's procurator, is Paddy
Ashdown, a British Liberal-Democrat, an erstwhile commando, a member of
the House of Lords. He might need all these trades in his new post.

Quoted by the International War and Peace Report, he says:

"The truth is that Bosnia and Herzegovina spends far too much money on
its politicians and far too little on its 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."

The outgoing High Representative, Petritsch, was much less diplomatic in
an interview he gave to Associated Press upon his return from Brussels
on May 24:

"(Bosnians must) understand that many people in other countries that are
financing this have their own problems and they don't want to be
bothered with (Bosnia's) problems."

Still, why is Bosnia so economically backward?

The politicians of BiH have perfected their mendicity - as well as their
venality - into art forms. A former president, Izetbegovic, and his
cronies, were alleged by Western media to have absconded with more than
$1 billion in aid money in less than 4 years.

Moreover, Bosnians of all ethnic groups are powered by an overwhelming
sense of entitlement. They sincerely feel that the world owes them -
either because it stood by as a genocide unfolded (the way the Moslems
see it), or because it spitefully deprived them of an imminent victory
(as the Serbs perceive it).

Bosnia's beggars are assertive choosers. Beriz Belkic, the Chairman of
the make-belief presidency of BiH, had the temerity to say this, in
connection with a forthcoming Srebrenica donors conference:

"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."

Content to maintain the precarious house of cards that passes for a
polity, IFI's have rarely applied pressure to implement in BiH the
prescriptions of the "Washington Consensus" over-zealously and
indiscriminately applied elsewhere.

When the World Bank submitted recently a report about the privatization
of Aluminji Mostar, an aluminum plant in Croat territory, the BiH
Federation government thumbed its nose at it and issued this statement:

"(The Federation Government) confirmed its commitment to protecting the
state capital in all companies which are strategically vital to the
Bosnia-Herzegovina Federation economy."

This timidity of the gatekeepers of the international community was
exploited to the hilt by intertwined networks of politicians,
bureaucrats, militias, businessmen, managers, and criminals in Bosnia.
Economic enterprises were transformed into cash cows and money
laundering fronts. The payment system - a relic of socialist times -
served as a mammoth "off-shore", Hawala-like, cash conveyance web until
it was dismantled.


BiH has no checks and balances. Its institutions are utterly compromised
and distrusted. Its police and judiciary are little more than private
enforcers at the employ of the 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.

While International Financial Institutions and donors - such as the IMF,
the World Bank, the European Development Bank, the EU, and the UNDP -
stressed foreign investment, no one paid attention to inward flows.

The EBRD has floated a few sporadic initiatives to encourage small and
medium sized enterprises and the World Bank provides microfinance
through the Local Initiatives Project (LIP). But the emphasis was
overwhelmingly on trying to secure headline-grabbing, big-ticket, FDI.

Yet, foreign investors - deterred by political instability, pernicious
graft, crime, and economic stagnation - are unlikely to pitch their tent
in Bosnia any time soon - unless they are provided with economically
counterproductive tax and customs benefits, passim Volkswagen. Even the
resilient and persevering McDonald's failed to penetrate the thicket of
Bosnian demands for backhanders coupled with self- serving and
contradictory regulations.

BiH had a surprisingly large, entrepreneurial, and cosmopolitan
middle-class before the war. Its assets (mainly real estate) and savings
(largely foreign exchange deposits) were expropriated and squandered by
the warring parties and other, post-war, scoundrels.

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.

Yet, they were not. The multilaterals appeared to have been concerned
chiefly with tax collection - but not with engendering a taxable
economy. Until the latter part of 2000, they did not even bother to
significantly reform the intractable, business-repelling, and
corruption- inducing tax code. Nor was the legal environment made more
business-friendly. Numerous and tedious inspections, regulations,
controls, and conflicting permits afflict every shop, plant, and service
establishment in the land.

Incredibly, it was as late as last week that the World Bank approved a
$44 million "Business Environment Adjustment Credit". At one third the
size of the government's annual budget, it is supposed to support these
long-overdue reforms:

"Facilitating business entry through the creation of a simplified and
transparent countrywide approach to business registration, and licensing
and a strengthened legal framework and capacity for attracting foreign
investment; Streamlining business operations by reducing administrative
and regulatory compliance costs through the rationalization of
inspections and regulations; building judicial and extra- judicial
capacity to resolve commercial disputes; improving enforcement of
secured transactions, and ensuring equal access to public procurement;
and, easing business exit through strengthened bankruptcy and
liquidation systems."

Yet, this program is bound to fail. IFI's, governments, and development
banks - hypnotized by the mantra of "country ownership" - keep
pretending that Bosnia meets the definition of a state, with functioning
institutions, and patriotic politicians. They keep conveniently ignoring
the fact that Bosnia has no banks, no courts, no police and that its
customs service is a primitive extortion racket.

The international community should have founded parallel financial, tax,
customs, bureaucratic, and judicial systems to cater to the needs of the
emerging private sector, now less than 40 percent of Bosnia's moribund
economy.

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.

Instead, the multilaterals keep enriching and empowering the mortal foes
of private enterprise: criminalized monopolists, power-inebriated
virulent nationalists, corrupt officials, and their penumbral sidekicks,
the Bosnian "bankers".

Every soft loan, every grant, every subsidized credit, and every round
of "negotiations" with the criminals that pass 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.

There is an enormous pent-up demand for small business finance. The
World Bank summarizes the astounding success of its - single -
microcredit facility in Bosnia thus:

"Five years after the start of the LIP, the overall evaluation of the
project is highly satisfactory. As of March 31, 2001, some 80,000 loans
have been disbursed to microentrepreneurs throughout the country helping
to create or sustain over 100,000 jobs. Monthly disbursements support
more than 3,000 new loans. Levels of repayment are very high at 98.5%,
with only 1.21% of outstanding repayments (30 days past due).

On the ground, these numbers translate in improved living conditions and
a renewed sense of hope and confidence for many of the poor. An
independent Client Survey commissioned by the Local Initiative
Departments (the monitoring agencies of the project) in 1999 found that
79% of borrowers considered that the loan had significantly improved
their economic situation. Furthermore, some microfinance institutions
have used microcredit as a tool to bring together people previously
divided by the war.

On the operational and financial side, the LIP has been equally
successful. Just three years after the project was initiated, seven
microfinance institutions became operationally sustainable, meaning that
they are able to cover their operating expenses from their operating
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."

This is not counting the prospering informal ("grey") economy - equal in
size to the formal bit - and the massive remittances of hundreds of
thousands of Bosnians abroad. The drain of brains and entrepreneurship
is inexorable. A United Nations survey conducted earlier this year found
that 62 percent of the youth dream of leaving BiH, six years into the
Dayton peace process.

The World Bank approved a second, $20 million, LIP last July. Yet, it is
telling - and outrageous - that credits for SME (small and medium
enterprises) and microcredits amount to less than 1 percent of the funds
expended in Bosnia hitherto.

Bosnia fosters in IFI's a keen and sudden adherence to their charters
and mandates. The IMF, which would have encroached gleefully on the
World Bank's turf in almost any other country, confines itself in Bosnia
to taxation.

While not averse, in dozens of countries, from Macedonia to Indonesia,
to sonorously conditioning its programs upon painful structural reforms
and development priorities - in the minefield that is Bosnia, the IMF is
content to tiptoe and procrastinate apologetically.

Public posturing - together with the US, EU, the World Bank, and
others - over the botched privatization process at the end of 1999
notwithstanding, the IMF's subservience to its American paymasters is
nowhere more transparent than in BiH.

Despite having consistently reneged on all its obligations, Bosnia's
1998 standby agreement with the Fund has - most unusually - been
extended three times over. A new agreement was finally negotiated late
last year.

As global interest wanes, BiH is likely to face a precipitous decline in
international aid. This will result in an economic crash akin to the one
experienced by Cambodia when the UN withdrew in 1993. A Lebanon-like
country, governed by Russian-style oligarchs, with African-level poverty
and Serb-reminiscent nationalism - Bosnia's future is unlikely to
improve on its sorry past.

Trading from a Suitcase - The Case of Shuttle Trade

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



They all sport the same shabby clothes, haggard looks, and bulging
suitcases bound with frayed ropes. These are the shuttle traders.
You can find them in Mongolia and Russia, China and Ukraine,
Bulgaria and Kosovo, the West Bank and Turkey. They cross the border
as "tourists", sometimes as often as 10 times a year, and come back
with as much merchandise as they can carry in their enormous
luggage. Some of them resort to freight forwarding their "personal
belongings".



They distort trade figures, smuggle goods across ill-guarded
borders, ignore international treaties and conventions and, in
short, revive moribund economies. They are the life-blood and the
only manifestation of true entrepreneurship in swathes of economic
wastelands. They meet demands for consumer goods unmet by domestic
manufacturers or by officially-sanctioned importers.



In recognition of their vital role, the worried Kyrgyz government
held a round table discussion last summer about the precarious state
of Kyrgyzstan's shuttle trade. Many former Soviet republics have
tightened up their border controls. In May last year, Russian
officials seized half a million dollars worth of shuttle goods
belonging to 1500 traders. When two million dollars worth of goods
were confiscated in a similar incident last fall, eight Kyrgyz
traders committed suicide.



The number of Kyrgyz shuttle traders dropped to 300,000 (from
500,000 in 1996). The majority of those who remain are insolvent.
Many of them emigrated to other countries. The shuttle traders asked
the government to legalize and regulate their vanishing trade and
thus to save them from avaricious and minacious customs officials.



Even prim international financial institutions recognize the
survival-value of shuttle trade to the economies of developing and
transition countries. It employs millions, boosts investments in
transport and infrastructure, and encourages grassroots capitalism.
The IMF - in the 11th meeting of its Committee on Balance of
Payments Statistics in 1998 - officially recognized shuttle trade as
a business activity to be recorded under "goods".



But there is a seedier and seamier side to shuttle trade where it
interfaces with organized crime and official corruption. Shuttle
trade also constitutes unfair competition to legitimate, tax and
customs duties paying enterprises - the manufacturers of textiles,
shoes, cigarettes, alcoholic drinks, and food products. Shuttled
goods are not subject to health and safety inspections, or quality
control.



According to the March 27th issue of East West Institute's "Russian
Regional Report", the value of Chinese goods shuttled into the
borderlands of the Russian Far East is a whopping $50 million a
month. China benefits from the serendipitous proceeds of these
informal exports - but is unhappy at the lost tax revenues.



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.



Shuttle trade is even more prominent between Iraq and Turkey. The
Anatolia News Agency expects it to increase to $2 billion this year.
By comparison, the official exports of Turkey to Iraq amount to $800
million. Prime minister Bulent Ecevit himself stated to the Ankara
Anatolia news agency: "We have provided necessary support to
increase shuttle trade".



"The Economist" reports about the flourishing "petty trade" between
China and Vietnam. Western and counterfeit goods are smuggled to
bazaars in Vietnam, owned and operated by Chinese nationals. The
border between these two erstwhile enemies opened in 1990. This led
to the rise of criminal networks which involve border guards and
policemen.



Another hot spot is the Balkan. In a report dated July 2001, the
Balkan Information Exchange describes the "Tulip Market" in
Istanbul. Vendors are fluent in Russian, Bulgarian and Romanian and
most of the clients are East European. They buy wholesale and use
special vans and buses to transport the goods - mainly textiles -
northwards, frequently to destinations in the Balkan. This kind of
trade is estimated to be worth $8 billion a year - more than one
quarter of Turkey's official exports.



Bulgarian customs officials, border patrols, and policemen form part
of these efficient rings - as do their Macedonian and, to a lesser
extent, Greek counterparts. The Sofia-based Center for the Study of
Democracy thinks that a third of the Bulgarian workforce (i.e., c. 1
million people) may be involved. Many of the traders maintain mom-
and-pop establishments or stalls in public bazaars, where members of
their family sell the goods.



Some of the merchandise ends up in Serbia, which was subjected to UN
sanctions until lately. Fuel smuggling on bikes and other forms of
sanctions busting have largely ended but they have been replaced by
cigarettes, alcohol, firearms, stolen cars, and mobile phones.



The Serbian authorities often round up and deport Bulgarian shuttle
traders, provoking furious resentment in Bulgaria. Headlines
like "(Serbian) Policemen take away our countrymen's money"
and "Serbs searching (Bulgarian) women's genitals for money" are
pretty common. The Bulgarians are embittered. They used to smuggle
medicines and fuel into embargoed Serbia - only to be abused by Serb
officials now, that the embargo has been lifted.



East European buyers used to reach as far as India where they
shopped wholesale in winter. Russians used to buy readymade clothes,
leather goods, and cheap jewelry in New Delhi and elsewhere and sell
the goods in the numerous flea markets back home.



To finance their purchases, they used to sell in India Russian
cosmetics and consumer goods such as watches, 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.



Governments are trying to stem the shuttle trade. The Russian news
agency, ITAR-TASS, reports that Sergei Stepashin, the dynamic
chairman of the Russian Audit Chamber (and a former short-lived
prime minister of Russia) is bent on tightening the cooperation
between member states of the Shanghai Cooperation Organization.



The audit agencies of China, Russia, Kazakhstan, Kyrgyzstan,
Tajikistan and Uzbekistan will exchange information and strive to
control the thriving shuttle trade across their porous borders.
China and Russia are poised to sign a bilateral accord regarding
these issues in October.



The WPS Monitoring Agency reported last November that the Economic
Development and Trade Ministry of Russia intends to treat cargos of
more than 50 kilos as a consignment of commercial goods, subject to
import tariffs (on top of the current tax of 30 percent).



The Ministry claimed that shuttle trade accounts for up to 90
percent of all imported goods "in certain spheres" (e.g., furs). As
late as 1994, Russians were allowed to import up to $5000 of duty-
free goods in their accompanied baggage - a relic of communist days
when only the privileged few were allowed to travel.



Up to 2 million Russian citizens may be engaged in shuttle trade and
the value of "gray" goods may be as high as $10 billion annually.
Goods from Turkey alone amounted to $1.5-2 billion, according to
vice-premier Viktor Khristenko, but shuttle traders also operate in
the United Arab Emirates, Syria, Israel, Pakistan, India, China,
Poland, Hungary, and Italy.



A set of figures published for the first quarter of 2001 shows that
shuttle trade amounted to $2.6 billion, or 8 percent of Russia's
total foreign trade. Shuttle traded goods made up 1.5 percent of
exports - but a full quarter of imports.



But the shuttle trade's coup de grace may well be EU enlargement.
Already a new "iron curtain", comprised of visas and regulations, is
rising between EU candidates and other East European and Balkan
countries.



Consider the EU's future eastern boundary. More than a million
people cross the busy Ukrainian-Polish border every month. Enhanced
regulation on the Polish side and new, IMF-inspired, tax laws on the
Ukrainian side - led to a massive increase in corruption and
smuggling. Truck owners now bribe customs officials to the tune of
$300 per vehicle, according to a January 2001 report by CEPS.



The results are grave. Following the introduction of these new
measures, cross border traffic fell by 50 percent and unemployment
in the Polish border zones jumped by 40 percent. It has since
doubled. The IMF and the EU are much derided by the Polish minority
now trapped in Western Ukraine.



The situation is likely to be further exacerbated with the foreseen
introduction of a reciprocal visa regime between the two countries.
Shuttle trade may be decimated by the resulting bureaucratic
bottlenecks.



Still, it may no longer be needed by the time Poland accedes in 2004
or 2005. 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.

This is the continuation of my series about the Bretton-Woods
institutions, the IMF and the world Bank.

Previous instalments are here:

http://samvak.tripod.com/pp148.html


The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

The edited version of this article was published by Central Europe
Review:

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...


The Washington Consensus

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia


Indonesia's Minister of Development Planning called last week on his
country to sever its ties with the "colonial power", the IMF, come
November, when its agreement with the lending agency expires. He blamed
its coercive policies for the country's alleged near insolvency and
civil disorder. Local bigwigs hastened to concur.

Lenders and donors often condition credits, debt reduction, and aid upon
the IMF's seal of approval, in the form of a standby arrangement.
Despite protestations to the contrary, cross-conditionality - including
World Bank conditions in IMF programs and vice versa - is still rife.

Thus, inadvertently, the IMF has assumed in the last two decades the
dual - and intimately related - roles of a sovereign credit risk rating
agency and a lender of last resort - hitherto not among its core few and
well-defined competencies.

Because other, non-IMF, financing is premised on its endorsement, the
IMF carries disproportionate weight with governments and often leverages
this stature to non-economic ends. From Moldova to Russia, the IMF has
not been above meddling in domestic politics, though in the guise of
"impartial advice" or "loan conditions to be met".

The IMF lends funds to countries in distress - e.g., to ameliorate a
balance of payment or a capital account crisis (for instance, in
Thailand in 1997), or a meltdown of the financial system (in Turkey last
year). Such lending is predicated on a program ostensibly negotiated
with the authorities - but, in practice, dictated by the IMF. The
program provides detailed policy guidelines and performance evaluation
benchmarks.

Yet, how reliable and realistic are these programs? Often produced in
the throes of civil strife (Macedonia), currency collapse (Brazil),
implosion of the banking system (Argentina), or natural and man-made
disasters (Africa) - they tend to reflect mere wishful thinking and
bureaucratic wrangles.

They are based on partial or fake figures provided by the kleptocracies
that rule many of the IMF's most needy clients. Though mainly
forward-looking (prospective) - IMF programs imply a modicum of
certainty where there is none and are, thus, grossly misleading
documents.

Rarely does the IMF admit that it is as much at a loss as its client
government. Last year - as Albanians fought Macedonians in the outskirts
of the capital, Skopje - The IMF suspended a previous program and placed
Macedonia on "staff monitoring" - a euphemism for "let's wait and see
how things turn out".

But these criticisms aside - the IMF is an important global center of
scholarship and policy advice. It has made some contributions to the
overhaul of the international financial architecture in train since
1998 - and is advocating controversial innovations such as national
bankruptcy proceedings. Yet, is its advice sound and are its policies
efficacious?

The IMF's prescriptive - and universally applied - policy mix displayed
remarkable resilience in the face of global financial crises in the past
decade. It includes: austerity measures, fiscal and monetary discipline,
decreased inflation, balanced budgets, a sustainable public debt,
avoidance of moral hazard, restrained wage and expenditure policies,
preference for the private sector, the strengthening of the financial
system, and structural reform.

In its recent past, the IMF advocated crippling competitive
devaluations. This policy "recommendation" has now been replaced by
either a pegged exchange rate - or a free floating rate coupled with an
inflation target. These are known as "nominal anchors" and are supposed
to guarantee economic stability and its inevitable outcome: economic
growth.

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

The IMF is fairly dogmatic and ideological. It never praises - or learns
from - countries - no matter how economically successful - if they
diverged from its doctrines. Two prime examples are: Malaysia which
introduced capital controls following the 1998 Asian crisis - and
Ireland which pursued expansionary fiscal policies despite a decade of
searing-hot economy. Both acted contrary to every vestige of IMF
wisdom - and both prospered.

The IMF deviates from its catechism only when instructed to do so by its
paymaster, the USA. Thus, Stratfor, the American strategic forecasting
firm, noted the recent 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.

Most strikingly, in line with the much proclaimed US positions, and
contrary to everything the IMF has ever preached, it encourages Japan to
slash its taxes even further while increasing its public spending, and,
by implication, its crushing and unsustainable public debt and gaping
budget deficit.

But these are aberrations. Moreover, even the orthodoxy of the
"Washington Consensus" is not all wrong. The faults of the IMF's
policies run deeper and can be traced to its modus operandi and raison
d'etre.

First, though much reduced, some IMF "crisis" lending is concessionary -
soft loans, at subsidized interest rates, with sizable grace periods.
This fosters moral hazard and encourages imprudent behavior. Walter
Bagehot, the legendary 19th editor of "The Economist", advised lenders
of last resort to lend freely but at a penalty rate and against
collateral.

Charles Calomiris and Allan Meltzer follow this sound advice in their
Summer 1999 article published in "National Affairs" and titled "Fixing
the IMF":

"A penalty rate encourages the borrower to negotiate with private
creditors to seek (lower) market rates. The IMF would lend only when
there is a liquidity crisis-that is, when private lenders are unwilling
to lend. That is precisely the responsibility that a lender of last
resort should fulfill."

The second fundamental problem is that IMF programs exclusively tackle
national "balance sheets" - budget deficits, inflation, and public debt.
The implicit assumption is that the smaller and more spendthrift the
state - the better off its citizenry. This principle invariably holds
true in rich and well-governed countries.

Not so in developing, emerging, and transition economies. Here, the
better the national accounts - the worst off the inhabitants.
Unemployment, social tensions, and poverty grow as macroeconomic
parameters "improve". Income and wealth inequalities soar and the middle
class evaporates to the detriment of the country's political stability.

This inversion is due to arthritic monetary transmission mechanisms -
and to the absence of a private sector. The economic engine in such
destitute countries is the state. Public spending takes the place of
capital formation and generates consumption. The savings level is
largely immaterial because financial intermediaries fail to transform it
into investments. Thus, the curbing of the state's involvement in the
economy has an adverse and prolonged recessionary impact.

The third perverse trend is the crowding-out of private sector or
bilateral capital flows by multilateral debt. The share of IMF and World
Bank lending in the total public debt of developing countries has
quintupled in the last two decades. The money is mostly used to repay
creditors - multilateral, bilateral, and private sector (i.e., banks).
Thus, the increase in the total indebtedness of borrowing countries
serves to bail out stranded lenders - but does little to foster economic
growth and development.

The IMF's biggest problem by far may be that it strayed way out of its -
ostensible - competency. It is reasonably qualified to deal with fiscal
matters, the financial system, and monetary issues with emphasis on the
exchange rate regime. It is an absolute dilettante when it comes to
reform - structural or otherwise.

"The Reality of Aid 2002", a report produced by a coalition of NGO's,
charges that:

"Far from abandoning aid conditionality, international financial
institutions and bilateral donors are collaborating in an unprecedented
consensus to retool the aid regime under the rubric of 'ownership' and
aid effectiveness".

The IMF itself admits, in its February 2001 report, "Structural
Adjustment Conditionality in Fund-Supported Programs", to an average of
41 conditions per agreement concluded between 1995-2000. Independent
scholars, such as Nancy Alexander, found 114 conditions in a typical
program in sub-Saharan Africa in 1999.

The International Confederation of Free Trade Unions (ICFTU) cites the
example of Romania's November 2001 standby arrangement with the IMF. It
included conditions pertaining to the liberalization of domestic energy
prices, privatization, and the restructuring of state- owned
enterprises. Macedonia was required by the IMF to sell or shut down its
loss-making state enterprises as a condition for any agreement with the
Fund.

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.

They regard the Fund's programs as external and sinister impositions and
at best ignore parts of it. The dual concepts of "ownership" and "aid
effectiveness" are rendered shams by this overweening attitude. What
could have been a partnership between indigenous reformists and
well-meaning, knowledgeable, foreigners - is frequently transformed into
a xenophobic tug of war.

The tenets of the Washington Consensus are no longer confined to arcane
provisos in IMF and World Bank programs. They are now the pillars of a
new regime of international law. They are embedded in the charter of the
World Trade Organization, for instance - a quasi- judiciary body as well
as a regulator of international trade and much more besides.

In many respects, therefore, the IMF survived the 1997-8 crisis to
prosper and become more potent than ever. Hence, perhaps, the backlash
by well-meaning but often ignorant and impractical anti-globalizers and
assorted self-appointed NGO's. To its credit, the IMF is not ignoring
them. It is trying to maintain a meaningful dialog. But its survival is
not premised on the success of such a discourse - as it was once thought
to be.

Syria's Sunshine Policy

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



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 parano=
ia and xenophobia, and socialist to boot - it revolved around the personalit=
y cult of the current president's father, Hafiz al-Assad.

The Western media reported how Syria colonized Lebanon, suppressed the Sunn=
i majority at home, and aided and abetted unsavory terrorist organizations i=
nside the region and without. It is still on the USA's black list, though no=
t a member of the tripartite "axis of evil".

These perceptions are gradually changing. Under the leadership of the soft-=
spoken, 37 years old ophthalmologist, Bashar al-Assad, Syria seems to be ben=
t on re-joining the international community. In his inaugural address, Basha=
r encouraged "positive criticism" of the regime, suppressed a nascent person=
ality cult centered around him, and called for economic liberalization.

On March 29, the Syrian parliament rubber-stamped a law, tabled by the Mini=
stry of Economy and Foreign Trade. According to Sana, the state news agency,=
  the act established a Monetary and Credit Council. But its most daring depa=
rture from past practices was to allow banking joint ventures between the go=
vernment and the private sector.

Applying firms must still be at least 51% owned by Syrians. The Central Ban=
k will start accepting applications on April 20. A January cabinet decision =
to allow foreign owned banks to operate in Syria still awaits the habitually=
-glacial presidential approval.

This ends four decades of ruinous government monopoly, the result of a nati=
onalization campaign by the triumphant Ba'ath party in 1963. Deputy Prime Mi=
nister for Economic Affairs, Khaled Ra'ad, said that some 50 foreign banks a=
re interested to set up shop in Syria. This may be an exaggerated figure. On=
e hundred applications were reported following a late 2000 law opening the d=
oor to private investment in the banking sector - yet not a single license w=
as issued hitherto.

Foreign, tax-exempt, banks have been allowed to operate in Syria's five fre=
e zones since June 2000. But the conditions were so onerous that not many di=
d. Only "first rank" banks with $11 million in capital - in foreign exchange=
  - were supposed to be let in. They were permitted to transfer and receive f=
oreign exchange, usually on behalf of foreign clients. Yet, even these munda=
ne operations were hobbled by a mountain of restrictions and regulations.

A year later, the free zones became nests of money laundering. Six (now fiv=
e) obscure Lebanese banks provided services to less than 300 clients. Few ot=
hers followed. The Oxford Business Group quotes a senior Lebanese banker:

"... The CEO of Lebanon's Byblos Bank, Francois Bassil, which is one of the=
  five Lebanese banks established in Syria's free trade zones, told a London-=
based newspaper that the banks saw almost no activity. He cited problems in =
Syria's economic and financial environment, as well as the lack of a financi=
al reform law. In a positive step, Syrian media reported in mid-February tha=
t 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 affi=
liate, Societe Generale de Banque au Liban."

Despite this disheartening prelude, Syria has no choice but to liberalize i=
ts moribund and ossified banking sector. In recognition of this inevitabilit=
y, Bashar al-Assad, the current president, has shuffled most of the economic=
  positions in his cabinet last December.

He surrounded himself with reformers, some of them Western-educated, as he =
is. Four of them are members of his "Syrian Computer Society", a hotbed of r=
eform. A notable appointment is Ghassan al-Rifai, the Minister of Economy an=
d Foreign Trade, who spent 30 years with the World Bank. Among his many achi=
evements, he was an active member of the team that launched MIGA - the Bank'=
s Multilateral Investment Guarantee Agency.

This " palace coup" did not go down well with old, Ba'athist, hands and wit=
h entrenched economic interests - some of them criminal - in both Syria and =
Lebanon. Resentment and dejection are mounting and may yet lead to open conf=
rontation. To placate them, the Syrian government has decided not to pursue =
the privatization of state companies and their numerous sinecures.

Xenophobia and sentiments against liberalization and deregulation are not l=
imited to Ba'athist interest groups. In "Emerging Syria 2002", published by =
the Oxford Business Group, IFC Senior Investment Officer, Bassel Hamwi is qu=
oted as saying:

"While on a business trip to Syria in 1998 in the wake of the far eastern e=
conomic collapse, a Syrian official boasted to me that the Asian Tigers had =
become vegetarian. Surprisingly, the same antagonism towards liberalization =
was echoed by many of the private sector businessmen I met as well.

Up to that point, Syrians had chosen to insulate themselves not only from t=
he risks inherent in the global economy, but also from its potential rewards=
. Two years later, however, it was a very different picture with the governm=
ent making a concerted effort to open up to the financial world by allowing =
private banks to be established for the first time in some 40 years. The int=
ernational community quickly took notice, and considered Damascus' efforts a=
s a welcome signal that further liberalization was ahead.

The local community, however, was more divided. Indeed, Syrian businessmen =
were happy at the prospects of not having to travel abroad to service their =
banking needs. But one question that seemed to be on the minds of many was: =
`Would liberalization bring about a financial crisis similar to that experie=
nced in East Asia?'"

Syria's tottering economy can be salvaged only by the introduction of a fun=
ctioning, competitive, well-capitalized, and foreign-managed banks. The EU m=
ade this abundantly clear to President al-Assad in his talks last month abou=
t an EU association agreement with Pascal Lamy, the EU's trade commissioner.=
  The same message was trumpeted by an EIB (European Investment Bank) visitin=
g delegation.

Close to 60% of Syria's exports - c. $1.5 billion - are received by the EU.=
  Syria also imported $2.9 billion from the EU last year.

The Heritage Foundation Index of Economic Freedom ranked Syrian banks as 5 =
- very high level of restrictions. It expounded thus:

"The banking system is completely controlled by the government, which owns =
all of the country's major banks, and most banks lend only to the public sec=
tor. According to the Economist Intelligence Unit, "Syria's financial servic=
es are poor, unsophisticated and a serious obstacle to economic development.=


There are five banks working alongside the Central Bank of Syria, all of th=
em state-run and state-owned…. CBS (Syrian Central Bank) discount rates to t=
he private sector have been fixed at 9% since 1981 (7% for the public sector=
) irrespective of the rate of inflation. As a result, real interest rates ha=
ve often been negative in times of high inflation."

Though state-owned, Syrian banks are woefully under-capitalized. The only r=
etail network in the country, the "Commercial Bank of Syria" had less than $=
25 million in foreign currency reserves in 2000, according to government fig=
ures. There are $9 billion on deposit in state banks.

The Central Bank of Syria supervises the Commercial Bank of Syria, Industri=
al Bank, Agricultural Cooperative Bank, Loan and Savings Bank, Real Estate B=
ank, the General Syrian Insurance Agency and the General Postal Savings Esta=
blishment. These provide the entire range of banking services - but in a cum=
bersome, costly, and maddeningly inefficient manner.

The banks are subject to intense political meddling. Interest rates are pur=
posefully negative. Public and mixed-sector enterprises crowd out private se=
ctor lending. Additionally, Syria has no capital or foreign exchange financi=
al markets to speak of. Surprisingly, non-residents often fare better than l=
ocals: they can obtain (Syrian currency) loans based on bank guarantees.

Laws and regulations are often contradictory. Law number 24 prohibits Syria=
ns from holding foreign exchange. Law number 10 permits Syrian investors to =
deal in foreign currency. This is merely one of a myriad examples.

Corruption is rife. The general director of "Commercial Bank", Nadim Mithqa=
l, was arrested a fortnight ago. According to "Tishreen", an official daily,=
  he diverted loan re-payments to an unidentified, but "marginal", foreign ba=
nk. The damage is estimated to be a sorely- needed $5 million. The Miro gove=
rnment seized on this opportunity to re-iterate its demand to limit the term=
  of bank directors to four years.

Syria's banks were treated by the late al-Assad as Ba'ath fiefdoms and venu=
es of patronage. In 1995 he appointed a lackluster but well- connected presi=
dential advisor with no previous banking experience, Mohammed Bashar Kabbara=
, as governor of Syria's oft-idle Central Bank. Syrian bankers complained bi=
tterly - though anonymously - about this appointment to the Middle East Econ=
omic Digest. The latest developments may have made them happier - though, pr=
obably, in the Syrian tradition, only incrementally so.

The Labour Divide

V. Employee Benefits and Ownership

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


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 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.

Whitney Tilson of Tilson Capital Partners notes in "The Motley Fool" that the
hidden dilution of corporate equity caused by stock options inflates the stated
profit per share. In the USA, stock options are not treated as a business
expense. Payment of the strike price by employees exercising their options
augments cash flow from financing activities. Companies also get to deduct from
their taxable income the difference between the strike price of the options and
the market price of the stocks. As a result, overall earnings figures are
exaggerated, sometimes grossly.

"The Economist" quotes studies by Bear Stearns, the Federal Reserve, and
independent economists, such as the British anti-stock- options crusader, Andrew
Smith.

These show that earnings per share may have been inflated by as much as 9
percent in 2000, that options amounted to c. 20 percent of the profits of big
American firms (and three quarters of the profits of dot.coms), and that the
distorted tax treatment of options overstated earnings growth by 2.5 percent
annually between 1995 and 2000.

The Federal Reserve concludes:

"... There is presently no theoretical or empirical consensus on how stock
options affect ... firm performance."

Towers Perrin, a leading global management consultancy, spot a trend.

"(There is) a move by employees towards placing greater emphasis on long-term
incentive plans ... (This is) creating new international currencies in
remuneration ... (There is) a rapid, worldwide growth in stock option plans ...
Regardless of the type of company, stock options are much more widely used than
performance plans, restricted stock plans, and other long-term incentive (LTI)
programs in most countries."

Stock options are now used not only to reward employees - but also as retention
tools, building up long term loyalty of employees to their workplace.
Multinationals the world over, in an effort to counter competitive pressures
exerted by their US adversaries in the global labour market, have resorted to
employee stock options plans (ESOP).

Vesting periods and grant terms as well as the events which affect the
conditions of ESOPs - in short, the exact structure and design of each plan -
are usually determined by local laws and regulations as well as by the
prevailing tax regime. As opposed to popular mythology, in almost all countries,
options are granted at market price (i.e., fair market value) and subject to
certain performance criteria ("hurdles").

Eligibility is mostly automatic and determined either by the employee's position
or by his reporting level within the organization. Management in most countries
was recently stripped of its discretionary powers to allocate options to
employees - the inevitable outcome of widespread abuses.

Ed Burmeister of Baker McKenzie delineates two interlocking trends in the
bulletin "Global Labour, Employment, and Employee Benefits":

"Two common trends are the broad-based, worldwide option grant, such as recently
implemented at such companies as PepsiCo, Bristol- Myers, Squibb, Merck, and Eli
Lilly & Company, and the extension of more traditional executive stock plans or
rank-and-file, payroll- based stock purchase plans to employees of overseas
subsidiaries. Employers are also beginning to implement stock-based incentive
plans through use of offshore trusts.

These trends have led to increased scrutiny of equity-based compensation by
overseas taxing and regulatory bodies. Certain trends, such as the relaxation of
exchange and currency controls in Europe and South America, have favored the
extension of U.S.-based equity compensation plans to overseas employees."

Granting stock options is only one of the ways to motivate an employee. Some
companies award their workers with stocks, rather than options, a practice known
as "non-restrictive stock bonus". Others dispense "phantom stocks" or "simulated
equity plans" - using units of measurement and accounting whose value
corresponds to the price fluctuations of a given number of shares. Yet others
allow their employees to purchase company shares at a discount (section 423
stock purchase plans).

David Binns, Associate Director of the Foundation for Enterprise Development
describes novel solutions to the intricate problem of customizing a global stock
options and equity plan:

"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.

"Another approach to international equity plans is to create an " International
ESOP" in a tax-free haven. Each of the company's international subsidiaries are
given an account within the trust and each participating employee has an
individual account with the appropriate subsidiary. The subsidiary corporations
then either purchase shares of the parent corporation based on profitability or
receive grants of stock from the parent and those shares are allocated to the
accounts of the participating employees. The shares are held in a trust for the
employees; at termination of service, the ESOP trustee sells the employee's
shares and makes a distribution of the proceeds to the employee. This has the
advantage of alleviating securities registration concerns in most countries as
well as avoiding certain country regulations associated with the ownership of
shares in foreign corporations"

As far back as 1997, virtually all American, Canadian, and British companies
offered one kind of LTI plan, or another. According to the Foundation for
Enterprise Development, employees own significant blocks of shares - aggregately
valued at more than $300-400 billion - in more than 15,000 American
corporations. This amounts to 5-7 percent of the market capitalization of
American firms. The process was facilitated by the confluence of divestiture,
corporate downsizing, and privatization of state and federal assets.

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.

Hong Kong went from 25 percent to 50 percent. China - from 5 percent to 45
percent. Germany tripled from 20 to 60 percent. Italy jumped from 20 to half of
all companies. Spain galloped from 5 to 50 percent. Even staid Switzerland went
from 20 percent of all firms offering LTI - to 60 percent.

Stock options are gaining in popularity in central Europe as well. More than 10
percent of the employees of S&T, a Vienna-based IT solutions provider, owned
stock options by the end of 2000. The company operates mainly in Slovenia,
Slovakia, and the Czech Republic - but is fast expanding in a host of other
countries, including Bulgaria and Russia.

"Internet Securities" - a publisher of emerging market news and information
based in Bratislava, Bucharest, Budapest, Prague, Sofia, and Warsaw- also
rewards its employees with stock options. The list is long and is getting longer
by the day.

Watson Wyatt, a human resources consultancy, conducted a detailed survey among
firms in CEE (central and east Europe) in 1999. It traced the introduction of
non-wage employee benefits to the fierce competition for scarce human capital
among multinationals at the beginning of the 1990's. Later, as qualified and
skilled personnel became more abundant, employers faced the need to retain them.

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.

LTI programs are offered mainly by IT and telecom companies - 63 percent of the
25 surveyed by Watson Wyatt had an ESOP in place. But, as opposed to the
practice in the West, few, if any, firms in CEE limit eligibility to the upper
hierarchy. Still, management enjoys more sizable benefits that non-executive
employees.

Watson Wyatt note that offering enhanced retirement benefits is fast becoming a
major attraction and retention technique. Where state provision of pensions is
insecure or dwindling - Russia, Bulgaria, Hungary, Slovenia - close to 20
percent of all workers had supplementary retirement funds provided by their
employers in 1999.

Their ranks have been since joined by other pension-reforming countries, such as
Croatia and Romania. Where pension reform has stalled - e.g., Lithuania and the
Czech Republic - less than 1 percent of all workers enjoyed employer retirement
largesse in 1999.

There is a convergence between East and West. Privatization in post-communist
CEE countries often took the form of management and employee buyouts (MEBO).
Employees ended up with small stakes in their firms, now owned by the managers.
This model proved popular in countries as diverse as Croatia, Macedonia, Poland,
Romania, Slovakia, and Slovenia.

In Poland, more than 1000 small and medium enterprises were privatized by
"liquidation" - a management cum employee lease-buyout. Leveraged ESOP's -
employees purchasing company shares over many years and on credit - played a
part in at least 150 major Hungarian privatization deals.

Russia has become the country with the largest employee-ownership in the world.
More than two thirds of the 12,000 medium and big Russian enterprises privatized
after 1992 are majority owned by employees. But MEBO also characterized
privatizations in France, the UK, Nigeria, Sri Lanka, Chile, Argentina,
Pakistan, and Egypt, among many others.

More than 4 percent of all Dutch firms - c. 2000 in all - are partly
employee-owned. More than 12,000 French companies sold $10 billion in shares to
their employees - an average of $1000 per employee. Profit sharing schemes in
firms with less than 50 employees are compulsory in France. More than a quarter
of the workforce - some 5 million people - are covered by 16,000 such schemes.
Ten thousand other, voluntary, plans cover 2.5 million workers.

Sixty percent of all MEBO's in the former East Germany relied on public
financing. The government of British Columbia in Canada is equally involved
through its "Employee Share Ownership Program". Chile provided employees with
subsidized loans to purchase shares in privatized firms in what was dubbed
"labour capitalism". Egypt encouraged the establishment of almost 150 Employee
Shareholder Associations.

Initially, MEBO resulted in gross inefficiencies as the new owners looted their
own firms and maintained an insupportably high level of employment. The newly
private firms suffered from under-investment and poor management. Shoddy,
unwanted, products and deficient marketing led to poor sales, massive layoffs,
and labour conflicts. Employees were quick to turn around and sell their
privatization vouchers or shares to their managers, to speculators, or to
foreign investors.

Yet, as foreign capital replaced corrupt or inapt indigenous managers and as
workers became more sophisticated and less amenable to manipulation - employee
ownership began to bear fruit. China has learned the lesson and has introduced a
gradual transition to employee ("social") ownership of enterprises at the
grassroots, local community, level. It also strives to emulate Japan's extensive
and successful experience since the early 1960's.

Employee ownership is evolving in ways the fathers of socialism would have
approved of. Employees throughout Asia, Africa, and Latin America - egged on by
the likes of the World Bank and regional development institutions - now form
numerous collectives and labour or producer cooperatives. Some firms are even
owned by trade unions through their proactive pension funds.

Jacquelyn Yates describes a typical cooperative in her essay "National Practices
in Employee Ownership":

"... 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.

Governance is usually based on one vote for each member, and the elected
directors of the enterprise set overall policy and hire top management. The main
benefits of membership are job security, participation in the distribution of
profits, and above average social benefits. Sometimes membership means
participation in enterprise losses or making additional contributions to the
reserve. In some countries, the assets of the cooperative can never be
distributed to its members, preventing them from realizing long-term
appreciation in the cooperative's value, but creating an incentive to continue
it over many years."

Yates reviews other practices, such as the labour banks and the workingmen's
funds. The former are financial institutions that invest in the shares of
companies that employ their depositors. Workingmen's funds are collectively
owned portfolios of the employer's stock owned by employees and they were first
tried in Sweden. Similarly, the UK and Ireland have legalized the employee stock
ownership trust.

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.

It is ironic, though, that the ostensible triumph of capitalism resulted in the
resurgence of employee-ownership of the means of production. It seems that to
preserve industrial peace as well as to motivate one's workers - sharing of
ownership and its attendant pecuniary benefits is called for, on a scale which
far exceeds anything dreamt of in socialist countries.

The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

The edited version of this article was published by Central Europe
Review:

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...



Global Differential Pricing

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia


Also Read:

The Revolt of the Poor

http://samvak.tripod.com/nm047.html


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:

"... There was broad recognition that differential pricing could play an
important role in ensuring access to existing drugs at affordable
prices, particularly in the poorest countries, while the patent system
would be allowed to continue to play its role in providing incentives
for research and development into new drugs."

The 80 experts, who attended the workshop, proposed to reconcile these
two, apparently contradictory, aspirations by introducing different
prices for drugs in low-income and rich countries. This could be
achieved bilaterally, between companies and purchasers, patent holders
and manufacturers, global suppliers and countries - or through a market
mechanism.

According to IMS Health, poor countries are projected to account for
less than one quarter of pharmaceutical sales this year. Of every $100
spent on medicines worldwide - 42 are in the USA, 25 in Europe, 11 in
Japan, 7.5 in Latin America and the Caribbean, 5 in China and South East
Asia, less than 2 in East Europe and India each, about 1 in Africa and
the Commonwealth of Independent States (CIS) each.

Vaccines, contraceptives, and condoms are already subject to
cross-border differential pricing. Lately, drug companies, were forced
to introduce multi-tiered pricing following court decisions, or
agreements with the authorities. Brazilians and South Africans, for
instance, pay a fraction of the price paid in the West for their
anti-retroviral AIDS medication.

Even so, the price of a typical treatment is not affordable. Foreign
donors, private foundations - such as the Bill and Melissa Gates
Foundation - and international organizations had to step in to cover the
shortfall.

The experts acknowledged the risk that branded drugs sold cheaply in a
poor country might end up being smuggled into and consumed in a much
richer ones. Less likely, industrialized countries may also impose price
controls, using poor country prices as benchmarks. Other participants,
including dominant NGO's, such as Oxfam and Medecins Sans Frontieres,
rooted for a reform of the TRIPS agreement - or the manufacturing of
generic alternatives to branded drugs.

The "health safeguards" built into the Trade-related Aspects of
Intellectual Property Rights (TRIPS) convention allow for compulsory
licensing - manufacturing a drug without the patent holder's
permission - and for parallel imports - importing a drug from another
country where it is sold at a lower price - in case of an health
emergency.

Aware of the existence of this Damocles sword, the European Union and
the trans-national pharmaceutical lobby have come out last May in favor
of "global tiered pricing".

In its 2001 Human Development Report (HDR), the United Nations
Development Program (UNDP) called to introduce differential rich versus
poor country pricing for "essential high-tech products" as well. The
Health GAP Coalition commented on the report:

"On the issue of differential pricing, the Report notes that, while an
effective global market would encourage different prices in different
countries for products such as pharmaceuticals, the current system does
not. With high-tech products, where the main cost to the seller is
usually research rather than production, such tiered pricing could lead
to an identical product being sold in poor countries for just
one-tenth-or one-hundredth- the price in Europe or the United States.

But drug companies and other technology producers fear that knowledge
about such discounting could lead to a demand for lower prices in rich
countries as well. They have tended to set global prices that are
unaffordable for the citizens of poor countries (as with many AIDS
drugs).

'Part of the battle to establish differential pricing must be won
through consumer education. The citizens of rich countries must
understand that it is only fair for people in developing countries to
pay less for medicines and other critical technology products.' - stated
Ms. Sukaki Fukuda-Parr" the lead author of the Report.

Public declarations issued in Havana, Cuba, in San Jose, Costa Rica in
the late 1990's touted the benefits of free online scholarship for
developing countries. The WHO and the Open Society Institute initiated
HINARI - Health InterNetwork Access to Research Initiative. Peter Suber,
the publisher of the "Free Online Scholarship" newsletter, summarizes
the initiative thus:

"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.

The six participating publishers are Blackwell Synergy, Elsevier Science
Direct, Harcourt IDEAL, Springer Link, Wiley Interscience, and Wolters
Kluwer. The subscriptions are given to universities and research
institutions, not to individuals. But they are identical in scope to the
subscriptions received by institutions paying the full price."

Of 500 bottom-tier eligible institutions, more than 200 have already
signed up. Additional publishers have joined this 3-5 years program and
most biomedical journals are already on offer. Mid-tier pricing will be
declared by January next year. HINARI will probably be expanded to cover
other scientific disciplines.

Authors from developing countries also benefit from the spread of free
online scholarship coupled with differential pricing. "Best of Science",
for example, a free, peer-reviewed, online science journal subsists on
fees paid by the authors. It charges authors from developing countries
less.

But differential pricing is unlikely to be confined to scholarly
journals. Already, voices in developing countries demand tiered pricing
for Western textbooks sold in emerging economies. Quoted in the Free
Online 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."

Touchingly, the issue of the dispossessed within rich country societies
was raised by two African Special Rapporteurs in a report submitted last
year to the UN sub-Commission on Human Rights and titled "Globalization
and its Impact on the Full Enjoyment of Human Rights". It said:

" ... The emphasis on R & D investment conveniently omits mention of the
fact that some of the financing for this research comes from public
sources; how then can it be justifiably argued that the benefits that
derive from such investment should accrue primarily to private
interests? Lastly, the focus on differential pricing between (rich and
poor) countries omits consideration of the fact that there are many
people within developed countries who are also unable to afford the same
drugs. This may be on account of an inaccessible or inhospitable health
care system (in terms of cost or an absence of adequate social welfare
mechanisms), or because of racial, gender, sexual orientation or other
forms of discrimination."

Differential pricing is often confused with dynamic pricing.

Bob Gressens of Moai Technologies and Christopher Brousseau of Accenture
define dynamic pricing, in their paper "The Value Propositions of
Dynamic Pricing in Business-to-Business E-Commerce" as: "... The buying
and selling of goods and services in markets where prices are free to
move in response to supply and demand conditions."

This is usually done through auctions or requests for quotes or tenders.
Dynamic pricing is most often used in the liquidation of surplus
inventories and for e-sourcing.

Nor is differential pricing entirely identical with non-linear pricing.
In the real world, prices are rarely fixed. Some prices vary with
usage - "pay per view" in the cable TV industry, or "pay per print" in
scholarly online reference. Other prices combine a fixed element (e.g.,
a subscription fee) with a variable element (e.g., payment per broadband
usage). Volume discounts, sales, cross-selling, three for the price of
two - are all examples of non-linear pricing. Non-linear pricing is
about charging different prices to different consumers - but within the
same market.

Hal Varian of the School of Information Management and Systems at the
University of California in Berkeley summarizes the treatment of "Price
Discrimination" in A. C. Pigou's seminal 1920 tome, "The Economics of
Welfare":

"First-degree price discrimination means that the producer sells
different units of output for different prices and these prices may
differ from person to person. This is sometimes known as the case of
perfect price discrimination.

Second-degree price discrimination means that the producer sells
different units of output for different prices, but every individual who
buys the same amount of the 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.

Third-degree price discrimination occurs when the producer sells output
to different people for different prices, but every unit of output sold
to a given person sells for the same price. This is the most common form
of price discrimination, and examples include senior citizens'
discounts, student discounts, and so on."

Varian evaluates the contribution of each of these practices to economic
efficiency in a 1996 article published in "First Monday":

"First-degree price discrimination yields a fully efficient outcome, in
the sense of maximizing consumer plus producer surplus.

Second-degree price discrimination generally provides an efficient
amount of the good to the largest consumers, but smaller consumers may
receive inefficiently low amounts. Nevertheless, they will be better off
than if they did not participate in the market. If differential pricing
is not allowed, groups with small willingness to pay may not be served
at all.

Third-degree price discrimination increases welfare when it encourages a
sufficiently large increase in output. If output doesn't increase, total
welfare will fall. As in the case of second-degree price discrimination,
third-degree price discrimination is a good thing for niche markets that
would not otherwise be served under a uniform pricing policy.

The key issue is whether the output of goods and services is increased
or decreased by differential pricing."

Strictly speaking, global differential pricing is none of the above. It
involves charging different prices in different markets, in accordance
with the purchasing power of the local clientele (i.e., their
willingness and ability to pay) - or in deference to their political and
legal clout.

Differential prices are not set by supply and demand and, therefore, do
not fluctuate. All the consumers within each market are charged the
same - prices vary only across markets. They are determined by the
manufacturer in each and every market separately in accordance with
local conditions.

A March 2001 WHO/WTO background paper titled "More Equitable Pricing for
Essential Drugs" discovered immense variations in the prices of
medicines among different national markets. But, surprisingly, these
price differences were unrelated to national income.

Even allowing for price differentials, the one-month cost of treatment
of Tuberculosis in Tanzania was the equivalent of 500 working hours -
compared to 1.4 working hours in Switzerland. The price of medicines in
poor countries - from Zimbabwe to India - was clearly higher than one
would have expected from income measures such as GDP per capita or
average wages. Why didn't drug prices adjust to reflect indigenous
purchasing power?

According to the Paris-based International Chamber of Commerce (ICC),
differential pricing is also - perhaps 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.

Differential pricing was made possible by the application of mass
manufacturing to the knowledge society. Many industries, both emerging
ones, like telecommunications, or information technology - and mature
ones, like airlines, or pharmaceuticals - defy conventional pricing
theory. They involve huge sunk and fixed costs - mainly in research and
development and plant.

But the marginal cost of each and every manufactured unit is identical -
and vanishingly low. Beyond a certain quantitative threshold returns
skyrocket and revenues contribute directly to the bottom line.

Consider software applications. The first units sold cover the enormous
fixed and sunk costs of authoring the software and the machine tools
used in the manufacturing process. The actual production ("variable" or
"marginal") cost of each unit is a mere few cents - the wholesale price
of the diskettes or CD-ROM's consumed. Thus, after having achieved
breakeven, sales revenues translate immediately to gross profits.

This bifurcation - the huge fixed costs versus the negligible marginal
costs - vitiates the rule: "set price at marginal cost". At which
marginal cost? To compensate for the sunk and fixed costs, the first
"marginal units" must carry a much higher price tag than the last ones.

Hal Varian studied this problem. His conclusions:

"(i) Efficient pricing in such environments will typically involve
prices that differ across consumers and type of service; (ii) producers
will want to engage in product and service differentiation in order for
this differential pricing to be feasible; and, (iii) differential
pricing will arise naturally as a result of profit seeking by firms. It
follows that differential pricing can generally be expected to
contribute to economic efficiency."

Differential pricing is also the outcome of globalization. As brands
become ubiquitous and as the information superhighway renders prices
comparable and transparent - different markets react differently to
price signals. In impoverished countries, differential pricing was
introduced illegally where manufacturers insisted on rigid, rich-world,
price lists.

Piracy of intellectual property, for instance, is a form of coercive
(and illegal) differential pricing. The existence of thriving rip-off
markets proves that, at the right prices, demand is rife (demand
elasticity). Both piracy and differential pricing may be spreading to
scholarly publishing and other form of intellectual property such as
software, films, music, and e-books.

Consumers are divided on the issue of multi-tiered pricing tailored to
fit the customer's purchasing power. Not surprisingly, rich world buyers
are apprehensive. They feel that differential pricing is a form of
hidden subsidy, or a kind of "third world tax".

On September 2000, Amazon.com conducted a unique poll - this time among
customers - regarding differential pricing (actually, non-linear
pricing) - showing different prices to different users on the same book.

Forty two percent of all respondents though it was "discrimination" and
"should stop" - but a surprising 31 percent regarded it as "a valid use
of data mining". A quarter said it is "OK, if explained to users". The
comments were telling:

"I work over 80 hours a week. As a small business owner, I may make good
money, but does that mean I should be charged more than unmotivated
individuals who are broke because they don't want to work more than 30
hours a week. I don't think so ... Should (preferred) customers
disappear in (the) off-line world? Should Gold Cards or Platinum Cards
disappear? ...

The interesting thing is that discrimination of pricing is very common
in the insurance industry - the basis for actuarial work and in
airlines - based on load factors. The key is the pricing available to
groups of customers with similar profiles ... Simple supply and demand,
competition from other suppliers should offset ... A dangerous policy to
implement ... As a consumer I don't necessarily like it, (unless I get a
lower price!). However, economically speaking, (think of a monopolist's
MR curve) the ideal is to have each person pay the maximum amount that
they are willing to pay."

The Economics of Conspiracy Theories

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


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.

The murderer, Yigal Amir, should have been immediately recognized by Rabin's
bodyguards. He has publicly attacked his query before. Israel's fierce and
fearsome internal security service, the Shabak, had moles and agents
provocateurs among the plotters. Chamish published a book about the affair. He
travels and lectures widely, presumably for a fee.

Chamish's paranoia-larded prose is not unique. The transcripts of Senator Joseph
McCarthy's inquisitions are no less outlandish. But it was the murder of John F.
Kennedy, America's youthful president, that ushered in a golden age of
conspiracy theories.

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.

New Order one world government, Zionist and Jewish cabals, Catholic, black,
yellow, or red subversion, the machinations attributed to the freemasons and the
illuminati - all flourished yet again from the 1970's onwards. Paranoid
speculations reached frenzied nadirs following the deaths of celebrities, such
as "Princess Di".

Tony Blair, Britain's ever righteous prime minister denounced the "Diana Death
Industry". He was referring to the books and films which exploited the wild
rumors surrounding the fatal car crash in Paris in 1997. The Princess, her
boyfriend Dodi al-Fayed, heir to a fortune, as well as their allegedly
inebriated driver were killed in the accident.

Among the exploiters were "The Times" of London which promptly published a
serialized book by Time magazine reports. Britain's TV networks, led by Live TV,
capitalized on comments made by al-Fayed's father to the "Mirror" alleging foul
play.

But there is more to conspiracy theories than mass psychology. It is also big
business. Voluntary associations such as the Ku Klux Klan and the John Birch
Society are past their heyday. But they still gross many millions of dollars a
year.

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.

It is named after Charles Fort who compiled unexplained mysteries from the
scientific literature of his age (he died in 1932). He published four
bestsellers in his lifetime and lived to see "Fortean societies" established in
many countries.

A 12 months subscription to "Fortean Times" costs c. $45. With a circulation of
60,000, the magazine was able to spin off "Fortean Television" - a TV show on
Britain's Channel Four. Its reputation was further enhanced when it was credited
with inspiring the TV hit series X-Files and The Sixth Sense.

"Lobster Magazine" - a bi-annual publication - is more modest at $15 a year. It
is far more "academic" looking and it sells CD ROM compilations of its articles
at between $80 (for individuals) and $160 (for institutions and organizations) a
piece. It also makes back copies of its issues available.

Its editor, Robin Ramsay, said in a lecture delivered to the "Unconvention 96",
organized by the "Fortean Times":

"Conspiracy theories certainly are sexy at the moment ... I've been contacted by
five or six TV companies in the past six months - two last week - all interested
in making programmes about conspiracy theories. I even got a call from the Big
Breakfast Show, from a researcher who had 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."

But these two publications are the tip of a gigantic and ever-growing iceberg.
"Fortean Times" reviews, month in and month out, books, PC games, movies, and
software concerned with its subject matter. There is an average of 8 items per
issue with a median price of $20 per item.

There are more than 86,600 Web sites dedicated to conspiracy theories in
Google's database of 1.6 billion pages. The "conspiracy theories" category in
the Open Directory Project, a Web directory edited by volunteers, contains
hundreds of entries.

There are 1077 titles about conspiracies listed in Amazon and another 12078 in
its individually-operated ZShops. A new (1996) edition of the century-old
anti-Semitic propaganda pamphlet faked by the Czarist secret service, "Protocols
of the Learned Elders of Zion", is available through Amazon. Its sales rank is a
respectable 64,000 - out of more than 2 million titles stocked by the online
bookseller.

In a disclaimer, Amazon states:

"The Protocols of the Learned Elders of Zion is classified under "controversial
knowledge" in our store, along with books about UFOs, demonic possession, and
all manner of conspiracy theories."

Yet, cinema and TV did more to propagate modern nightmares than all the books
combined. The Internet is starting to have a similar impact compounded by its
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.

According to the Internet Movie Database, the first 50 all time hits include at
least one "straight" conspiracy theory movie (in the 13th place) - "Men in
Black" with $587 million in box office receipts. JFK (in the 193rd place)
grossed another $205 million. At least ten other films among the first 50
revolve around a conspiracy theory disguised as science fiction or fantasy. "The
Matrix" - in the 28th place - took in $456 million. "The Fugitive" closes the
list with $357 million. This is not counting "serial" movies such as James Bond,
the reification of paranoia shaken and stirred.

X-files is to television what "Men in Black" is to cinema. According to
"Advertising Age", at its peak, in 1998, a 30 seconds spot on the show cost
$330,000 and each chapter raked in $5 million in ad revenues. Ad prices declined
to $225,000 per spot two years later, according to CMR Business to Business.

Still, in its January 1998 issue, "Fortune" claimed that "X-Files" (by then a
five year old phenomenon) garnered Fox TV well over half a billion dollars in
revenues. This was before the eponymous feature film was released. Even at the
end of 2000, the show was regularly being watched by 12.4 million households -
compared to 22.7 million viewers in 1998. But X-files was only the latest, and
the most successful, of a line of similar TV shows, notably "The Prisoner" in
the 1960's.

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.

Collective paranoia has been boosted by the Internet. Consider the computer game
"Majestic" by Electronic Arts. It is an interactive and immersive game, suffused
with the penumbral and the surreal. It is a Web reincarnation of the borderlands
and the twilight zone - centered around a nefarious and lethal government
conspiracy. It invades the players' reality - the game leaves them mysterious
messages and "tips" by phone, fax, instant messaging, and e-mail. A typical
round lasts 6 months and costs $10 a month.

Neil Young, the game's 31-years old, British-born, producer told Salon.com
recently:

"... The concept of blurring the lines between fact and fiction, specifically
around conspiracies. I found myself on a Web site for the conspiracy theory
radio show by Art Bell ... the Internet is such a fabulous medium to blur those
lines between fact and fiction and conspiracy, because you begin to make
connections between things. It's a natural human reaction - we connect these
dots around our fears. Especially on the Internet, which is so
conspiracy-friendly. That was what was so interesting about the game; you
couldn't tell whether the sites you were visiting were Majestic-created or
normal Web sites..."

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 ...

Conspiracy theories have pervaded every facet of our modern life. A.H. Barbee
describes in "Making Money the Telefunding Way" (published on the Web site of
the Institute for First Amendment Studies) how conspiracy theorists make use of
non-profit "para- churches".

They deploy television, radio, and direct mail to raise billions of dollars from
their followers through "telefunding". Under section 170 of the IRS code, they
are tax-exempt and not obliged even to report their income. The Federal Trade
commission estimates that 10% of the $143 billion donated to charity each year
may be solicited fraudulently.

Lawyers represent victims of the Gulf Syndrome for hefty sums. Agencies in the
USA debug bodies - they "remove" brain "implants" clandestinely placed by the
CIA during the Cold War. They charge thousands of dollars a pop. Cranks and
whackos - many of them religious fundamentalists - use inexpensive desktop
publishing technology to issue scaremongering newsletters (remember Mel Gibson
in the movie "Conspiracy Theory"?).

Tabloids and talk shows - the only source of information for nine tenths of the
American population - propagate these "news". Museums - the UFO museum in New
Mexico or the Kennedy Assassination museum in Dallas, for instance - immortalize
them. Memorabilia are sold through auction sites and auction houses for
thousands of dollars an item.

Numerous products were adversely affected by conspiratorial smear campaigns. In
his book "How the Paranoid Style Flourishes and Where it Comes From", Daniel
Pipes describes how the sales of Tropical Fantasy plummeted by 70% following
widely circulated rumors about the sterilizing substances it allegedly contained
- put there by the KKK. Other brands suffered a similar fate: Kool and Uptown
cigarettes, Troop Sport clothing, Church's Fried Chicken, and Snapple soft
drinks.

It all looks like one giant conspiracy to me. Now, here's one theory worth
pondering...

The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

The edited version of this article was published by Central Europe
Review:

http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...



Empire and Fund - The IMF

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia


Also Read:

The IMF - Kill or Cure?

http://samvak.tripod.com/nm044.html

The IMF Deconstructed - A Dialog

http://samvak.tripod.com/pp10.html

Russian Roulette

http://samvak.tripod.com/pp2.html



A typical week at the IMF. Franek Rozwadowki, the new Chief of Mission
for Macedonia implored the government to "implement prudent fiscal and
monetary policies, particularly on wages (which impact) the budget,
employment, and growth." The government - facing elections in
September - and the IMF failed to conclude a standby agreement for
2002-2003.

In another fragile corner of the globe, the Senate of Argentina, at the
behest of the IMF, scrapped the 1974 Law of Economic Subversion often
applied to foreign investors by the military junta and, more recently,
by the courts. It was one of numerous conditions posed by the IMF in its
negotiations with the embattled government.

The Malawian authorities accused the IMF of "encouraging" the country to
sell its strategic maize reserves at a 50 percent loss on the eve of
crippling and famine-inducing crop shortages. The proceeds were to be
used to pay off foreign commercial debts - claimed the Minister of
Agriculture. The IMF denied any involvement and pointed the finger at
both a food expert of the European Union - and the Malawi government.

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.

The IMF was founded in 1944 by the nearly victorious allies. It reflects
the lessons derived from the global depression that preceded and
precipitated the conflagration. Its limited and crystal clear charter
reads:

"The IMF was created to promote international monetary co-operation ; to
facilitate the expansion and balanced growth of international trade; to
promote exchange stability; to assist in the establishment of a
multilateral system of payments; to make its general resources
temporarily available to its members experiencing balance of payments
difficulties under adequate safeguards; and to shorten the duration and
lessen the degree of disequilibrium in the international balances of
payments of members."

Like other Cold War structures - the IMF is an organization in search of
a mission. It is more powerful, more controversial, more intrusive, more
paternal, more coercive, more ubiquitous and more integrated with the US
administration and other multilateral agencies and institutions than it
has ever been. It has "invaded" the turf of other agencies and NGO's and
appropriated some private sector functions as well.

In the process, it has exceeded its charter and its mandate by far and
has transformed itself into a combination gigantic research institute,
consultancy house, technical 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.

Others question the wisdom of such functional imperialism and its impact
on the IMF and on its "clients" and shareholders - the nation- states.
Doubts are voiced: is the IMF, this Byzantine bureaucracy, truly
necessary? Can't the private sector take over many of its roles? The
IMF's lack of transparency and accountability do not help.

It had to pass a special "transparency decision" in January 2001,
calling for more thorough disclosure of its deliberations with member
countries. Responding to the indignant outcry of NGO's and the private
sector - the IMF has recently formed an Internal Evaluation Unit. Yet,
its inner processes, its finances, the inflated wages, perks and
perquisites of its much feted and bloated bureaucracy - all remain
alarmingly opaque.

As an example of the IMF's unexpected mutation, consider, for instance,
its growing role in the regulation and surveillance of capital and
financial markets throughout the world.

Last week, at the First Annual Forum of APEC's Finance and Development
Program held in Beijing, the IMF's affable Deputy Managing Director,
Shigemitsu Sugisaki, summed up the current philosophy of the lending
agency:

"Our main priorities at the IMF have been on strengthening surveillance
and crisis prevention. We cannot expect to eliminate all future crises,
nor can we 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."

A new International Capital Markets Department keeps track of private
capital flows, collaborates with other departments on assessment of
vulnerabilities, on the monitoring of markets, forecasting, and the
development of early warning systems. Sugisaki is unabashed about the
IMF's role in providing investors with "a stronger basis to make
judgments about the allocation of private capital" - hitherto the
reserve of private sector rating agencies and global investment banks.

The IMF regularly issues Reports on the Observance of Standards and
Codes (ROSC's) which cover "institutional issues, in particular on data
dissemination, fiscal transparency, monetary and financial policy
transparency, and financial sector issues." The IMF is collaborating
with the OECD's FATF (Financial Action Task Force) on an anti-money
laundering module.

This is only one of the Fund's institutional reform initiatives -
hitherto tackled by the World Bank, NGO's, multilateral organizations
(such as the UN), and bilaterally, between governments.

The Fund - jointly with the World Bank and other multilateral
institutions - provides its members with a "Financial Sector Assessment
Program" (FSAP) - a review of financial institutions, legislation,
regulation, and supervision coupled with prescriptive measures to
counter detected vulnerabilities. This review process covers also off
shore money centers.

But the IMF is now competing head on not only with rating agencies and
investment bankers - but also with regional development lenders and with
its Bretton-Woods twin, the World Bank. IMF officials, rendered cynical
by decades of friction with crime gangs thinly disguised as
governments - consistently disparaged and mocked the feely-touchy, less
than rigorous approach to lending of their World Bank counterparts.

To the citizens of many impoverished countries, who bear the brunt of
its dogmatic austerity measures, the IMF is a repository of privileged
and confidential information about their countries. It is unelected,
unsupervised, misunderstood - yet, seemingly omnipotent and forever
encroaching on often hard-earned sovereignty, like some sinister
Medieval order.

In a dialog with Tom Rodwell, an Australian journalist, I wrote:

"The IMF has yet to adopt the "client-orientated" approach. It harbors
deep (and oft-justified) distrust of the willingness of governments to
blindly follow its dictates. It is a paranoid organization, based on
authoritarian techniques of "negotiations" and "agreement". Euphemisms
rule. Normally, the IMF holds "consultations" with the host governments.
These are rather one-sided affairs. The governments are needy and
impoverished ones. They lack the cadre of educated people needed in
order to truly engage the IMF in constructive discourse. They are
intimidated by the bullying tactics of the IMF and of its emissaries.
The tone is imperial and impatient."

I was, therefore, startled to learn that the IMF's hallowed Executive
Board has approved, on May 10, the Africa Capacity Building Initiative
"in response to the urgent call by African leaders ... to strengthen
economic governance and domestic capacity ... to carry out sound
economic poverty-reducing policies."

Though presented as part of the IMF's ongoing technical assistance
program - it is clearly and closely linked to political initiatives in
Africa by the American administration - and to the New Partnership for
Africa's Development, South Africa's pet project.

The World Bank and assorted donors - as well as the atrociously run
African Development Bank - are supposed to act as equal partners. Still,
the Initiative is clearly "owned" by the IMF. Its resident experts are
slated to do the bulk of the arduous work. The IMF has, thus, firmly
established itself in the hitherto excluded bureaucratic turf of
development financing.

The argument against the IMF often revolves around two axes:

That it is a neo-colonialist institution, out to perpetuate the hegemony
of rich countries over poorer ones - and that it is an impregnable
fortress of outdated, inappropriate, even detrimental economic policies,
collectively known as "The Washington Consensus".

The IMF is undoubtedly under undue political influence by the USA -
which underwrites a quarter of its budget 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.

It is also true that the IMF is greatly concerned with its members'
ability to service their external debt and, therefore, with the debt's
size, sustainability, and sensitivity to fiscal and monetary policies.
In this sense, the IMF is, indeed, the guardian of foreign creditors and
their representative and enforcer. It so happens that most creditors are
rich countries or banks and investors from the West.

But it would be nothing short of paranoid to postulate some kind of
conspiracy, or colonial-mercantilist designs, or to claim, as the
Canadian Prof. Michel Chussodowski does, that the IMF is a willing and
cognizant instrument in the destruction of certain nations (e.g.,
Yugoslavia), or, generally, accuse it of other geopolitical
machinations.

Few of the IMF's vocal anti-globalization opponents know that it deals
as regularly and as strictly with its richer members - even those which
do not require its assistance, advice, or intervention. On May 8 it
concluded the mandatory Article IV consultation with Denmark.

The IMF explains Article IV thus:

"Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff team
visits the country, 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."

The IMF sounded these cautionary notes about Denmark's generally
much-praised economic policies:

"It will be important to avoid public spending overruns while allowing
for the operation of automatic stabilizers ... Some wage moderation is
needed to stem losses in market shares in continental Europe ...
Improving public expenditure discipline, particularly at the lower
levels of the government, should be a priority ... (We) encourage the
authorities to pursue intentions to strengthen public management and
outsource services where appropriate ... recommend that the long-term
viability of the present welfare system should be kept under close
review by the Danish authorities." And so on.

While the conspiracy theories can be safely and off-handedly discarded -
it is a lot more difficult to defend the IMF's policies. These consist
of a universally-applied prescription of fiscal and monetary discipline,
balanced 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.

The IMF still sticks to the doctrine of a "nominal anchor": if not the
exchange rate - than inflation targeting. The IMF concedes that the
consensus is shifting towards more flexible exchange rate regimes in
countries exposed to the global capital markets - but this is not
supported by its policy advice.

The IMF's Deputy Managing Director, Shigemitsu Sugisaki hastened to
stamp out this heresy in his address to the First Annual Forum of APEC's
Finance and Development Program held in Beijing on May 26:

"Of course, this is not to say that, for certain economies, a pegged
exchange rate regime, buttressed by the requisite supporting policies
and institutions, cannot be a viable alternative. For such economies, in
general, the harder and more rigid the peg, the better ... (Floating
exchange rate regimes) do not imply a policy of benign neglect toward
the exchange rate.

For emerging market countries, with their high degree of involvement
with global trade and finance, movements in exchange rates have
important economic consequences, and economic policies, including
monetary policy and exchange market intervention, need to take account
of these movements." This is the oxymoron of "managed float".

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.

Alas, many of these policies are ill-suited to the needs of failed or
mismanaged states and the kleptocracies that rule them - the IMF's main
clientele. While in "normal" countries macroeconomic stability is the
prerequisite to long-term economic growth - this is not necessarily the
case in the developing, emerging, and transition economies of
sub-Saharan Africa, the Middle East, South Asia, East Europe, Central
Asia, Latin America, or the Balkan.

Actually, too much stability may, in these benighted corners of the
Earth, spell stagnation. Stability cannot translate to growth in the
absence of functioning institutions, the rule of law, and properly
rights. A dysfunctional banking system and rusted or clogged monetary
transmission mechanisms render any monetary policy impotent.

A venal bureaucracy and graft-prone political class are likely to
squander and misappropriate loans and grants - no matter how well
intentioned and closely supervised. Finally, in the absence of a formal,
entrepreneurial, and thriving private sector - only the state can
provide a counter-cyclical impetus and the sole engine of growth is
development-related and consumption-enhancing public spending. Public
expenditures are the only functioning automatic stabilizer.

In this context, the classic argument of "public borrowing crowding out
the private sector" is misplaced. Most of the private sector in these
countries is informal. It does not compete in the credit markets with
public borrowing - simply because there are no credit or capital markets
to speak of. Interest rates are onerously high due to outlandish default
rates - so, businesses borrow from each other, barter, and work in cash.
Banks refuse to lend to businesses or households and thrive on
arbitrage. Investment horizons are limited.

The IMF is obsessed with "exchange rate (and other nominal) anchors". It
erroneously believes that - where all else is ominously fluid - only a
predictable exchange rate (or inflation target) can guarantee stability.
But this forces the government to adhere to constant policies of
Procrustean fiscal contraction and thus exacerbate the anyhow depressed
state of the economy. The alternative - fiscal expansion - would lead to
pressure on the exchange rate peg and result in devaluation.

Yet, a pegged exchange rate in inflation-prone economies is tantamount
to appreciation of the domestic currency - another form of instability.
An overvalued currency coupled with deficient structural reforms and low
productivity - adversely affect the country's terms of trade (i.e., its
competitiveness in export markets).

This declining competitiveness, in turn, leads to trade deficits and a
deteriorating balance of payment. Hence another IMF-inspired source of
instability. Thus, a 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.

The current account of a country that runs a gigantic balance of
payments deficit but is not permitted by the IMF to devalue its
currency - is only likely to deteriorate. Often, to protect the
currency, the whole system is drained of liquidity (demonetized),
interest rates are kept debilitatingly high, and the balance of payments
deficit skyrockets, until the inevitable collapse.

Moreover, exchange (rate) stability inhibits the expansion and balanced
growth of international trade - an explicit role of the IMF. Trade is
based on dynamic exchange rate disparities which reflect the relative
advantages of the countries involved. In a world of artificially fixed
exchange rates - trade stagnates and price signals are distorted.

The IMF was never mandated to rate the creditworthiness of its members
and shareholders. In providing clean or soiled bills of financial health
it is manifestly acting ultra vires. Its ability to strangle a country
financially if it does not comply with its programs - no matter what the
social or economic costs are - is very worrying.

The IMF refuses to acknowledge that, far from being an exact science,
economics is a branch of mass psychology and a form of social
engineering. Not unlike previous central planning agencies, it neglects
the social, political, and environmental costs of its policies. Yet,
these sometimes outweigh the purely economic outcomes.

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:

Persistent unemployment breeds crime. Poverty results in civil strife.
Taxes drive a growing part of the economy underground. Low wages in the
public sector lead to venality and graft. Growing income inequalities
foster discontent and brain drain. Different cultures possess different
priorities, preferences, and values.

The IMF is indispensable. It imposes monetary and fiscal discipline on
unruly governments, forces them to plan ahead, and introduces painful
adjustments and reforms as well as better governance. It serves as a
convenient scapegoat: politicians blame it for their own shortcomings
and misguided policies and claim that negotiations with the IMF and
follow-up consume the bulk of their management time to little effect.

Finally, there is the Damocles sword of moral hazard. IMF lending of
last resort is a safety net made available to countries "too big or too
important to fail". It encourages politicians, creditors, and investors
to assume risks they would not have otherwise, convinced of an ultimate
bailout in case of failure. This certainty has been dented when the IMF
refused to salvage Russia in 1998 and Argentina this year - but it is
still largely intact.

But there is a second type of moral hazard. When IMF-mandated policies
succeed, local politicians hasten to take credit. When they fail - the
IMF is universally derided. Thus, stakeholders - decision makers,
reckless lenders, loss-prone investors, friendly governments, the
citizenry - conveniently shift to Washington the blame for their own
misdeeds and misbehavior.

This kind of buck passing is known in psychology as "alloplastic
defenses" and is considered an integral part of some pathologies. Here,
too, increased transparency and accessibility can help. The IMF needs to
assertively point the finger and allocate blame when wrongly accused.

The IMF is lucky to be attacked either by anti-market fundamentalists,
or by anti-IMF fanatics. Passionate emotions frequently produce
ill-thought and unfounded arguments. Consider this exchange:

In a press briefing on May 16, Thomas Dawson, the Fund's Director of
External Relations Department was asked by one of the journalists:

"I'd like to get your reaction to a prominent Nobel prize- winning
economist (Joseph Stiglitz), who laid out an opinion last weekend,
saying that the IMF's insistence on fiscal tightening in Argentina made
things worse, and that the high rates of interest in Argentina were
largely a function of external factors, such as the Asian financial
crisis, and that the IMF's approach and the approach of others have
amounted to blaming the victim."

He responded, thrashing the poor arguments of the distinguished - but
biased - critic:

"With regard to the fiscal tightening point ... in the course of the
year 2001 when the authorities, without consulting with us, instituted
the zero-deficit law ... We 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 ...

He also indicates that corruption is not much of a problem. The
authorities ... indicate that corruption issues are very important. He
also, I think, fails to understand or recognize the sovereignty of the
Argentine people. The Currency Board was adopted by the Argentine
Government in the early 1990s, enjoyed for a number of years a great
deal of popular support, and it seems as if Professor Stiglitz is trying
to say that what we should have done is gone to the Argentines and
dictate to them to change their currency regime. That's what we are
usually accused of by Professor Stiglitz, but he seems to be taking that
sort of approach himself. So, I have to say I am rather under whelmed
with his arguments."

Steeling a March on Europe

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


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.

The battle is far from over. US producers of oil country tubular goods have just
applied for relief under the infamous section 201. They blame Ukraine and
Romania - as well as 11 other countries - of dumping. They demand to apply
duties at the border on this steel product, so as to restore fairness and
"equilibrium" to the market.

Last month Bush imposed tariffs of up to 30 percent in the first year of the new
regime on $8 billion of steel imports, mainly from Europe, South Korea, and
Japan. This is about one tenth of the global market. The tariffs are scheduled
to decline to 24 percent in the second year and 18 percent in the third. Both
Europe and Japan are challenging these measures in the WTO.

Bush was fiercely chastised for his decision by free-traders and economic
liberals the world over. Many believe that this is merely the opening shot in an
all-encompassing trade war. They fear a 1930's-style world depression.

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.

One of the chief complainants to the American administration is US Steel, the
largest American producer, now that LTV, National Steel, and Bethlehem Steel
went bust.

The absurd is that US Steel is a major European steel producer as well. Two
years ago it has purchased the continent's second largest steel mill, VSZ, in
Kosice, Slovakia. It paid over $60 million in cash, assumed more than $320
million in obligations and agreed to invest c. $700 million in plant over a ten
year period.

This was no small acquisition. VSZ has a capacity of 4 million tons (and a
production run of 3.4 million tons) - to US Steel's 13 million tons. Next year,
the Slovak factory will be upgraded with new tin-plate steel facilities and an
automotive-grade galvanized steel line. This will boost its annual production by
15 percent.

Last year, US Steel lost $62 per every domestically produced ton. US Steel
Kosice (USSK) made a profit of $55 per ton. USSK plans to purchase still mills
in the Czech Republic as well. No wonder other American companies - such as
Harsco - were drawn to invest in eastern Slovakia.

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.

The unilateral slapping of tariffs by their biggest market - the EU - threw
central European producers into disarray. Hungarian Radio announced that Hungary
will impose import restrictions later this month "to protect the domestic steel
industry and market". The EU was likely to institute import barriers against
cheap Hungarian steel as well.

According to the April issue of "Rzeczpospolita", the Deputy Minister of
Economy, Janusz Kaczurba, threatened to introduce import restrictions on foreign
producers, if they attempt to bring the surplus of their steel output to
Poland." His posturing was aimed mainly at Russian mills, now somewhat deprived
on both the American and the EU markets.

Poland epitomizes the dilemma facing central European countries in the wake of
the American action.

Exports from central and eastern Europe to the USA will not be adversely
affected. Actually, they may yet increase. But steel imports to the region may
explode. It is thus forced into protectionism by the hasty moves of other, much
larger, market players.

Polish exporters are damaged by any European retaliatory move. Poland is the
third largest steel exporter to the EU, after Russia and Turkey. The BBC
reported that the Polish press quoted Polish experts in Brussels as:

"(Warning) that the EU protective measures (safeguard quotas and tariffs of up
to 26 percent) may hit Polish exporters arguing that the import quotas will
require exporters to implement swift and precise administrative procedures to
win a chunk from the overall import pool which is to be distributed on a "first
come, first serve" basis. They also warned that Polish steel exporters could be
pushed out from the EU market by more aggressive rivals, such as South Korean
steel concerns, that could offer more attractive commercial terms."

Poland is going through an agonized restructuring of its inefficient steel
mills. The government actually pays these decrepit and rusty plants to phase out
their production over a few years. EU competition policy officials have lodged
vocal - and often petty - objections to the aid the Polish government plans to
provide to the consolidating steel industry. Poland will submit a revamped plan
to Brussels by April 20.

The US also spared other niche players, such as Slovenia. This tiny country's
steel industry, geared to the needs of the now-defunct Yugoslav Federation, has
dwindled from 15,000 workers to less than 4000 workers, according to the
Financial Times. What's left of "Slovenske Zelazarne" will likely be privatized
this year. Smaller steel mills have already been sold to Swedish and other
European investors.

"Vecer", a Macedonian daily, estimated that the measures and countermeasures in
the latest trade conflict will have no serious effect on Macedonian producers
such as 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.

Countries like Macedonia and Poland may even see their exports to the US
increase at the expense of larger fish. According to "Plus Biznesu", Poland, for
instance, is allowed, under WTO regulations, to export up to 850,000 tons of
steel products to the American market. It currently exports less than one eighth
of this quantity.

"Vecer" expects Macedonia to negotiate a bilateral compromise with the USA.
Macedonian exports to the EU are also sheltered under the Stabilization and
Association Agreement signed last year. Most of Macedonia's $120 million in
annual steel exports go to the EU.

Even Russian exports to the US will go largely untouched. No tariffs were
imposed on the first 5.4 million tons of slab steel. Imports from Russia
constitute one quarter of this tariff-free quota. Kasyanov, the Russian premier,
went as far as supporting the American move. Quoted by Radio Free Europe/Radio
Liberty, he said:

"One should not regard this [U.S. decision] as a step towards a trade war with
anyone ... It is the right of any country. If there was a difficult situation
with certain imports in the Russian Federation that would jeopardize a whole
industry, I would not exclude the possibility of taking similar measures, in
accordance with our laws ... Nevertheless, as I have already pointed out, the
negative effect is evident."

The steel industry in central and eastern Europe is in dire straits.
Over-capacity may have been exacerbated by massive investments enthusiastically
promoted by multilateral financial institutions such as the EBRD.

The European Bank for Reconstruction and Development invested hundreds of
millions of dollars since its inception in steel production from Kazakhstan to
Macedonia. It awarded a $25 million revolving credit line to a privatized
Ukrainian mill. The ill-timed loan was intended to help the plant increase its
exports and penetrate new markets.

Another $100 million were lent to Sidex, the recently privatized Romanian
producer. These funds are intended to help it reduce emissions. Magnitogorsk
Iron and Steel Works in Russia received $105 million. The investment in
Kazakhstan is envisaged at c. $400 million. Similar investments were made in
Hungary.

The result is a glut of production capacity in some categories - mainly long and
flat steel, rolled aluminum, and semi-fabricated copper.

Other desperate steel mills throughout the region are being nationalized.

The Czech daily, "Mlada Fronta Dnes" reports that the Vitkovice Steel Company
was sold to Osinek, a subsidiary of the National Property Fund (FNM). Osinek was
preferred to the likes of US Steel, Shiran (from Israel), and Trinec Iron Works.
The state vouched to privatize the mill - but only in a package with Nova Hut,
another tottering steel plant in Ostrava.

In Poland, the Treasury Ministry - in cahoots with a consortium of five banks -
had to bail out Huta Katowice. One third of the mill's debt was written off and
the Polish 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.

While the manufacturing side of the business is being vigorously privatized and
modernized - mining, smelting, and fabrication are still technologically
backward and state-owned. According to Adam Stobart in his presentation to the
Adam Smith Conference in Vienna in August 2000 - the main problem is developing
and capturing markets. Central and eastern Europe has become a net importer from
Western Europe of many steel products.

The old sales strategies in captive domestic and east European markets no longer
work. Competition from Western Europe and Asia is awesome. Consumers - including
branches of multinationals - have become more sophisticated and demanding. Some
manufacturers adapted - but the majority haven't.

Stobart enumerates the advantages of steel producers in central and eastern
Europe: good location, low labour costs, skilled labour and "enthusiastic
managers", growing domestic markets, customers that are keen to buy locally.
Will these be translated into a dominant market share? Not if free trade is
thwarted by blatant politicking and rampant protectionism.

Red Sun Rising - Hungary's Elections

By: Dr. Sam Vaknin

Also published by United Press International (UPI)

Also Read:

Hungary's Ever Closer Union

http://samvak.tripod.com/pp123.html

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:

"If this policy of two faces were to continue, it would worsen relations at
least on the level of government and the given (Hungarian) ethnic minority." The
Hungarian minority in Slovakia was not even consulted before the 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.

If they win the runoff on April 21 as well - and fervent coalition-making is
currently under way - the Socialists will lead this prosperous country of 10
million people into the EU. This would not be their first taste of power,
though. They ruled Hungary between 1994 and 1998.

Many Free Democrats found the experience of allying with the Socialists
traumatic and believe that it tarnished the party's reputation irreversibly.
Some are even pushing to team up with Fidesz rather than with the victorious
Socialists. But this is unlikely. The party campaigned on an anti-Fidesz ticket.

A two-party system has emerged from these elections, in which a record 71
percent of eligible voters participated - a sign of the maturation of the
Hungarian political scene. Rabid right-wingers, like the Hungarian Justice and
Life party (MIEP), were trounced. This removed an obstacle from Hungary's
accession to the EU. Their leader, Istvan Csurka, ordered his acolytes to vote
for Orban (Fidesz), hoping to recreate the reversal of fortunes in the 1998
elections. The Socialists then also won the first round, only to lose the
elections in the second.

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 advise our supporters in the provinces to take part in the second round.
Their will should not be thwarted by Budapest."

Such was the disenchantment with Orban that the stock exchange surged almost 4%
on the news. The Socialists promised less interference in the economy. And
during their previous term in office, Hungary's stock market enjoyed an
uninterrupted bull run. The forint - propped up by Hungary's preference for a
strong currency under Fidesz - dutifully weakened.

Hungary's remarkable economic performance during Orban's reign, state
interventionism notwithstanding, seems to have been utterly forgotten, though.
The somewhat incredulous Socialist prime ministerial candidate, Peter Medgyessy,
said, in his typical low-key manner:

"We are very happy with the confidence that has been expressed by investors. We
can guarantee predictability for the economy."

But voters were after justice as well as predictability. Inequality in
capitalistic Hungary grew under Orban. In post-communist societies, evenly
spread poverty is often preferred to unevenly spread riches. Gnawing envy may
have led to electoral retribution. Orban was accused of authoritarianism,
cronyism, and patronage.

Fidesz has been denigrated as merely enjoying the long-delayed fruits of painful
reforms the Socialists have instituted - for which the latter paid dearly in the
last elections in 1998. The chairman of the Free Democrats, Gabor Kuncze,
already cautioned against "stealth privatization" of various state assets,
including many farms and a retail chain. The government, he warned, should act
as a mere caretaker.

Orban's escalating rhetoric worked against him. It began to unsettle foreign
investors and EU commissioners alike. But, above all, it did not resonate with
the increasingly sophisticated and cosmopolitan society that Hungary has become.
Orban typecast himself as a rustic, traditionalist, anti-intellectual,
nationalistic, and down to earth populist folk hero. Hungary is urban,
non-conservative, intellectual, and European. It feared a possible Fidesz-MIEP
rule.

Peter Medgyessy could not have been more different. He joined the Socialist
party only lately and reluctantly. He worked as a besuited banker in Societe
Generale in Paris. He is a technocrat. The Financial Times described his
performance in a debate with the brash and arrogant Orban - "Calm and factual".

Agrarian voters may yet turn the tide. If enough Socialist voters stay home on
April 21, now that MIEP is no more - Fidesz could still pull a last minute
rabbit out of the hostile ballot box. But whoever wins, the right will never be
the same again. It has been humbled - and warned. Be part of a liberal Europe -
or cease to be altogether.

April 19, 2002

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.

Having apparently learned nothing from his biting defeat in the first round of
the elections on April 7, the youthful and unrepentant prime minister, Orban,
fanned the xenophobia that has become his hallmark. He cited the stock
exchange's vicissitudes as proof positive of the undue and pernicious influence
of "big (read: foreign) capital", likely to be running the country under the
socialists.

In some ways, these elections seem to perpetuate a pattern. No government in
central Europe has leveraged its first term to win a second one. Yet, in other
ways, these elections are a watershed. What is decided is not the fate of
politician or a party. At stake is the process of EU enlargement and the future
image of a united Europe.

In a massive rally on Saturday at Kossuth ter in front of the well-lit building
of parliament, Orban, flanked by pop stars and celebrity athletes, addressed the
crowd, claiming to believe in the forces of "unity and love". He implored his
listeners to join the train to the future. He contrasted the Bokros austerity
plan of his socialist predecessors with his own business-friendly Szechenyi
program. He called upon voters to "bring a friend with them to vote (for the
party he chairs, Fidesz)".

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.

His nationalism often comes uncomfortably close to a vision of "Great Hungary".
It is a non-territorial kind of expansionism and it encompasses all the
Hungarians wronged by the treaty of Trianon and doomed to become minorities in
neighboring countries.

By showering these expatriates with financial benefits and extra-territorial
rights, Orban has engaged in economic imperialism on a minor scale. The
socialists want to renegotiate the agreement with Romania, granting special
privileges to Romanian temporary workers in Hungary. This was the political
price Orban had to pay in order to extend these rights and more to Hungarians in
Romania.

Fidesz has an informal and uneasy alliance with MIEP, the far-right,
ultra-nationalist, and intermittently anti-Semitic, Hungarian Justice and Life
Party. Its supporters attended the Saturday rally. Its leaders called on Fidesz
to out and accept MIEP's help publicly.

Quoted in Hungarian Radio, deputy parliamentary group leader, Csaba Lentner,
said that "it could have tragic consequences if the 250,000 MIEP voters will not
even receive a good word from the centre-right for their unselfish sacrifice (in
voting for Fidesz in the second round, as their leadership recommended)."

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.

This mythical vision was contrasted with the no less mythical vision of the city
- Budapest. Cosmopolitan, traitorous, non-productive, swarming with criminals,
con-men, foreigners, and uprooted intellectuals. Orban starved Budapest by
denying it access to budget funds. He clashed with its mayor publicly and
gleefully. He berated urbanites and extolled the farmers. He was duly punished
in the ballot box by disgruntled city-dwellers.

Europe's hinterland - the vast arable lands of Poland, Germany, Hungary,
Ukraine, and Russia - is being denuded by the forces of the market. The cities
swell inexorably. Urban development has become unsustainable. Infrastructure is
crumbling. Crime is soaring. Orban represents the forces of reaction to these
disturbing trends.

Orban may be paying the price for the success of the Hungarian economy.
Capitalism is driven by inequality - and ruined by iniquity. Capitalist
societies encourage people to swap their rags for riches. Capitalism seeks to
foster constructive envy and the wish to emulate success stories. But a society
divided among haves and haves not 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.

Orban was also accused of authoritarianism, cronyism, and patronage. These have
nothing to do with capitalism and a lot to do with nanny-state communism. Old
habits die hard. State interference, the formation of a nomenclature, cronyism
in privatization deals, lack of transparency, paranoia - are all leftovers from
four decades of communist depredation.

In an ominous note, Peter Medgyessy, the socialist's technocratic prime
ministerial candidate, vowed to honor agreements signed by the current
government - if they are found to be legal. Orban, being the brash
representative of a new generation, was supposed not to have been contaminated
by a depraved past. But he proved to be even more socialist than any socialist
before him. The markets rejoiced at the reasonable prospect of his political
demise.

Where is the EU headed? Will it become a confederation of independent
nation-states, as Britain would have it? Or will a Unites States of Europe
emerge and subsume its components, the erstwhile nation-states?

This may well be decided in central Europe rather than in its west. Countries
like France and Britain are already committed to one model or another. The swing
votes - today's applicants, tomorrow's members - will, in all likelihood,
determine the outcome of this debate. Hungary realizes that the greater the
number of candidates it sponsors, the more clout it will possess in any future
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.

It was a Frenchman (Ernest Renan) who wrote:

"Nations are not eternal. They had a beginning and they will have an end. And
they will probably be replaced by a European confederation".

Israel's Economic Intifada

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



Also Read:

Israel's Hi, Tech - Bye, Tech

http://samvak.tripod.com/pp107.html

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.

Alarmed by this unprecedented erosion in their international image, Israeli
industrialists donated food, clothing, and medicines to the inhabitants of the
still-smoldering refugee camp in Jenin. The Israeli Electricity Company has
contributed 4 transformers to the East Jerusalem Electricity Company, intended
to help mend the ravaged grid in Tul-Karem. These gestures are aimed at
ameliorating the EU's wrath as it convenes today in Luxembourg -together with
Russia - to debate possible trade sanctions against Israel.

The European Parliament and the Belgian ministry of foreign affairs have already
recommended to the Council of Ministers to suspend the EU's Association
Agreement with the beleaguered state. It provides Israel with favorable terms
and privileged access to its largest trading partner. The country exported c. $8
billion of goods to the EU in 2000.

An effective, though unofficial, arms embargo is already in place. Israel
complained that Germany withheld 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.

Belgium denied rumors regarding a unilateral boycott of Israeli goods, including
diamonds. It will act, it muttered ominously, only in tandem with all other EU
members. Belgium exports c. $4 billion of rough diamonds annually to Israel's
diamond industry.

The EU is unlikely to revoke the agreement - but it is likely to invoke its
human rights provisions in bilateral "consultations" with the Jewish state.
Despite its warm endorsement of deeper American involvement in the region, the
EU is competing with the ubiquitous USA for clout - mainly of the economic sort
- in the Middle East. A joint EU-US-Russian statement, issued in Madrid last
week, was followed by Colin Powell's trip and a re-assertion of America's
(reluctant) dominance. In a desperate effort to remain relevant, Germany has
floated its own peace plan.

Next week's round in the Barcelona Process of co-operation between the EU and 12
countries of the Mediterranean Basin is likely to be an awkward affair. Israel
is invited - as well as all its Arab adversaries, including the tattered
Palestinian Authority. It is difficult to envision a free trade pact between all
the participants by 2010 - the end goal of the Process.

But EU sanctions may be the least of Israel's concerns. Its economy seems to be
imploding. Small business debts, worth some $5 billion (out of $15 billion
outstanding), may have gone sour. Bank Hapoalim, Israel's largest, has lately
undershot Bank of Israel's (the Central Bank) capital adequacy ratio of 9
percent - and misreported it. Small businesses constitute one fifth of the asset
portfolio and two fifths of the operating profit of Bank Leumi - Israel's second
largest bank. Last year, bad debt allowances in the banking sector almost
doubled to $1 billion.

Israel's Minister of Finance, a life-long political activist, wavers between
levying a compulsory war "loan" and drastic cuts in budget spending. The
Director General of the Ministry, Ohad Marani, is less ambiguous. Cuts in
government spending would have to amount to c. $2.1-2.5 billion to offset the
gaping hole left by the fighting.

No one bothers to explain how could expenditures be so pervasively cut in
mid-fiscal year. The Treasury talks about freezing "populist" laws which cost
the budget c. $200 million annually. But even if political hurdles to such an
unpopular move are overcome - this is less than one tenth of the cuts needed in
order to constrain the deficit to 3 percent of Israel's fast contracting GDP. In
the year to January, Israel's industrial production dived by 10 percent and its
GDP by 3.5 percent. Last year's budget deficit reached 4.6 percent of GDP. The
trade deficit will top $5 billion this year - compared to $3.7 billion last
year.

More likely, taxes - including VAT - will have to continue to be raised after
climbing steeply in 2001. In a speech to the Israeli Venture Association
Conference in Tel-Aviv, on April 14, Marani gloomily warned of a "financial
collapse" and an "economic crisis".

Dan Gillerman, the affable president of the Federation of Israel's Chambers of
Commerce, warned against raising taxes:

"Such a move would give a final blow to the economy's backbone, especially as
the same population that pays taxes also does reserve duty, and is economically
productive."

The government's chief economic advisor by law, the Governor of Bank of Israel,
David Klein, is a much-respected economist and technocrat. Yet, he is on the
verge of resigning. He bitterly complains of being isolated by Treasury
officials. He was quoted in "The Jerusalem Post" as saying:

"There is a total lack of communication between the Finance Ministry and Bank of
Israel. The Treasury has not included me in any discussions over the economic
package. I am not a partner in debate on the deficit target or discussions over
new taxes."

The Minister of Finance promises to present an economic plan to the Knesset in
two weeks time. While he procrastinated, a survey of 575 businesses, conducted
by the central bank, documented a sixth consecutive quarter of economic
slowdown.

Domestic orders were sharply reduced - though exports held stable. Surprisingly
both the hi-tech sector (including telecommunications) and traditional
industries fared better than mid-tech manufacturing. Perhaps because they were
battered senseless in the last two years and have nowhere to go but up. For the
first time since 1998, Israeli firms also expect higher inflation and
accelerated depreciation. The New Israeli Shekel has depreciated by almost 15
percent in the last few months.

This - and a sharp reduction in inventories - are the two lonely sprouts in this
economic wasteland. The devaluation has rendered many Israeli products
competitive exactly when a global recovery has commenced. A massive inventory
builddown will translate into a sharp upswing once the economy recovers.

Still, Dun and Bradstreet's index of purchasing managers plunged below the 50
percent line last month, indicating a contraction in the activities of
manufacturers. Domestic demand shrank by 3.5 percent and exports have yet to
pick up the slack. The employment component of the index stood at a dismal 45
percent.

Klein, the Governor of Bank of Israel, warned, though, that further depreciation
might result in additional interest rate hikes, following a recent dizzying
shift from easing to tightening. He has little choice. The March CPI figure may
have been a low 0.5 percent (2.4 percent in the 12 months to March) - but future
figures are likely to be higher than the 0.3-0.4 percent forecast by pundits and
government alike.

Inflation was already catapulted by depreciation cum deficit spending to an
annual 4 on a quarterly basis, up from 1.4 percent last year and an average of
2.7 percent in the last three years. Should the fighting escalate, Israel may
well end up in the familiar 7-11 percent inflation range.

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.

Small wonder that S&P revised Israel's outlook from "stable" to "negative". Only
the country's $24 billion in foreign exchange reserves prevented the downgrading
of its long-term foreign currency debts from the "A minus" rating they currently
enjoy.

The desperation of Israeli businessmen can be gauged from an interview granted
by Dov Nardimon, general manager of Israel W&S management consultancy to
Israel's leading paper "Yedioth Aharonot". Nardimon pins his hopes on a recovery
led by surging demand for old-fashioned military products, such as munitions and
gas masks. This will revive the moribund metallurgic, chemical, and electrical
industries in 2002-3, he predicted. Growing global security awareness will
enhance Israeli defense exports.

Regrettably, he may well be right. Foreign direct investment in February
amounted to c. $300 million (compared to $200 million in January). The bulk of
this amount went to defense-related hi-tech firms. The American Department of
Defense invested c. $3 million in Atox - an Israeli R&D firm which is in the
throes of developing molecules that suppress the activity of biological weapons.

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 $17,000.

The real victims of the Intifada are its instigators, the Palestinians.
According to the World Bank, the Palestinian economy lost $2.4 billion by
December 2001. Israeli economists add another $1 billion in triturated
infrastructure and lost earnings since then.

The bulk of the damage is the result of Israeli closures - a manifestly
inefficacious defensive measure against proliferating suicide bombers as well as
a punitive reflex. Between 120-150,000 Palestinians used to work inside the
"green line" separating Israel from the occupied territories - mainly as day
laborers in construction workers, in tourism and in restaurants. Yet another
50,000 found employment illegally. Officially the number - and with it
remittances - have now dropped to zero. In reality, about 50-70,000 Palestinians
still cross the line daily.

The IMF estimates that Israel withholds c. $400 million in revenues - mostly VAT
and tax receipts - owed to the Authority. As a result, Palestinian tax
collection dropped to one fifth its pre-Intifada level. The Authority owes half
a billion dollars in arrears. Household savings are utterly depleted and PA GDP
dropped 12 percent last year according to the World Bank.

The Palestinian Authority - whose Web site now re-directs to "Electronic
Intifada", a counter-spin news page - puts the unemployment rate at 25 percent.
The real figure is at least 40 percent. Half the population subsists on less
than $2 a day - the official poverty line.

The United Nations Office of the Special Coordinator in the Occupied Territories
mostly concurs with these findings.

Had it not been for $1 billion annually doled out by donors as diverse as the
EU, USA, Iraq, and Saudi-Arabia - 120,000 civil servants would have joined the
ranks of the pulverized private sector and the destitute unemployed.

Israel's trade with the PA - c. $3 billion annually - has all but vanished. It
was forced to open its gates to unwanted and unskilled African and Asian migrant
labour to compensate for the disastrous deficiency in Palestinian semi-skilled
labour. This, perhaps, would be the most lasting lesson of this sorry episode:
that the PA is economically dependent on Israel and that no complete separation
is a feasible solution. The parties are doomed to swim together or sink
together. At this stage, they both seem to prefer sinking.

The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...

The Daniel Pearl Murder Tape

http://prohosters.com/pearl/


Moral Hazard and the Survival Value of Risk

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia



Also Read:

The Business of Risk

http://samvak.tripod.com/pp118.html


The reallocation and transfer of risk are booming industries.
Governments, capital markets, banks, and insurance companies have all
entered the fray with ever-evolving financial instruments. Pundits
praise the virtues of the commodification and trading of risk. It allows
entrepreneurs to assume more of it, banks to get rid of it, and traders
to hedge against it. Modern risk exchanges liberated Western economies
from the tyranny of the uncertain - they enthuse.

But this is precisely the peril of these new developments. They mass
manufacture moral hazard. They remove the only immutable incentive to
succeed - market discipline and business failure. They undermine the
very fundaments of capitalism: prices as signals, transmission channels,
risk and reward, opportunity cost. Risk reallocation, risk transfer, and
risk trading create an artificial universe in which synthetic contracts
replace real ones and third party and moral hazards replace business
risks.

Moral hazard is the risk that the behaviour of an economic player will
change as a result of the alleviation of real or perceived potential
costs. It has often been claimed that IMF bailouts, in the wake of
financial crises - in Mexico, Brazil, Asia, and Turkey, to mention but a
few - created moral hazard.

Governments are willing to act imprudently, safe in the knowledge that
the IMF is a lender of last resort, which is often steered by
geopolitical considerations, rather than merely economic ones. Creditors
are more willing to lend and at lower rates, reassured by the IMF's
default-staving safety net. Conversely, the IMF's refusal to assist
Russia in 1998 and Argentina this year - should reduce moral hazard.

The IMF, of course, denies this. In a paper titled "IMF Financing and
Moral Hazard", published June 2001, the authors - Timothy Lane and
Steven Phillips, two senior IMF economists - state:

"... In order to make the case for abolishing or drastically overhauling
the IMF, one must show ... that the moral hazard generated by the
availability of IMF financing overshadows any potentially beneficial
effects in mitigating crises ... Despite many assertions in policy
discussions that moral hazard is a major cause of financial crises,
there has been astonishingly little effort to provide empirical support
for this belief."

Yet, no one knows how to measure moral hazard. In an efficient market,
interest rate spreads on bonds reflect all the information available to
investors, not merely the existence of moral hazard. Market reaction is
often delayed, partial, or distorted by subsequent developments.

Moreover, charges of "moral hazard" are frequently ill-informed and
haphazard. Even the venerable Wall Street Journal fell in this
fashionable trap. It labeled the Long Term Capital Management (LTCM)
1998 salvage - "$3.5 billion worth of moral hazard". Yet, no public
money was used to rescue the sinking hedge fund and investors lost most
of their capital when the new lenders took over 90 percent of LTCM's
equity.

In an inflationary turn of phrase, "moral hazard" is now taken to
encompass anti-cyclical measures, such as 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.

In a September 2001 paper titled "Moral Hazard and the US Stock Market",
the authors - Marcus Miller, Paul Weller, and Lei Zhang, all respected
academics - accuse the Fed of creating a "Greenspan Put". In a scathing
commentary, they write:

"The risk premium in the US stock market has fallen far below its
historic level ... (It may have been) reduced by one-sided intervention
policy on the part of the Federal Reserve which leads investors into the
erroneous belief that they are insured against downside risk ... This
insurance - referred to as the Greenspan Put - (involves) exaggerated
faith in the stabilizing power of Mr. Greenspan."

Moral hazard infringes upon both transparency and accountability. It is
never explicit or known in advance. It is always arbitrary, or subject
to political and geopolitical considerations. Thus, it serves to
increase uncertainty rather than decrease it. And by protecting private
investors and creditors from the outcomes of their errors and
misjudgments - it undermines the concept of liability.

The recurrent rescues of Mexico - following its systemic crises in 1976,
1982, 1988, and 1994 - are textbook examples of moral hazard. The Cato
Institute called them, in a 1995 Policy Analysis paper, "palliatives"
which create "perverse incentives" with regards to what it considers to
be misguided Mexican public policies - such as refusing to float the
peso.

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.

Not so with private debtors. In remarks made by Gary Stern, President of
the Federal Reserve Bank of Minneapolis, to the 35th Annual Conference
on Bank Structure and Competition, on May 1999, he said:

"I propose combining market signals of risk with the best aspects of cur
rent regulation to help mitigate the moral hazard problem that is most
acute with our largest banks ... The actual regulatory and legal changes
introduced over the period-although positive steps-are inadequate to
address the safety net's perversion of the risk/return trade-off."

This observation is truer now than ever. Mass-consolidation in the
banking sector, mergers with non-banking financial intermediaries (such
as insurance companies), and the introduction of credit derivatives and
other financial innovations - make the issue of moral hazard all the
more pressing.

Consider deposit insurance, provided by virtually every government in
the world. It allows the banks to pay to depositors interest rates which
do not reflect the banks' inherent riskiness. As the costs of their
liabilities decline to unrealistic levels -banks misprice their assets
as well. They end up charging borrowers the wrong interest rates or,
more common, financing risky projects.

Badly managed banks pay higher premiums to secure federal deposit
insurance. But this disincentive is woefully inadequate and
disproportionate to the enormous benefits reaped by virtue of having a
safety net. Stern dismisses this approach:

"The ability of regulators to contain moral hazard directly is limited.
Moral hazard results when economic agents do not bear the marginal costs
of their actions. Regulatory reforms can alter marginal costs but they
accomplish this task through very crude and often exploitable tactics.
There should be limited confidence that regulation and supervision will
lead to bank closures before institutions become insolvent. In
particular, reliance on lagging regulatory measures, restrictive
regulatory and legal norms, and the ability of banks to quickly alter
their risk profile have often resulted in costly failures."

Stern concludes his remarks by repeating the age-old advice: caveat
emptor. Let depositors and creditors suffer losses. This will enhance
their propensity to discipline market players. They are also likely to b
ecome more selective and invest in assets which conform to their risk
aversion.

Both outcomes are highly dubious. Private sector creditors and
depositors have little leverage over delinquent debtors or banks. When
Russia - and trigger happy Russian firms - defaulted on their
obligations in 1998, even the largest lenders, such as the EBRD, were
unable to recover their credits and investments.

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.

Asset selection within a well balanced and diversified portfolio is also
a bit of a daydream. Information - even in the most regulated and liquid
markets - is partial, distorted, manipulative, and lagging. Insiders
collude to monopolize it and obtain a "first mover" advantage.

Intricate nets of patronage exclude the vast majority of shareholders
and co-opt ostensible checks and balances - such as auditors,
legislators, and regulators. Enough to mention Enron and its
accountants, the formerly much vaunted Andersen.

Established economic theory - pioneered by Merton in 1977 - shows that,
counterintuitively, the closer a bank is to insolvency, the more
inclined it is to risky lending. Nobuhiko Hibara of Columbia University
demonstrated this effect convincingly in the Japanese banking system in
his November 2001 draft paper titled "What Happens in Banking Crises -
Credit Crunch vs. Moral Hazard".

Last but by no means least, as opposed to oft-reiterated wisdom - the
markets have no memory. Russia has egregiously defaulted on its
sovereign debt a few times in the last 100 years. Only four years ago it
thumbed its nose with relish at tearful foreign funds, banks, and
investors.

Yet, it is now besieged by investment banks and a horde of lenders
begging it to borrow at concessionary rates. The same goes for Mexico,
Argentina, China, Nigeria, Thailand, other countries, and the
accident-prone banking system in almost every corner of the globe.

In many places, international aid constitutes the bulk of foreign
currency inflows. It is severely tainted by moral hazard. In a paper
titled "Aid, Conditionality and Moral Hazard", written by Paul Mosley
and John Hudson, and presented at the Royal Economic Society's 1998
Annual Conference, the authors wrote:

"Empirical evidence on the effectiveness of both overseas aid and the
'conditionality' employed by donors to increase its leverage suggests
disappointing results over the past thirty years ... The reason for both
failures is the same: the risk or 'moral hazard' that aid will be used
to replace domestic investment or adjustment efforts, as the case may
be, rather than supplementing such efforts."

In a May 2001 paper, tellingly titled "Does the World Bank Cause Moral
Hazard and Political Business Cycles?" authored by Axel Dreher of
Mannheim University, he responds in the affirmative:

"Net flows (of World Bank lending) are higher prior to elections ... It
is shown that a country's rate of monetary expansion and its government
budget deficit (are) higher the more loans it receives ... Moreover, the
budget deficit is shown to be larger the higher the interest rate
subsidy offered by the (World) Bank."

Thus, the antidote to moral hazard is not this legendary beast in the
capitalistic menagerie, market discipline. Nor is it regulation. Nobel
Prize winner Joseph Stiglitz, Thomas Hellman, and Kevin Murdock
concluded in their 1998 paper - "Liberalization, Moral Hazard in
Banking, and Prudential Regulation":

"We find that using capital requirements in an economy with freely
determined deposit rates yields ... inefficient outcomes. With deposit
insurance, freely determined deposit rates undermine prudent bank
behavior. To induce a bank to choose to make prudent investments, the
bank must have sufficient franchise value at risk ... Capital
requirements also have a perverse effect of increasing the bank's cost
structure, harming the franchise value of the bank ... Even in an
economy where the government can credibly commit not to offer deposit
insurance, the moral hazard problem still may not disappear."

Moral hazard must be balanced, in the real world, against more ominous
and present threats, such as contagion and systemic collapse. Clearly,
some moral hazard is inevitable if the alternative is another Great
Depression. Moreover, most people prefer to incur the cost of moral
hazard. They regard it as an insurance premium.

Depositors would like to know that their deposits are safe or
reimbursable. Investors would like to mitigate some of the risk by
shifting it to the state. The unemployed would like to get their
benefits regularly. Bankers would like to lend more daringly.
Governments would like to maintain the stability of their financial
systems.

The common interest is overwhelming - and moral hazard seems to be a
small price to pay. It is surprising how little abused these safety nets
are - as Stephane Pallage and Christian Zimmerman of the Center for
Research on Economic Fluctuations and Employment in the University of
Quebec note in their paper "Moral Hazard and Optimal Unemployment
Insurance".

Martin Gaynor, Deborah Haas-Wilson, and William Vogt, cast in doubt the
very notion of "abuse" as a result of moral hazard in their NBER paper
titled "Are Invisible Hands Good Hands?":

"Moral hazard due to health insurance leads to excess consumption,
therefore it is not obvious that competition is second best optimal.
Intuitively, it seems that imperfect competition in the healthcare
market may constrain this moral hazard by increasing prices. We show
that this intuition cannot be correct if insurance markets are
competitive.

A competitive insurance market will always produce a contract that
leaves consumers at least as well off under lower prices as under higher
prices. Thus, imperfect competition in healthcare markets can not have
efficiency enhancing effects if the only distortion is due to moral
hazard."

Whether regulation and supervision - of firms, banks, countries,
accountants, and other market players - should be privatized or
subjected to other market forces - as suggested by the likes of Bert Ely
of Ely & Company in 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.

Private counterparties are a whole different ballgame. They are loth and
slow to pay. Dismayed creditors have learned this lesson in Russia in
1998. Investors in derivatives get acquainted with it in the 2001-2
Enron affair. Mr. Silverstein is being agonizingly introduced to it in
his dealings with insurance companies over the September 11 World Trade
Center terrorist attacks.

We may more narrowly define moral hazard as the outcome of asymmetric
information - and thus as the result of the rational conflicts between
stakeholders (e.g., between shareholders and managers, or between
"principals" and "agents"). This modern, narrow definition has the
advantage of focusing our moral outrage upon the culprits - rather than,
indiscriminately, upon both villains and victims.

The shareholders and employees of Enron may be entitled to some kind of
safety net - but not so its managers. Laws - and social norms - that
protect the latter at the expense of the former, should be altered post
haste. The government of a country bankrupted by irresponsible economic
policies should be ousted - its hapless citizens may deserve financial
succor. This distinction between perpetrator and prey is essential.

The insurance industry has developed a myriad ways to cope with moral
hazard. Co-insurance, investigating 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.

The Cost of Forgiveness

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


As its disintegration in 1992 has proven, Czechoslovakia may have been mere=
ly an artificial multi-ethnic chimera. But it was also an  industrial and mi=
litary 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 equippe=
d and well trained army.

The Sudeten was a region of Czechoslovakia bordering on Germany and Austria=
  and inhabited mainly by Germans. The new-fangled country incorporated more =
than 3 million Germans in what used to be Austrian Silesia. These Germans, o=
nce members of the ruling majority in the Austrian Empire - became overnight=
  a minority subjected to subtle forms of discrimination in their new country=
.

The Germans - a hostile and restless lot - demanded to have an autonomy, wh=
ich Czechoslovakia refused to grant them. It feared that the Germans will se=
cede and join Hitler's emerging "Great Reich". Such calamity would have depr=
ived Czechoslovakia of important industrial and mineral assets and of its ra=
il links to northern Europe. The Sudeten was also a formidable natural barri=
er against an imminent German invasion.

Unemployment and inflation further radicalized the Sudeten Germans. Support=
  for Hitler and his pan-Germanic policies increased with every bloodless and=
  bold German victory: the militarization of the Rhineland and the Anschluss =
(the unification with Austria). The extremist Sudeten German party, led by t=
he Nazi puppet Konrad Henlein, blossomed after 1938.

Henlein sought the dissolution of Czechoslovakia, "this French air carrier =
in Europe's midst", in Hitler's words. The Germans demanded to exercise the =
right to self-determination enshrined in numerous international treaties. Th=
e status of the German language was a major issue as was the local participa=
tion of Germans in the police forces and army. Hitler instructed Henlein: "Y=
ou must always demand so much that you cannot be satisfied".

"Spontaneous" demonstrations, protests, and riots erupted all over the Sude=
tenland. The Czechoslovaks were cast by Hitler and the West as intransigent =
racists, bigots, and bullies. The economies and armies of France and Britain=
  were pitifully unprepared for war. Western leaders were traumatized by the =
great conflagration of 1914-8. They were reflexive appeasers and pressured C=
zechoslovakia into making one unpalatable concession after another.

Britain and France bullied Czechoslovakia by annulling their mutual defense=
  pacts. Bonnet, France's Minister of Foreign Affairs advised the Czechoslova=
ks not to be "unreasonable". Otherwise, he warned, France will "consider her=
self released from her bonds". Halifax, the British Foreign Minister, enligh=
tened his Ambassador in Paris about the "importance of putting the greatest =
possible pressure on Dr. Benes (Czechoslovakia's president) without delay".

The Sudeten Germans have, in the meantime, established militias and clashed=
  with Czechs in mixed towns. An "independent" British mediator - Lord Runcim=
an - was dispatched to arm twist the Czechoslovaks. His instructions were to=
  prevent war at all costs. "We will use the big stick on Benes" - thus Cadog=
an, permanent under-secretary in the British Foreign Office.

Henlein kept raising new demands or reviving old ones. On September 4, 1938=
, an exhausted President Benes accepted all German demands. This was rejecte=
d by both Henlein and Hitler as "too late". Even a pro-German idea of refere=
ndum in the Sudetenland was rebuffed by Hitler.

Finally, the French and the British presented this ultimatum to democratic,=
  multiethnic Czechoslovakia, on September 22, 1938 - Quoted in "On the Origi=
ns of War and the Preservation of Peace" by Donald Kagan:

"One - That which has been proposed by England and France is the only hope =
of averting war and the invasion of Czechoslovakia.
Two - Should the Czechoslovak Republic reply in the negative, she will bear=
  the responsibility for war.
Three - This would destroy Franco-English solidarity, since England would n=
ot march.
Four - If under these circumstances the war starts, France will not take pa=
rt; i.e., she will not fulfill her treaty obligations."

Benes accepted this ultimatum. Hitler demurred. Now he demanded that German=
  troops occupy parts of Czechoslovakia to protect rioting Sudeten Germans fr=
om Czechoslovak retribution. In the Munich Conference of the leaders of the =
West these demands were essentially accepted and Czechoslovakia was no more.=
  Hitler conquered it, in stages, and assimilated it in the German Reich.

The infamous British Prime Minister, Neville Chamberlain made this radio ad=
dress to the British people in the heat of the crisis on September 27, 1938:=


"How horrible, fantastic, incredible it is that we should be digging trench=
es and trying on gas masks here because of a quarrel in a far- away country =
between people of whom we know nothing ... However much we sympathize with a=
  small nation confronted by a big and powerful neighbors, we cannot in all c=
ircumstances undertake to involve the whole British Empire in war simply on =
her account. If we have to fight it must be on larger issues that that."

Between 1940, while still in exile in London, and 1946, when Czechoslovakia=
  was reconstituted, president Benes issued a series of decrees, later made l=
aw by the Czechoslovak provisional national assembly. The decrees mandated t=
he expulsion of 2.5 million Germans and tens of thousands of Hungarians from=
  Czechoslovakia, expropriating their land and stripping their citizenship in=
  the process. A few German males were subjected to forced labour.

The laws were never repealed and, technically, are still in force. Statutes=
  of restitution enacted after the 1989 Velvet Revolution apply only to prope=
rty confiscated by communists after the 1948 coup. The Czechs and Slovaks ar=
e still afraid of a flood of claims by relatives of the refugees.

Hungary's prime minister, Orban, repeatedly called on Prague and Bratislava=
  to rescind the decrees. They are incompatible with EU membership, he thunde=
red. The EU seems to unofficially agree with him. Officially, Gunther Verheu=
gen, the EU Commissioner for Enlargement says the decrees were issued long b=
efore there was a European Union and, therefore, should have no effect on EU=
-Czech relations. The European Parliament disagrees. It has called upon the =
Czech Republic in 1999 to revoke the laws and it has now ordered its foreign=
  policy commission to scrutinize the legality of the decrees.

The German Chancellor, Schroeder, cancelled a trip to the Czech Republic la=
st month. Joschka Fischer, the German foreign minister, said the decrees wer=
e the biggest obstacle to bilateral relations - despite a 1997 joint declara=
tion that seemed at the time to have resolved the differences.

The decrees became an election campaign issue in these four central Europea=
n countries. An association of Sudeten Germans based in Austria is preparing=
  to sue the Czech government in a Czech court, aiming to, as they put it "re=
ctify damages resulting from the decrees' infringement on human rights".

Another, US-based group, is contemplating a similar move, according to "For=
ward Magazine". A lawsuit was filed by Sudeten Germans located in Germany ag=
ainst the German authorities for failing to act to countermand the Benes Dec=
rees.

Czechs are not unanimous about the decrees either. A former presidential ad=
visor, Jiri Pehe, told Radio Free Europe/Radio Liberty:

"I think that from the whole package of decrees, [parliament] should repeal=
  those decrees which massively violated human rights and were essentially un=
democratic, because not all the decrees issued by President Benes were like =
that. Decision making through decrees in the first months after the war was =
a legitimate component of the Czech legal order. To that end, the decrees we=
re ratified by the provisional parliament."

A group of prominent Czechs, including Bishop Vaclav Maly, is circulating a=
  "Stop Nationalism" petition, urging politicians not to exploit the controve=
rsy in the run-up to the June elections.


But the Czech Republic's former - and possibly future - outspoken prime min=
ister, Vaclav Klaus, suggests to embed the decrees in the country's accessio=
n agreement with EU in order to render them tamper-proof. Zeman, the current=
  Czech premier labeled the Sudeten Germans "Hitler's fifth column" and "trai=
tors" in an interview in an Austrian magazine.

The reparations demanded by the Sudeten Germans ever since they filed a pet=
ition with the UN in 1975, potentially amount to tens of billions of US doll=
ars. They cover confiscated bank accounts, annulled insurance policies, land=
, property, artifacts, and compensation for slave labour and wrongful deaths=
.

It is an irony of history that the struggle of the Sudeten Germans is great=
ly aided by the recent successful settlement of claims of - mostly Jewish - =
holocaust victims.

US House of Representatives Resolution 562 dated October 13, 1998 - in supp=
ort of these claims - calls upon "countries which have not already done so t=
o return wrongfully expropriated properties to their rightful owners or, whe=
n actual return is not possible, to pay prompt, just and effective compensat=
ion, in accordance with principles of justice...to remove restrictions which=
  limit restitution or compensation ...to persons who reside in or are citize=
ns of the country...".

As early as 1952, West Germany has enacted the Federal Indemnification Law =
(BEG). Other laws aimed at compensating the victims of the holocaust followe=
d in 1953, 1956, and 1965. Austria has similar legislation on its books. But=
, contrary to popular mythology, these laws were shamefully stingy and heart=
less. They have mostly lapsed now.

Survivors were given small monthly sums to amortize health care and medical=
  costs. Eligibility criteria were so strict and application procedures so co=
nvoluted that a cottage industry of restitution lawyers and advisors has spr=
ung up.

Some victims still receive monthly allowances from the German social securi=
ty fund. The slave labour of a few workers is even recognized for the purpos=
e of accumulating pension benefits. A tiny group of mothers receive symbolic=
  child rearing benefits. The State of Israel support the vast majority of th=
ese crippled and traumatized people from funds it allocates under its Invali=
ds and Nazi Prosecution Law.

Despite the fact that the holocaust occurred mainly in central and eastern =
Europe, holocaust survivors behind the iron curtain were ineligible for Germ=
an compensation. A "Hardship Fund" was set up in 1980 and paid 5,000 DM to 1=
80,000 claimants from these countries. But Jews residing in the region are s=
till not eligible to any other kind of aid - 13 years after the downfall of =
communism.

In response to repeated complaints, the German government has set up a Cent=
ral and East European Fund (CEEF). It pledged to contribute to CEEF $180 mil=
lion in 4 annual installments starting in 1999. By end 2001, the Fund has pa=
id c. $150 million to more than 17,000 survivors, with maximum monthly benef=
its of $120.

All told, the Germans allocated $220 million to victims from Poland and les=
s than $470 million to survivors from Russia and Ukraine combined. More than=
  4.5 million people perished in these three countries - exterminated in camp=
s such as Auschwitz. At least 10,000,000 people served as slave laborers bet=
ween 1933-1945, enriching a clutch of German firms and senior Nazis in the p=
rocess. About 2,000,000 of them are still alive.

It took decades of negotiations - and a re-unified Germany - to secure fund=
s for formerly ineligible survivors. The Article 2 Fund was established in 1=
993. The very few who fulfill the myriad, cumulative, conditions, receive le=
ss than $250 a month. Germany claims that since it has provided 12 west Euro=
pean governments with "global compensation" funds between 1959 and 1964, the=
ir subjects are not eligible either.

Austria set up its compensation fund in 1995, conveniently well after most =
of the victims died. The maximum indemnity Austria pays is $6000 per person.=
  In a typically cynical fashion, Austria auctioned off art looted from the J=
ews in 1996 and used the proceeds to compensate the victimized former owners=
  through its Mauerbach Fund.

The governments of formerly Nazi-occupied territories proved sometimes to b=
e more generous than the perpetrators. Denmark and the Netherlands financial=
ly support disabled victims to this very day. Norway established in 1999 a $=
58 million fund for its few remaining Jews. Even Switzerland founded, in 199=
7, Shoa - a $183 million fund for 310,000 Needy Victims of the Holocaust.

The corporate and banking sectors were next.

Following intensive public pressure by Jewish organizations - and a thinly-=
disguised anti-Semitic backlash - funds to compensate slave laborers were se=
t up by various firms (Siemens, Volkswagen). Allianz, BASF, Bayer, BMW, Daim=
lerChrysler, Deutsche Bank, Degussa- Hüls, Dresdner Bank, FrieDrive Krupp, H=
oesch-Krupp, Hoechst, Siemens and Volkswagen and 50 other wartime exploiters=
  - boosted by matching funds from the German federal authorities - grudgingl=
y and reluctantly formed a "Foundation Initiative of German Firms: Memory, R=
esponsibility and Future." The Foundation has $5 billion to distribute to sl=
ave laborers and their descendants.

In August 1998, Switzerland's two major banks, UBS and Credit Suisse, agree=
d to set up a $1.25 billion fund to settle claims by holocaust survivors and=
  their relatives. The red-faced Swiss government threw in $210 million. It s=
eems that banks - from the USA to Switzerland - were in no hurry to find the=
  heirs to the murdered Jewish owners of dormant account with billions of dol=
lars in them.

A settlement was reached only when legal action was threatened against the =
Swiss National Bank and both public opinion and lawmakers in the USA turned =
against Switzerland. It covers owners of dormant accounts, slave laborers, a=
nd 24,000 refugees turned back to certain death at the Swiss border - or the=
ir heirs.

A high level international commission, headed by Paul Volcker, a former cha=
irman of the Federal Reserve Board, identified 54,000 accounts opened by hol=
ocaust victims - not before it inspected 350,000 accounts at an outlandish c=
ost, borne by the infuriated banks, of $400 million. A similar - though much=
  smaller ($45 million) settlement was reached with Bank Austria and Creditan=
stalt of Vienna. Another $2 billion are claimed from 9 French banks.

Five major insurance firms - Allianz AG, AXA, Generali, Zurich and Winterth=
ur Leben - formed an International Commission on Holocaust Era Insurance to =
deal with unresolved insurance claims of holocaust victims. Assicurazioni Ge=
nerali went ahead and set aside $12 million in a compensation fund. But the =
claims may total $1 to 4 billion.

Surprisingly, calls for the restitution of Jewish real-estate, property, ba=
nk accounts, insurance policies, and art works confiscated by the Nazis and =
their collaborators are fairly recent. The International Committee on Restit=
ution took until 1999 to appeal to the Austrian government to restore assets=
  to their rightful Jewish owners.

Governments from Austria to France and from Belgium to the Netherlands appo=
inted commissions to investigate Jewish claims. The United Kingdom has poste=
d to the Internet a list of tens of thousands of assets confiscated - mostly=
  from refugee Jews - under the 1939 Trading with the Enemy law.

More than $60 million were set aside by 18 governments in the 1997 London c=
onference on Nazi gold. A French commission, chaired by Jean Matteoli, a res=
istance fighter, identified $1 billion in expropriated Jewish property, incl=
uding 40,000 apartments and hundreds of thousands of works of art.

According the World Jewish Congress, Germany and Poland confiscated $3 bill=
ion of Jewish property each (in 1945 values), Romania and France - $1 billio=
n each, the Czech Republic and Austria - c. $700 million each. Hungary saw $=
600 million appropriated and the Netherlands - $450 million. Russia still ho=
lds 200,000 looted works of art. Plundered pieces by Monet and van Gogh, amo=
ng others, were identified and restored to their Jewish owners all over the =
world - from Boston to Berlin.

Matters are more complicated in eastern Europe where the concept of propert=
y rights is novel and communist confiscations followed Nazi ones, hopelessly=
  complicating the legal situation. Moreover, victims and survivors of waves =
of ethnic cleansing have recently lodged claims with post-communist governme=
nts. Macedonians from the Aegean part of Greece, recently repatriated Kosova=
rs, Serbs expelled from Croatia, Croats exiled from Serbia, Hungarians every=
where - are all studying the Jewish example and its precedents thoroughly.

The Bulgarian ministry of finance has just announced that it will pay repar=
ations to some of the 350,000 Turks forcibly expelled from Bulgaria to Turke=
y during Zhivkov's communist regime in 1984-89. The Haskovo City Council dem=
anded compensation for 550 bulldozed houses.

The government - which includes in its coalition the ethnic-Turkish Movemen=
t for Rights and Freedoms (DPS) - agreed to cough up the funds. The accommod=
ation of such demands for compensation by an ethnic minority is unprecedente=
d. It could be the harbinger of massive, politically destabilizing, claims, =
expensive court battles, and multi-billion dollar settlements.

This tidal wave is not confined to Europe. Aborigines in Australia, descend=
ents of slaves in the States, Japanese-Americans incarcerated during WWII ar=
e all suing. "The Economist" wrote in its review of Elazar Barkan's "The Gui=
lt of Nations":

"Negotiations over these claims are not really about the past, but the futu=
re. However they are resolved, they give victims, usually the poor and dispo=
ssessed, a voice and a reason to believe that they have a stake in their soc=
iety. And such negotiations force the better-off to recognise their obligati=
ons to those beneath them in the pecking order. A society which can face the=
  ugly episodes in its own history, and agree a way to repudiate them, is als=
o a society capable of setting moral standards for itself, of constraining i=
ts own worst instincts, and of aspiring to a better future."

The edited version of this article was published by United Press
International (UPI):

http://www.upi.com

It is also published on these web sites:

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article INCLUDING ALL THE WEB SITES ABOVE.

To reprint - kindly write to: palma@...


Let My People Go - The Jackson-Vanik Controversy

Sam Vaknin

UPI Senior Business Correspondent

Skopje, Macedonia



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.

The often disdainful newcomers were clearly much exercised by the
minutia of the generous economic benefits showered on them by the
grateful Jewish state. Yet, they were described by the Israeli media as
zealous Zionists, returning to their motherland to re-establish in it a
long-interrupted Jewish presence. Thus, is a marvelous fiat of
spin-doctoring, economic immigrants became revenant sons.

Congress joined the chorus in 1974, with the Jackson-Vanik Amendment to
the Trade Reform Act - now Title IV of the Trade Act. It was Sponsored
by Senator Henry ("Scoop") Jackson of Washington and Rep. Charles Vanik
of Ohio, both Democrats.

It forbids the government to extend the much coveted "Most Favored
Nation (MFN)" status - now known as "Normal Trade Relations" - NTR -
with its attendant trade privileges to "non-market economy" countries
with a dismal record of human rights - chiefly the right to freely and
inexpensively emigrate.

This prohibition also encompasses financial credits from the various
organs of the American government - the Export-Import Bank, the
Commodity Credit Corporation (CCC), and the Overseas Private Investment
Corporation (OPIC).

Though applicable to many authoritarian countries - such as Vietnam, the
subject of much heated debate with every presidential waiver - the
thrust of the legislation is clearly anti-Russian. Henry Kissinger, the
American Secretary of State at the time, was so alarmed, that he flew to
Moscow and extracted from the Kremlin a promise that "the rate of
emigration from the USSR would begin to rise promptly from the 1973
level."

The demise of the USSR was hastened by this forced openness and the
increasing dissidence it fostered. Jackson-Vanik was a formidable
instrument in the cold warrior's arsenal. More than 1.5 million Jews
left Russia since 1975. At the time, Israelis regarded the Kremlin as
their mortal enemy. Thus, when the Amendment passed, official Israel was
exuberant. The late Prime Minister Yitzhak Rabin wrote this to President
Gerald Ford:

"The announcement that agreement has been obtained facilitating
immigration of Soviet Jews to Israel is causing great joy to the people
of Israel and to Jewish communities everywhere. This achievement in the
field of human rights would not have been possible but for your personal
sympathy for the cause involved, for your direct concern and deep
interest."

And, to Senator Henry Jackson, one of the two sponsors of the bill:

"Dear Scoop,

The agreement which has been achieved concerning immigration of Soviet
Jews to Israel has been published in this country -a few hours ago and
is evoking waves of joy throughout Israel and no doubt throughout Jewish
communities in every part of the globe. This great achievement could not
have been possible but for your personal leadership which rallied such
wide support in both Houses of Congress, for the endurance with which
you pursued this struggle and for the broad human idealism which
motivated your activities on behalf of this great humanitarian cause. At
this time therefore I would like to send you my heartfelt appreciation
and gratitude."

US trade policy is often subordinated to its foreign policy. It is
frequently sacrificed to the satisfaction of domestic constituencies,
pressure groups, and interest lobbies. It is used to reward foreign
allies and punish enemies overseas. The Jackson-Vanik Amendment
represents the quintessence of this relationship. President Clinton
tacitly admitted as much when he publicly decoupled trade policy from
human rights in 1994.

The disintegration of the Evil Empire - and the privatization of Russian
foreign trade - has rendered the law a relic of the Cold War. Russian
Jews - including erstwhile "refuseniks", such as Natan (Anatoly)
Sharansky - now openly demand to rescind it and to allow Russia to
"graduate" into a Permanent Normal Trade Relations (PNTR) status by act
of Congress.

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.

Congress is even more suspicious of Russian intentions. Senator Gordon
Smith, a Republican from Oregon, recently proposed an amendment that
would deprive Russia of foreign aid if it passes legislation impinging
on religious freedom. Together with Hillary Clinton, a Democrat from New
York, he introduced a damning Jackson-Vanik resolution, saying:

"Any actions by the United States Government to "graduate" or terminate
the application of the Jackson-Vanik Amendment to any individual country
must take into account ... appropriate assurances regarding the
continued commitment of that government to enforcing and upholding the
fundamental human rights envisioned in the Amendment. The United States
Government must demonstrate how, in graduating individual countries, the
continued dedication of the United States to these fundamental rights
will be assured."

The Senate still refuses to repeal the Jackson-Vanik Amendment despite
its impact on six former Soviet republics and other countries and
despite passionate pleas from the administration. On May 22 it passed a
non-binding resolution calling for PNTR with Russia. Jackson- Vanik
remained in place because of the row with Russia over imports of US
poultry.

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:

"I can either be Russia's best friend or worst enemy. They keep fooling
around like this, they're going to have me as their enemy."

Mikhail Margelov, Chairman of the Foreign Relations Committee of the
Federation Council, understandably retorted, according to Radio Free
Europe/Radio Liberty quoting from strana.ru:

"By citing the controversy over chicken legs, the Democrats have openly
acknowledged that Jackson-Vanik does not protect Russian Jews, but
American farmers."

According to ITAR-TASS, he presented to President Putin a report which
blamed Russia's "unstable" trade relations with the USA on the latter's
"discriminatory legislative norms."

The Amendment has been a dead letter since 1994, due to a
well-entrenched ritual of annual Presidential waiver which precedes the
granting of NTR status to Russia. The waiver is based on humiliating
semi-annual reviews. The sole remaining function of Jackson-Vanik seems,
therefore, to be derogatory.

This infuriates Russians of all stripes - pro-Western reformers
included. "This demonstrates the double standards of the U.S." - Anatoly
B. Chubais, the Chairman of UES, Russia's electricity monopoly, told
BusinessWeek. "It undermines trust." Putin called the law "notorious".

In October last year, the Russian Foreign Ministry released this
unusually strongly-worded statement:

"The Jackson-Vanik Amendment has blocked the granting to Russia of most
favored nation status in trade with the USA on a permanent and
unconditional basis over many years, inflicting harm upon the spirit of
constructive and equal cooperation between our countries. It is rightly
considered one of the last anachronisms of the era of confrontation and
distrust."

Considering that China - with its awful record of egregious human rights
violations - was granted PNTR last year, Russia rightly feels slighted.
Its non-recognition as a "market economy" under the Jackson-Vanik
Amendment led to the imposition of import restrictions on some of its
products (e.g. steel). The Amendment also prevents Russia from joining
the WTO.

Worst of all, the absence of PNTR also inhibits foreign investment and
the conclusion of long term contracts. Boeing expressed to the
Associated Press its relief at the decision to normalize trade relations
with China thus:

``Stability is key in our business. We must look 18 to 24 months ahead
in terms of building parts, planes and servicing them. It has been
difficult for China to make such agreements when they don't know if they
would have an export license the following year or whether the United
States would allow the planes to be delivered.''

Slush Funds

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


Also Read:

The Varieties of Corruption

http://samvak.tripod.com/nm089.html

Corruption and Transparency

http://samvak.tripod.com/corruption.html

Hawala, or the Bank that Never Was

http://samvak.tripod.com/pp104.html

Money Laundering in a Changed World

http://samvak.tripod.com/pp96.html


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.

The idea was to infiltrate global crime networks but a lot of the money in
"Operation Swordfish" may have ended up in the wrong pockets. Government agents
and sheriffs got mysteriously and filthily rich and the whole sorry affair was
wound down. The GAO reported more than $3.6 billion missing. This bit of history
gave rise to at least one blockbuster with Oscar-winner Halle Berry.

Alas, slush funds are much less glamorous in reality. They usually involve
grubby politicians, pawky bankers, and philistine businessmen - rather than
glamorous hackers and James Bondean secret agents.

The Kazakh prime minister, Imanghaliy Tasmaghambetov, freely admitted on April 4
to his country's rubber-stamp parliament the existence of a $1 billion slush
fund. The money was apparently skimmed off the proceeds of the opaque sale of
the Tengiz oilfield. Remitting it to Kazakhstan - he expostulated with a poker
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".

The money was used to pay off pension arrears in 1997 and to offset the
pernicious effects of the 1998 devaluation of the Russian ruble. What was left
was duly transferred to the $1.5 billion National Fund, the PM insisted. Alas,
the original money in the Fund came entirely from another sale of oil assets to
Chevron, thus casting in doubt the official version.

The National Fund was, indeed, augmented by a transfer or two from the slush
fund - but at least one of these transfers occurred only 11 days after the
damning revelations. Moreover, despite incontrovertible evidence to the
contrary, the unfazed premier denied that his president possesses multi-million
dollar bank accounts abroad.

He later rescinded this last bit of disinformation. The president, he said, has
no bank accounts abroad but will promptly return all the money in these
non-existent accounts to Kazakhstan. These vehemently denied accounts, he
speculated, were set up by the president's adversaries "for the purpose of
compromising his name".

On April 15, even the docile opposition had enough of this fuzzy logic. They
established a People Oil's Fund to monitor, henceforth, the regime's financial
shenanigans. By their calculations less than 7 percent of the income from the
sale of hydrocarbon fuels (c. $4-5 billion annually) make it to the national
budget.

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.

The Catholic Bishops Conference of Papua New Guinea and the Solomon Islands
issued a press release November last in which it welcomed the government's plans
to abolish slush funds. They described the poisonous effect of this practice:

"With a few notable exceptions, the practice of directing funds through
politicians to district projects has been disastrous. It has created an
atmosphere in which corruption is thought to have flourished. It has reduced the
responsibility of public servants, without reducing their numbers or costs. It
has been used to confuse people into believing public funds are the "property"
of individual members rather than the property of the people, honestly and
fairly administered by the servants of the people.

The concept of 'slush-funds' has resulted in well-documented inefficiencies and
failures. There were even accusations made that funds were withheld from certain
members as a way of forcing them into submission. It seems that the era of the
'slush funds' has been a shameful period."

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.

Rob Gordon, the Director of the National Wilderness Institute accused "The US
Interior Department (of) looting the special funds that were established to pay
for wildlife conservation and squandering the money instead on questionable
administrative expenses, slush funds and employee moving expenses".

Charles Griffin, the Deputy Director of the Heritage Foundation's Government
Integrity Project, charges:

"The federal budget provides numerous slush funds that can be used to subsidize
the lobbying and political activities of special-interest groups."

On his list of "Top Ten Federal Programs That Actively Subsidize Politics and
Lobbying" are: AmeriCorps, Senior Community Service Employment Program, Legal
Services Corporation, Title X Family Planning, National Endowment for the
Humanities, Market Promotion Program, Senior Environmental Employment Program,
Superfund Worker Training, HHS Discretionary Aging Projects, Telecomm. & Info.
Infrastructure Assistance. These federal funds alone total $1.8 billion.

"Next" and "China Times" - later joined by "The Washington Post" - accused the
former Taiwanese president, Lee Teng-hui, of forming a $100 million 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.

High ranking Japanese officials, among others, may have received payments
through this stealthy venue. Lee is alleged to have drawn $100,000 from the
secret account in February 1999. The money was used to pay for the studies of a
former Japanese Vice-Defense Minister Masahiro Akiyama's at Harvard.

Ryutaro Hashimoto, the former Japanese prime minister, was implicated as a
beneficiary of the fund. So were the prestigious lobbying firm, Cassidy and
Associates and assorted assistant secretaries in the Bush administration.

Carl Ford, Jr., currently assistant secretary of state for intelligence and
research, worked for Cassidy during the relevant period and often visited
Taiwan. James Kelly, assistant secretary of state for East Asian and Pacific
Affairs enjoyed the Taiwanese largesse as well. Both are in charge of crafting
America's policy on Taiwan.

John Bolton, undersecretary of state for arms control and international
security, admitted, during his confirmation hearings, to having received $30,000
to cover the costs of writing 3 research papers.

The Taiwanese government has yet to deny the news stories.

A Japanese foreign ministry official used slush fund money to finance the
extra-marital activities of himself 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 ago but
kept mum.

Even low-level prefectural bureaucrats and teachers in Japan build up slush
funds by faking business trips or padding invoices and receipts. Japanese
citizens' groups conservatively estimated that $20 million in travel and
entertainment expenses in the prefectures in 1994 were faked, a practice known
as "kara shutcho" (i.e., empty business trip).

Officials of the Hokkaido Board of Education admitted to the existence of a 100
million yen secret fund. In a resulting probe, 200 out of 286 schools were found
to maintain their own slush funds. Some of the money was used to support
friendly politicians.

But slush funds are not a sovereign prerogative. Multinationals, banks,
corporation, religious organizations, political parties, and even NGO's salt
away some of their revenues and profits in undisclosed accounts, usually in
off-shore havens.

Secret election campaign slush funds are a fixture in American politics. A
2-year old bill requires disclosure of donors to such funds but the House is
busy loosening its provisions. "The Economist" listed lately the tsunami of
scandals that engulfs Germany, both its major political parties, many of the
Lander and numerous highly placed and mid-level bureaucrats. Secret, mainly
party, funds seem to be involved in the majority of these lurid affairs.

Italian firms made donations to political parties through slush funds, though
corporate donations - providing they are transparent - are perfectly legal in
Italy. Both the right and, to a lesser extent, the left in France are said to
have managed enormous political slush funds.

President Chirac is accused of having abused for his personal pleasure, one such
municipal fund in Paris, when he was its mayor. But the funds were mostly used
to provide party activists with mock jobs. Corporations paid kickbacks to obtain
public works or local building permits. Ostensibly, they were paying for sham
"consultancy services".

The epidemic hasn't skipped even staid Ottawa. Its Chief Electoral Officer told
Sun Media last September that he is "concerned" about millions stashed away by
Liberal candidates. Sundry ministers who coveted the prime minister's job, have
raised funds covertly and probably illegally.

On April 11, UPI reported that Spain's second-largest bank, Banco Bilbao Vizcaya
Argentaria (BBVA), held nearly $200 million hidden in secret offshore accounts,
"which were allegedly used to manipulate politicians, pay off the 'revolutionary
tax' to ETA - the Basque terrorist organization - and open the door for business
deals, according to news reports."

The money may have gone to luminaries such as Venezuela's Hugo Chavez, Peru's
Alberto Fujomori and Vladimiro Montesinos. The bank's board members received
fat, tax-free, "pensions" from the illegal accounts opened in 1987 - a total of
more than $20 million.

Latin American drug money launderers - from Puerto Rico to Colombia - may have
worked through these funds and the bank's clandestine entities in the Cayman
Islands and Jersey. The current Spanish Secretary of State for the Treasury has
been the bank's tax advisor between 1992-7.

The "Financial Times" reported in June 2000 that, in anticipation of new
international measures to curb corruption, "leading European arms manufacturers"
resorted to the creation of off-shore slush funds. The money is intended to
bribe foreign officials to win tenders and contracts.

Kim Woo-chung, Daewoo's former chairman, is at the center of a massive scandal
involving dozens of his company's executive, some of whom ended up in prison. He
stands accused of diverting a whopping $20 billion to an overseas slush fund.

A mind boggling $10 billion were alleged to have been used to bribe Korean
government officials and politicians. But his conduct and even the scale of the
fraud he perpetrated may have been typical to Korea's post-war incestuous
relationship between politics and business.

In his paper "The Role of Slush Funds in the Preparation of Corruption
Mechanisms", reprinted by Transparency International, Gherardo Colombo defines
corporate slush funds thus:

"Slush funds are obtained from a joint stock company's finances, carefully
managed so that the amounts 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.

If a fund is in the form of money, it is not even necessary to refer to it
outside the company accounts, since it can appear in them in disguised form (the
"accruals and deferrals" heads are often resorted to for the purpose of hiding
slush money). In light of this, it is not always correct to regard it as a
reserve fund that is not accounted for in the books. Deception, trickery or
forgery of various kinds are often resorted to for the purpose of setting up a
slush fund."

He mentions padded invoices, sham contracts, fictitious loans, interest accruing
on holding accounts, back to back transactions with related entities (Enron) -
all used to funnel money to the slush funds. Such funds are often set up to
cover for illicit and illegal self- enrichment, embezzlement, or tax evasion.

Less known is the role of these furtive vehicles in financing unfair competitive
practices, such as dumping. Clients, suppliers, and partners receive hidden
rebates and subsidies that much increase the - unreported - real cost of
production.

BBVA's payments to ETA may have been a typical payment of protection fees. Both
terrorists and organized crime put slush funds to bad use. They get paid from
such funds - and maintain their own. Ransom payments to kidnappers often flow
through these channels.

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.

http://www.volny.cz/praguereporter

Author archive of Prague-based James Drake - one of the most prolific
writers about Central and Eastern Europe and the Balkan.

Sam

Sam Vaknin, Ph.D.
United Press International (UPI) Senior Business Correspondent
+389-70-565-488, +389-2-214-281 (also fax)
E-mail : svaknin@... OR (as backup)  vaknin@...
http://ceeandbalkan.tripod.com/
Issues in the economics and politics of economies in transition
http://samvak.tripod.com/guide.html
Conflicts and Transition
http://www.intellnet.org/topics/balkans/
Intelligence Network Balkan Topic Centre
http://www.ce-review.org/authorarchives/vaknin_archive/vaknin_main.html
Author Archive of Political Columns in "Central Europe Review"
http://after.cjb.net
(Buy "After the Rain - How the West Lost the East")

The Enrons of the East

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



Hermitage Capital Management, an international investment firm owned by HSB=
C London, is suing PwC (PricewaterhouseCoopers), the biggest among the big f=
our accounting firms (Andersen, the fifth, is being cannibalized by its comp=
etitors).

Hermitage also demands to have PwC's license suspended in Russia. All this =
fuss over allegedly shoddy audits of Gazprom, the Russian energy behemoth wi=
th over $20 billion in annual sales and the world's largest reserves of natu=
ral gas. Hermitage runs a $600 million Russia fund which is invested in the =
shares of the allegedly misaudited giant.

The accusations are serious. According to infuriated Hermitage, PwC falsifi=
ed and distorted the 2000-1 audits by misrepresenting the sale of Gazprom's =
subsidiary, Purgaz, to Itera, a conveniently obscure entity. Other loss spin=
ning transactions were also creatively tackled. Stoitransgaz - partly owned =
by former Gazprom managers and their relatives - landed more than $1 billion=
  in lucrative Gazprom contracts.

These shenanigans resulted in billions of dollars of losses and a depressed=
  share price. AFP quotes William Browder, Hermitage's disgruntled CEO, as sa=
ying: "This is Russia's Enron". PwC threatened to counter-sue Hermitage over=
  its "completely unfounded" allegations.

But Browder's charges are supported by Boris Fyodorov, a former Russian min=
ister of finance and a current Gazprom independent director. Fyodorov manage=
s his own investment boutique, United Financial Group. Browder is a former S=
olomon Brothers investment banker. Other investment banks and brokerage firm=
s - foreign and Russian - are supportive of his allegations. They won't and =
can't be fobbed.

Fyodorov speculates that PwC turned a blind eye to many of Gazprom's shadie=
r deals in order to keep the account. Gazprom shareholders will decide in Ju=
ne whether to retain it as an auditor or not. Browder is initiating a class =
action lawsuit in New York of Gazprom ADR holders against PwC.

Even Russia's president concurs. A year ago, he muttered ominously about "e=
normous amounts of misspent money (in Gazprom)". He replaced Rem Vyakhirev, =
the oligarch that ran Gazprom, with his own protégé. Russia owns 38 percent =
of the company.

Gazprom is just the latest in an inordinately long stream of companies with=
  dubious methods. Avto VAZ bled itself white - under PwC's nose - shipping c=
ars to dealers, without guarantees or advance payments. The penumbral dealer=
s then vanished without a trace. Avto VAZ wrote off more than $1 billion in =
"uncollected bills" by late 1995. PwC did make a mild comment in the 1997 au=
dit. But the first real warning appeared only three years later in the audit=
  for the year 2000.

Andrei Sharonov, deputy minister in the federal Ministry of Economics said,=
  in an interview he granted "Business Week" last February: "Auditors have be=
en working on behalf of management rather than shareholders." In a series of=
  outlandish ads, published in Russian business dailies in late February, sen=
ior partners in the PwC Moscow office made this incredible statement: "(Audi=
t) does not represent a review of each transaction, or a qualitative assessm=
ent of a company's performance."

The New York Times quotes a former employee of Ernst&Young in Moscow as say=
ing: "A big client is god. You do what they want and tell you to do. You can=
  play straight-laced and try to be upright and protect your reputation with =
minor clients, but you can't do it with the big guys. If you lose that accou=
nt, no matter how justified you are, that's the end of a career."

PwC should know. When it mentioned suspicious heavily discounted sales of o=
il to Rosneft in a 1998 audit report, its client, Purneftegaz, replaced it w=
ith Arthur Andersen. The dubious deals dutifully vanished from the audit rep=
orts, though they continue apace. Andersen claims such transactions do not r=
equire disclosure under Russian law.

How times change! Throughout the 1990's, Russia and its nascent private sec=
tor were subjected to self-righteous harangues from visiting Big Five accoun=
tants. The hectoring targeted the lack of good governance among Russia's cor=
porations and public administration alike. Hordes of pampered speakers and c=
onsultants espoused transparent accounting, minority shareholders' rights, m=
anagement accessibility and accountability and other noble goals.

That was before Enron. The tables have turned. The Big Five - from disinteg=
rating Andersen to KPMG - are being chastised and fined for negligent practi=
ces, flagrant conflicts of interests, misrepresentation, questionable ethics=
  and worse. Their worldwide clout, moral authority, and professional standin=
g have been considerably dented.

America's GAAP (Generally Accepted Accounting Practices) - once considered =
the undisputable benchmark of rectitude and disclosure - are now thought in =
need of urgent revision. The American issuer of accounting standards - FASB =
(Financial Accounting Standards Board) - is widely perceived to be an incest=
uous arrangement between the clubby members of a rapacious and unscrupulous =
profession. Many American scholars even suggest to adopt the hitherto much-d=
erided alternative - the International Accounting Standards (IAS) recently i=
mplemented through much of central and eastern Europe.

Russia's Federal Commission for the Securities Market (FCSM) convened a con=
clave of Western and domestic auditing firms. The theme was how to spot and =
neutralize bad auditors. With barely concealed and gleeful schadenfreude, th=
e Russians said that the Enron scandal undermined their confidence in Wester=
n accountants and the GAAP.

The Institute of Corporate Law and Corporate Governance (ICLG), having stud=
ied the statements of a few major Russian firms, concluded that there are in=
dications of financial problems, "not mentioned by (mostly Western) auditors=
". They may have a point. Most of the banks that collapsed ignominiously in =
1998 received glowing audits signed by Western auditors, often one of the Bi=
g Five.

The Russian Investor Protection Association (IPA) and Institute of Professi=
onal Auditors (IPAR) embarked on a survey of Russian investors, enterprises,=
  auditors, and state officials - and what they think about the quality of th=
e audit services they are getting.

Many Russian managers - as avaricious and venal as ever - now can justify h=
iring malleable and puny local auditors instead of big international or dome=
stic ones. Surgutneftegaz - with $2 billion net profit last year and on-goin=
g dispute with its shareholders about dividends - wants to sack "Rosexperitz=
a", a respectable Russian accountancy, and hire "Aval", a little known accou=
nting outfit. Aval does not even make it to the list of 200 largest accounti=
ng firms in Russia, according to Renaissance Capital, an investment bank.

Other Russian managers are genuinely alarmed by the vertiginous decline in =
the reputation of the global accounting firms and by the inherent conflict o=
f interest between consulting and audit jobs performed by the same entity. S=
viazinvest, a holding and telecom company, hired Accenture on top of - some =
say instead of - Andersen Consulting.

A decade of achievements in fostering transparency, better corporate govern=
ance, and more realistic accounting in central and eastern Europe - may well=
  evaporate in the wake of Enron and other scandals. The forces of reaction a=
nd corruption in these nether lands - greedy managers, venal bureaucrats, an=
d anti-reformists - all seized the opportunity to reverse what was hitherto =
considered an irreversible trend towards Western standards. This, in turn, i=
s likely to deter investors and retard the progress towards a more efficient=
  market economy.

The Big Six accounting firms were among the first to establish a presence i=
n Russia. Together with major league consultancies, such as Baker-McKinsey, =
they coached Russian entrepreneurs and managers in the ways of the West. The=
y introduced investors to Russia when it was still considered a frontier lan=
d. They promoted Russian enterprises abroad and nursed the first, precarious=
, joint ventures between paranoid Russians and disdainful Westerners.

Companies like Ernst&Young are at the forefront of the fight to include ind=
ependent directors in the boards of Russian firms, invariably stuffed with r=
elatives and cronies. Together with IPA, Ernst&Young recently established th=
e National Association of Independent Directors (NAID). It is intended to "a=
ssist Russian companies to increase their efficiency through introduction of=
  best independent directors' practices."

But even these - often missionary - pioneers were blinded by the spoils of =
a "free for all", "winner takes all", and "might is right" environment. They=
  geared the accounts of their clients - by minimizing their profits - toward=
s tax avoidance and the abolition of dividends. Quoting unnamed former emplo=
yees of the audit firms, "The New York Times" described how "... the auditor=
s often chose to play by Russian rules, and in doing so sacrificed the trans=
parency that investors were counting on them to ensure."

Immigrants and the Fallacy of Labour Scarcity

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



First Read:

Migration and Brain Drain

http://samvak.tripod.com/pp118.html



Jean-Marie Le Pen - France's dark horse presidential contender - is clearly
emotional about the issue of immigration and, according to him, its correlates,
crime and unemployment. His logic is dodgy at best and his paranoid xenophobia
ill-disguised. But Le Pen and his ilk - from Carinthia to Copenhagen - succeeded
to force upon European mainstream discourse topics considered hitherto taboos.
For decades, the European far right has been asking all the right questions and
proffering all the far answers.

Consider the sacred cow of immigration and its emaciated twin, labour scarcity,
or labour shortage.

Immigrants can't be choosy. They do the dirty and dangerous menial chores
spurned by the native population. At the other extreme, highly skilled and
richly 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.

According to the United Nations Population Division, the EU would need to import
1.6 million migrant workers annually to maintain its current level of working
age population. But it would need to absorb almost 14 million new, working age,
immigrants per year just to preserve a stable ratio of workers to pensioners.

Similarly hysterical predictions of labour shortages and worker scarcity
abounded in each of the previous three historic economic revolutions.

As agriculture developed and required increasingly more advanced skills, the
extended family was brutally thrust from self-sufficiency to insufficiency. Many
of its functions - from shoemaking to education - were farmed out to
specialists. But such experts were in very short supply. To overcome the
perceived workforce deficiency, slave labour was introduced and wars were fought
to maintain precious sources of "hands", skilled and unskilled alike.

Labour panics engulfed Britain - and later other industrialized nations such as
Germany - during the 19th century and the beginning of the twentieth.

At first, industrialization seemed to be undermining the livelihood of the
people and the production of "real" (read: agricultural) goods. There was fear
of over-population and colonial immigration coupled with mercantilism was
considered to be the solution.

Yet, skill shortages erupted in the metropolitan areas, even as villages were
deserted in an accelerated process of mass urbanization and overseas migration.
A nascent education system tried to upgrade the skills of the newcomers and to
match labour supply with demand. Later, automation usurped the place of the more
expensive and fickle laborer. But for a short while scarce labour was so strong
as to be able to unionize and dictate employment terms to employers the world
over.

The services and knowledge revolutions seemed to demonstrate the
indispensability of immigration as an efficient market-orientated answer to
shortages of skilled labour. Foreign scientists were lured and imported to form
the backbone of the computer and Internet industries in countries such as the
USA. Desperate German politicians cried "Kinder, not Inder" (children, not
Indians) when chancellor Schroeder allowed a miserly 20,000 foreigners to
emigrate to Germany on computer-related work visas.

Sporadic, skill-specific scarcities notwithstanding - all previous apocalyptic
Jeremiads regarding the economic implosion of rich countries brought on by their
own demographic erosion - have proven spectacularly false.

Some prophets of doom fell prey to Malthusian fallacies. According to these
scenarios of ruination, state pension and health obligations grow exponentially
as the population grays. The number of active taxpayers - those who underwrite
these obligations - declines as more people retire and others migrate. At a
certain point in time, the graphs diverge, leaving in their wake disgruntled 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.

Other doomsayers gorge on "lumping fallacies". These postulate that the
quantities of all economic goods are fixed and conserved. There are immutable
amounts of labour (known as the "lump of labour fallacy"), of pension benefits,
and of taxpayers who support the increasingly insupportable and tenuous system.
Thus, any deviation from an infinitesimally fine equilibrium threatens the very
foundations of the economy.

To maintain this equilibrium, certain replacement ratios are crucial. The ratio
of active workers to pensioners, for instance, must not fall below 2 to 1. To
maintain this ratio, many European countries (and Japan) need to import millions
of fresh tax-paying (i.e., legal) immigrants per year.

Either way, according to these sages, immigration is both inevitable and
desirable. This squares nicely with politically correct - yet vague - liberal
ideals and so everyone in academe is content. A conventional wisdom was born.

Yet, both ideas are wrong. These are fallacies because economics deals in
non-deterministic and open systems. At least nine forces countermand the gloomy
prognoses aforementioned and vitiate the alleged need for immigration:

I. Labour Replacement

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.

As productivity grows, fewer workers produce more. American agriculture is a
fine example. Less than 3 percent of the population are now engaged in
agriculture in the USA. Yet, they produce many times the output produced a
century ago by 30 percent of the population. Per capita the rise in productivity
is even more impressive.

II. Chaotic Behaviour

All the Malthusian and Lumping models assume that pension and health benefits
adhere to some linear function with a few well-known, actuarial, variables. This
is not so. The actual benefits payable are very sensitive to the assumptions and
threshold conditions incorporated in the predictive mathematical models used.
Even a tiny change in one of the assumptions can yield a huge difference in the
quantitative forecasts.

III. Incentive Structure

The doomsayers often assume a static and entropic social and economic
environment. That is rarely true, if ever. Governments invariably influence
economic outcomes by providing incentives and disincentives and thus distorting
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.

IV. Labour Force Participation

At a labour force participation rate of merely 60% (compared to the USA's 70%) -
Europe still has an enormous reservoir of manpower to draw on. Add the
unemployed - another 8% of the workforce - to these gargantuan numbers - and
Europe has no shortage of labour to talk of. These workers are reluctant to work
because the incentive structure is titled against low-skilled, low-pay, work.
But this is a matter of policy. It can be changed. When push comes to shove,
Europe will respond by adapting, not by perishing, or by flooding itself with
150 million foreigners.

V. International Trade

The role of international trade - now a pervasive phenomenon - is oft-neglected.
Trade allows rich countries to purchase the fruits of foreign labour - without
importing the laborers themselves. Moreover, according to economic theory, trade
is preferable to immigration because it embodies the comparative advantages of
the trading parties. These reflect local endowments.

VI. Virtual Space

Modern economies are comprised 70% of services and are sustained by vast
networks of telecommunications and transport. Advances in computing allow to
incorporate 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.

VII. Punctuated Demographic Equilibria

Demographic trends are not linear. They resemble the pattern, borrowed from
evolutionary biology, and known as "punctuated equilibrium". It is a fits and
starts affair. Baby booms follow wars or baby busts. Demographic tendencies
interact with economic realities, political developments, and the environment.

VIII. Emergent Social Trends

Social trends are even more important than demographic ones. Yet, because they
are hard to identify, let alone quantify, they are scarcely to be found in the
models used by the assorted Cassandras and pundits of international development
agencies. Arguably, the emergence of second and third careers, second families,
part time work, flextime, work-from-home, telecommuting, and unisex professions
have had a more decisive effect on our economic landscape than any single
demographic shift, however pronounced.

IX. The Dismal Science

Immigration may contribute to growing mutual tolerance, pluralism,
multiculturalism, and peace. But there is no definitive body of evidence that
links it to economic 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.

So, is Le Pen right?

Only in stating the obvious: Europe can survive and thrive without mass
immigration. The EU may cope with its labour shortages by simply increasing
labour force participation. Or it may coerce its unemployed (and women) into
low-paid and 3-d (dirty, dangerous, and difficult) jobs. Or it may prolong
working life by postponing retirement. Or it may do all the above - or none. But
surely to present immigration as a panacea to Europe's economic ills is as
grotesque a caricature as Le Pen has ever conjured.

Healthcare finance package - to move 5/28

Healthcare finance: The coming money chasm

A 12 part series from United Press International

UPI presents this series of articles to your publication to use with credit to
UPI.  If you have any questions regarding pricing or other issues, please call
Tobin beck at 1-202-898-8004

Or write to:

Julie Silberger - JSilberger@...

Susan Dale - sdale@...

Healthcare financing is the biggest of all the money pits facing both the
developed and emerging worlds in the 21st century. With the cost of healthcare
rising, as new and more complex drugs treatments are discovered, and with
populations in western countries aging, the problem of how healthcare is to be
financed is an increasingly urgent one.  In developing countries, AIDS is not
only a social cataclysm, but also produces impossible financing problems for
poorly endowed governments. Worldwide, healthcare finance is a problem
governments and peoples are struggling to solve.  Yet the Global Health Council,
meeting in Washington May 28-30, devotes none of its many forums and seminars to
this topic - to the healthcare industry, financing is a secondary issue.

In this survey., UPI correspondents and analysts from around the world survey
the state of healthcare finance, and the scientific and cultural factors that
make this such as a difficult problem.

The series:

1.      "The Bear's Lair: Healthcare money chasm".  There are many bad examples
of bad healthcare finance systems around the world, and very few good ones. 
Nevertheless, looking at healthcare finance from an incentive oriented viewpoint
provides some indicators about how to contain the problem.  By MARTIN
HUTCHINSON, UPI Business and Finance Editor. 
http://www.upi.com/view.cfm?StoryID=13052002-045636-1774r

2.      "Medical technology expected to drive costs". Advances in medical
technology saves lives and improve the life standards of millions, but they are
increasingly expensive, and consumers demand the best medial care, without
regard to cost.  Choices must be made.  By KATRINA WOZNICKI, UPI Science News.  
http://www.upi.com/view.cfm?StoryID=15052002-123059-8890r

3.      "Old age continues to push boundaries". Medicine can keep people alive
for longer about 2-3 years extra life expectancy per decade - but the difficulty
will be to keep the longer lived active far into old age. By Katrina Woznicki,
UPI Science News.   http://www.upi.com/view.cfm?StoryID=15052002-020313-1663r

4.      "China wrestles with healthcare". China has the typical healthcare
financing problems of an emerging economy but has found a unique solution -
underground (unlicensed) healthcare centers, where simple healthcare is provided
at affordable prices.  But is the quality even adequate?  By CHRISTIAN WADE, UPI
Business Correspondent http://www.upi.com/view.cfm?StoryID=15052002-102204-4265r

5.      "Singapore looks to healthcare changes".  The Central Provident Fund,
where Sinagporeans save in advance for healthcare and retirement costs, is in
many ways a model system.  But even in Singapore, healthcare financing problems
are escalating.  By SONIA KOLESNIKOV, UPI Business Correspondent.
http://www.upi.com/view.cfm?StoryID=07052002-113324-1956r

6.      "Japan's healthcare burdens".  Japan is facing first what other
countries must face soon: the graying of its population, and consequent increase
in demands on healthcare services.  It has the most generous healthcare system
in the world, but for how much longer? By SHIHOKO GOTO, UPI Senior Business
Correspondent http://www.upi.com/view.cfm?StoryID=14052002-120405-9746r

7.      "Better get sick in Germany".  The German healthcare system is modern,
generous and efficient, if staggeringly bureaucratic.  It is also increasingly
becoming unaffordable.  By SAM VAKNIN, UPI Senior Business Correspondent
http://www.upi.com/view.cfm?StoryID=10052002-022811-3907r

8.      "Dying breed: Health care in Eastern Europe". In Eastern Europe, on the
other hand, it's better to stay healthy.  Healthcare systems are antiquated,
corrupt and underfunded, and the problem is not going away. By SAM VAKNIN, UPI
Senior Business Correspondent
http://www.upi.com/view.cfm?StoryID=09052002-121104-1004r

9.      "Shock Therapy in Macedonian healthcare". In Macedonia, western aid
agencies have attempted to modernize the existing specialist-based healthcare
system and replace it with a US-style general practitioner-based system.  The
attempt hasn't worked, and has produced the worst of both worlds, By CHRISTOPHER
DELISO, Special to UPI http://www.upi.com/view.cfm?StoryID=24052002-030615-8517r

10.     "South Africa acknowledges AIDS" How does a nation account for its
healthcare financing when it refuses to believe why 14 percent of its
population, or 30 percent of its workforce, might die by the year 2010? By
ZACHARY WALES, Special to UPI. 
http://www.upi.com/view.cfm?StoryID=22052002-055035-8504r

11.      "Brazil healthcare shines, falters" Health care in Brazil is very much
the story of David taking on the Goliath of international drug companies,
flaunting patent laws and saving or prolonging the lives of its citizens at risk
of contracting human immunodeficiency virus, or HIV, and AIDS. By BRADLEY
BROOKS, UPI Business Correspondent 
http://www.upi.com/view.cfm?StoryID=23052002-123036-3108r

12.     "Inside Mexico: health for a half." In Mexico, sophistication is not the
problem. The challenge is to bring good basic care to more of the population
over a vast country and one divided by a gulf between rich and poor.  By IAN
CAMPBELL, UPI Chief Economics Correspondent 
http://www.upi.com/view.cfm?StoryID=23052002-111220-3060r

   ---------



[Non-text portions of this message have been removed]

The Iron Union - A Profile of IG Metal

By: Dr. Sam Vaknin

Also published by United Press International (UPI)





A measure of IG Metall's clout is the persistent rumor that the ECB
has held off on sorely needed interest rates cuts on account of the
German trade union's wage demands. Moreover, though, with 2.7 million
members, it is only the second largest, IG Metall serves as the
benchmark and the trendsetter to less veteran or less sonorous unions
in Germany.

Ver.di, the service sector's behemoth, with 3 million members, waited
for IG Metall's regional wage boards to pronounce their sentence
before plunging into its own negotiations with employers.
Miraculously, it - and many other unions - ended up demanding the
very same pay rise as did the metal-bashers. IG Metall's standing
reflects the historical reverence accorded in Germany to the
engineering and scientific professions.

IG Metall justified the outlandish wage increases it insists on (4-5
percent) - and the impending strike in Baden-Württemberg by 50,000
(out of 3.6 million) metalworkers on May 6 - by saying that the
raises will boost domestic consumption and revive the flagging
economy. Some of the extra money will be used to modernize the pay
framework agreements and equate the status and the remuneration of
blue collar and white collar workers doing "similar" jobs.

Warning strikes have already erupted over the last few weeks. The
main employers' federation, Gesamtmetall, threatened the striking
employees with lockouts.

The strike may yet be averted. Employers are offering an across the
board hike of 3.3 percent over the next 15 months and a one time cash
handout of $170 per worker. This is imperceptibly lower than IG
Metall's target of 4 percent. IG Metall is likely to buckle down and
agree to arbitration or mediation, perhaps by the embattled
Schroeder, though he is reluctant to gamble his political future on
the outcome as he has done two years ago. A compromise of 3.6 percent
is likely, though. As IG Metall knows, many an invincible union
perished through bungled strikes.

Moreover, IG Metall's previous strike was in 1995 and it cannot
afford to alienate a socialist Chancellor who is in the throes of a
re-election campaign. Still, it is implausibly threatening to spread
the unrest from its stronghold, the southern state of Baden-
Württemberg, to Berlin and Brandenburg. Ominous mutterings of a
repeat of the mythical six weeks strike in the spring of 1984 abound.

This reads like a repeat of the wage negotiations in 2000. Then, as
now, IG Metall demanded an increase of 5.5 percent as well as a
reduction in retirement age to 60 and in the working week to 32
hours. Warning strikes petered out and the union capitulated by
accepting a two year contract with modest pay rises (3 percent in
2000 and 2.1 percent in 2001).

The two previous annual wage settlements trailed inflation, expected
to reach 2 percent this year. They reflected only a part of the
handsome productivity gains 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.

Real unit labour costs tumbled - but mainly due to massive layoffs.
More than 1.5 million workers out of a total of 5 million in 1991
were sacked. IG Metall wants its members to recoup some of their past
generosity. In a typical German euphemism, this grab is called
a "redistribution component".

Admittedly, German employers abused the union's relative wage
restraint during the 1990's. They did not create additional
employment, nor did they invest in the retraining and re-
qualification of workers made redundant. The union justly claims that
wage moderation only fostered the transfer of wealth from labour to
capital (i.e., from employees to shareholders).

Whatever the outcome of this industrial action, the employers will
foot the bill. "Frankfurter Allgemeine" estimates that every day of
the strike would translate to a whopping $2.3 billion in lost net
output. Each 0.1 percent in wage increases costs the metal and
electric industries c. $140 million a year. This in an industry mired
in declining orders and falling production.

IG Metall's Web site is a militant affair. "Right to Strike - Away
with the anti-strike paragraphs!" -it thunders. "Strike is a civil
right - lockout is a misuse of power" - it preaches. It even provides
practical "how-to-strike" guides, tips for strikers, and promotes a
new model of "flexi-strike".

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.

"The Economist" reports the case of Viessmann, a German engineering
firm. To avoid shifting the production of a new boiler to the Czech
Republic, it negotiated with its workers an increase in the working
week without a commensurate pay rise. IG Metall blocked the deal,
though it later compromised.

This is a typical story. The collective agreements in 2000 and 2001
were an aberration and a political concession to a socialist regime
in trouble. In contrast, wages rose 4.1 percent in workplaces covered
by the 1999 settlement with IG Metall - most of them multinationals
who exploited the agreement's egregious terms to squeeze their
indigenous Mittelstand suppliers.

IG Metall is notoriously intransigent. Unlike its brethren in other
industries, it refuses to link pay rises (or even annual bonuses) to
profitability, for instance. It rejects the idea of implementing, by
mutual consent of employees and employers, wage reductions or
overtime to prevent lay-offs. It abhors profit sharing schemes,
either regional, or sectoral, or even confined to the single plant
level.

It would not sign two-year pay agreements based on "bad experience"
in the past. Many exasperated firms resort to the profligate exercise
of "opening (escape) clauses". They renege on the collective
agreements without being seen to flout the rules.

Employers ask employees to continue the working day at home after
hours. Some workers clock out but continue to work all the same.
Other firms - especially in the east - opt out of the employers'
associations altogether, thus exempting themselves from onerous
collective pay agreements.

Many attribute IG Metall's irrational exuberance to its rational
fears of becoming marginalized and irrelevant. Wage increases - the
union's only political leverage - are hard to negotiate in an
environment of stable and low inflation, high unemployment, and ever
more flexible labour markets.

The unions hitherto refrained from tackling the most pressing issues:
flexible time, part time work, retirement, low wage jobs, social
security reform, illegal immigrants. IG Metall spent the last 15
years negotiating an agreement to apply uniform wage criteria to blue-
collar and white-collar workers.

The "Alliance for Work" pact between unions, employees, and
government, proposed by its Chairman, Klaus Zwickel, in its 18th
convention in 1995, went nowhere effective, though it was signed by
all three parties. It included revolutionary ideas like linking pay
to productivity - in return for job creation by the private sector
and unemployment subsidies by the state. This was also the fate of a
1997 initiative to reduce working hours in parallel with wages in
order to boost job formation.

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.

In a major survey conducted last year in the framework of the
unions' "Debate on the Future" initiative, 78 percent of German
workers - union members and non-members alike - professed to being
more interested in job security than in higher pay. Nine out of 10
respondents expected the unions to support secure jobs and fight
unemployment.

Some workers begin to fathom the union's role in destroying
employment by foisting a non-competitive wage structure upon
reluctant employers. Eighty percent of employees surveyed expected IG
Metall to do much more for the unemployed. Regrettably, the vast
majority of the membership of IG Metall are still pugnacious and
under the sway of populist activists.

Even so, IG Metall is past its heyday. It is the anachronistic
outcome of numerous mergers with other fading unions in the plastics,
textile, and wood industries. Despite these acquisitions and the
influx of East German laborers, its membership hasn't budged since
the early 1980's. In the 1990's alone it has declined by more than a
million members - almost one third of the total - despite acquiring a
million new members from the east.

One third of the members are retired. Less than 7 percent are under
the age of 25. Women are deserting the union in droves. IG Metall
represents less than 30 percent of actively employed workers in its
industrial sectors.

In its "Debate on the Future" survey only 5 percent of all
respondents said they would "definitely" join IG Metall. Only 3
percent imagined a long-term membership. Two thirds of the
unorganized employees surveyed said they have no interest whatsoever
in becoming union members.

The surges in membership that followed previous confrontations with
employers seem to have abated. And 1 percent of gross wages in
membership dues is a lot to pay for ill-defined and uncertain
benefits. The average wage in industry - among the highest in the
world - amounts to $37,000 a year, including social security
contributions.

To make matters worse, in the last few significant rounds of wage
negotiations, IG Metal lost its traditional bellwether role to IG
BCE, the more nimble union of workers in the chemical and energy
sectors. This much smaller new union signed the first collective
agreements each time, thus weakening IG Metall's hand in its own
negotiations.

There are cracks in IG Metall's hitherto uniform ideological facade.
On March 1998 it signed an agreement with Debis -  a group of car
makers and metal bashing firms represented by Daimler-Benz. It agreed
to let the employers decide how to flexibly implement a reduced
working week of 35 hours. Five thousand companies had individual
contracts with unions by the end of 1997.

Last August, bowing to political pressures by the SDP and the public
outcry of its own members, IG Metall signed a 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.

The convergence of the manufacturing and services sectors leads to
mergers or collaborative efforts among competing unions. Fields like
Information Technology (IT), telecommunications, pharmaceutics, and
biotechnology blur the lines between knowledge and production.

Last year, for instance, IG Metall created a joint bargaining
committee with the new umbrella services union, Ver.di. The
committee - the indirect outcome of arbitration involving the two
unions - will represent all of IBM's 26,000 workers in its German
subsidiaries. Ver.di includes as one of its components one of IG
Metall's most bitter rival unions, DAG.

But it would take a determined - and somewhat Thatcherite -
government to face the unions down. Many German luminaries advocate a
sea change in the laws pertaining to strikes, labour relations, and
wage bargaining. Strikes should be allowed only after mediation
fails. Employers and employees should negotiate plant-level
arrangements. These seismic shifts will not transpire without a
bloodied fight. Unions are monopolies and they act as cartels. Their
interests are overwhelmingly vested in the status quo.

Yet, such a showdown is long overdue - and victory is within reach.
Only one in five working age Germans - less than 8 million - belong
to a union. Overall membership 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.

No wonder that IG Metall has in its sights targets in east Germany
and in Germany's "sphere of influence". The union owns the Otto
Brenner Foundation. It is named after IG Metall's first boss and was
established in 1972 "to promote the metalworkers trade union". In
1997, its dismal finances were boosted by the serendipitous
liquidation of IG Metall's assets in the former East Germany.

Though claiming to engage in impartial "scientific" research, the
Foundation aims to spread the union gospel among the heathen of
central and eastern Europe and, especially, the eastern German
Lander. The Foundation's Administrative Board is appointed by IG
Metall.

Perhaps in an effort to improve its public image, IG Metall issued,
in January 1999, a press release in support of compensation for
forced laborers in the metal industry. It notes that the 10 million
slaves that toiled and perished in German factories during the Nazi
occupation of Europe constituted 40 percent of Germany's industrial
workforce. More than 1000 concentration camps were "directly near or
on" company property.

It took IG Metall - an ostensibly leftist organization - almost 50
years to condemn the crimes of German business and industry during
the Nazi era. It is a measure of the glacial tempo of its decision
making processes. Nothing seems to shake it from its well rehearsed
torpor. It, therefore, is probably doomed to share the fate of other
unions - gradual but assured dissipation.

http://www.ce-
review.org/authorarchives/vaknin_archive/vaknin_main.html

http://groups.yahoo.com/group/conflictransition/messages

http://samvak.tripod.com/guide.html

http://www.intellnet.org/topics/balkans/

http://www.intellnet.org/

http://ceeandbalkan.tripod.com


Feel free to forward this article.

To reprint - kindly write to: palma@...


http://www.rferl.org/nca/features/2002/05/16052002090609.asp



EBRD: The World's Easiest Bank To Criticize (Part 1)
By Mark Baker

The European Bank for Reconstruction and Development (EBRD) is the
largest lender by far to the transitional countries of Eastern Europe
and the former Soviet Union.  Yet the bank has been dogged since its
inception by criticism that it's wasteful, ineffective, and
unnecessary.  Officials at the bank understandably see the matter
differently and point to a string of successful deals in which their
role, they say, was crucial.  Ahead of the bank's annual meeting this
weekend in Bucharest, RFE/RL correspondent Mark Baker filed this two-
part series.  The first part looks at criticisms of the bank.  The
second part will look at some of the bank's accomplishments and at
its future.

Prague, 16 May 2002 (RFE/RL) -- Few financial institutions ever had a
rockier start than the London-based European Bank for Reconstruction
and Development (EBRD).

The bank was formed in 1991 with the laudable intention of helping
countries in Eastern Europe and the former Soviet Union rebuild from
decades of communist mismanagement and neglect.  But since its
inception, the bank been dogged by criticism that it's wasteful,
ineffective, and counterproductive.

The British newspaper "Financial Times" struck the first blow during
the bank's annual meeting in 1993.  In a series of articles, the
paper blasted the bank for spending lavishly on its London
headquarters instead of funding projects in Eastern Europe.

The "FT" focused on expensive Italian marble that the bank had
ordered for its head office at a cost of more than $1 million.  At
the time, the EBRD was spending twice as much on itself -- in
salaries and furnishings -- than it was in Eastern Europe.

The marble scandal prompted changes, and then-President Jacques
Attali was ultimately forced to step down.  Yet the criticism
continued.

To be sure, it was never going to be easy for the EBRD.  The bank had
to allocate resources among 27 former communist countries while
balancing the preferences and petty jealousies of its more than 50
shareholders.  These include the U.S., the European Union, and the
transition countries themselves.

To make matters worse, regional development banks like the EBRD had
become unfashionable by the early 1990s.  There was concern that
these types of banks -- which also exist in Asia, Africa, and Latin
America -- unfairly compete with and "crowd out" private lenders.
Development banks were seen as favoring projects that harmed the
environment and served political rather than economic interests.

To satisfy critics, the EBRD adopted strict guidelines on the
environment and pledged to operate according to what it called "sound
banking principles."

The bank went a step further, pledging in its charter to refuse loans
to regimes that were not democratically elected or responsive to
their populations.  The EBRD thus became the world's first
development bank to make the promotion of democracy one of its aims.

In practice, though, the bank has found it difficult to reconcile
these frequently conflicting demands, providing ample ammunition to
its detractors.

Sam Vaknin is an economic adviser to the Macedonian government in
Skopje.  He is unsparing in his view that the EBRD has not
worked.  "The EBRD has failed on all counts.  Instead of serving as a
regional development bank with emphasis on small and medium-sized
enterprises, entrepreneurship, corporate governance, property rights,
and so on, instead of fostering a private sector where there was
none, the bank [has] actually cast itself as a competing investment
bank with subsidized financing."

Vaknin says the EBRD, by virtue of its size and access to
governments, has pushed the private sector out of the market and
taken the best projects for itself.  He adds that the EBRD has failed
in its mission to support small businesses by relying on local banks,
which are often corrupt, to distribute the loans.  He says the
situation in Macedonia is typical: "Most of the money [the EBRD made
available to small businesses in Macedonia] was channeled through
five banks -- one of which went belly up, two of which are under
criminal investigations.  And the other two are without proper
capital adequacy."

Noreen Doyle, the EBRD's first vice president and its top banker,
disagrees.  She says she's aware of concern that the EBRD may
be "crowding out" private-sector lending but says the bank tries to
work with -- not in competition with -- private lenders.  "I have
always been conscious that our role is not to crowd out private
financial lenders or investors, and to complement what they will do,
either by helping them to do it or by taking more or longer or
different risks than they take.  One of the early decisions that the
EBRD took was not to provide financial advisory services for a fee
because the private sector could do that [better than we could]."

Doyle says that in many of the bank's target countries, there are no
private-sector lenders to crowd out.  "If you take a country with
both political and economic difficulties, like Georgia or Armenia, we
would be very hard-pressed to find private sector lenders to take
[very long-] term maturities."

Doyle also acknowledges the difficulties of working with local banks,
but points to more than 200,000 loans the bank has made through its
small-loans program since 1994.

That's not to say the bank has been perfect.  Doyle admits the EBRD
has made its share of mistakes over the years.  The worst, she says,
occurred during the Russian financial crisis in August 1998, when the
country's banks went insolvent overnight.  The EBRD lost millions of
dollars and much of its Russia portfolio.  "We certainly have made
mistakes.  Probably our most costly mistake was assuming in Russia,
in the banking system, that we could determine which were the best
banks based on financial due diligence and by knowing the management
of the banks."

The Russian debacle and the steady stream of criticism have forced
the bank to change its outlook and scale down its ambitions.  There
are no plans to change the marble on the wall, and bank officials no
longer speak in terms of "reconstructing nations," as first bank
president Attali once famously remarked, but rather of making loans.

Even Vaknin concedes the EBRD has made changes.  He dates the
turnaround from two years ago, when current President Jean Lemierre
took office.  "[The EBRD] has become much less grandiloquent and
grandiose in its aspirations.  It's more down-to-earth.  It works
directly with the private sector in a few countries.  It has altered
the internal composition of its portfolio by getting rid of prime
assets -- mainly in the Czech Republic and Russia.  It has refrained
from lending to corrupt or to companies which are not properly
governed -- which do not apply proper corporate governance, such as
Gazprom in Russia.  It has withstood political pressures from its
masters -- or actually, its shareholders -- regarding a few dubious
financing schemes, mainly in Ukraine.  All in all, the bank has
improved considerably over the last two years."

But he still wonders whether the bank was ever necessary in the first
place.




http://www.rferl.org/nca/features/2002/05/16052002091301.asp



EBRD: What's Next For The Bank's Second Decade?  (Part 2)
By Mark Baker

The European Bank for Reconstruction and Development (EBRD) was
formed in the aftermath of the collapse of communism to help the
countries of Eastern Europe and Central Asia build market economies.
That was more than 10 years ago, however, and many of those
countries -- especially in Central Europe -- are firmly on the road
to accomplishing that goal.  Officials and shareholders of the bank
are meeting this weekend in the Romanian capital, Bucharest, and one
of the items on the agenda is the bank's future.  RFE/RL
correspondent Mark Baker files the second in a two-part series on the
EBRD.

Prague, 16 May 2002 (RFE/RL) -- It's been more than 10 years since
the European Bank for Reconstruction and Development, the EBRD, set
up shop to help the former communist countries of Europe and Central
Asia build market economies.

Since 1991, the EBRD has made thousands of loans and committed
billions of dollars to the 27 countries in the region it was set up
to help.

In many of those countries, the commitments -- along with the reforms
and the addition of private and other capital -- are paying off.
While living standards in Central Europe remain well below those in
the West, a future can now be glimpsed when these differences will
dramatically narrow.  Many EBRD target countries are actively
negotiating entry into the European Union.

Despite this progress, however, bank officials say the EBRD has no
plans to wind up its activities anytime soon -- even in Central
Europe.

Norbert Radermacher is the executive director for Germany, one of the
bank's leading shareholders, at the EBRD's main office in
London.  "In our view, the transition for all of the countries is not
over.
Transition is an ongoing process in all of the 27 countries of our
operations.  There's still a need to support that transition.  In
this transition, the bank is moving to the east, [but] there are
still remaining tasks in Eastern Europe."

The bank's mandate is open-ended.  The EBRD's purpose is to assist
the transition countries of Eastern Europe and the former Soviet
Union to build market economies and democratic political systems.  No
time frame for completing these goals was ever envisioned.

But clearly the bank's future lies to the east -- to the former
Soviet countries in the Caucasus and Central Asia, as well as
Moldova, Belarus, and Ukraine.  The EBRD refers to these countries
euphemistically in its reports as being in the "early and
intermediate" stage of transition.

Radermacher says that, in the medium term, the bank would like to
apportion its investments so that at least 40 percent goes to "early
and intermediate" countries.  The rest would be divided equally
between Russia and the more advanced countries of Central Europe and
the Baltic states.  He says the EBRD is already making progress
toward that target: "We have already reached -- in the so-called
early and intermediate countries of transition -- the objectives we
wanted to reach in volume in the year 2003, and also this year when
it comes to commitments for lending and in terms of equity
investment.  We can also prove that the bulk of it is now being done
in those countries that belong to the early and intermediate stage of
transition."

But any serious transfer of EBRD resources to underdeveloped
countries in Central Asia will run into formidable constraints.  The
EBRD is mandated to work with private companies, and many of these
are still reluctant to invest in countries that lack transparent
political and economic structures.

Noreen Doyle, the bank's first vice president, explains the bind the
bank finds itself in: "Because we're oriented toward the private
sector, we [at the EBRD] depend upon foreign direct investment and
that depends upon the environment, the institutional environment,
being appropriate.  We would like and strive to move south and east,
moving into the countries that have not advanced as far as Central
Europe, but we're constrained by the investment atmosphere."

Many outside the bank would like to see the EBRD accelerate its
transition away from Central Europe in favor of needier regions.
They argue that private and commercial banks stand ready to provide
all the capital that countries like the Czech Republic, Poland, and
Hungary need, and that the EBRD, by offering subsidized loans, only
competes with private banks.

Sam Vaknin, an economic adviser to the Macedonian government, is an
outspoken critic of the EBRD.  "No, in my view, [the EBRD does not]
have a role to play.  If there is place for capital, then the private-
sector investment banks would fill the vacuum.  Nature does not
tolerate a vacuum." Vaknin says the notion of regional development
banks, like the EBRD, is outdated.  He says research shows injecting
capital through existing government and banking structures, as the
EBRD does, does not usually work.

Doyle defends the EBRD's continued presence in some of the fastest-
growing and best-performing countries in the world.  She says
countries like the Czech Republic and Hungary will need huge amounts
of capital in the years ahead, especially given their ambitions of
joining the European Union.  "There has been very good progress, but
even in the most advanced countries, if you project forward their
growth rates -- which you know are 3 and 4 percent, they're
reasonably good -- for the next 10 years, they will only be at GDPs
(gross domestic products) per capita in 10 years' time that the least
well-off existing members of the European Union are at today.  So
there is a significant amount of capital needed to grow these
countries."

She says that in Central Europe, however, the EBRD will start
shifting its focus away from issuing loans to existing companies in
favor of making higher-risk direct investments in start-up companies
where, she says, the capital shortage is most serious.

Better Get Sick in Germany

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



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.

The German national health insurance is inordinately comprehensive.
It even reimburses its clients for a few prophylactic weeks at a
health spa (Kurort). Medicines - including the over the counter
generic sort - are taken extremely seriously. They can be bought only
in pharmacies.

This coincides with the guild-like and cartelized character of German
business. But, even so, Germans find the thought of Aspirin made
available in a supermarket reprehensible. Pharmacists are allowed to
prescribe medicines for minor ailments, though.

There are many forms of health insurance. The Privatpatient is
covered by a foreign, or German private health plan. The much lauded
statutory national healthcare system - the Krankeskasse - insures the
Kassenpatienten, about 90 percent of the population.

Various national health insurers - BEK, DAK, AOK - compete for the
lucrative business of catering to the needs of an ageing and affluent
population. Healthcare provision is even more diversified: some
providers are federal, others regional, local, voluntary, or private.

In "Healthcare Reform in Germany in Comparative Perspective",
Christina Altenstetter of the Graduate School and European Union
Studies Center of the City University of New York, summarizes the
principles that guided German healthcare since 1883:

"... Membership in the national health insurance program is mandated
by law; the administration of the health insurance program is
delegated to non-state bodies with representatives of the insured and
employers; entitlement to benefits is linked to past contributions
rather than need; benefits and contributions are related to earnings;
and financing is secured through wage taxes levied on the employer
and the employee."

German bureaucracies implausibly combine efficiency with red tape.
The healthcare system is no exception. It has been running smoothly
since Bismarck's days. The national insurers issue to their
members "Krankenscheine" - booklets with coupons or vouchers. Many of
them also help obtain the indispensable social security (i.e.,
identity) card.

Insured patients are entitled to one free consultation every 3
months. The coupon used in lieu of payment is redeemed by the
insurance company which pays the doctors. Recognizing the dangers of
over-visitation and over-consumption of free services and drugs, in
Germany patients partly pay for everything else - from medicines to
corrective contact lenses.

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.

"We have free choice of physicians, we have practically no waiting
lists" - bragged Prof. Friedrich Breyer of the University of Konstanz
in an interview to the BBC. He added wryly: "I wouldn't call the
(British) NHS the envy of the world." Germany spends c. 8 percent of
its larger GDP on public healthcare - 40 percent more than Britain.
Add to this private expenditure on health and the figure balloons to
12 percent of GDP - almost twice Britain's.

British Conservatives are so impressed that they dispatched their
Health Spokesman, Dr. Liam Fox, MP, on a fact-finding mission to
German wonderland.

The BBC ("On the Record", December 2001) marvels that two thirds of
German patients with prostate cancer survive five years after
diagnosis - compared to less than one half in Britain. With leukemia,
two fifths of German patients live on for five years - but only 28
percent of Britons do.

Patients can change doctors once a quarter. Within each quarter they
require a referral from their original physician. This hybrid system
of doctor-referral cum autonomous choice combines the best of both
the General Practitioner (GP) model - and the self-referral model.

But not all is wunderbar.

Germany's healthcare market is consumer-tilted (it is called "patient
orientation"). Healthcare providers are subject to rigorous quality
inspections and, too often, meddlesome micromanagement. Suppliers -
like medical device manufacturers - are less cosseted.

Jacoti Insights publishes "Mapping the Maze through Germany". The
latest controversial healthcare reforms suppressed sales throughout
the $10 billion sector in the last three years - despite a market
receptive, not to say addicted, to new technology.

The reform consists of the introduction of the DRG - Diagnosis
Related Group - case-based reimbursement system as of January 2004.
It is only the latest in a series of panicky cost containment
initiatives. Cost awareness has caused the number of hospitals in
Germany to decline considerably over the last decade. Many facilities
became more specialized.

According to a report by Thorsten Korner and Friedrich Wilhelm
Schwartz from the Hanover medical School ("Recent Healthcare Reforms
and Hospital Financing in Germany"), the country has 7 beds per 1000
people and a hospital occupancy rate of 80 percent.

This represents a massive decline from 1991 - of 15 percent in the
western Lander and 25 percent in the eastern Lander. Another 2 beds
per 1000 people can be found in - mostly private - preventative and
rehabilitative centers. One quarter of more than 2000 hospitals - but
only 7 percent of all beds - are private. Still, as the public sector
shrank by one quarter - the private sector mushroomed by 60 percent.

More than a million people (in a population of just over 80 million)
work in healthcare - one eighth of them 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.

The number of doctors increased by 10 percent in the last decade but
all other medical professions - including nurses - suffered sharp
cutbacks. Moreover, despite an increase of admissions by 9 percent in
the west and 30 percent in the east - the average length of stay has
dropped precipitously by 25 percent in the west and 35 percent in the
east.

Many hospitals find it difficult to adjust to the new, profit and
loss (deficit) orientated environment. Mini-"revolutions" such as
fixed budgets, prospective payments, and the shift from in-patient to
out-patient treatments as represented by ambulatory surgery,
integrative care, and disease management initially met with stiff
resistance.

The forthcoming transition to case-fee reimbursement, for instance,
forces hospitals to invest massive amounts of resources in
information technology and re-training. This led to a wave of
mergers, alliances, and acquisitions.

It wasn't always this way. A 1972 law on hospital financing provided
hospitals with a "full cost coverage". The state footed all
investment bills while the various "sickness funds" and private
patients financed all the operational costs. The resulting growth in
healthcare costs was exponential.

The "Health Insurance Cost Containment Act" of 1977 tried in vain to
stem the flood. Contributions by the funds 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.

While expenditures per capita stabilized - contribution rates
skyrocketed by 40 percent between 1975 and 1999. As the population
ages, demand for healthcare is likely to increase. As technology
invades every nook and cranny of medicine, further investments are
required. As costs skyrocket, budget tightening and micromanagement
will increase together with a commensurate shift of power from
physician to administrator.

To cap it all, Christina Altenstetter notes the possible conflict
with the European Union:

"... It is difficult to predict the future role of the European Court
of Justice in raising the question whether national fees schedule and
benefits catalog are a violation of free trade because corporatist
decision-making by German organized medicine and sickness funds is in
conflict with European competition policy. If the Court were to rule
on this issue against corporatism and price fixing in national
practices, impressive changes can be anticipated (in the) long term."

German healthcare is comprehensive and efficient. It is also
unsustainably expensive. Patients pay twice - indirectly through
their heavy taxes and directly in medical fees and the cost of
medicines. A guild-like, corporatist approach still stifles the
competitive provision of services.

The hidden costs of such monopolistic and cartel behavior is best
evident in ambulatory surgery. Only recently were hospitals allowed
to provide this service - previously the preserve of the ambulatory
care services. Now half of all hospitals have ambulatory surgery
units and the costs of most such procedures has fallen off a cliff.

The Emerging Water Wars

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



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.

Drought often conspires with man-made disasters. Macedonia
experienced its second worst dry spell during the civil strife of
last year. Benighted Afghanistan is having one now - replete with
locusts. Rapid, unsustainable urbanization, desertification,
exploding populations, and economic growth, especially of water-
intensive industries, such as microprocessor fabs - all contribute to
the worst water crisis the world has ever known.

Governments reacted late, hesitantly, and haltingly. Water
conservation, desalination, water rights exchanges, water pacts,
private-public partnerships, and privatization of utilities (e.g., in
Argentina and the UK) - may have been implemented too little, too
late.

Rising incomes lead to the exertion of political pressure on the
authorities by civic movements and NGO's to improve water quality and
availability. But can the authorities help? According to the World
Bank, close to $600 billion will be needed by 2010 just to augment
existing reserves and to improve water grade levels.

The UNDP believes that half the population in Africa will be subject
to wrenching water shortages in 25 years. The environmental research
institute, Worldwatch, quoted by the BBC, recommends food imports as
a way to economize on water.

It takes 1000 tons of water to produce 1 ton of grain and agriculture
consumes almost 70 percent of the world's water - though only less
than 30 percent in OECD countries. It takes more than the entire
throughput of the Nile to grow the grain imported annually by Middle
Eastern and North African countries alone. Some precipitation-poor
countries even grow cotton and rice, both insatiable crops. By 2020,
says the World Water Council, we will be short 17 percent of the
water that would be needed to feed the population.

The USA withdraws one fifth of its total resources annually -
proportionately, one half of Belgium's drawdown. But according to the
OECD, Americans are the most profligate consumers of fresh water,
more than double the OECD's average in the 1990's. Britain and
Denmark have actually reduced their utilization by 20 percent between
1980 and 1996 - probably due to sharp and ominous drops in their
water tables.

Stratfor, a strategic forecasting firm, reported on May 14 that
Mexico and the USA are in the throes of a conflict over
Mexico's "failure to live up to its water supply commitments under a
1944 treaty", which allocates water from the Colorado, Rio Concho,
and Rio Grande among the two signatories.

Mexico seems to have accumulated a daunting debt of 1.5 million acre-
feet over the last 8 years - 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.

Faced with the worst drought in more than a century in some states,
the Bush administration has announced on May 3 that it is considering
sanctions, including, perhaps the suspension of water supplies from
the Colorado to Mexico. Texas lawmakers demanded to re-open NAFTA and
amend it punitively.

Mexico is a typical case. Only 9 percent of its streams and rivers
are fit for drinking. Its underground water is almost equally
polluted. Its infrastructure is crumbling, leading to severe seepage
of more than two fifths of the water. Half of the rest evaporates in
open canals.

Moreover, water is under-priced, thus encouraging wasteful
consumption, mainly by farmers. Stratfor cites an estimate published
in the May 5 issue Fort Worth Star-Telegram - more than $60 billion
will be needed over the next decade to refurbish Mexico's urban and
rural networks.

William K. Reilly, former administrator of the EPA, writing in
the "ITT Industries Guidebook to Global Water Issues", mentions the
human cost of water scarcity: a million dead children a year, a
billion people without access to treated water, almost double this
number without sanitation.

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.

Water shortage hobbles industrial production in places as diverse as
Sicily and Malaysia. The lower estuaries of the Yellow River -
China's most important - are now dry two thirds of the year. The
water table beneath China's fertile northern plane is falling by 1.5
meters a year.

The drought in Sri Lanka is so severe and so prolonged that the
International Red Cross had to intervene and launch an appeal for
emergency funds. The Mekong River, which flows from China to Vietnam,
is being obstructed by 7 Chinese dams under construction. Once
completed, its flow will be reduced by half.

Close to 200 million people in seven countries will be affected. In a
retaliatory move, Laos is planning to hold back c. 70 percent of its
contribution to the Mekong by constructing 23 dams. Thailand follows
with 20 percent of its contribution and a mere 4 dams. Vietnam is
likely to pay the price of this "dam war". Thailand is sufficiently
rich to simply buy the water it needs from its truculent neighbors.

Australia is in no better shape. The diversion of Snowy River inland
led to massive salinization of the lands it irrigates - Australia's
bread basket. Many of the tributaries are now unfit for either
irrigation or drinking. In India, the holy river, Ganges, is depleted
and impregnated with poisonous arsenic.

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.

A July 2000 conference of the riparian states, backed by the likes of
the World Bank and the United Nations, eased the tension somewhat by
promulgating a workable plan to redistribute the African river's
throughput. The emphasis in the February 2001 meeting of the
International Consortium Cooperation on the Nile, though, was on
hydro-power over the contentious minefield of water usage rights.

Turkey is constructing more than two dozen dams on the Tigris and
Euphrates within the Southeastern Anatolia Project (GAP). Once
completed, Turkey will have the option to deprive both Syria and Iraq
of their main sources of water, though it vowed not to do so. In a
cynical twist, it offers to sell them water from its Manavgat river.
Iraq's own rivers have shriveled by half. Still, this is the less
virulent and violent of the water conflicts in the Middle East.

Israel controls the Kinneret Sea of Galilee. It is the source of one
third of its water consumption. The rest it pumps from rivers in the
region, to the vocal dismay of Syria, Lebanon, and Jordan. Despite
decades of indoctrination, Israelis are water-guzzlers. They quaff 4-
6 times the water consumption of their Palestinian and Arab
neighbors.

"The Economist" claims that:

"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."

Only two decades ago, the Aral Sea featured in encyclopedias as the
world's fourth largest inland brine. In a typical hair-brained
subterfuge, the communists diverted its two sources - the Amu Darya
and Syr Darya - to grow cotton in the desert. The "sea" is now a
series of disconnected, toxic, patches overlaid on a vast wasteland
of salt.

But excess water can be as damaging to multilateral relationships -
and to the economy - as scarcity. Floods brought on by the Zambezi
River have devastated the countries on its path, despite their
efforts to harness it. Often, these calamities are man-made. Zimbabwe
wrought a deluge upon its region by opening the gates of the Kariba
dam on March 2000. The countries of West Africa, from Ghana to Mali
are "one river states". Their fortunes rise and fall with the flow
and ebb of waterways.

Sometimes watercourses are conduits of destruction and death. A
single - though massive - chemical spill in Romania on January 31,
2000 devastated the entire Tisa River which runs through Yugoslavia
and Hungary. Only when the waste reached the Danube did the West wake
up to the danger.

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 two
years old government plan to redistribute water from rain-drenched
regions to the arid 60 percent of Spain met 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.

Singapore, concerned by its dependence on water from capricious
Malaysia, decided last November to purchase water from private sector
suppliers who will be required to build one or more desalination
plants, capable of providing it with 10% of its annual consumption.

Singapore is so desperate, it even considers importing water from the
strife-torn Aceh province in Indonesia. The cost of Malaysian fresh
water skyrocketed following a bilateral accord with Singapore signed
September 2000.

Control of water sources has always served as geopolitical leverage.
In Central Asia, both Kyrgyzstan and Tajikistan 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.

To avoid such dependence, Turkmenistan has decided to divert water
from the catchment basin of one of the rivers - the Amu Darya - to a
$6 billion artificial lake. This inane project is comparable only to
China's much-disputed Three Gorges Dam - the $30 billion, 180 meters
tall hydroelectric plant that will block the fierce Yangtze River.

On January 2000, a Kinshasa-based firm, Western Trade Corporation,
and an American partner, Sapphire Aqua, proposed to raise financing
for a $9 billion set of 1000-2000 km. pipes from the Congo River to
the Middle East and South Africa. Stratfor justly noted that the
water were to be given free, casting in doubt the viability - or the
even the very existence - of such a project.

Con-artists and gullible investors notwithstanding, water is big
business. Water Forum 2002, sponsored and organized by the World
Bank, attracted many NGO's, donors, and private companies. The Agadir
conference next month is expected to attract scholars and governments
as well. According to the government of Morocco, it will deal
with "views and experiences on water pricing, cost recovery and the
interactions between micro and macro policies related to water."

T. Boone Pickens, a corporate raider, has bought water rights from
Texans during last year's drought. He succeeded to amass c. 200,000
acre-feet worth c. $200 million.

Economic competition coupled with acute and growing scarcity often
presage conflict.

"Water stress" is already on the world's agenda at least as firmly as
global warming. The Hague Ministerial Declaration released on March
2000 identified seven "water-related challenges". This led to the
establishment of the "World Water Assessment Program" and
UNESCO's "From Potential Conflict to Cooperation Potential" (PC to
CP) which "addresses more specifically the challenge of sharing water
resources primarily from the point of view of governments, and
develops decision-making and conflict prevention tools for the
future."

Simultaneously, Green Cross International and UNESCO floated "Water
for Piece" project whose aims are "to enhance the awareness and
participation of local authorities and the public in water conflict
resolution an integrated management by facilitating more effective
dialogue between all stakeholders." In its efforts to minimize
tensions in potential and actual conflict regions, the project
concentrates on a few case studies in the basins of the Rhine, the
Aral Sea, the Limpopo/Incomati, the Mekong, the Jordan River, the
Danube, and the Columbia.

Peter Gleik of the Pacific Institute suggested this taxonomy of water-
related conflicts (quoted in thewaterpage.com):

"Control of Water Resources (state and non-state actors): where water
supplies or access to water is at the root of tensions.
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."

Mark de Villiers, author of "Water Wars" contrasts, in ITT's
aforementioned Guidebook, two opposing views about the likelihood of
water-related conflicts. Thomas Homer-Dixon, the Canadian security
analyst says:

"Water supplies are needed for all aspects of national activity,
including the production and use of military power, and rich
countries are as dependent on water as poor countries are . . .
Moreover, about 40 percent of the world's population lives in the 250
river basins shared by more than one country . . . But ... wars over
river water between upstream and downstream neighbors are likely only
in a narrow set of circumstances. The downstream country must be
highly dependent on the water for its national well-being; the
upstream country must be able to restrict the river's flow; there
must be a history of antagonism between the two countries; and, most
important, the downstream country must be militarily much stronger
than the upstream country."

Frederick Frey, of the University of Pennsylvania, disagrees:

"Water has four primary characteristics of political importance:
extreme importance, scarcity, maldistribution, and being shared.
These make internecine conflict over water more likely than similar
conflicts over other resources. Moreover, tendencies towards water
conflicts are exacerbated by rampant population growth and water-
wasteful economic development. A national and international 'power
shortage,' in the sense of an inability to control these two trends,
makes the problem even more alarming."

Who is right?

The citizens of Karnataka and Tamil Nadu states in India are enmeshed
in bloody skirmishes over the waters of the Carvery River. Colonel
Quaddafi has been depleting the Iittoral aquifer in the Sahara for
decades now - to the detriment of all his neighbors - yet, not a
single violent incident has been recorded. Last year, the Rio Grande
has failed to reach the Gulf of Mexico - for the first time in many
decades. Yet, no war erupted between the USA and Mexico.

As water become more scarce, market solutions are bound to emerge.
Water is heavily subsidized and, as a direct result, atrociously
wasted. More realistic pricing would do wonders on the demand side.
Water rights are already traded electronically in the USA. Private
utilities and water markets are the next logical step.

Water recycling is another feasible alternative. Despite unmanageable
financial problems and laughable prices, the municipality of Moscow
maintains enormous treatment plants and re-uses most of its water.

Wars are the outcomes of cultures and mores. Not every casus belli
leads to belligerence. Not every conflict, however severe, ends in
battle. Mankind has invented numerous other conflict-resolution
mechanisms. There is no reason to assume that water would cause more
warfare than oil or national pride. But water scarcity sure causes
dislocation, ethnic tension, impoverishment, social anomy, and a host
of other ills. It is in fending off these pernicious, all-pervasive,
and slow-acting social processes that we should concentrate our
efforts.

The Dying Breed - Healthcare in Eastern Europe

By: Dr. Sam Vaknin

Also published by United Press International (UPI)




Transition has trimmed Russian life expectancy by well over a decade.
People lead brutish and nasty lives only to 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.

As income deteriorated, plunging people into abject poverty, they
found it increasingly difficult to maintain a healthy lifestyle.
Crumbling healthcare systems, ridden by corruption and cronyism,
ceased to provide even the appearance of rudimentary health services.
The number of women who die at - ever rarer - childbirth skyrocketed.

Healthcare under communism was a public good, equitably provided by
benevolent governments. At least in theory. Reality was drearier and
drabber. Doctors often extorted bribes from hapless patients in
return for accelerated or better medical treatment.

Country folk were forced to travel hundreds of miles to the nearest
city to receive the most basic care. Medical degrees were - and still
are - up for sale to the highest, or most well-connected, bidder.
Management was venal and amateurish, as it has remained to this very
day.

Hospital beds were abundant - not so preventive medicine and
ambulatory care. One notable exception is Estonia where the law
requires scheduled prophylactic exams and environmental assessment of
health measures in the workplace.

Even before the demise of central healthcare provision, some
countries in east Europe experimented with medical insurance schemes,
or with universal healthcare insurance. Others provided healthcare
only through and at the workplace. But as national output and
government budgets imploded, even this ceased abruptly.

Hospitals and other facilities are left to rot for lack of
maintenance or shut down altogether. The much slashed government paid
remuneration of over-worked medical staff was devoured by
hyperinflation and stagnated ever since. Equipment falls into
disrepair. Libraries stock on tattered archaic tomes.

Medicines and other substances - from cultures to vaccines to
immunological markers - are no longer affordable and thus permanently
in short supply. The rich monopolize the little that is left, or
travel abroad in search of cure. The poor languish and die.

Healthcare provision in east Europe is irrational. In the healthcare
chapter of a report prepared by IRIS Center in the University of
Maryland for USAID, it says:

"In view of the fall in income and government revenue, there is a
need for more accurate targeting of health care (for instance, more
emphasis on preventive and primary care, rather than tertiary care),
and generally more efficient use of benefits (e.g., financing spa
attendance by Russian workers can be cut in favor of more widespread
vaccination and public education). As the formal privatization (much
is already informally privatized) of health care proceeds, and health
insurance systems are developed, health care access for poverty-
stricken groups and individuals needs to be provided in a more
reliable and systematic way."

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.

The outcomes of a mere 6 percent of national level consultations in
Lithuania were influenced by the health unions. Their membership fell
to 20 percent of eligible workers, the same as in Poland and only a
shade less than the Czech Republic (with 32 percent).

No wonder that "under the table" "facilitation fees" are common and
constitute between 40 and 50 percent of the total income of medical
professionals. In countries like the Czech Republic, Croatia, and
chaotic Belarus, the income of doctors has diverged upwards compared
to other curative vocations. It is not possible to obtain any kind of
free medical care in the central Asian republics.

This officially tolerated mixture of quasi-free services and for-pay
care is labeled "state-regulated corruption" by Maxim Rybakov from
Central European University in his article "Shadow Cost-sharing in
Russian Healthcare".

As though to defy this label, the Russian Ministry of Health is
conducting - together with the Audit Chamber and the Ministry of the
Interior - a criminal investigation against healthcare professionals.
The Russian "Rossiiskaya Gazeta" quoted in Radio Liberty/Radio Free
Europe:

"According to Shevchenko (the Russian minister of health), there are
some 600,000 doctors and 3 million nurses working in Russia today; of
this total around 500 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."

The UN's ILO (International Labour Organization) warned, in a
December 2001 press release, of a "crisis in care". According to a
new survey by the ILO and Public Services International (PSI):

"The economic and social situation in several East European countries
has resulted in the near collapse of some health care systems and
afflicted health sector workers with high stress, poor working
conditions and salaries at or below minimum wage - if and when they
are paid."

Guy Standing, the ILO Director of the Socio-Economic Security Program
and coordinator of the studies added:

"Rapidly increasing rates of sexually-transmitted diseases, HIV/AIDS,
tuberculosis and numerous chronic diseases have created a crisis of
care made all the more dramatic by diminishing public health
structures, lack of training of health care professionals and general
de-skilling of the workforce. All of this has surely contributed to
the catastrophic fall in life expectancy rates in Russia, Ukraine and
some other countries in the region."

The situation is dismal even in the more prosperous and peaceful
countries of central Europe. In another survey, also conducted by the
ILO ("People's Security Survey"), 82 percent of families in Hungary
claimed to be unable to afford even basic care.

This is not much better than Ukraine where 88 percent of all families
share this predicament. Agreements signed in the last two years
between Hungarian hospitals and cash-plan insurers further removed
health care from the financial reach of most Hungarians.

Healthcare workers in all surveyed countries - from the Czech
Republic to Moldova - complained of earning less than the national
average and of crippling wage arrears. In some countries - Armenia,
Moldova, Kyrgyzstan - few bother to clock in anymore. In others -
Poland and Latvia, for instance - a much abbreviated working week and
temporary labor contracts are imposed on the reluctant and restive
healthcare workers.

One in twenty hospitals in Poland had to close between 1998-2001. In
an impolitic spat of fiscal devolution, ill-prepared local
authorities throughout the region were left to administer and finance
the shambolic health services within their jurisdictions.

The governments of east Europe tried to cope with this unfolding
calamity in a variety of ways.

Consider Romania. Half the population claim to be "very satisfied"
with its health services.

In Romania, the 1997 Health Insurance Law shifted revenue collection
and provider payments to a maze-like coalition of 41 district health
insurance houses (HIH) headed by a National Health Insurance House.
Romanian 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.

About 70 percent of the meager state budget is derived from erratic
payroll health insurance fund contributions, now set at 14 percent of
wages. The national budget supplements the rest. Some of the
contributions are distributed among the poorest regions to narrow the
inequality between urban and rural areas.

The HIH's pay health care providers, such as hospitals based on
capitation, or a projected global budget. They are experimenting now
with fee-for-service reimbursement methods. All these payment
systems, inevitably, are open to abuse. Monitoring and auditing are
poor and relations are incestuous.

The Ministry of Health still makes all major procurement decisions.
Many government organs - the Ministry of the Interior, the transport
system, the Army - all maintain their wastefully parallel care
provision networks. Donor funds, multilateral financing, and
government money have all vanished into this insatiable sink of
venality.

The only rays of light are private dental and medical clinics,
laboratories, and polyclinics working side by side with private
pharmacies and apothecaries. These cater to the well-to-do. But the
government emulated them and "privatized" the institution of the
family physician (general practitioner).

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.

In an article published on March 2000 in "Central Europe Review" and
titled "Trying our Patients", Professor Pavel Pafko, Head of the
Third Surgery Department, Charles University Faculty Hospital,
Prague, lamented the state of Czech medicine:

"After the 1989 Velvet Revolution, there were fundamental changes in
the health service: the market was opened to manufacturers of medical
equipment, aids and medicines, and Parliament announced the right for
everyone to choose their own doctor. In my opinion, the health
service was not sufficiently prepared for these fundamental changes.

In the public's mind the idea of "free health care" survived and
continues to survive from the Communist period, as does the idea that
all of us are equal as long as we are healthy. The sick man in many
cases loses this equality and cannot himself pay by legal means for
what the state, or rather the insurance companies, have no resources
to provide."

Expenditure on health amounted in the 1990's to c. 7 percent of GDP
per year (compared to 14 percent of a much larger GDP in OECD
countries). But medical insurance firms cannot cope with vertiginous
prices of imported medicines. Hospitals now receive insufficient lump-
sum payments rather than getting reimbursed for procedures and
treatments carried out. Naturally, most of these go towards staff
wages. Little is left for medical care.

Poland is in no better shape. Its embattled minister of health,
Mariusz Lapinski, stumbles from crisis to criticism in his doomed
effort to reform a ramshackle system. The two current scandals
involve heavily and unsustainably subsidized drugs and a new health
bill, fiercely opposed by progressive interests, such as medical
doctors and nurses. The Polish weekly, Wprost, went as far as
comparing Poland's healthcare to Egypt's, Turkey's, and Mexico's.

The World Bank discovered in 1998 that 78 percent of Poles had to pay
illicitly to obtain basic care. Lapinski intends to dissolve the
regional state health funds and resurrect them in the form of a
national edition. But state-run hospitals in Poland are insolvent.
Naturally, healthcare workers have little faith in the management
skills of the state.

They are calling for open competition among teams of commercial
health insurance funds and health care providers. They would also
like to increase health insurance contributions to allow Poland to
spend on health more than the current 5.5 percent of GDP.

UPI reported recently ("Shock Therapy in Macedonian Healthcare")
about a strike of medics in Macedonia as typical of the problems
facing the healthcare systems of all countries in transition:
privatization, the involvement of the state, and Western influence of
the reform process. The transition to the western General
Practitioner (GP) model is hotly debated. As far as doctors are
concerned, it is a lucrative proposition. But it could exclude poorer
patients from medical care altogether.

Still, the main problem is the gap between grandiose expectations and
self-image - and shabby reality. East European medicine harbors
fantastic pretensions to west European standards of quality and
service. But it is encumbered with African financing and Vietnamese
infrastructure. Someone must bridge this abyss with loads of cash.
Either the government, or the consumer must cough up the funds. The
sooner everyone come to terms with this stressful truth - the
healthier.

The Industrious Spies

By: Dr. Sam Vaknin

Also published by United Press International (UPI)




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.

Such contraptions are an integral part of industrial espionage. The
American Society for Industrial Security (ASIC) estimated a few years
ago that the damage caused by economic or commercial espionage to
American industry between 1993-5 alone was c. $63 billion.

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 assessed by the 1995 report of the
White House Office of Science and Technology.

This figures are mere extrapolations based on anecdotal tales of
failed espionage. Many incidents go unreported. In his address to the
1998 World Economic Forum, Frank Ciluffo, Deputy Director of the CSIS
Global Organized Crime Project, made clear why:

The perpetrators keep quiet for obvious reasons. The victims do so
out of fear. It may jeopardize shareholder and consumer confidence.
Employees may lose their jobs. It may invite copycats by
inadvertently revealing vulnerabilities. And competitors may take
advantage of the negative publicity. In fact, they keep quiet for all
the same reasons corporations do not report computer intrusions."

Interactive Television Technologies complained - in a press release
dated August 16, 1996 - that someone broke into its Amherst, NY,
offices and stole "three computers containing the plans, schematics,
diagrams and specifications for the BUTLER, plus a number of computer
disks with access codes." BUTLER is a proprietary technology which
helps connect television to computer networks, such as the Internet.
It took four years to develop.

In a single case, described in the Jan/Feb 1996 issue of "Foreign
Affairs", Ronald Hoffman, a software scientist, sold secret
applications developed for the Strategic Defense Initiative to
Japanese corporations, such as Nissan Motor Company, Mitsubishi
Electric, Mitsubishi Heavy Industries, and Ishikawajima-Harima Heavy
Industries. He was caught in 1992, having received $750,000 from
his "clients", who used the software in their civilian aerospace
projects.

Canal Plus Technologies, a subsidiary of French media giant Vivendi,
filed a lawsuit last March against NDS, a division of News Corp.
Canal accused NDS of hacking into its pay TV smart cards and
distributing the cracked codes freely on a piracy Web site. It sued
NDS for $1.1 billion in lost revenues. This provided a rare glimpse
into information age, hacker-based, corporate espionage tactics.

Executives of publicly traded design software developer Avant! went
to jail for purchasing batches of computer code from former employees
of Cadence in 1997.

Reuters Analytics, an American subsidiary of Reuters Holdings, was
accused in 1998 of theft of proprietary information from Bloomberg by
stealing source codes from its computers.

In December 2001, Say Lye Ow, a Malaysian subject and a former
employee of Intel, was sentenced to 24 months in prison for illicitly
copying computer files containing advanced designs of Intel's Merced
(Itanium) microprocessor. It was the crowning achievement of a
collaboration between the FBI's High-Tech squad and the US Attorney's
Office CHIP - Computer Hacking and Intellectual Property - unit.

U.S. Attorney David W. Shapiro said: "People and companies who steal
intellectual property are thieves just as bank robbers are thieves.
In this case, the Itanium microprocessor is an extremely valuable
product that took Intel and HP years to develop. These cases should
send 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."

Yet, such cases are vastly more common than publicly acknowledged.

"People have struck up online friendships with employers and then
lured them into conspiracy to commit espionage. People have put
bounties on laptops of executives. People have disguised themselves
as janitors to gain physical access," Richard Power, editorial
director of the Computer Security Institute told MSNBC.

Marshall Phelps, IBM Vice President for Commercial and Industry
Relations admitted to the Senate Judiciary Committee as early as
April 1992:

"Among the most blatant actions are outright theft of corporate
proprietary assets. Such theft has occurred from many quarters:
competitors, governments seeking to bolster national industrial
champions, even employees. Unfortunately, IBM has been the victim of
such acts."

Raytheon, a once thriving defense contractor,
released "SilentRunner", a $25,000-65,000 software package designed
to counter the "insider threat". Its brochure, quoted by "Wired",
says:

"We know that 84 percent of your network threats can be expected to
come from inside your organization.... This least intrusive of all
detection systems will guard the integrity of your network against
abuses from unauthorized employees, former employees, hackers or
terrorists and competitors."



This reminds many of the FBI's Carnivore massive network sniffer
software. It also revives the old dilemma between privacy and
security. An Omni Consulting survey of 3200 companies worldwide
pegged damage caused by insecure networks at $12 billion.



There is no end to the twists and turns of espionage cases and to the
creativity shown by the perpetrators.

On June 2001 an indictment was handed down against Nicholas Daddona.
He stands accused of a unique variation on the old theme of
industrial espionage: he was employed by two firms - transferring
trade secrets from one (Fabricated Metal Products) to the other
(Eyelet).

Jungsheng Wang was indicted last year for copying the architecture of
the Sequoia ultrasound machine developed by Acuson Corporation. He
sold it to Bell Imaging, a Californian company which, together with a
Chinese firm, owns a mainland China corporation, also charged in the
case. The web of collaboration between foreign - or foreign born -
scientists with access to trade and technology secrets, domestic
corporations and foreign firms, often a cover for government
interests - is clearly exposed here.

Kenneth Cullen and Bruce Zak were indicted on April 2001 for trying
to purchase a printed or text version of the source code of a
computer application for the processing of health care benefit claim
forms developed by ZirMed. The legal status of printed source code is
unclear. It is undoubtedly intellectual property - but of which kind?
Is it software or printed matter?

Peter Morch, a senior R&D team leader for CISCO was accused on March
2001 for simply burning onto compact discs all the intellectual
property he could lay his hands on with the intent of using it in his
new workplace, Calix Networks, a competitor of CISCO.

Perhaps the most bizarre case involves Fausto Estrada. He was
employed by a catering company that served the private lunches to
Mastercard's board of directors. He offered to sell Visa proprietary
information that he claimed to have stolen from Mastercard. In a
letter signed "Cagliostro", Fausto demanded $1 million. He was caught
red-handed in an FBI sting operation on February 2001.

Multinationals are rarely persecuted even when known to have colluded
with offenders. Steven Louis Davis pleaded guilty on January 1998 to
stealing trade secrets and designs from Gillette and selling them to
its competitors, such as Bic Corporation, American Safety Razor, and
Warner Lambert. Yet, it seems that only he paid the price for his
misdeeds - 27 months in prison.

Nor are industrial espionage or the theft of intellectual property
limited to industry. Mayra Justine Trujillo-Cohen was sentenced on
October 1998 to 48 months in prison for stealing proprietary software
from Deloitte-Touche, where she worked as a consultant, and passing
it for its own. Caroll Lee Campbell, the circulation manager of
Gwinette Daily Post (GDP), offered to sell proprietary business and
financial information of his employer to lawyers representing a rival
paper locked in bitter dispute with GDP.

Nor does industrial espionage necessarily involve clandestine, cloak
and dagger, operations. The Internet and information technology are
playing an increasing role.

In a bizarre case, Caryn Camp developed in 1999 an Internet-
relationship with a self-proclaimed entrepreneur, Stephen Martin. She
stole he employer's trade secrets for Martin in the hope of attaining
a senior position in Martin's outfit - or, at least, of being richly
rewarded. Camp was exposed when she mis-addressed an e-mail
expressing her fears - to a co-worker.

Steven Hallstead and Brian Pringle simply advertised their wares -
designs of five advanced Intel chips - on the Web. They were, of
course, caught and sentenced to more than 5 years in prison. David
Kern copied the contents of a laptop inadvertently left behind by a
serviceman of a competing firm. Kern trapped himself. He was forced
to plead the Fifth Amendment during his deposition in a civil lawsuit
he filed against his former employer. This, of course, provoked the
curiosity of the FBI.

Stolen trade secrets can spell the difference between extinction and
profitability. Jack Shearer admitted to building an $8 million
business on trade secrets pilfered from Caterpillar and Solar
Turbines.

United States Attorney Paul E. Coggins stated: "This is the first EEA
case in which the defendants pled guilty to taking trade secret
information and actually  converting the stolen information into
manufactured products that were 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."

Economic intelligence gathering - usually based on open sources - is
both legitimate and indispensable. Even reverse engineering -
disassembling a competitor's products to learn its secrets - is a
grey legal area. Spying is different. It involves the purchase or
theft of proprietary information illicitly. It is mostly committed by
firms. But governments also share with domestic corporations and
multinationals the fruits of their intelligence networks.



Former - and current - intelligence operators (i.e., spooks),
political and military information brokers, and assorted shady
intermediaries - all switched from dwindling Cold War business to the
lucrative market of "competitive intelligence."



US News and World Report described on May 6, 1996, how a certain Mr.
Kota - an alleged purveyor of secret military technology to the KGB
in the 1980's - conspired with a scientist, a decade later, to
smuggle biotechnologically modified hamster ovaries to India.

This transition fosters international tensions even among
allies. "Countries don't have friends - they have interests!" -
screamed a DOE poster in the mid-nineties. France has vigorously
protested US spying on French economic and technological
developments - until it was revealed to be doing the same. French
relentless and unscrupulous pursuit of purloined intellectual
property in the USA is described in Peter Schweizer's "Friendly
Spies: How America's Allies Are Using Economic Espionage to Steal Our
Secrets."

"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.

Similarly, according to Robert Dreyfuss in the January 1995 issue
of "Mother Jones", Non Official Cover (NOC) CIA operators - usually
posing as businessmen - are stationed in Japan. These agents conduct
economic and technological espionage throughout Asia, including in
South Korea and China.

Even the New York Times chimed in, accusing American intelligence
agents of assisting US trade negotiators by eavesdropping on Japanese
officials during the car imports row in 1995. And President Clinton
admitted openly that intelligence gathered by the CIA regarding the
illegal practices of French competitors allowed American aerospace
firms to win multi-billion dollar contracts in Brazil and Saudi
Arabia.

The respected German weekly, Der Spiegel, castigated the USA, in
1990, for arm-twisting the Indonesian government into splitting a
$200 million satellite contract between the Japanese NEC and US
manufacturers. The American, alleged the magazines, intercepted
messages pertaining to the deal, using the infrastructure of the
National Security Agency (NSA). Brian Gladwell, a former NATO
computer expert, calls it "state-sponsored information piracy".

Robert Dreyfuss, writing in "Mother Jones", accused the CIA of
actively gathering industrial intelligence (i.e., stealing trade
secrets) and passing them on to America's 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."

A February 1995 National Security Strategy statement cited by MSNBC
declared:

"Collection and analysis can help level the economic playing field by
identifying threats to U.S. companies from foreign intelligence
services and unfair trading practices."

The Commerce Department's Advocacy Center solicits commercial
information thus:

"Contracts pursued by foreign firms that receive assistance from
their home governments to pressure a customer into a buying decision;
unfair treatment by government decision-makers, preventing you from a
chance to compete; tenders tied up in bureaucratic red tape,
resulting in lost opportunities and unfair advantage to a competitor.
If these or any similar export issues are affecting your company,
it's time to call the Advocacy Center."



And then, of course, there is Echelon.



Exposed two years ago by the European Parliament in great fanfare,
this telecommunications interception network, run by the US, UK, New
Zealand, Australia, and Canada has become the focus of bitter mutual
recriminations and far flung conspiracy theories.



These have abated following the brutal terrorist attacks of September
11 when the need for Echelon-like system with even laxer legal
control was made abundantly clear. France, Russia, and 28 other
nations operate indigenous mini-Echelons, their hypocritical
protestations to the contrary notwithstanding.


But, with well over $600 billion a year invested in easily pilfered
R&D, the US is by far the prime target and main victim of such
activities rather than their chief perpetrator. The harsh - and much
industry lobbied - "Economic Espionage (and Protection of Proprietary
Economic Information) Act of 1996" defines the criminal offender thus:

"Whoever, intending or knowing that the offense will benefit any
foreign government, foreign instrumentality, or foreign agent,
knowingly" and "whoever, with intent to convert a trade secret, that
is related to or included in a product that is produced for or placed
in interstate or foreign commerce, to the economic benefit of anyone
other than the owner thereof, and intending or knowing that the
offense will , injure any owner of that trade secret":

(1) steals, or without authorization appropriates, takes, carries
away, or conceals, or by fraud, artifice, or deception obtains a
trade secret (2) without authorization copies, duplicates, sketches,
draws, photographs, downloads, uploads, alters, destroys,
photocopies, replicates, transmits, delivers, sends, mails,
communicates, or conveys a trade secret (3) receives, 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."

Other countries either have similar statutes (e.g., France) - or are
considering to introduce them. Taiwan's National Security Council has
been debating a local version of an economic espionage law lat month.
There have been dozens of prosecutions under the law hitherto.
Companies - such as "Four Pillars" which stole trade secrets from
Avery Dennison - paid fines of millions of US dollars. Employees -
such as PPG's Patrick Worthing - and their accomplices were jailed.

Foreign citizens - like the Taiwanese Kai-Lo Hsu and Prof. Charles Ho
from National Chiao Tung university - were detained. Mark Halligan of
Welsh and Katz in Chicago lists on his Web site more than 30
important economic espionage cases tried under the law by July last
year.

The Economic Espionage law authorizes the FBI to act against foreign
intelligence gathering agencies toiling on US soil with the aim of
garnering proprietary economic information. During the Congressional
hearings that preceded the law, the FBI estimated that no less that
23 governments, including the Israeli, French, Japanese, German,
British, Swiss, Swedish, and Russian, were busy doing exactly that.
Louis Freeh, the former director of the FBI, put it
succinctly: "Economic Espionage is the greatest threat to our
national security since the Cold War."

The French Ministry of Foreign Affairs runs a program which commutes
military service to work at high tech US firms. Program-enrolled
French computer engineers were arrested attempting to steal
proprietary source codes from their American employers.

In an interview he granted to the German ZDF Television quoted
by "Daily Yomiuri" and Netsafe, the former Director of the French
foreign counterintelligence service, the DGSE, freely confessed:

"....All secret services of the big democracies undertake economic
espionage ... Their role is to peer into hidden corners and in that
context business plays an important part ... In France the state is
not just responsible for the laws, it is also an entrepreneur. There
are state-owned and semi-public companies. And that is why it is
correct that for decades the French state regulated the market with
its right hand in some ways and used its intelligence service with
its left hand to furnish its commercial companies ... It is among the
tasks of the secret services to shed light on and analyze the white,
grey and black aspects of the granting of such major contracts,
particularly in far-off countries."

The FBI investigated 400 economic espionage cases in 1995 - and 800
in 1996. It interfaces with American corporations and obtains
investigative leads from them through its 26 years old Development of
Espionage, Counterintelligence, and Counter terrorism Awareness
(DECA) Program renamed ANSIR (Awareness of National Security Issues
and Response). Every local FBI 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).

These are massive operations. In 1993-4 alone, the FBI briefed well
over a quarter of a million corporate officers in more than 20,000
firms. By 1995, OSAC collaborated on overseas security problems with
over 1400 private enterprises. "Country Councils", comprised of
embassy official and private American business, operate in dozens of
foreign cities. They facilitate the exchange of timely "unclassified"
and threat-related security information.

More than 1600 US companies and organization are currently
permanently affiliated wit OSAC. Its Advisory Council is made up of
twenty-one private sector and four public sector member organizations
that, according to OSAC, "represent specific industries or agencies
that operate abroad. Private sector members serve for two to three
years. More than fifty U.S. companies and organizations have already
served on the Council. Member organizations designate representatives
to work on the Council.
These representatives provide the direction and guidance to develop
programs that most benefit the U.S. private sector overseas.
Representatives meet quarterly and staff committees tasked with
specific projects. Current committees include Transnational Crime,
Country Council Support, Protection of Information and Technology,
and Security Awareness and Education."

But the FBI is only one of many agencies that deal with the problem
in the USA. The President's Annual Report to 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.

The federal government alerts its contractors to CI threats and
subjects them to "awareness programs" under the DOD's Defense
Information Counter Espionage (DICE) program. The Defense
Investigative Service (DIS) maintains a host of useful databases such
as the Foreign Ownership, Control, or Influence (FOCI) register. It
is active otherwise as well, conducting personal security interviews
by industrial security representatives and keeping tabs on the
foreign contacts of security cleared facilities. And the list goes on.

According to the aforementioned report to Congress:

"The industries that have been the targets in most cases of economic
espionage and other collection activities include biotechnology;
aerospace; telecommunications, including the technology to build
the "information superhighway"; computer software/ hardware; advanced
transportation and engine technology; advanced materials and
coatings, including ' stealth" technologies; energy research; defense
and armaments technology; manufacturing processes; and
semiconductors. Proprietary business information-that is, bid,
contract, customer, and strategy in these sectors is aggressively
targeted. Foreign collectors have also shown great interest in
government and corporate financial and trade data."

The collection methods range from the traditional - agent recruitment
and break ins - to the technologically 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.

Foreign students, foreign employees, foreign tourist guides,
tourists, immigrants, translators, affable employees of NGO's, eager
consultants, lobbyists, spin doctors, and mock journalists are all
part of national concerted efforts to prevail in the global
commercial jungle. Recruitment of traitors and patriots is at its
peak in international trade fairs, air shows, sabbaticals, scientific
congresses, and conferences.

On May 2001, Takashi Okamoto and Hiroaki Serizwa were indicted of
stealing DNA and cell line reagents from Lerner Research Institute
and the Cleveland Clinic Foundation. This was done on behalf of the
Institute of Physical and Chemical Research (RIKEN) in Japan - an
outfit 94 funded by the Japanese government. The indictment called
RIKEN "an instrumentality of the government of Japan".

The Chinese Ministry of Posts and Telecommunications was involved on
May 2001 in an egregious case of theft of intellectual property. Two
development scientists of Chinese origin transferred the PathStar
Access Server technology to a Chinese corporation owned by the
ministry. The joint venture it formed with the thieves promptly came
out with its own product probably based on the stolen secrets.
The following ad appeared in the Asian Wall Street Journal in 1991 -
followed by a contact phone number in western Europe:

"Do you have advanced/privileged information of any type of
project/contract that is going to be carried out in your country? We
hold commission/agency agreements with many large European companies
and could introduce them to your project/contract. Any commission
received would be shared with yourselves."

Ben Venzke, publisher of Intelligence Watch Report, describes how
Mitsubishi filed c. 1500 FOIA (Freedom of Information Act) requests
in 1987 alone, in an effort to enter the space industry. The US
Patent office is another great source of freely available proprietary
information.

Industrial espionage is not new. In his book, "War by Other Means :
Economic Espionage in America", The Wall Street Journal's John
Fialka, vividly describes how Frances Cabot Lowell absconded from
Britain with the plans for the cutting edge Cartwright loom in 1813.

Still, the phenomenon has lately become more egregious and more
controversial. As Cold War structures - from NATO to the KGB and the
CIA - seek to redefine themselves and to assume new roles and new
functions, economic espionage offers a tempting solution.

Moreover, decades of increasing state involvement in modern economies
have blurred the traditional demarcation between the private and the
public sectors. Many firms are either state-owned (in Europe) or
state-financed (in Asia) or sustained by state largesse and patronage
(the USA). Many businessmen double as politicians and numerous
politicians serve on corporate boards.

Eisenhower's "military-industrial complex" though not as sinister as
once imagined is, all the same, a reality. The deployment of state
intelligence assets and resources to help the private sector gain a
competitive edge is merely its manifestation.

As foreign corporate ownership becomes widespread, as multinationals
expand, as nation-states dissolve into regions and coalesce into
supranational states - the classic, exclusionary, and dichotomous
view of the world ("we" versus "they") will fade. But the notion
of "proprietary information" is here to stay. And theft will never
cease as long as there is profit to be had.

The Economics of Foreign Military Bases

By: Dr. Sam Vaknin

Also published by United Press International (UPI)



Conflicts in neighboring countries can be a serendipitous affair. Ask
Pakistan. Even Macedonia, battered as it was by the war in adjacent
Kosovo in 1999, benefited from NATO largesse, later supplanted by
KFOR spending. It is estimated that the allied forces expended well
over $40 million a month on purchases in the Balkan region 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.

The phenomenon may be recurring now in the Central Asian former
Soviet republics. In its May 4 issue, "The Economist" estimated that
Kyrgyzstan enjoyed an infusion of at least $16 million in American
expenditures on fuel, gravel, food, and beds. In return, it allowed
the West to use its crumbling infrastructure, both civilian and
military - roads, airports, bases and railways. It is now home to a
multinational force of 1900 exorbitantly well-paid soldiers, pilots,
engineers, and support staff.

Kyrgyzstan is an impoverished country with less than $1.5 billion in
GDP. Its authoritarian president, Askar Akaev and his ring of cronies
own and operate a swathe of businesses. International profligacy is
bound to prop up his regime by boosting the local economy and his own
pecuniary fortunes.

According to the RIA Novosti Russian news agency, Kyrgyzstan offered
to swap its debts to the West for military bases long before the
events of September 11. Stratfor, a strategic forecasting firm, says
that the Azerbaijani president, Heydar Aliev, did the same.

President Nursultan Nazarbaev of Kazakhstan hinted - last time this
February - that he, too, may welcome some kind of American military
presence on his soil. With more than $12 billion in foreign
investment stock last year - one half of which by American oil firms -
  he may feel vulnerable to Russian attentions.

Last March, the White House promised Islam Karimov, the Uzbek
president, and America's staunchest newfound ally in the region, $160
million in bilateral aid - mainly for the use of bases in Uzbekistan.
More than 1500 US air force personnel are stationed in the Khanabad
air base.

The administration's fiscal year 2003 budget request envisions $19
billion in for fighting the war on terrorism abroad. A supplemental
appropriation bill will be submitted by March 2003. Another $3.5
billion are required for "economic assistance, military equipment and
training for front line states". Yet another $121 million will be
allocated to "anti-terrorism assistance to other states", $4 million
for "technical assistance to foreign government's finance ministries
to help cut off terrorist funding", and so on.

Foreign military presence in destitute countries has always had a
profound effect on both their economies and their politics. It also
often substitutes for domestic investments in the military. Even in
prosperous Europe, American presence, in the framework of NATO,
allowed the Europeans to cut back on defense spending.

In some parts of the world the foreign military and its attendant
procurement and consumption are - or used to be - the main economic
activity.

The contraction of American forces in Okinawa, Japan, following a
series of scandals provoked by crimes 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.

When the Philippines closed down the American Clark air base and
Subic naval base in 1992, it lost billions in revenues from long-term
lease payments and onshore consumption by military personnel.
Moreover, the Philippines regarded the American presence as a
security guarantee against the increasingly predatory practices of
China. With their protectors gone, the Filipinos had to increase
spending on the navy alone by a sorely scarce $6.5 billion in 1997.

Still, some countries are ideologically opposed to foreign military
presence on their soil. In protest against what it regards as
imperialist occupation, Cuba has cashed only one of the checks it has
received from the United States covering the - admittedly symbolic -
annual lease payments for the Guantanamo Bay naval base, where more
than 150 al-Qaida fighters are currently being interned.

Similarly, Saudis - as opposed to their royal family - decry the
presence of American bases on their "sacred land". Somalis affiliated
with the warlord Mohamed Aidid made their views about American naval
bases in their country bloodily clear in the battle of Mogadishu in
1993. The US is currently negotiating with the self-declared
independent state of Somaliland for rights to use its ports.

According to a Defense Department report quoted by the left-wing "The
Monthly Review" on March 2002 and an Army College Study quoted by
the "Los Angeles Times" on January 6, 2002 - prior to September 11,
more than 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.

The Defense Department's Base Structure Report, 2001, lists bases and
installations in 44 countries and territories - but this excludes
many bases with heavy US presence (e.g., within multinational
forces).

Average tours of duty abroad lasted on 1996 - 135 days a year in the
army, 170 days a year in the navy, and 176 days a year in the air
force. Army soldiers were deployed overseas on average once every 14
weeks. The numbers have sharply increased during the war in
Afghanistan and in its wake.

By March 2002, the USA has stationed well over 60,000 soldiers in new
bases - from Bulgaria to Qatar and from Turkey to Tajikistan.
According to the Pentagon, the US now has "status of forces"
agreements - which regulate American military presence overseas -
with 93 countries.

Such "forward presence" requires massive outlays. The bulk of it is
spent at home, with exuberant domestic defense contractors. But even
the leftovers disbursed in foreign lands are enough to lift recipient
economic from their dismal torpor. This is especially true where the
US military is used - implicitly or explicitly - to safeguard
unilateral or bilateral economic interests, such as oil pipelines or
oil fields - as is the case in the countries bordering the Caspian
Sea, or in Colombia.

The New York Times obliquely noted on December 15, 2001, that:

"The State Department is exploring the potential for post-Taliban
energy projects in the region, which has more than 6 percent of the
world's proven oil reserves and almost 40 percent of its gas
reserves."

But the economically beneficial influence of foreign military
presence is not limited to emerging or transition economies.
According to "The Regional Impact of Defense Expenditure" by Derek
Braddon (published in "Handbook of Defense Economics"), during the
1980's, NATO troops and their families stationed in West Germany - a
total of 400,000 people - generated $10 billion in expenditures. More
than 230,000 people were - directly and indirectly - employed by the
bases. A similar number of Soviet troops in East Germany accounted
for 1 percent of its industrial output.

Those were the days!

Hello,

This email message is a notification to let you know that
a file has been uploaded to the Files area of the conflictransition
group.

   File        : /Russia.rtf
   Uploaded by : vaksam <palma@...>
   Description : Russia Under Putin

You can access this file at the URL

http://groups.yahoo.com/group/conflictransition/files/Russia.rtf

To learn more about file sharing for your group, please visit

http://help.yahoo.com/help/us/groups/files

Regards,

vaksam <palma@...>

Hello,

This email message is a notification to let you know that
a file has been uploaded to the Files area of the conflictransition
group.

   File        : /atrpdf.zip
   Uploaded by : vaksam <palma@...>
   Description : After the Rain - How the West Lost the East - A Sampler

You can access this file at the URL

http://groups.yahoo.com/group/conflictransition/files/atrpdf.zip

To learn more about file sharing for your group, please visit

http://help.yahoo.com/help/us/groups/files

Regards,

vaksam <palma@...>