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Capital Flows, Global The recent upheavals in the world financial markets were quelled by the immediate intervention of both international financial institutions such as the IMF and of domestic ones in the developed countries, such as the Federal Reserve in the USA. The danger seems to have passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We may face yet another crisis of the same or a larger magnitude momentarily. What are the lessons that we can derive from the last crisis to avoid the next? The first lesson, it would seem, is that short term and long term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries it can be destructive in less liquid, immature economies or in economies in transition. The two phenomena should be accorded a different treatment. While long term capital flows should be completely liberalized, encouraged and welcomed the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally-oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever higher yields. There is nothing inherently wrong with high yields but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered. The second lesson is the important role that central banks and other financial authorities play in the precipitation of financial crises or in their prolongation. Financial bubbles and asset price inflation are the result of euphoric and irrational exuberance said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspun and who can dispute this? But the question that was delicately side-stepped was: WHO is responsible for financial bubbles? Expansive monetary policies, well timed signals in the interest rates markets, liquidity injections, currency interventions, international salvage operations are all co-ordinated by central banks and by other central or international institutions. Official INACTION is as conducive to the inflation of financial bubbles as is official ACTION. By refusing to restructure the banking system, to introduce appropriate bankruptcy procedures, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the implementation of anti competition legislation many countries have fostered the vacuum within which financial crises breed. The third lesson is that international financial institutions can be of some help when not driven by political or geopolitical considerations and when not married to a dogma. Unfortunately, these are the rare cases. Most IFIs notably the IMF and, to a lesser extent, the World Bank are both politicized and doctrinaire. It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent" themselves, their doctrines and their recipes. This added conceptual and theoretical flexibility led to better results. It is always better to tailor a solution to the needs of the client. Perhaps this should be the biggest evolutionary step: That IFIs will cease to regard the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather they should regard these countries as CLIENTS, customers in need of service. After all, this, exactly, is the essence of the free market and it is from IFIs that such countries should learn the ways of the free market. In broad outline, there are two types of emerging solutions. One type is market oriented and the other, interventionist. The first type calls for free markets, specially designed financial instruments (see the example of the Brady bonds) and a global "laissez faire" environment to solve the issue of financial crises. The second approach regards the free markets as the SOURCE of the problem, rather than its solution. It calls for domestic and where necessary international intervention and assistance in resolving financial crises. Both approaches have their merits and both should be applied in varying combinations on a case by case basis. Indeed, this is the greatest lesson of all: There are NO magic bullets, final solutions, right ways and only recipes. This is a a trial and error process and in war one should not limit one's arsenal. Let us employ all the weapons at our disposal to achieve the best results for everyone involved. Casino 154,000,000. This is the number of Americans who visited the gambling institutions in the USA in 1995. Another 177,000,000 participated in other forms of gambling: car races, horse races, other sports tournaments. They have spent well over 44 BILLION USD on gambling. On average, they lost 20% of the money that they invested - and this, approximately, is the profit of this industry in the US. The industry's annual growth rate is 11% which is an excellent figure for an industry which commenced its operations in 1940 in a desert in the State of Nevada. Wall Street likes casinos and shares of gambling related companies skyrocketed and yielded much more than the Dow Jones Average Index. Hotels chains - such as Hilton and ITT - are competing fiercely to purchase casinos. Casinos do not like to call themselves "Gambling Outfits" (which is really what they are). The politically correct name today is: "Gaming and Leisure establishments". The reason is that gambling has a lot of what we, economists, like to call "negative externalities". Put in less delicate terms: casinos exact a heavy social and economic price from the countries in which they operate. Lately the Government of Macedonia has decided to liberalize gaming. Anyone with 500,000 DM will be allowed to establish and operate a casino. Certain gambling - hitherto monopolized by the Macedonian Lottery - will be open to other, private operators. I am not privy to the considerations behind these decisions. Yet, it is a safe bet to assume that the same political and economic motivating force is in operation here as it was in the USA: money. Gambling is considered the easy way out. Gamblers will come from all over, leave their money with the casino and go home. The local and national governments will tax the casinos heavily and a perpetuum mobile will be created, virtually providing money at no cost. But there is one law in economy which is indisputable and unbreachable: THERE IS NO FREE LUNCH AND THERE IS NO SUCH THING AS MONEY WITHOUT ITS PRICE TO PAY. In warmly embracing the casino culture, Macedonia maybe committing a grave error. Let us try and understand why: (1) To be a success, a casino must be geographically isolated and almost a monopoly. The most successful casinos in human history were established by the American mob (=Mafia) in a desert (in Las Vegas). There were no other casinos available. Gamblers who came all the way to the desert - had to stay a few days. This encouraged the construction of hotels, restaurants and other tourist attractions and diversions. This also increased the revenues of the casinos considerably. Macedonia is surrounded by neighbours with a rich and well developed casino culture. Greece, Bulgaria and Turkey are casino superpowers. Casinos also exist in Slovenia, Croatia, Hungary and Romania. So, Macedonia will be competing headlong with powerful gambling realities. The situation would have been different if Macedonia were to attract affluent tourism. But tourism in Macedonia has all but collapsed. Its tourist-related infrastructure has dwindled and it cannot support an influx of tourists. In Skopje, the cultural and economic hub of Macedonia, a city of 600,000 inhabitants - there are only two class "A" hotels (which really compare to 4 star hotels in the West). Until such an infrastructure is re-instated and tourist attractions - natural and artificial - are maintained - tourists will not flock into Macedonia. Thus, a casino in Macedonia will be fed by the gambling of LOCAL CITIZENS and one-day (or one night) tourists. This is the wrong way to operate a casino. A casino cannot look forward to an economically viable future based on these types of clients. Moreover, a casino which will take the local citizens (anyhow scarce) money will wreak havoc on the social fabric of Macedonia. It will not be very different from the impact exerted by the collapse of the various pyramid schemes (in Albania) and Stedilnicas (in Macedonia). Gambling is equivalent to mild drugs: some people get addicted. The social cost is an important factor. One way to avoid these unfortunate consequences is to prohibit Macedonians from gambling in the casinos in Macedonia. But this will ruin the economic justification for the establishment of such an institutions. Experience gathered in other countries also teaches us that the local citizens will find ways around this prohibition. (2) Governments think about casinos as a way to create employment and to enlarge the tax base (=to generate additional taxes). These two assumptions are quite dubious, according to recent research. When a casino is established, its owners and operators usually promise that they will invest money in the locality. They promise to renew decrepit city centres, to repave roads, to invest in infrastructure and to assist the establishment of restaurants and hotels. Some states in the USA have earmarked revenues from gambling to specific purposes. All the income generated by the New York State lottery goes to education and the construction of new schools. In Israel, the money earned by the state monopoly of Gambling is transferred to the Government's annual development budget and is invested in the construction of schools, community centres and clinics. But even the gambling industry itself admits - in its annual Harra's Survey of the Gaming and Leisure Industries - that the investments in the economy, generated by casinos are far less than even the most modest expectations. True, in the USA alone, casinos employ 367,000 people - a 24% increase over 1994. But most of these jobs are menial. These are temporary jobs without job security and without a career plan or future. They are dead end jobs for desperate people. Casinos also cause jobs to be cancelled. Older firms (old hotels, restaurants, service firms) are closed down and people get fired. The number quoted above also does not take into consideration the natural (not related to gambling) growth in employment in the USA as a whole. Taking all this into account, the claims that casinos create jobs looks more and more dubious. The more casinos established - the less business each of them is able to do. Some of them are making losses and are firing people, exacerbating a bad employment scene. Casinos did invest in municipal infrastructure. Yet, they preferred decoration to grass roots, ornamental veneer type visible investments - rather than real improvement in things less glorious (such as the sewage system, for example). Cities with casinos enjoyed a brief renaissance which was followed by the collapse and degeneration of the city centre's scape. (3) Casinos not only generate revenues. They also generate enormous direct (not to mention the indirect) costs. Criminal elements tend to gather around casinos and sometimes try to own them. Gambling addicts commit crimes in a desperate attempt to obtain funds. So, a lot of money has to be expended on an increase in the police force and on the additional work of other law enforcement agencies. There is also a sizeable increase in the costs of cleaning the street, sanitation and extra social services needed to cope with the break up of families and with gambling addictions. Taking all this into consideration, it is not at all clear that casinos are a net benefit to the economy and it is almost certain that they are not a net benefactor of society as a whole. (4) Casinos undoubtedly hurt the local economy when they take money from local citizens. A Macedonian with free income could use it to buy clothes, go to a restaurant or buy a computer. If he spends this money in a casino - other businesses suffer. Their turnover is reduced. They must fire employees. They also pay less taxes - which offsets the taxes that casinos pay. No one has ever calculated which is more: the taxes that casinos pay - or the taxes which businesses stop to pay because of reduced consumption by local citizens who spent all their money in a casino. Sometimes these businesses close down altogether. Anyone who visited Atlantic City or Gary, Indiana can testify to this. Atlantic City is a gambling capital - and, yet, it is was of the most trodden down cities of the USA. Statistics show that casinos prefer to employ non-local people. They employ foreigners. If this is not possible, they will try to employ people from Bitola in Skopje - and vice versa. This is intended to prevent collusions and conspiracies between the staff and the gamblers. More than 60% of casino employees in the USA do not live in the city in which the casino is located. So, we cannot even say that a casino generates employment for the inhabitants of a city whose infrastructure it uses. (5) There are some alarming statistics. Nevada has the highest suicide rate in the USA. It also has the highest accident rate (per mile driven). It has amongst the highest rates of crime and school drop out rates. Its economy is totally dependent on gambling. It is like a laboratory in which what happens to a gambling state can be tested and measured - and the results are far from encouraging. Moreover, 4% of the population are "pathological gamblers". Those who cannot stop and who will stop at nothing - crime included - to get the money that they need in order to gamble. 10% of the gamblers account for 80% of the money wagered in casinos. 40% of white collar crime (especially embezzlement and fraud) is rooted in gambling. Families, immediate social circles and colleagues in the workplace are gravely affected. The direct costs are enormous. One small town in Massachusetts (in the neighbourhood of a casino) had to increase its police budget by $400,000 per year. Think what the costs are for big cities with casinos in them!!! Small countries are advised to think well before it commits itself to a casino. Establishing a casino is as much a gamble as playing in one. Cellular Telephony The government of Yugoslavia, usually strapped for cash, has agreed to purchase 29 percent of Telekom Srbija, of which it already owns 51 percent. It will pay the seller, Italia International, close to $200 million. The Greek telecom, OTE, owns the rest. On Friday, the Serb privatization minister, Aleksandar Vlahovic, continued to spar in public with a Milosevic-era oligarch, Blagoljub Karic, over his share of Mobtel, Serbia's largest cellular phone operator. The company, announced the minister, will be privatized by tender and Karic's share will be diluted to 30 percent. Such clashes signal rich pickings. The mobile phone market is booming throughout central and eastern Europe. According to Baskerville's Global Mobile industry newsletter, annual subscriber growth in countries as rich as Russia and as impoverished as Albania exceeds 100 percent. Belarus is off the charts with 232 percent. Macedonia (82 percent), Ukraine (79 percent), Moldova (86 percent), Lithuania (84 percent) and Bulgaria (79 percent) are not far behind. Growth rates are positively correlated with the level of penetration. More than four fifths of Slovenes and Czechs have access to a cellphone. Hence the lackadaisical annual increases of 14 and 37 percent respectively. But even these are impressive numbers by west European standards. Annual subscriber growth there is a meager 7 percent. Penetration, in turn, is a function of the population's purchasing power and the state of the - often decrepit - fixed phone network. Thus, in Serbia, smarting from a decade of war and destitution, both the penetration and the growth rates are dismal, at c. 20 percent. Russia alone accounts for one of every five subscribers in the region and one third of the overall market growth. According to the Jason & Partners consultancy, the number of mobile phone subscribers in Russia has more than doubled in 2002 to 17.8 million users. AC&M, another telecommunications consulting outfit, pegs the growth at 117-124 percent. Mobile TeleSystems (MTS) services one third of all users, Vimpelcom more than one quarter and MegaFon about one sixth. But there is a host of much smaller companies nibbling at their heels. Advanced cellular networks - such as under the 2.5G protocol - are expected to take off. Usage in Russia is still largely confined to metropolitan areas. While the country-wide penetration is c. 12 percent (more than double the 2001 figure) - Moscow's is an impressive 48 percent. St. Petersburg, Russia's second most important metropolis, is not far behind with 33 percent. Still, as urban markets mature, the regions and provinces represent untapped opportunities. Vimpelcom, backed by Norway's Telenor, paid last month $26.5 million for Vostok-Zapad Telecom, a company whose sole assets are licenses covering the Urals. This was the operator's third such purchase this year. Earlier, it purchased Extel which covers the Baltic exclave of Kaliningrad and Orensot, another Urals licensee. Vimpelcom is up against Uralsvyazinform, a Perm-based fixed-line and mobile-phone telecommunications operator in the Urals Federal District. According to Radio Free Europe/Radio Liberty and Prime-TASS, the former has increased its capacity last year by some 265,000 cellular-phone numbers. But Vimpelcom is undeterred. According to Gazeta.ru, it has announced its expansion to Siberia (Karsnoyarski Krai) to compete head on with two indigenous incumbents, EniseiTelecom and SibChallenge. Vimpelcom's competitors are pursuing a similar strategy: MTS has recently purchased Kuban GSM, the country's fourth largest operator, mainly in its south. Local initiatives have emerged where cellular phone services failed to transpire. RIA-Novosti recounted how 11 pensioners, the residents of a village in Novgorod Oblast have teamed up to invest in a community mobile phone to be kept by the medic. The fixed line network extended only to the nearest village. The industry is bound to consolidate as new technologies, developing user expectations and exiting foreign investors - mainly Scandinavian, American and German telecoms - increase the pressure on profit margins. One of the major problems is collecting on consumer credit. Vedomosti, the Russian business weekly, reported that Vimpelcom was forced to write off $16 million in non-performing credit last year. Close to 2 percent of its clients are more than 60 days in arrears. Vremya Novosti, another Russian paper, puts the accounts receivable at 15 percent of revenues in Vimpelcom, though only 5 percent at MTS. The cellular phone market throughout central and eastern Europe is at least as exciting as it is in Russia. As of Jan 1, Romania's fixed line telecommunications system, Romtelecom, majority owned by the Greek OTE, has lost its monopoly status. In the wake of this long awaited liberalization, more than 700 applications for operating licences have been filed with the Romanian authorities, many of them for both fixed and mobile numbers. Fixed line density is so low, mobile penetration, at 20 percent, so dismal, prices so inflated and service so inefficient - that new operators are bound to make a killing on their investment. Past liberalizations in central European markets - Poland, the Czech Republic and Hungary - have not been auspicious. Prices rose, the erstwhile monopoly largely retained its position and competition remained muted. But Romania is different. Its liberalization is neither partial, nor hesitant. The process is not encumbered by red tape and political obstruction. Even so, mobile phones are likely to be the big winners as the fixed line infrastructure recovers glacially from decades of neglect. Bulgaria's GSM operator, MobiTel is on the block, though a deal concluded with an Austrian consortium last year fell through. It is considering an initial public offering next year. Another GSM licensee, GloBul, attracted 330,000 subscribers in its first year of operation and covers 65 percent of the population. The country's first cellphone company, Mobikom, intends to branch into GSM and CDMA, following a recent reallocation of national radio frequencies. Macedonia's second mobile operator, MTS, owned by the Greek OTE, was involved last year in bitter haggling with Mobimak (owned by Makedonski Telekom), the only incumbent, over its inter-connection price. The telecommunications administration threatened to cut off Mobimak but, finding itself on murky legal ground, refrained from doing so. The British cellular phone company, Vodafone, has expressed interest in the past in Promonte, Montenegro's mobile outfit. Mobile phone companies are going multinational. Russia's MTS owns a - much disputed - second license in Belarus. It has pledged, last November, to plough $60 million into a brand new network. MTS also acquired a majority stake in Ukrainian Mobile Communications (UMC), the country's second largest operator. The Russian behemoth is eyeing Bulgaria and Moldova as well. Wireless telephony is a prime example of technological leapfrogging. Faced with crumbling fixed line networks, years on waiting lists, frequent interruptions of service and a venal bureaucracy, subscribers opt to go cellular. Last year, the aggregate duration of mobile phone calls in Croatia leapt by 50 percent. It nudged up by a mere 0.5 percent on wired lines. New services, such as short messages (SMS) and textual information pages are booming. Romania's operator, Orange, has launched multimedia messaging. Macedonia introduced WAP, a protocol allowing cellphones to receive electronic data including e-mail messages and Web pages. The revenues from such value added offerings will shortly outweigh voice communications in the west. The east is attentive to such lessons. Central Banks, Role in Crises of Central banks are relatively new inventions. An American President (Andrew Jackson) even cancelled its country's central bank in the nineteenth century because he did not think that it was very important. But things have changed since. Central banks today are the most important feature of the financial systems of most countries of the world. Central banks are a bizarre hybrids. Some of their functions are identical to the functions of regular, commercial banks. Other functions are unique to the central bank. On certain functions it has an absolute legal monopoly. Central banks take deposits from other banks and, in certain cases, from foreign governments which deposit their foreign exchange and gold reserves for safekeeping (for instance, with the Federal Reserve Bank of the USA). The Central Bank invests the foreign exchange reserves of the country while trying to maintain an investment portfolio similar to the trade composition of its client - the state. The Central bank also holds onto the gold reserves of the country. Most central banks have lately tried to get rid of their gold, due to its ever declining prices. Since the gold is registered in their books in historical values, central banks are showing a handsome profit on this line of activity. Central banks (especially the American one) also participate in important, international negotiations. If they do not do so directly - they exert influence behind the scenes. The German Bundesbank virtually dictated Germany's position in the negotiations leading to the Maastricht treaty. It forced the hands of its co-signatories to agree to strict terms of accession into the Euro single currency project. The Bunbdesbank demanded that a country's economy be totally stable (low debt ratios, low inflation) before it is accepted as part of the Euro. It is an irony of history that Germany itself is not eligible under these criteria and cannot be accepted as a member in the club whose rules it has assisted to formulate. But all these constitute a secondary and marginal portion of a central banks activities. The main function of a modern central bank is the monitoring and regulation of interest rates in the economy. The central bank does this by changing the interest rates that it charges on money that it lends to the banking system through its "discount windows". Interest rates is supposed to influence the level of economic activity in the economy. This supposed link has not unequivocally proven by economic research. Also, there usually is a delay between the alteration of interest rates and the foreseen impact on the economy. This makes assessment of the interest rate policy difficult. Still, central banks use interest rates to fine tune the economy. Higher interest rates - lower economic activity and lower inflation. The reverse is also supposed to be true. Even shifts of a quarter of a percentage point are sufficient to send the stock exchanges tumbling together with the bond markets. In 1994 a long term trend of increase in interest rate commenced in the USA, doubling interest rates from 3 to 6 percent. Investors in the bond markets lost 1 trillion (=1000 billion!) USD in 1 year. Even today, currency traders all around the world dread the decisions of the Bundesbank and sit with their eyes glued to the trading screen on days in which announcements are expected. Interest rates is only the latest fad. Prior to this - and under the influence of the Chicago school of economics - central banks used to monitor and manipulate money supply aggregates. Simply put, they would sell bonds to the public (and, thus absorb liquid means, money) - or buy from the public (and, thus, inject liquidity). Otherwise, they would restrict the amount of printed money and limit the government's ability to borrow. Even prior to that fashion there was a widespread belief in the effectiveness of manipulating exchange rates. This was especially true where exchange controls were still being implemented and the currency was not fully convertible. Britain removed its exchange controls only as late as 1979. The USD was pegged to a (gold) standard (and, thus not really freely tradable) as late as 1971. Free flows of currencies are a relatively new thing and their long absence reflects this wide held superstition of central banks. Nowadays, exchange rates are considered to be a "soft" monetary instrument and are rarely used by central banks. The latter continue, though, to intervene in the trading of currencies in the international and domestic markets usually to no avail and while losing their credibility in the process. Ever since the ignominious failure in implementing the infamous Louvre accord in 1985 currency intervention is considered to be a somewhat rusty relic of old ways of thinking. Central banks are heavily enmeshed in the very fabric of the commercial banking system. They perform certain indispensable services for the latter. In most countries, interbank payments pass through the central bank or through a clearing organ which is somehow linked or reports to the central bank. All major foreign exchange transactions pass through - and, in many countries, still must be approved by - the central bank. Central banks regulate banks, licence their owners, supervise their operations, keenly observes their liquidity. The central bank is the lender of last resort in cases of insolvency or illiquidity. The frequent claims of central banks all over the world that they were surprised by a banking crisis looks, therefore, dubious at best. No central bank can say that it had no early warning signs, or no access to all the data - and keep a straight face while saying so. Impending banking crises give out signs long before they erupt. These signs ought to be detected by a reasonably managed central bank. Only major neglect could explain a surprise on behalf of a central bank. One sure sign is the number of times that a bank chooses to borrow using the discount windows. Another is if it offers interest rates which are way above the rates offered by other financing institutions. There are may more signs and central banks should be adept at reading them. This heavy involvement is not limited to the collection and analysis of data. A central bank - by the very definition of its functions - sets the tone to all other banks in the economy. By altering its policies (for instance: by changing its reserve requirements) it can push banks to insolvency or create bubble economies which are bound to burst. If it were not for the easy and cheap money provided by the Bank of Japan in the eighties - the stock and real estate markets would not have inflated to the extent that they have. Subsequently, it was the same bank (under a different Governor) that tightened the reins of credit - and pierced both bubble markets. The same mistake was repeated in 1992-3 in Israel - and with the same consequences. This precisely is why central banks, in my view, should not supervise the banking system. When asked to supervise the banking system - central banks are really asked to draw criticism on their past performance, their policies and their vigilance in the past. Let me explain this statement: In most countries in the world, bank supervision is a heavy-weight department within the central bank. It samples banks, on a periodic basis. Then, it analyses their books thoroughly and imposes rules of conduct and sanctions where necessary. But the role of central banks in determining the health, behaviour and operational modes of commercial banks is so paramount that it is highly undesirable for a central bank to supervise the banks. As I have said, supervision by a central bank means that it has to criticize itself, its own policies and the way that they were enforced and also the results of past supervision. Central banks are really asked to cast themselves in the unlikely role of impartial saints. A new trend is to put the supervision of banks under a different "sponsor" and to encourage a checks and balances system, wherein the central bank, its policies and operations are indirectly criticized by the bank supervision. This is the way it is in Switzerland and - with the exception of the Jewish money which was deposited in Switzerland never to be returned to its owners - the Swiss banking system is extremely well regulated and well supervised. We differentiate between two types of central bank: the autonomous and the semi-autonomous. The autonomous bank is politically and financially independent. Its Governor is appointed for a period which is longer than the periods of the incumbent elected politicians, so that he will not be subject to political pressures. Its budget is not provided by the legislature or by the executive arm. It is self sustaining: it runs itself as a corporation would. Its profits are used in leaner years in which it loses money (though for a central bank to lose money is a difficult task to achieve). In Macedonia, for instance, annual surpluses generated by the central bank are transferred to the national budget and cannot be utilized by the bank for its own operations or for the betterment of its staff through education. Prime examples of autonomous central banks are Germany's Bundesbank and the American Federal Reserve Bank. The second type of central bank is the semi autonomous one. This is a central bank that depends on the political echelons and, especially, on the Ministry of Finance. This dependence could be through its budget which is allocated to it by the Ministry or by a Parliament (ruled by one big party or by the coalition parties). The upper levels of the bank - the Governor and the Vice Governor - could be deposed of through a political decision (albeit by Parliament, which makes it somewhat more difficult). This is the case of the National Bank of Macedonia which has to report to Parliament. Such dependent banks fulfil the function of an economic advisor to the government. The Governor of the Bank of England advises the Minister of Finance (in their famous weekly meetings, the minutes of which are published) about the desirable level of interest rates. It cannot, however, determine these levels and, thus is devoid of arguably the most important policy tool. The situation is somewhat better with the Bank of Israel which can play around with interest rates and foreign exchange rates - but not entirely freely. The National Bank of Macedonia (NBM) is highly autonomous under the law regulating its structure and its activities. Its Governor is selected for a period of seven years and can be removed from office only in the case that he is charged with criminal deeds. Still, it is very much subject to political pressures. High ranking political figures freely admit to exerting pressures on the central bank (at the same breath saying that it is completely independent). The NBM is young and most of its staff - however bright - are inexperienced. With the kind of wages that it pays it cannot attract the best available talents. The budgetary surpluses that it generates could have been used for this purpose and to higher world renowned consultants (from Switzerland, for instance) to help the bank overcome the experience gap. But the money is transferred to the budget, as we said. So, the bank had to do with charity received from USAID, the KNOW-HOW FUND and so on. Some of the help thus provided was good and relevant - other advice was, in my view, wrong for the local circumstances. Take supervision: it was modelled after the Americans and British. Those are the worst supervisors in the West (if we do not consider the Japanese). And with all this, the bank had to cope with extraordinarily difficult circumstances since its very inception. The 1993 banking crisis, the frozen currency accounts, the collapse of the Stedilnicas (crowned by the TAT affair). Older, more experienced central banks would have folded under the pressure. Taking everything under consideration, the NBM has performed remarkably well. The proof is in the stability of the local currency, the Denar. This is the main function of a central bank. After the TAT affair, there was a moment or two of panic - and then the street voted confidence in the management of the central bank, the Denar-DM rate went down to where it was prior to the crisis. Now, the central bank is facing its most daunting task: facing the truth without fear and without prejudice. Bank supervision needs to be overhauled and lessons need to be learnt. The political independence of the bank needs to be increased greatly. The bank must decide what to do with TAT and with the other failing Stedilnicas? They could be sold to the banks as portfolios of assets and liabilities. The Bank of England sold Barings Bank in 1995 to the ING Dutch Bank. The central bank could - and has to - force the owners of the failing Stedilnicas to increase their equity capital (by using their personal property, where necessary). This was successfully done (again, by the Bank of England) in the 1991 case of the BCCI scandal. The State of Macedonia could decide to take over the obligations of the failed system and somehow pay back the depositors. Israel (1983), the USA (1985/7) and a dozen other countries have done so recently. The central bank could increase the reserve requirements and the deposit insurance premiums. But these are all artificial, ad hoc, solutions. Something more radical needs to be done: A total restructuring of the banking system. The Stedilnicas have to be abolished. The capital required to open a bank or a branch of a bank has to be lowered to 4 million DM (to conform with world standards and with the size of the economy of Macedonia). Banks should be allowed to diversify their activities (as long as they are of a financial nature), to form joint venture with other providers of financial services (such as insurance companies) and to open a thick network of branches. And bank supervision must be separated from the central bank and set to criticize the central bank and its policies, decisions and operations on a regular basis. There are no reasons why Macedonia should not become a financial centre of the Balkans - and there are many reasons why it should. But, ultimately, it all depends on the Macedonians themselves. Central Europe, Economies of Invited by a grateful United States, the Czech Republic on Saturday sent a representative to meet with Iraqi opposition in Kurdish north Iraq. The country was one of the eight signatories on a letter, co-signed by Britain, Italy, Spain and the two other European Union central European candidate-members, Poland and Hungary, in support of US policy in the Gulf. According to The Observer and the New York Times, American troops in Germany - and the billions of dollars in goods and services they consume locally - will be moved further east to the Czech Republic, Poland and the Baltic states. This shift may have come regardless of the German "betrayal". The Pentagon has long been contemplating the futility of stationing tens of thousands of soldiers in the world's most peaceful and pacifistic country. The letter is a slap in the face of Germany, a member of the "Axis of Peace", together with France and Belgium and the champion of EU enlargement to the east. Its own economic difficulties aside, Germany is the region's largest foreign investor and trading partner. Why the curious rebuff by its ostensible protιgιs? The Czech Republic encapsulates many of the economic and political trends in the erstwhile communist swathe of Europe. The country's economic performance still appears impressive. Figures released yesterday reveal a surge of 6.6 percent in industrial production, to yield an annual increase of 4.8 percent. Retail sales, though way below expectations, were still up 2.7 percent last year. The Czech National Bank (CNB) upgraded its gross domestic product growth forecast on Jan 30 to 2.2-3.5 percent. But the country is in the throes of a deflationary cycle. The producer price index was down 0.8 percent last year. Year on year, it decreased by 0.4 percent in January. Export prices are down 6.7 percent, though import prices fell by even more thus improving the country's terms of trade. The Czech koruna is unhealthily overvalued against the euro thus jeopardizing any export-led recovery. The CNB was forced to intervene in the foreign exchange market and buy in excess of 2 billion euros last year - four times the amount it did in 2001. It also cut its interest rates last month to their nadir since independence. This did little to dent the country's burgeoning current account deficit, now at over 5 percent of GDP. Unemployment in January broke through the psychologically crucial barrier of 10 percent of the workforce. More than 540,000 bread earners (in a country of 10 million inhabitants) are out of a job. In some regions every fifth laborer is laid off. There are more than 13 - and in the worst hit parts, more than 100 - applicants per every position open. Additionally, the country is bracing itself for another bout of floods, more devastating than last year's and the ones in 1997. Each of the previous inundations caused in excess of $2 billion in damages. The government's budget is already strained to a breaking point with a projected deficit of 6.3 percent this year, stabilizing at between 4 and 6.6 percent in 2006. The situation hasn't been this dire since the toppling of communism in the Velvet Revolution of 1989. Ironically, these bad tidings are mostly the inevitable outcomes of much delayed reforms, notably privatization. Four fifths of the country's economy is alleged to be in private hands - a rate similar to the free markets of Estonia, Slovakia and Hungary. In reality, though, the state still maintains intrusive involvement in many industrial assets. It is the reluctant unwinding of these holdings that leads to mass layoffs. Yet, the long term outlook is indisputably bright. The ministry of finance forecasts a rise in the country's GDP from 59 percent to 70 percent of the European Union's output in 2005 - comparable to Slovenia and far above Poland with a mere 40 percent. The Czech Republic is preparing itself to join the eurozone shortly after it becomes a member of the EU in May 2004. Foreign investors are gung ho. The country is now the prime investment destination among the countries in transition. In a typical daily occurrence, bucking a global trend, Matsushita intends to expand its television factory in Plzen. Its investment of $8 million will enhance the plant's payroll by one tenth to 1900 workers. Siemens - a German multinational - is ploughing $50 million into its Czech unit. Siemens Elektromotory's 3000 employees export $130 million worth of electrical engines annually. None of this would have been possible without Germany's vote of confidence and overwhelming economic presence in the Czech Republic. The deteriorating fortunes of the Czech economy are, indeed, intimately linked to the economic stagnation of its northern neighbor, as many an economist bemoan. But this only serves to prove that the former's recovery is dependent on the latter's resurrection. Either way, to have so overtly and blatantly abandoned Germany in its time of need would surely prove to be a costly miscalculation. The Czechs - like other central and east European countries - mistook a transatlantic tiff for a geopolitical divorce and tried to implausibly capitalize on the yawning rift that opened between the erstwhile allies. Yet, Germany is one of the largest trading partners of the United States. American firms sell $24 billion worth of goods annually there - compared to $600 million in Poland. Germany's economy is five to six times the aggregated output of the EU's central European new members plus Slovakia. According to the New York Times, there are 1800 American firms on German soil, with combined sales of $583 billion and a workforce of 800,000 people. Due to its collapsing competitiveness and rigid labor laws, Germany's multinationals relocate many of their operations to central and east Europe, Asia and north and Latin America. Even with its current malaise, Germany invested in 2001 $43 billion abroad and attracted $32 billion in fresh foreign capital. Indeed, supporting the United States was seen by the smaller countries of the EU as a neat way to counterbalance Germany's worrisome economic might and France's often self-delusional aspirations at helmsmanship. A string of unilateral dictates by the French-German duo to the rest of the EU - regarding farm subsidies and Europe's constitution, for instance - made EU veterans and newcomers alike edgy. Hence the deliberate public snub. Still, grandstanding apart, the nations of central Europe know how ill-informed are recent claims in various American media that their region is bound to become the new European locomotive in lieu of an aging and self preoccupied Germany. The harsh truth is that there is no central European economy without Germany. And, at this stage, there is no east European economy, period. Consider central Europe's most advanced post-communist economy. One third of Hungary's GDP, one half of its industrial production, three quarters of industrial sales and nine tenths of its exports are generated by multinationals. Three quarters of the industrial sector is foreign-owned. One third of all foreign direct investment is German. France is the third largest investor. The situation is not much different in the Czech Republic where the overseas sales of the German-owned Skoda alone account for one tenth the country's exports. The relationship between Germany and central Europe is mercantilistic. Germany leverages the region's cheap labor and abundant raw materials to manufacture and export its finished products. Central Europe conforms, therefore, to the definition of a colony and an economic hinterland. From a low base, growth there - driven by frenzied consumerism - is bound to outstrip the northern giant's for a long time to come. But Germans stands to benefit from such prosperity no less than the indigenous population. Aware of this encroaching "economic imperialism", privatization deals with German firms are being voted down throughout the region. In November, the sale of a majority stake in Cesky Telecom to a consortium led by Deutsche Bank collapsed. In Poland, a plan to sell Stoen, Warsaw's power utility, to Germany's RWE was scrapped. But these are temporary - and often reversible - setbacks. Germany and its colonies share other interests. As The Economist noted correctly recently: "The Poles may differ with the French over security but they will be with them in the battle to preserve farm subsidies. The Czechs and Hungarians are less wary of military force than the Germans but sympathize with their approach to the EU's constitutional reform. In truth, there are no more fixed and reliable alliances in the EU. Countries will team up with each other, depending on issue and circumstances." Thus, the partners, Germany and central Europe, scarred and embittered, will survive the one's haughty conduct and the other's backstabbing. That the countries of Europe currently react with accommodation to what, only six decades ago, would have triggered war among them, may be the greatest achievement of the Euro-Atlantic enterprise. CFO (Chief Finance or Financial Officer) Sometimes, I harbour a suspicion that Dante was a Financial Director. His famous work, "The Inferno", is an accurate description of the job. The CFO (Chief Financial Officer) is fervently hated by the workers. He is thoroughly despised by other managers, mostly for scrutinizing their expense accounts. He is dreaded by the owners of the firm because his powers that often outweigh theirs. Shareholders hold him responsible in annual meetings. When the financial results are good they are attributed to the talented Chief Executive Officer (CEO). When they are bad the Financial Director gets blamed for not enforcing budgetary discipline. It is a no-win, thankless job. Very few make it to the top. Others retire, eroded and embittered. The job of the Financial Director is composed of 10 elements. Here is a universal job description which is common throughout the West. Organizational Affiliation The Chief Financial Officeris subordinated to the Chief Executive Officer, answers to him and regularly reports to him. The CFO is in charge of:
Despite the above said, the CFO can report directly to the Board of Directors through the person of the Chairman of the Board of Directors or by direct summons from the Board of Directors. In many developing countries this would be considered treason but, in the West every function holder in the company can and regularly is summoned by the (active) Board. A grilling session then ensues: debriefing the officer and trying to spot contradictions between his testimony and others'. The structure of business firms in the USA reflects its political structure. The Board of Directors resembles Congress, the Management is the Executive (President and Administration), the shareholders are the people. The usual checks and balances are applied: the authorities are supposedly separated and the Board criticizes the Management. The same procedures are applied: the Board can summon a worker to testify the same way that the Senate holds hearings and cross-questions workers in the administration. Lately, however, the delineation became fuzzier with managers serving on the Board or, worse, colluding with it. Ironically, Europe, where such incestuous practices were common hitherto is reforming itself with zeal (especially Britain and Germany). Developing countries are still after the cosy, outdated European model. Boards of Directors are rubber stamps, devoid of any will to exercise their powers. They are staffed with cronies and friends and family members of the senior management and they do and decide what the General Managers tell them to do and to decide. General Managers unchecked get nvolved in colossal blunders (not to mention worse). The concept of corporate governance is alien to most firms in developing countries and companies are regarded by most general managers as milking cows fast paths to personal enrichment. Functions of the Chief Financial Officer (CFO): (1) To regulate, supervise and implement a timely, full and accurate set of accounting books of the firm reflecting all its activities in a manner commensurate with the relevant legislation and regulation in the territories of operation of the firm and subject to internal guidelines set from time to time by the Board of Directors of the firm. This is somewhat difficult in developing countries. The books do not reflect reality because they are "tax driven" (i.e., intended to cheat the tax authorities out of tax revenues). Two sets of books are maintained: the real one which incorporates all the income and another one which is presented to the tax authorities. This gives the CFO an inordinate power. He is in a position to blackmail the management and the shareholders of the firm. He becomes the information junction of the firm, the only one who has access to the whole picture. If he is dishonest, he can easily enrich himself. But he cannot be honest: he has to constantly lie and he does so as a life long habit. He (or she) develops a cognitive dissonance: I am honest with my superiors I only lie to the state. (2) To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of funds, the adherence to the budget, the expenditures, the income, the cost of sales and other budgetary items. In developing countries, this is often confused with central planning. Financial control does not mean the waste of precious management resources on verifying petty expenses. Nor does it mean a budget which goes to such details as how many tea bags will be consumed by whom and where. Managers in developing countries still feel that they are being supervised and followed, that they have quotas to complete, that they have to act as though they are busy (even if they are, in reality, most of the time, idle). So, they engage in the old time central planning and they do it through the budget. This is wrong. A budget in a firm is no different than the budget of the state. It has exactly the same functions. It is a statement of policy, a beacon showing the way to a more profitable future. It sets the strategic (and not the tactical) goals of the firm: new products to develop, new markets to penetrate, new management techniques to implement, possible collaborations, identification of the competition, of the relative competitive advantages. Above all, a budget must allocate the scarce resources of the firm in order to obtain a maximum impact (=efficiently). All this, unfortunately, is missing from budgets of firms in developing countries. No less important are the control and audit mechanisms which go with the budget. Audit can be external but must be complemented internally. It is the job of the CFO to provide the management with a real time tool which informs them what is happening in the firm and where are the problematic, potential problem areas of activity and performance. Additional functions of the CFO include: (3) To timely, regularly and duly prepare and present to the Board of Directors financial statements and reports as required by all pertinent laws and regulations in the territories of the operations of the firm and as deemed necessary and demanded from time to time by the Board of Directors of the Firm. The warning signs and barbed wire which separate the various organs of the Western firm (management from Board of Directors and both from the shareholders) have yet to reach developing countries. As I said: the Board in these countries is full with the cronies of the management. In many companies, the General Manager uses the Board as a way to secure the loyalty of his cronies, friends and family members by paying them hefty fees for their participation (and presumed contribution) in the meetings of the Board. The poor CFO is loyal to the management not to the firm. The firm is nothing but a vehicle for self enrichment and does not exist in the Western sense, as a separate functional entity which demands the undivided loyalty of its officers. A weak CFO is rendered a pawn in these get-rich-quick schemes a stronger one becomes a partner. In both cases, he is forced to collaborate, from time to time, with stratagems which conflict with his conscience. It is important to emphasize that not all the businesses in developing countries are like that. In some places the situation is much better and closer to the West. But geopolitical insecurity (what will be the future of developing countries in general and my country in particular), political insecurity (will my party remain in power), corporate insecurity (will my company continue to exist in this horrible economic situation) and personal insecurity (will I continue to be the General Manager) combine to breed short-sightedness, speculative streaks, a drive to get rich while the going is good (and thus rob the company) and up to criminal tendencies. (4) To comply with all reporting, accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise listed. The absence of a functioning capital market in many developing countries and the inability of developing countries firms to access foreign capital markets make the life of the CFO harder and easier at the same time. Harder because there is nothing like a stock exchange listing to impose discipline, transparency and long-term, management-independent strategic thinking on a firm. Discipline and transparency require an enormous amount of investment by the financial structures of the firm: quarterly reports, audited annual financial statements, disclosure of important business developments, interaction with regulators (a tedious affair) all fall within the remit of the CFO. Why, therefore, should he welcome it? Because discipline and transparency make the life of a CFO easier in the long run. Just think how much easier it is to maintain one set of books instead of two or to avoid conflicts with tax authorities on the one hand and your management on the other. (5) To prepare and present for the approval of the Board of Directors an annual budget, other budgets, financial plans, business plans, feasibility studies, investment memoranda and all other financial and business documents as may be required from time to time by the Board of Directors of the firm. The primal sin in developing countries was so called "privatization". The laws were flawed. To mix the functions of management, workers and ownership is detrimental to a firm, yet this is exactly the path that was chosen in numerous developing countries. Management takeovers and employee takeovers forced the new, impoverished, owners to rob the firm in order to pay for their shares. Thus, they were unable to infuse the firm with new capital, new expertise, or new management. Privatized companies are dying slowly. One of the problems thus wrought was the total confusion regarding the organic structure of the firm. Boards were composed of friends and cronies of the management because the managers also owned the firm but they could be easily fired by their own workers, who were also owners and so on. These incestuous relationships introduced an incredible amount of insecurity into management ranks (see previous point). (6) To alert the Board of Directors and to warn it regarding any irregularity, lack of compliance, lack of adherence, lacunas and problems whether actual or potential concerning the financial systems, the financial operations, the financing plans, the accounting, the audits, the budgets and any other matter of a financial nature or which could or does have a financial implication. The CFO is absolutely aligned and identified with the management. The Board is meaningless. The concept of ownership is meaningless because everyone owns everything and there are no identifiable owners (except in a few companies). Absurdly, Communism (the common ownership of means of production) has returned in full vengeance, though in disguise, precisely because of the ostensibly most capitalist act of all, privatization. (7) To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking system and other financial venues. Many firms in developing countries (again, not all) are interested in collusion not in consultancy. Having hired a consultant or the accountant they believe that they own him. They are bitterly disappointed and enraged when they discover that an accountant has to comply with the rules of his trade or that a financial consultant protects his reputation by refusing to collaborate with shenanigans of the management. (8) To maintain a working relationship and to develop additional relationships with banks, financial institutions and capital markets with the aim of securing the funds necessary for the operations of the firm, the attainment of its development plans and its investments. One of the main functions of the CFO is to establish a personal relationship with the firm's bankers. The financial institutions which pass for banks in developing countries lend money on the basis of personal acquaintance more than on the basis of analysis or rational decision making. This "old boy network" substitutes for the orderly collection of data and credit rating of borrowers. This also allows for favouritism and corruption in the banking sector. A CFO who is unable to participate in these games is deemed by the management to be "weak", "ineffective" or "no-good". The lack of non-bank financing options and the general squeeze on liquidity make matters even worse for the finance manager. He must collaborate with the skewed practices and decision making processes of the banks or perish. (9) To fully computerize all the above activities in a combined hardware-software and communications system which integrates with the systems of other members of the group of companies. (10) Otherwise, to initiate and engage in all manner of activities, whether financial or other, conducive to the financial health, the growth prospects and the fulfillment of investment plans of the firm to the best of his ability and with the appropriate dedication of the time and efforts required. It is this, point 10, that occupies the working time of Western CFOs. it is their brain that is valued not their connections or cunning. Chechnya, Cost of War in One hundred and eighteen hostages and 50 of their captors died in the heavy handed storming of the theatre occupied by Chechen terrorists four days ago. This has been only the latest in a series of escalating costs in a war officially terminated in 1997. On August 22, a helicopter carrying 115 Russian servicemen and unauthorized civilians went down in flames. The Russian military is stretched to its limits. Munitions and spare parts are in short supply. The defense industry shrunk violently following the implosion of the USSR. Restarting production of small-ticket items is prohibitively expensive. Even bigger weapon systems are antiquated. A committee appointed by the Duma, Russia's lower house of parliament, found that the average age of the army's helicopters is 20. Russia lost dozens of them hitherto and does not have the wherewithal to replace them. The Russian command acknowledges 3000 fatalities and 8000 wounded but the numbers are probably way higher. The Committee of Soldiers' Mothers pegs the number of casualties at 12-13,000. Unpaid, disgruntled, and under-supplied troops exert pressure on their headquarters to air-strafe Chechnya, to withdraw, or to multiply the money budgeted to support the ill-fated operation. Russia maintains c. 100,000 troops in Chechnya, including 40,000 active soldiers and 60,000 support and logistics personnel. The price tag is sizable though not unsustainable. As early as October 1999, the IMF told Radio Free Europe/Radio Liberty: "Yes, we're concerned that it could undermine the progress in improving (Russia's) public finances." As they did in the first Chechen conflict in 1994-6, both the IMF and the World Bank reluctantly kept lending billions to Russia throughout the current round of devastation. A $4.5 billion arrangement was signed with Russia in July 1999. Though earmarked, funds are fungible. The IMF has been accused by senior economists, such as Jeffrey Sachs and Marshall Goldman, of financing the Russian war effort against the tiny republic and its 1.5 million destitute or internally displaced citizens. Even the staid Jane's World Armies concurred. No one knows how much the war has cost Russia hitherto. It is mostly financed from off-budget clandestine bank accounts owned and managed by the Kremlin, the military, and the security services. Miriam Lanskoy, Program Manager at the Institute for the Study of Conflict, Ideology and Policy at Boston University, estimated for "NIS Observed" and "The Analyst" that Russia has spent, by November 2001, c. $8 billion on the war, money sorely needed to modernize its army and maintain its presence overseas. Russia was forced to close, post haste, bases in Vietnam and Cuba, two erstwhile pillars of its geopolitical and geostrategic presence. It was too feeble to capitalize on its massive, multi-annual assistance to the Afghan Northern Alliance in both arms and manpower. The USA effortlessly reaped the fruits of this continuous Russian support and established a presence in central Asia which Russia will find impossible to dislodge. The Christian Science Monitor has pegged the cost of each month in the first three months of offensive against the separatists at $500 million. This guesstimate is supported by the Russians but not by Digby Waller, an economist at the International Institute for Strategic Studies (IISS), a London-based military think tank. He put the real, out-of-pocket expense at $110 million a month. Other experts offer comparable figures - $100-150 a month. Similarly, Jane's Defense Weekly put the outlay at $40-50 million a day - but most of it in cost-free munitions produced during Soviet times. A leading Soviet military analyst, Pavel Felgengauer, itemized the expenditures. The largest articles are transport, fuel, reconstruction of areas shattered by warfare, and active duty bonuses to soldiers. The expense of this brawl exceed the previous scuffle's. The first Chechen war is estimated to have cost at most $5.5 billion and probably between $1.3 and $2.6 billion. Russia allocated c. $1 billion to the war in its 2000 budget. Another $263 million were funded partly by Russia's behemoth electricity utility, UES. Still, these figures are misleading underestimates. According too the Rosbalt News Agency, last year, for instance, Russia was slated to spend c. $516 million on rebuilding Chechnya - but only $158 million of these resources made it to the budget. Russia has been lucky to enjoy a serendipitous confluence of an export-enhancing and import-depressing depreciated currency, tax-augmenting inflation, soaring oil prices, and Western largesse. It is also a major producer and exporter of weapons. Chechnya serves as testing grounds where proud designers and trigger-craving generals can demonstrate the advantages and capabilities of their latest materiel. Some - like the Institute of Global Issues - say that the war in Chechnya has fully self-financed by reviving the military-industrial complex and adding billions to Russia's exports of armaments. This surely is a wild hyperbole. Chechnya - a potentially oil-rich territory - is razed to dust. Russia is ensnared in an ever-escalating cycle of violence and futile retaliation. Its society is gradually militarized and desensitized to human rights abuses. Corruption is rampant. Russia's Accounting Board disclosed that a whopping 12 percent of the money earmarked to fight the war two years ago has vanished without a trace. About $45 million dollars in salaries never reached their intended recipients - the soldiers in the field. Top brass set up oil drilling operations in the ravaged territory. They are said by Rosbalt and "The Economist" to be extracting up to 2000 tons daily - double the amount the state hauls. Another 7000 tons go up in smoke due to incompetence and faulty equipment. There are 60 oil wells in Grozny alone. Hence the predilection to pursue the war as leisurely - and profitably - as possible. Often in cahoots with their ostensible oppressors, dispossessed and dislocated Chechens export crime and mayhem to Russia's main cities. The war is a colossal misallocation of scarce economic resources and an opportunity squandered. Russia should have used the windfall to reinvent itself - revamp its dilapidated infrastructure and modernize its institutions. Oil prices are bound to come down one day and when they do Russia will discover the true and most malign cost of war - the opportunity cost. Child Labor From the comfort of their plush offices and five to six figure salaries, self-appointed NGO's often denounce child labor as their employees rush from one five star hotel to another, $3000 subnotebooks and PDA's in hand. The hairsplitting distinction made by the ILO between "child work" and "child labor" conveniently targets impoverished countries while letting its budget contributors - the developed ones - off-the-hook. Reports regarding child labor surface periodically. Children crawling in mines, faces ashen, body deformed. The agile fingers of famished infants weaving soccer balls for their more privileged counterparts in the USA. Tiny figures huddled in sweatshops, toiling in unspeakable conditions. It is all heart-rending and it gave rise to a veritable not-so-cottage industry of activists, commentators, legal eagles, scholars, and opportunistically sympathetic politicians. Ask the denizens of Thailand, sub-Saharan Africa, Brazil, or Morocco and they will tell you how they regard this altruistic hyperactivity - with suspicion and resentment. Underneath the compelling arguments lurks an agenda of trade protectionism, they wholeheartedly believe. Stringent - and expensive - labor and environmental provisions in international treaties may well be a ploy to fend off imports based on cheap labor and the competition they wreak on well-ensconced domestic industries and their political stooges. This is especially galling since the sanctimonious West has amassed its wealth on the broken backs of slaves and kids. The 1900 census in the USA found that 18 percent of all children - almost two million in all - were gainfully employed. The Supreme Court ruled unconstitutional laws banning child labor as late as 1916. This decision was overturned only in 1941. The GAO published a report last week in which it criticized the Labor Department for paying insufficient attention to working conditions in manufacturing and mining in the USA, where many children are still employed. The Bureau of Labor Statistics pegs the number of working children between the ages of 15-17 in the USA at 3.7 million. One in 16 of these worked in factories and construction. More than 600 teens died of work-related accidents in the last ten years. Child labor - let alone child prostitution, child soldiers, and child slavery - are phenomena best avoided. But they cannot and should not be tackled in isolation. Nor should underage labor be subjected to blanket castigation. Working in the gold mines or fisheries of the Philippines is hardly comparable to waiting on tables in a Nigerian or, for that matter, American restaurant. There are gradations and hues of child labor. That children should not be exposed to hazardous conditions, long working hours, used as means of payment, physically punished, or serve as sex slaves is commonly agreed. That they should not help their parents plant and harvest may be more debatable. As Miriam Wasserman observes in "Eliminating Child Labor", published in the Federal Bank of Boston's "Regional Review", second quarter of 2000, it depends on "family income, education policy, production technologies, and cultural norms." About a quarter of children under-14 throughout the world are regular workers. This statistic masks vast disparities between regions like Africa (42 percent) and Latin America (17 percent). In many impoverished locales, child labor is all that stands between the family unit and all-pervasive, life threatening, destitution. Child labor declines markedly as income per capita grows. To deprive these bread-earners of the opportunity to lift themselves and their families incrementally above malnutrition, disease, and famine - is an apex of immoral hypocrisy. Quoted by "The Economist", a representative of the much decried Ecuador Banana Growers Association and Ecuador's Labor Minister, summed up the dilemma neatly: "Just because they are under age doesn't mean we should reject them, they have a right to survive. You can't just say they can't work, you have to provide alternatives." Regrettably, the debate is so laden with emotions and self-serving arguments that the facts are often overlooked. The outcry against soccer balls stitched by children in Pakistan led to the relocation of workshops ran by Nike and Reebok. Thousands lost their jobs, including countless women and 7000 of their progeny. The average family income - anyhow meager - fell by 20 percent. Economists Drusilla Brown, Alan Deardorif, and Robert Stern observe wryly: "While Baden Sports can quite credibly claim that their soccer balls are not sewn by children, the relocation of their production facility undoubtedly did nothing for their former child workers and their families." Such examples abound. Manufacturers - fearing legal reprisals and "reputation risks" (naming-and-shaming by overzealous NGO's) - engage in preemptive sacking. German garment workshops fired 50,000 children in Bangladesh in 1993 in anticipation of the American never-legislated Child Labor Deterrence Act. Quoted by Wasserstein, former Secretary of Labor, Robert Reich, notes: "Stopping child labor without doing anything else could leave children worse off. If they are working out of necessity, as most are, stopping them could force them into prostitution or other employment with greater personal dangers. The most important thing is that they be in school and receive the education to help them leave poverty." Contrary to hype, three quarters of all children work in agriculture and with their families. Less than 1 percent work in mining and another 2 percent in construction. Most of the rest work in retail outlets and services, including "personal services" - a euphemism for prostitution. UNICEF and the ILO are in the throes of establishing school networks for child laborers and providing their parents with alternative employment. But this is a drop in the sea of neglect. Poor countries rarely proffer education on a regular basis to more than two thirds of their eligible school-age children. This is especially true in rural areas where child labor is a widespread blight. Education - especially for women - is considered an unaffordable luxury by many hard-pressed parents. In many cultures, work is still considered to be indispensable in shaping the child's morality and strength of character and in teaching him or her a trade. "The Economist" elaborates: "In Africa children are generally treated as mini-adults; from an early age every child will have tasks to perform in the home, such as sweeping or fetching water. It is also common to see children working in shops or on the streets. Poor families will often send a child to a richer relation as a housemaid or houseboy, in the hope that he will get an education." A solution recently gaining steam is to provide families in poor countries with access to loans secured by the future earnings of their educated offspring. The idea - first proposed by Jean-Marie Baland of the University of Namur and James A. Robinson of the University of California at Berkeley - has now permeated the mainstream. Even the World Bank has contributed a few studies, notably, in June, "Child Labor: The Role of Income Variability and Access to Credit Across Countries" authored by Rajeev Dehejia of the NBER and Roberta Gatti of the Bank's Development Research Group. Abusive child labor is abhorrent and should be banned and eradicated. All other forms should be phased out gradually. Developing countries already produce millions of unemployable graduates a year - 100,000 in Morocco alone. Unemployment is rife and reaches, in certain countries - such as Macedonia - more than one third of the workforce. Children at work may be harshly treated by their supervisors but at least they are kept off the far more menacing streets. Some kids even end up with a skill and are rendered employable. Common Agricultural Policy (CAP) One of the undeniable benefits of the forthcoming enlargement of the European Union (EU) accrues to its veteran members rather than to the acceding countries. The EU is forced to revamp its costly agricultural policies and attendant bloated bureaucracy. This, undoubtedly, will lead, albeit glacially, to the demise of Europe's farming sector as we know it. Contrary to public misperceptions, Europe is far more open to trade than the United States. According to the United Nations (UN), the International Monetary Fund (IMF) and the Organization of Economic Cooperation and Development (OECD), its exports amount to 14 percent of gross domestic product (GDP) compared to America's 11.5 percent. It is also the world's second largest importer. In constant dollar terms, it is the world's largest trader. A recent Trade Policy Review released by the World Trade Organization (WTO) mentions two notable exceptions: farm products and textiles. Europe's average tariff on agricultural produce is four times those levied on non-agricultural goods. Yet, a number of trends conspire to break the eerie stranglehold of 3 percent of Europe's population - its farmers - on its budget and political process. The introduction of the euro rendered prices transparent across borders and revealed to the European consumer how expensive his food is. Scares like the mishandled mad cow disease dented consumer confidence in both politicians and bureaucrats. But, most crucially, the integration of the countries of east and central Europe with their massive agricultural sectors makes the EU's Common Agricultural Policy (CAP) untenable. The CAP guzzles close to half of the EU's $98 billion budget. Recent, controversial reforms, introduced by the European Commission, call for a gradual reduction and diversion of CAP outlays from directly subsidizing production to WTO-compatible investments in agricultural employment, regional development, environment and training and research. Unnoticed, support to farmers by both the EU and member governments has already declined from $120 billion in 1999 to $110 billion in 2000. This decrease has since continued unabated. Still, the EU is unable to provide the candidate countries with the same level of farm subsidies it doles out to the current 15 members. Close to one quarter of Poland's population is directly or indirectly involved in agriculture - ten times the European average. The agreement struck between Germany and France in September and adopted in a summit Brussels in October freezes CAP spending in its 2006 level until 2013. This may further postpone the identical treatment much coveted by the applicants. Theoretically, subsidies for the farm sectors of the new members will increase and subsidies flowing to veteran members will decrease until they are equalized at around 80 percent of present levels throughout the EU by the end of the next budget period in 2013. But, in reality, the entire CAP stands to be renegotiated in 2005-6. No one can guarantee the outcome of this process, especially when coupled with the Doha round of trade liberalization. The offers made now to the candidate countries are not only mean but also meaningless. A recent tweak by Denmark, the current president of the EU, to peg support for farmers in the accession countries at two fifths the going rate, won a cautious welcome by the applicants. Some of this novel subventionary largesse will be deducted from a fund for rural development in the new members. Additionally, national governments will be allowed to top up inadequate EU dollops with governmental budget funds. Even this parsimonious offer - still disputed by the majority of contemporary EU members - will cost the Union an extra $500 million a year. It also fails to tackle equally weighty wrangles about production quotas, EU protectionist "safeguard" measures, import tariffs imposed by the applicant countries against heavily subsidized European farm products, reduced value added taxes on agricultural produce and referential periods and yields - the bases for calculating EU transfers. It also ignores the distinct - and thorny - possibility that the new members will end up as net contributors to the budget. Quoted by Radio Free Europe/Radio Liberty, Sandor Richter, a senior researcher with the Vienna Institute for International Economic Studies, concluded that the first intake of applicants will end up underwriting at least $410 million of the EU's budget in the first year of membership alone. With the GDP per capita of most candidates at one fifth the EU's, this would be a perverse, socially unsettling and politically explosive outcome. Aware of this, the European Commission denies any intention to actually accept cash from the candidates. Their net contributions would remain theoretical, it pledges implausibly. Yet, as long as a country such as Poland is incapable of absorbing - disseminating and utilizing - more than 28 percent of the aid it is currently entitled to - veteran EU members rightly question its administrative ability to tackle much larger provisions - c. $20 billion in the first three years after accession. The prolonged and irascible debate has taken its toll. In some candidate countries, pro-EU sentiment is on the wane. Leszek Miller, Poland's prime minister, told the PAP news agency that Poland should contribute to the EU less than it receives in agricultural subsidies. And what if not? "Nobody would be overly concerned if Poland did not enter the EU together with the first group of new members." Hungary echoes this argument. Almost two thirds of respondents in surveys conducted by the EU in Estonia, Latvia, Slovenia and Lithuania are undecided about EU membership or opposed to it altogether. The situation in the Czech Republic is not much improved. Only Hungary stalwartly supports the EU's eastern tilt. Opinion polls periodically conducted by GfK Hungaria, a market research group owned by GfK Germany, paint a more mixed picture. On the one hand, even in countries with a devout following of EU accession, such as Romania, support for integration has declined this year. Support in Hungary and Poland, on the other hand, picked up. Yet, the EU can't seem to get its act together. According to the Danish paper, Berlingske Tidende, Danish prime minister, Anders Fogh Rasmussen, rules out a "take it or leave it" ultimatum to the candidates. There will be "real negotiations", he insisted. Not so, says Anders Fogh Rasmussen, the Danish president of the EU until Dec 31: "The room for maneuver in negotiations will be very limited ... We have a certain framework, and we stick to it." Yet, disenchantment should not be exaggerated. Naturally, flood-affected farmers throughout the region - from the Czech Republic to Poland - are vigorously protesting their unequal treatment and the compromises their governments are arm-twisted into making. Still, according to a survey released last December by the European Commission, 60 percent of the denizens of the accession countries support it. As the endgame nears, the parties to the negotiations are posturing, though. EU enlargement commissioner, Gunter Verheugen, argued a fortnight ago against equalizing support for Poland's 6 million farmers with the subsidies given to the EU's 8 million smallholders. In a typical feat of incongruity he said it will prevent them from modernizing and alienate other professions. Franz Fischler, the Austrian EU's agriculture commissioner, hinted that miserly production quotas for cereals, meat and dairy products, offered by the EU to the seething applicants, can be augmented. The EU presently provides the candidate countries with funding, within the Special Accession Programme for Agriculture and Rural Development (SAPARD) to support farm investments, to boost processing and marketing of farm and fishery products and to bankroll infrastructure improvements. Hungarian farmers, for instance, are entitled to up to $38 million of SAPARD money annually. In a thinly veiled threat, Fischler included this in a speech he made in a recent official visit to Estonia: "The EU enlargement countries should be pleased with the 25 per cent agriculture subsidies, as the member states have not agreed even on that yet, therefore this should be the first goal and only after that can further subsidies be discussed ... It would not be very wise to tell the EU member states that accession countries are not pleased, that would not be positive for the whole process." Small wonder he was whistled down by irate Polish parliamentarians in an address to a joint session of the parliamentary committees for agriculture and European integration in the Sejm. Poland's fractured farm sector is notoriously inefficient. With one quarter of the labor force it produces less than 4 percent of GDP. But the peasants are well represented in the legislature and soaring unemployment - almost one fifth of all adults - makes every workplace count. In the meantime, the ten would-be new members of the EU have teamed up to present their case in Brussels. Their ministers of finance, foreign affairs and of agriculture, parliamentary deputies in their finance and farm committees - all issued and issue common statements, position papers, briefings and memoranda of understanding. But no one is inclined to take such ad-hoc alliances among the candidate countries seriously. The disparity between their farm sectors is such that it rules out a single voice. Moreover, the EU is strained to the limit of its habitual consensus-driven decision making. The breakdown of the European mechanism of deliberation was brought into sharp relief by the way in which the future of the CAP was decided in a series of chats between the leaders of France and Germany in a hotel in Brussels. Their deal was later rubber stamped, unaltered, in a summit of all EU members last month. The Union is in constitutional and institutional flux. Small and even medium sized members - such as the United Kingdom - are marginalized. As the EU grows to 25 countries, a core of leadership will emerge. It will involve Germany, France and, potentially the UK and Italy. These will hand down blueprints to be fleshed out by the less significant states and by an increasingly sidelined European Commission and a make-believe European Parliament. The countries of central and eastern Europe are and will, for a long time, be second class citizens, tolerated merely because they provide cheap, youthful, labor, raw materials and close-by markets for finished goods. The candidates are strategically located between the old continent and booming Asia. EU enlargement is a thinly disguised exercise in mercantilism tinged with the maudlin ideology of embracing revenant brothers long lost to communism. But beneath the veneer of civility and kultur lurk the cold calculations of realpolitik. The applicant countries - the EU's hinterland - would do well to remember this. According to Herve Gaymard, the French resistance is alive and kicking - at least with regards to the European Commission's proposed reforms of the European Union's Common Agricultural Policy (CAP). The French Minister for Agriculture, Food, Fisheries and Rural Affairs, in a speech to the misnamed "Real Solutions for the Future" Oxford Farming Conference last week, drew the battle lines. France - and six other EU countries - intend to stick religiously to a deal struck, tκte-ΰ-tκte, between the French president and the German chancellor last year. The CAP - which now consumes close to half of the EU's budget - will not be revamped until 2013 at the earliest, though outlays will be frozen in real terms and, starting in 2006, gradually diverted from subsidizing production to environmental and other good causes ("decoupling" and "modulation" in EU jargon). This upset the EU's ten new members, slated to join as early as May 2004. With spending capped, they are unlikely to enjoy the same pecuniary support bestowed on the veterans, even after 2013. As it is, their agricultural benefits are phased over ten years and face an uncertain future when the CAP is, inevitably and finally, scrapped. Moreover, France's recalcitrance imperils the crucial Doha round of trade talks. Both the EU and the USA are supposed to reveal their hands by March. The developing countries are already up in arms over promises made by the richer polities in the protracted Uruguay round and then promptly ignored by them. Agriculture is arguably the poorer members' highest priority. They demand the opening of the rich world's markets, whittling down export and production subsidies and the abrogation of non-tariff trade barriers and practices, such as the profuse application of anti-dumping quotas and duties. Gaymard proffered the usual woolly mantras of "farm products are more than marketable goods", "France, and Europe in general, need security of food supply", "food cannot be left to the mercy of market forces". Farmers, unlike industrialists - insisted the Minister counterfactually - cannot simply relocate and agrarian pursuits are a pillar of the nation's culture and its attachment to the land. Yet, it cannot be denied that Gaymard advanced in his speech a few thought-provoking and oft-overlooked points. He convincingly argued that farm products covered by EU subsidies are rarely in direct competition with the crops of the poor in Africa and Asia. The cotton, rice and groundnut oil subventions generously doled out to growers in the United States - the EU's most vocal critic - harm the third world smallholders and sharecroppers it purports to defend. The IMF - perceived in Europe as the long and heartless arm of the Americans - has dismantled the coffee regime and marketing structures causing irreparable damage to its indigent growers, Gaymard said. The CAP, insists Gaymard, does not encourage environmental ills. The policy does not subsidize the husbandry of disease-prone poultry and pigs, nor does it support genetically modified crops. The CAP is also way cheaper than portrayed by its detractors. Food constitutes only 16 percent of the family budget - one third of its share when the CAP was instituted, four decades ago. The CAP amounts to a mere 1 percent of the combined public spending of all EU members. The comparable figure in America is 1.5 percent. This last argument is, of course, spurious. It ignores the distorting effects of the CAP: exorbitant food prices in the EU, double payments by EU denizens, once as taxpayers and then as consumers, mountains of butter and rivers of milk produced solely for the sake of finagling subsidies out of an inert and bloated bureaucracy and deteriorating rela |
