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Earnings Yield In American novels, well into the 1950's, one finds protagonists using the future stream of dividends emanating from their share holdings to send their kids to college or as collateral. Yet, dividends seemed to have gone the way of the Hula-Hoop. Few companies distribute erratic and ever-declining dividends. The vast majority don't bother. The unfavorable tax treatment of distributed profits may have been the cause. The dwindling of dividends has implications which are nothing short of revolutionary. Most of the financial theories we use to determine the value of shares were developed in the 1950's and 1960's, when dividends were in vogue. They invariably relied on a few implicit and explicit assumptions:
But how is the fair value to be determined? A discount rate is applied to the stream of all future income from the share - i.e., its dividends. What should this rate be is sometimes hotly disputed - but usually it is the coupon of "riskless" securities, such as treasury bonds. But since few companies distribute dividends - theoreticians and analysts are increasingly forced to deal with "expected" dividends rather than "paid out" or actual ones. The best proxy for expected dividends is net earnings. The higher the earnings - the likelier and the higher the dividends. Thus, in a subtle cognitive dissonance, retained earnings - often plundered by rapacious managers - came to be regarded as some kind of deferred dividends. The rationale is that retained earnings, once re-invested, generate additional earnings. Such a virtuous cycle increases the likelihood and size of future dividends. Even undistributed earnings, goes the refrain, provide a rate of return, or a yield - known as the earnings yield. The original meaning of the word "yield" - income realized by an investor - was undermined by this Newspeak. Why was this oxymoron - the "earnings yield" - perpetuated? According to all current theories of finance, in the absence of dividends - shares are worthless. The value of an investor's holdings is determined by the income he stands to receive from them. No income - no value. Of course, an investor can always sell his holdings to other investors and realize capital gains (or losses). But capital gains - though also driven by earnings hype - do not feature in financial models of stock valuation. Faced with a dearth of dividends, market participants - and especially Wall Street firms - could obviously not live with the ensuing zero valuation of securities. They resorted to substituting future dividends - the outcome of capital accumulation and re-investment - for present ones. The myth was born. Thus, financial market theories starkly contrast with market realities. No one buys shares because he expects to collect an uninterrupted and equiponderant stream of future income in the form of dividends. Even the most gullible novice knows that dividends are a mere apologue, a relic of the past. So why do investors buy shares? Because they hope to sell them to other investors later at a higher price. While past investors looked to dividends to realize income from their shareholdings - present investors are more into capital gains. The market price of a share reflects its discounted expected capital gains, the discount rate being its volatility. It has little to do with its discounted future stream of dividends, as current financial theories teach us. But, if so, why the volatility in share prices, i.e., why are share prices distributed? Surely, since, in liquid markets, there are always buyers - the price should stabilize around an equilibrium point. It would seem that share prices incorporate expectations regarding the availability of willing and able buyers, i.e., of investors with sufficient liquidity. Such expectations are influenced by the price level - it is more difficult to find buyers at higher prices - by the general market sentiment, and by externalities and new information, including new information about earnings. The capital gain anticipated by a rational investor takes into consideration both the expected discounted earnings of the firm and market volatility - the latter being a measure of the expected distribution of willing and able buyers at any given price. Still, if earnings are retained and not transmitted to the investor as dividends - why should they affect the price of the share, i.e., why should they alter the capital gain? Earnings serve merely as a yardstick, a calibrator, a benchmark figure. Capital gains are, by definition, an increase in the market price of a security. Such an increase is more often than not correlated with the future stream of income to the firm - though not necessarily to the shareholder. Correlation does not always imply causation. Stronger earnings may not be the cause of the increase in the share price and the resulting capital gain. But whatever the relationship, there is no doubt that earnings are a good proxy to capital gains. Hence investors' obsession with earnings figures. Higher earnings rarely translate into higher dividends. But earnings - if not fiddled - are an excellent predictor of the future value of the firm and, thus, of expected capital gains. Higher earnings and a higher market valuation of the firm make investors more willing to purchase the stock at a higher price - i.e., to pay a premium which translates into capital gains. The fundamental determinant of future income from share holding was replaced by the expected value of share-ownership. It is a shift from an efficient market - where all new information is instantaneously available to all rational investors and is immediately incorporated in the price of the share - to an inefficient market where the most critical information is elusive: how many investors are willing and able to buy the share at a given price at a given moment. A market driven by streams of income from holding securities is "open". It reacts efficiently to new information. But it is also "closed" because it is a zero sum game. One investor's gain is another's loss. The distribution of gains and losses in the long term is pretty even, i.e., random. The price level revolves around an anchor, supposedly the fair value. A market driven by expected capital gains is also "open" in a way because, much like less reputable pyramid schemes, it depends on new capital and new investors. As long as new money keeps pouring in, capital gains expectations are maintained - though not necessarily realized. But the amount of new money is finite and, in this sense, this kind of market is essentially a "closed" one. When sources of funding are exhausted, the bubble bursts and prices decline precipitously. This is commonly described as an "asset bubble". This is why current investment portfolio models (like CAPM) are unlikely to work. Both shares and markets move in tandem (contagion) because they are exclusively swayed by the availability of future buyers at given prices. This renders diversification inefficacious. As long as considerations of "expected liquidity" do not constitute an explicit part of income-based models, the market will render them increasingly irrelevant. EBRD (European Bank for Reconstruction and Development) In typical bureaucratese, the pensive EBRD analyst ventures with the appearance of compunction: "A number of projects have fallen short of acceptable standards (notice the passive, exculpating voice - SV) and have put the reputation of the bank at risk". If so, very little was risked. The outlandish lavishness of its City headquarters, the apotheosis of the inevitable narcissism of its first French Chairman (sliding marble slabs, motion sensitive lighting and designer furniture) - is, at this stage, its only tangible achievement. In the territories of its constituencies and shareholders it is known equally for its logy pomposity, the irrelevance of its projects, its lack of perspicacity and its Kafkaesque procedures. And where the IMF sometimes indulges in oblique malice and corrupt opaqueness, the EBRD wallows merely in avuncular inefficacy. Both are havens of insouciant third rate economists and bankers beyond rating. Established in 1991, "it exists to foster the transition towards open market oriented economies and to promote private and entrepreneurial initiative in the countries of central and eastern Europe and the Commonwealth of Independent States (CIS) committed to and applying the principles of multiparty democracy, pluralism and market economics. The EBRD seeks to help its 26 countries of operations to implement structural and sectoral economic reforms, promoting competition, privatization and entrepreneurship, taking into account the particular needs of countries at different stages of transition. Through its investments it promotes private sector activity, the strengthening of financial institutions and legal systems, and the development of the infrastructure needed to support the private sector. The Bank applies sound banking and investment principles in all of its operations. In fulfilling its role as a catalyst of change, the Bank encourages co-financing and foreign direct investment from the private and public sectors, helps to mobilize domestic capital, and provides technical co-operation in relevant areas. It works in close co-operation with international financial institutions and other international and national organizations. In all of its activities, the Bank promotes environmentally sound and sustainable development." Grandiloquence aside, the EBRD was supposed to foster the formation of the private sector in the revenant wreckage of Central and Eastern Europe, the Balkan, Russia and the New Independent States. This it was mandated to do by providing finance where there was none ("bridging the gaps in the post communist financial system" to quote "The Economist"). Put more intelligibly, it was NOT supposed to transform itself into a long-term investment portfolio with equity holdings in most blue-chips in the region. Yet, this is precisely what it ended up becoming. It avoided project financing like the plague and met the burgeoning capital needs of small and medium size enterprises (SMEs) grudgingly. And it refuses to divest itself of stakes in the best run and most efficiently managed firms from Russia to the Czech Republic. In a way, it competes head on with other investors and commercial banks - often crowding them out with its subsidized financing. One of its main mistakes, in a depressingly impressive salmagundi, is that it channelled precious resources to this budding sector (SMEs), the dynamo of every economy, through the domestic, decrepit, venal and politically manhandled banking system. The inevitable result was a colossal waste of resources. The money was allocated to sycophantic cronies and sinecured relatives (often one and the same) and to gigantic, state-owned or state-favoured loss makers. Most of it lay idle and yielded to its hosts a hefty income in arbitrage and speculation. As banks went bankrupt, they wiped whole portfolios of EBRD SME funds, theoretically guaranteed by even more bankrupt states. Thus, the only segments of the private sector to benefit handsomely from the EBRD were lawyers and accountants involved in the umpteen lawsuits the EBRD is mired in. It is a growth industry in "countries" such as Russia. This is the melancholy outcome of indiscriminate, politically-motivated lending and of a lackadaisical performance as both lenders and shareholders. In the spirit of its first chairman, the suave and titivated Attali, the bank is in a constant road show, mortified by the possibility of its dissolution by reason of irrelevance. It aims to impress the West with its grandiose projects, mega investments, fast returns and acquiescence. In thus behaving, it is engaged in a perditionable perfidy of its fiduciary obligations. It lends to criminal managers, winking at their off-shore shenanigans and turning a blind eye to the scapegrace slaughter of minority shareholders. It throws good money after bad, cosies up to oligarchs near and far and engages in creative accounting. Instead of Westernizing the Easterners - it has been Easternized by them. Its sedentary though peregrinating employees are more adept at wining and at dining the high and mighty and at haughtily maundering in the odd, tangential, seminar - than at managing a banking institution or looking after the interests of their nominal shareholders with the tutelary solicitude expected of a bank. Consider two examples: Macedonia The nascent private sector is nowhere to be found in the list of projects the EBRD so sagely chose to falter into here. The Electricity and Telecoms monopolies are prime beneficiaries as is the airport. The EBRD is also a passive shareholder in both big universal banks - until recently, conduits of state mismanagement. The SME and Trade Facilitation credit lines were conveniently divvied up among five domestic banks (one went belly up, the managers of two are under criminal investigation and one was sold to a Greek state bank). Despite vigorous protestations to the contrary, none of this money reached its proclaimed entrepreneurial targets. Two loans were made to giant local firms - the natural preserve of commercial lenders and equity investors the world over. The EBRD contributed nothing to the emergence of a management culture, to the development of proper corporate governance, to the safeguarding of property rights and the protection of minority shareholders here. Instead, it colluded in the perpetuation of monopolies, shoddy and shady banking practices, the pertinacious robbery titled "privatization" and the pretence of funding languishing private sector enterprises. Russia Its 2 billion US dollars portfolio all but wiped out in the August 1998 financial crisis, the EBRD has now returned with 700 million new Euros to be - conservatively but not more safely - lent in major energy and telecom behemoths. The historic, pre-1998, portfolio appears impressive. Almost 11 billion US dollars were generated by the EBRD's less than 4. The bottom line reads 94 projects. Yet, when one neutralizes the infrastructural ones (including the gas and energy sector) - one is left with less than 50% of the amount. Add "infrastructure-like" projects (water transportation and the like) - and less than 30% of the portfolio went to what can be called proper "private sector". Moreover, even these investments and credits were geared towards traditional and smokestack industries: mining, food processing, pipelines, rubber and such. Not an entrepreneur in sight. And the EBRD's meagre loan-loss provisions and reserves cast serious doubts regarding the mental state of both its directors and its auditors. To varying degrees, these two countries are typical. Development banks, like industrial policy, import substitution and poverty reduction, have gone in and out of multilateral fashion several times in the last few decades. But there is a consensus regarding some minimum aims of such bureaucracy-laden establishments - and the EBRD achieves none. It does not encourage entrepreneurship. It does not improve corporate governance. It does not enhance property rights. It does not allocate economic resources efficiently. It competes directly with other - more desirable - financing alternatives. It is not equipped to monitor its vast and inert portfolio. By implication it collaborates in graft, tax evasion and worse. It is a waste of scarce resources badly needed elsewhere. It should be administered a coup de grace. And its marbled abode - so out of touch with the realities of its clients and its balance sheet - should be sold to someone more up to the task. A bank, for instance. POST SCRIPTUM - Comments Made to "The Banker" - February 2002 I would not have written the same article today. The EBRD used to be pretty monolithic in its four orientations: pro-state companies, pro-big business (or mega projects), pro-governmental projects, and pro-commodities (mostly energy products). It is now more open to SME financing - and not only as lip service. Instead of colluding with venal, inefficient, crony-ridden, and decrepit local banking systems - it has taken over them in partnership with foreign investors. It has a more tangible in-field operating presence. Its assets are more balanced (in maturity structures, single lender exposures, collateral portfolios, etc.). It is more innovative and creative in its collaboration with the private sector, offering a varied range of vehicles. In short: it is becoming more community orientated and less "commercially" conservative. It begins to fulfill its original charter of filling the gap between IFI's and micro-lending. It is still hobbled by overweening political interventionism - but that is to be expected in a regional development bank (see the ADB, IADB, and so on). Economics, Behavioral Aspects of
"It is impossible to describe any human action
if one does not refer to the meaning the actor sees in the stimulus as well as
in the end his response is aiming at."
The outcome has been an embarrassing divorce between economic theory and its subjects. The economic actor is assumed to be constantly engaged in the rational pursuit of self interest. This is not a realistic model - merely a useful approximation. According to this latter day - rational - version of the dismal science, people refrain from repeating their mistakes systematically. They seek to optimize their preferences. Altruism can be such a preference, as well. Still, many people are non-rational or only nearly rational in certain situations. And the definition of "self-interest" as the pursuit of the fulfillment of preferences is a tautology. The theory fails to predict important phenomena such as "strong reciprocity" - the propensity to "irrationally" sacrifice resources to reward forthcoming collaborators and punish free-riders. It even fails to account for simpler forms of apparent selflessness, such as reciprocal altruism (motivated by hopes of reciprocal benevolent treatment in the future). Even the authoritative and mainstream 1995 "Handbook of Experimental Economics", by John Hagel and Alvin Roth (eds.) admits that people do not behave in accordance with the predictions of basic economic theories, such as the standard theory of utility and the theory of general equilibrium. Irritatingly for economists, people change their preferences mysteriously and irrationally. This is called "preference reversals". Moreover, people's preferences, as evidenced by their choices and decisions in carefully controlled experiments, are inconsistent. They tend to lose control of their actions or procrastinate because they place greater importance (i.e., greater "weight") on the present and the near future than on the far future. This makes most people both irrational and unpredictable. Either one cannot design an experiment to rigorously and validly test theorems and conjectures in economics - or something is very flawed with the intellectual pillars and models of this field. Neo-classical economics has failed on several fronts simultaneously. This multiple failure led to despair and the re-examination of basic precepts and tenets. Consider this sample of outstanding issues: Unlike other economic actors and agents, governments are accorded a special status and receive special treatment in economic theory. Government is alternately cast as a saint, seeking to selflessly maximize social welfare - or as the villain, seeking to perpetuate and increase its power ruthlessly, as per public choice theories. Both views are caricatures of reality. Governments indeed seek to perpetuate their clout and increase it - but they do so mostly in order to redistribute income and rarely for self-enrichment. Economics also failed until recently to account for the role of innovation in growth and development. The discipline often ignored the specific nature of knowledge industries (where returns increase rather than diminish and network effects prevail). Thus, current economic thinking is woefully inadequate to deal with information monopolies (such as Microsoft), path dependence, and pervasive externalities. Classic cost/benefit analyses fail to tackle very long term investment horizons (i.e., periods). Their underlying assumption - the opportunity cost of delayed consumption - fails when applied beyond the investor's useful economic life expectancy. People care less about their grandchildren's future than about their own. This is because predictions concerned with the far future are highly uncertain and investors refuse to base current decisions on fuzzy "what ifs". This is a problem because many current investments, such as the fight against global warming, are likely to yield results only decades hence. There is no effective method of cost/benefit analysis applicable to such time horizons. How are consumer choices influenced by advertising and by pricing? No one seems to have a clear answer. Advertising is concerned with the dissemination of information. Yet it is also a signal sent to consumers that a certain product is useful and qualitative and that the advertiser's stability, longevity, and profitability are secure. Advertising communicates a long term commitment to a winning product by a firm with deep pockets. This is why patrons react to the level of visual exposure to advertising - regardless of its content. Humans may be too multi-dimensional and hyper-complex to be usefully captured by econometric models. These either lack predictive powers or lapse into logical fallacies, such as the "omitted variable bias" or "reverse causality". The former is concerned with important variables unaccounted for - the latter with reciprocal causation, when every cause is also caused by its own effect. These are symptoms of an all-pervasive malaise. Economists are simply not sure what precisely constitutes their subject matter. Is economics about the construction and testing of models in accordance with certain basic assumptions? Or should it revolve around the mining of data for emerging patterns, rules, and "laws"? On the one hand, patterns based on limited - or, worse, non-recurrent - sets of data form a questionable foundation for any kind of "science". On the other hand, models based on assumptions are also in doubt because they are bound to be replaced by new models with new, hopefully improved, assumptions. One way around this apparent quagmire is to put human cognition (i.e., psychology) at the heart of economics. Assuming that being human is an immutable and knowable constant - it should be amenable to scientific treatment. "Prospect theory", "bounded rationality theories", and the study of "hindsight bias" as well as other cognitive deficiencies are the outcomes of this approach. To qualify as science, economic theory must satisfy the following cumulative conditions:
Many current economic theories do not meet these cumulative criteria and are, thus, merely glorified narratives. But meeting the above conditions is not enough. Scientific theories must also pass the crucial hurdles of testability, verifiability, refutability, falsifiability, and repeatability. Yet, many economists go as far as to argue that no experiments can be designed to test the statements of economic theories. It is difficult - perhaps impossible - to test hypotheses in economics for four reasons.
In a way, economics has an affinity with some private languages. It is a form of art and, as such, it is self-sufficient and self-contained. If certain structural, internal constraints and requirements are met – a statement in economics is deemed to be true even if it does not satisfy external (scientific) requirements. Thus, the standard theory of utility is considered valid in economics despite overwhelming empirical evidence to the contrary - simply because it is aesthetic and mathematically convenient. So, what are economic "theories" good for? Economic "theories" and narratives offer an organizing principle, a sense of order, predictability, and justice. They postulate an inexorable drive toward greater welfare and utility (i.e., the idea of progress). They render our chaotic world meaningful and make us feel part of a larger whole. Economics strives to answer the "why’s" and "how’s" of our daily life. It is dialogic and prescriptive (i.e., provides behavioural prescriptions). In certain ways, it is akin to religion. In its catechism, the believer (let's say, a politician) asks: "Why... (and here follows an economic problem or behaviour)". The economist answers: "The situation is like this not because the world is whimsically cruel, irrational, and arbitrary - but because ... (and here follows a causal explanation based on an economic model). If you were to do this or that the situation is bound to improve". The believer feels reassured by this explanation and by the explicit affirmation that there is hope providing he follows the prescriptions. His belief in the existence of linear order and justice administered by some supreme, transcendental principle is restored. This sense of "law and order" is further enhanced when the theory yields predictions which come true, either because they are self-fulfilling or because some real "law", or pattern, has emerged. Alas, this happens rarely. As "The Economist" notes gloomily, economists have the most disheartening record of failed predictions - and prescriptions. Economies, Classification of
The national economies of the world can be divided to the scavenger and the predator types. The former are parasitic economies which feed off the latter. The relationship is often not that of symbiosis, where two parties maintain a mutually beneficial co-existence. Here, one economy feeds off others in a way, which is harmful, even detrimental to the hosts. But this interaction - however undesirable - is the region's only hope. The typology of scavenger economies reveals their sources of sustenance: Conjunctural - These economies feed off historical or economic conjunctures or crises. They position themselves as a bridge between warring or conflicting parties. Switzerland rendered this service to Nazi Germany (1933-1945), Macedonia and Greece to Serbia (1992 to the present), Cyprus aided and abetted Russia (1987 to the present), Jordan for Iraq (1991 to the present), and now, Montenegro acts the part for both Serbia and Kosovo. These economies consist of smuggling, siege breaking, contraband, arms trade and illegal immigration. They benefit economically by violating both international and domestic laws and by providing international outcasts and rogues with alternative routes of supply, and with goods and services. Criminal - These economies are infiltrated by criminal gangs or suffused with criminal behaviour. Such infiltration is two phased: the properly criminal phase and the money laundering one. In the first phase, criminal activities yield income and result in wealth accumulation. In the second one, the money thus generated is laundered and legitimized. It is invested in legal, above-board activities. The economy of the USA during the 19th century and in the years of prohibition was partly criminal. It is reminiscent of the Russian economy in the 1990s, permeated by criminal conduct as it is. Russians often compare their stage of capitalist evolution to the American "Wild West". Piggyback Service Economies - These are economies, which provide predator economies with services. These services are aimed at re-establishing economic equilibrium in the host (predator) economies. Tax shelters are a fine example of this variety. In many countries taxes are way too high and result in the misallocation of economic resources. Tax shelters offer a way of re-establishing the economic balance and re-instating a regime of efficient allocation of resources. These economies could be regarded as external appendages, shock absorbers and regulators of their host economies. They feed off market failures, market imbalances, arbitrage opportunities, shortages and inefficiencies. Many post-Communist countries have either made the provision of such services a part of their economic life or are about to do so. Free zones, off shore havens, off shore banking and transhipment ports proliferate, from Macedonia to Archangelsk. Aid Economies - Economies that derive most of their vitality from aid granted them by donor countries, multilateral aid agencies and NGOs. Many of the economies in transition belong to this class. Up to 15% of their GDP is in the form of handouts, soft loans and technical assistance. Rescheduling is another species of financial subsidy and virtually all CEE countries have benefited from it. The dependence thus formed can easily deteriorate into addiction. The economic players in such economies engage mostly in lobbying and in political manoeuvring - rather than in production. Derivative or Satellite Economies - These are economies, which are absolutely dependent upon or very closely correlated with other economies. This is either because they conduct most of their trade with these economies, or because they are a (marginal) member of a powerful regional club (or aspire to become one), or because they are under the economic (or geopolitical or military) umbrella of a regional power or a superpower. Another variant is the single-commodity or single-goods or single-service economies. Many countries in Africa and many members of the OPEC oil cartel rely on a single product for their livelihood. Russia, for instance, is heavily dependent on proceeds from the sale of its energy products. Most Montenegrins derive their livelihood, directly or indirectly, from smuggling, bootlegging and illegal immigration. Drugs are a major "export" earner in Macedonia and Albania. Copycat Economies - These are economies that are based on legal or (more often) illegal copying and emulation of intellectual property: patents, brandnames, designs, industrial processes, other forms of innovation, copyrighted material, etc. The prime example is Japan, which constructed its whole mega-economy on these bases. Both Bulgaria and Russia are Meccas of piracy. Though prosperous for a time, these economies are dependent on and subject to the vicissitudes of business cycles. They are capital sensitive, inherently unstable and with no real long term prospects if they fail to generate their own intellectual property. They reflect the volatility of the markets for their goods and are overly exposed to trade risks, international legislation and imports. Usually, they specialize in narrow segments of manufacturing which only increases the precariousness of their situation. The Predator Economies can also be classified: Generators of Intellectual Property - These are economies that encourage and emphasize innovation and progress. They reward innovators, entrepreneurs, non-conformism and conflict. They spew out patents, designs, brands, copyrighted material and other forms of packaged human creativity. They derive most of their income from licensing and royalties and constitute one of the engines driving globalization. Still, these economies are too poor to support the complementary manufacturing and marketing activities. Their natural counterparts are the "Industrial Bases". Within the former Eastern Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent, such generators. Israel is such an economy in the Middle East. Industrial Bases - These are economies that make use of the intellectual property generated by the former type within industrial processes. They do not copy the intellectual property as it is. Rather, they add to it important elements of adaptation to niche markets, image creation, market positioning, packaging, technical literature, combining it with other products or services, designing and implementing the whole production process, market (demand) creation, improvement upon the originals and value added services. These contributions are so extensive that the end products, or services can no longer to be identified with the originals, which serve as mere triggers. Again, Poland, Hungary, Slovenia (and to a lesser extent, Croatia) come to mind. Consumer Oriented Economies - These are Third Wave (Alvin Toffler's term), services, information and knowledge driven economies. The over-riding set of values is consumer oriented. Wealth formation and accumulation are secondary. The primary activities are concerned with fostering markets and maintaining them. These "weightless" economies concentrate on intangibles: advertising, packaging, marketing, sales promotion, education, entertainment, servicing, dissemination of information, knowledge formation, trading, trading in symbolic assets (mainly financial), spiritual pursuits, and other economic activities which enhance the consumer's welfare (pharmaceuticals, for instance). These economies are also likely to sport a largish public sector, most of it service oriented. No national economy in CEE qualifies as "Consumer Oriented", though there are pockets of consumer-oriented entrepreneurship within each one. The Trader Economies - These economies are equivalent to the cardiovascular system. They provide the channels through which goods and services are exchanged. They do this by trading or assuming risks, by providing physical transportation and telecommunications, and by maintaining an appropriately educated manpower to support all these activities. These economies are highly dependent on the general health of international trade. Many of the CEE economies are Trader economies. The openness ratio (trade divided by GDP) of most CEE countries is higher than the G7 countries'. Macedonia, for instance, has a GDP of 3.6 Billion US dollars and exports and imports of c. 2 billion US dollars. These are the official figures. Probably, another 0.5 billion Us dollars in trade go unreported. additionally, it has one of the lowest weighted customs rate in the world. Openness to trade is an official policy, actively pursued. These economies are predatory in the sense that they engage in zero-sum games. A contract gained by a Slovenian company - is a contract lost by a Croatian one. Luckily, in this last decade, the economic cake tended to grow and the sum of zero sum games was more welfare to all involved. These vibrant economies - the hope of benighted and blighted regions - are justly described as "engines" because they pull all other (scavenger) economies with them. They are not likely to do so forever. But their governments have assimilated the lessons of the 1930s. Protectionism is bad for everyone involved - especially for economic engines. Openness to trade, protection of property rights and functioning institutions increase both the number and the scope of markets. Education (in Countries in Transition) October 2002 has been a busy month in central and eastern Europe, at least as far as education goes. "Kliment and Metodius" university in Skopje, Macedonia went on investigating forged diplomas issued to its students - and staff - in the economics faculty by Bulgarian diploma mills. Similar allegations - of forged or hawked academic credentials - surface periodically against politicians and scholars in all the countries in transition - from Russia to Yugoslavia. Underpaid professors throughout the region have been accused in the local media of demanding - and receiving - bribes, including sexual favors, to tinker with exam marks. The denizens of central and east Europe are schizophrenic about their education system. On the one hand, they are proud of its achievements. According to the 1996 Third International Maths and Science Study, The Czech Republic and Slovakia fared better than Switzerland and Netherlands in mathematics. Hungary and Russia beat Australia, Ireland, Canada, Belgium, Israel, Sweden, Germany, England, Norway, Denmark, the United States and a host of other Western heavyweights. The situation with science skills was even better with the Czech Republic in the second place out of 41 countries, Bulgaria ranked fifth, Slovenia seventh, Hungary ninth and Russia in the fourteenth rung. This stellar showing defied low spending per pupil and high number of students per class in these mostly poor countries. But corruption is endemic, libraries and laboratories are poorly stocked, state institutions are cash-strapped and certain subjects - such as computer science, foreign languages, international law, business administration, and even economics - are poorly taught by Soviet-era educators. Hence the clamor for private and foreign alternatives. Brain drain is rampant. According to government figures, 82,000 youths - 4 percent of its total population - left Macedonia since 1991 to study abroad. Most of them never bother to return. Foreign information technology firms are forced to open their facilities to cater to their growing needs for skills. In July, the first Cisco Certified Network Associate Academy on the Balkans was opened in the building of the Bulgarian Industrial Association (BIA). Neighboring countries, such as Italy and Greece, aware of Bulgaria's cheap but well-educated cadre, have set up bilateral cooperation schemes to tap it. Italy now allows Bulgarians to spend six months on work and study in Italian institutions. Both Uni Credito Italiano and Bulbank are offering interest-free loans to the would-be students. Bulgaria signed with Greece a 2 year cooperation agreement including a student exchange program. The Serbian government submitted last week 11 projects worth $164 million to be funded the Greek Plan for Economic Reconstruction of the Balkan. Part of the money will be spent on educational schemes. Turkey is eyeing Macedonia. In a visit in august, the Turkish minister of education pledged to invest in eastern Macedonia home to a sizable Turkish minority. Foreign establishments are sometimes regarded by xenophobic locals as cultural, social, and political beachheads. The excellent university of Blagoevgrad in Bulgaria is only half-jokingly known as "CIA University" due to the massive amounts of American funding and the number of American lecturers. It happens to straddle the border with Serbia, a one-time foe of the United States. The Central European University in Budapest, Hungary, funded with hundreds of millions of dollars from George Soros' fortune, has been subject to head-spinning conspiracy theories ever since it was founded in 1991. But the most encouraging trend by far is the privatization of education, hitherto the patronage fief of politicians, trade unions, and state bureaucrats. According to The Economist Armenia had last year 69 private institutions of higher education with 20,000 students. Bulgaria had 9 with 28,000 students and Hungary had 32 with 28,000 undergraduates. The record belongs to Poland - 195 private institutions with 378,000 learners, one quarter of the total. Much smaller Romania had 54 establishments with 131,000 pupils - one third of all students in higher education. Some of these private schools are joint ventures with enterprising municipalities. According to Mediapoolbg.com, the newly opened program of business administration offered by the City University in Pravets, Bulgaria and the International Higher Business School plans to teach management, e-commerce and information technologies. The curriculum is subsidized by the US Congress and the Ministry of Education and Science. For an annual fee of $2500, students will attend classes taught by both Bulgarian and American lecturers and receive a dual Bulgarian and American diploma. City University offers both distance learning and classroom instruction in Poland, Romania, Bulgaria and Greece. There is an intra-regional demand for successful managers of private educational facilities. The Regional Vice President of the aforementioned branch of City University in Bulgaria is Jan Rebro, a Slovak, who previously served as Chairman of College of Management, the first private college in Slovakia. Education in these parts is not a luxury. According to a 1999 government report about unemployment, less than 2 percent of university graduates are unemployed in Macedonia - compared to more than 40 percent of the unskilled. In July, the Bulgarian National Statistics Institute published a survey of micro-enterprises, about 92 percent of all businesses in the country. The vast majority of all the owners-entrepreneurs turned out to be highly educated. Governments are aware of the correlation between education and prosperity. The Serb authorities are offering 6-months interest-free loans to buy school books and supplies. HINA, the Croat news agency, published last month a government blueprint for countering the declining numbers of high school and college students over the past ten years and a drop in the quality of education. Only seven per cent of the population ever attend college and just over one third of these actually graduate. But the countries of central and eastern Europe would do well not to fall into the sequential traps of Western education. As Alison Wolf recounts in her recently published tome “Does Education Matter? Myths about Education and Economic Growth” (Penguin Books, 2002), an obsession with quantitative targets in education reduces its quality and adversely affects economic growth. Moreover, educational issues often serve as proxy for national agendas. Years of bloody clashes between Macedonians and Albanians in western Macedonia led, last year, following intense arm-twisting by the international community, to the opening of the Southeast Europe University in Albanian-dominated Tetovo. In a country still torn by inter-ethnic strife and daily violent clashes in mixed schools, the university is "committed to the Albanian culture, language, and population". About half its board is comprised of nationalistic political activists. Bilingual education was always one of the chief demands of the Albanian minority. Yet, the opening of the university in February last year did nothing to forestall an armed uprising of Albanian rebels. Similarly, equal educational opportunities tops the agenda of the 4-5 million Romas (gypsies) in central Europe and the Balkan. Last November, Save the Children, a charity, reported that two thirds of Roma children never attend school. Most of the rest are shunted off by hostile governments to special schools for the mentally challenged and drop out by age 15. One in thousand ever makes it past the bullying and the bureaucratic hurdles to a university. Pressured by international public opinion and the European Union, governments reluctantly allowed private groups in the Czech Republic, Hungary and Slovakia to acquaint Roma toddlers with the indigenous languages so as to qualify them for a regular primary school. Finally, caveat emptor. Some "private institutions" - especially distance learning diploma mills - front for scam artists. The quality of instructors and lecturers - most of them moonlighting between jobs in state institutions - is often questionable. Curricula are rarely effectively scrutinized and controlled and there is no proper process of accreditation. Annual fees are high and equal a few years to a few decades of average pay. Links and joint ventures with foreign universities help but cannot substitute for structured and continued oversight. Electricity (Markets in Central and Eastern Europe) Russia's lower house, the Duma, is set to debate in November 29, a far reaching reform in the bloated and inefficient electricity generation sector. Worried by resurging inflation, the Russian government scrapped its plan to allow the Federal Energy Commission to fix tariffs for gas, power, and railways. A Commission spokesman complained to Moscow Times that government officials have overridden its authority to regulate the prices of natural monopolies. It threatened to take the matter to court. Electricity throughout the former Soviet bloc is heavily subsidized. Governments are reluctant to raise prices to realistic levels lest they incur the wrath of their impoverished subjects and reignite dormant inflation. Fuel prices, government taxes, and variable costs, such as labor, have been rising steeply in the last decade but the electricity behemoths' ability to amend their tariffs to reflect these is politically curbed. The Russian Unified Energy Systems electricity monopoly was allowed to up its prices this year by a mere 14 percent - barely the rate of Russian inflation. Its chances to attract the $50 billion in investments it says it needs in the forthcoming 10 years are slim as long as it continues to charge its customers - both wholesale and retail - a fraction of the cost of electricity its West European counterparts charge theirs. A restructuring plan, approved by the government in May 2001, is going nowhere. The sale of loss making generating plants - even at bargain basement prices and to insiders - is impossible without a massive - and massively unpopular - boost to electricity prices. Vociferous protests in Croatia last month forced the government to shelf a scheduled 9 percent hike in the price of electricity for domestic consumption. The IMF is displeased with the government's stranglehold over the energy sector and is pushing for liberalization. Slovakia's news agency, TASR, reported this week that thousands of members of the Trade Unions Confederation demonstrated in Bratislava against proposed budget cuts and increases in regulated prices, including electricity's. Still, consumers will not be able to buck the trend forever. Even the rich countries of the region are facing already unsustainable electricity subsidy bills. The Slovenian news agency, STA, reported yesterday that Slovenian producers of electricity and natural gas warned that - once the domestic market opens to foreign competition next January - they will be at a disadvantage due to the unrealistic electricity "price model". Yet, liberalization and privatization have acquired a bad name after the debacles in California and elsewhere in the world. Moreover, electricity generation depends on a free market in fuels- a rarity in central and eastern Europe. Prices cannot rise above the increase in net disposable income. As infrastructure crumbles, replacement costs soar. The Albanian Daily News reported that in the 12 months to September 2002, Albania's electricity self-sufficiency decreased from 66 percent to 46 percent. Power cuts of up to 18 hours a day are not rare. The same applies to Kosovo, where an electric storm demolished the local generation plant in July, and to Montenegro. The dependence of many countries in transition on decrepit and antiquated nuclear power plants causes friction with the European Union. Austria and the Czech Republic have clashed over the much-disputed Temelin facility. Croatia and Slovenia are locked in a bitter dispute over their shared ownership of the Krsko nuclear plant. Lithuania derives 78 percent of its power the atomic way. Slovakia gets 53 percent of its electricity from its reactors, Ukraine - 46 percent, Bulgaria, in the throes of a controversial plan to modernize its nuclear works in Kozloduy, 42 percent, Hungary and Slovenia - 39 percent. Nor can pure market mechanisms solve the problem. Late last year, hundreds of Romas, having been cut off the grid for unpaid bills, demonstrated in Plovdiv and in Lom, Bulgaria. Remote and rural areas are poorly catered to even by state-owned utilities, let alone by privatized ones. Last December, the Romanian government restructured Electrica, an electricity utility, but wisely retained ownership of the long-distance distribution network. Bulgaria is emerging as an energy hub. The cabinet is drafting a bill which calls for far-reaching liberalization. Subsidies for both electricity and heating would be phased out by 2006. The country is refurbishing its thermal power generation plants with an aim to reduce its dependence on oil, gas and coal imports from Russia and Ukraine. Bulgaria is slated to establish a regional energy distribution coordination centre under the auspices of the Stability Pact. Bulgaria covers 40-50 percent of southeast Europe's entire electricity deficit every winter. It also exports electricity to Turkey and even to Romania. Italy and Greece are negotiating a transit agreement which will permit the former to import Bulgarian electricity through the latter's territory. Bulgaria is not the only exporter. Romania, Croatia and even Bosnia sell power. In local terms, the market is sizable. Serbia's annual electricity import bill amounts to $100 million. Last year, Bulgaria's exports to Turkey, Greece and Yugoslavia reached $150 million. The figure is much higher this year. Romania doubled its electricity exports - mostly to Yugoslavia and Greece - during the first half of the year to $48 million. Aware of this, the World Bank has recently increased the amount of money allocated to energy projects. In Albania alone, it has earmarked $16m to reconstruct three hydropower plants and another $1 million to install electricity meters in Shkoder, in the north. Even the pariah Republika Srpska, the Serb part of Bosnia-Herzegovina, stands to get $90 million to construct an electricity grid. Multilateral funds will not be enough, though. Private capital is essential. Macedonia has just retained Austria's Meinl Bank to act as consultant and prepare within 11 months a sales strategy for the its national electricity company ESM. That won't be easy. The utility is in horrendous shape having served as the outgoing coalition's agency of patronage and cash cow. The country was reduced to importing more than one ninth of its consumption from Bulgaria. The more venal and xenophobic the political class, the less welcome are foreign investors. The Moldovan government seeks to annul the sale, two years ago, of three electricity distribution companies to Union Fenosa, a Spanish energy group. The World Bank is furious. Moldovan announcements of massive exports of electricity to Romania were greeted with derision by the alleged client. Private investors, though, seem to have lost their appetite for bloated state monopolies. According to Albania's Ministry of Industry and Energy, even a giant like General Electric prefers to build 10 small thermal power plants in the country's larger cities. Other investors are interested in 23 hydropower plants about to be privatized. Some utilities choose to tap the capital markets. Romania's Hidroelectrica launched a Eurobond issue of more than 120 million euros to improve hydropower equipment. Parex Bank and the Baltic investment company, Suprema, organized a consortium to lend $25 million to reconstruct one of Riga's thermoelectric power stations. Electricity is no longer merely a national affair, but, rather, a regional one. A memorandum regarding the establishment of a southeast European energy market and its ultimate integration with the European Union's was signed today in Athens by ministers from Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Greece, Macedonia, Romania and Yugoslavia. These represent a market with more than 55 million consumers who will be able to buy power directly from generating utilities by 2005, pledges the document. But this touches upon a second conundrum. Households and firms don't pay their bills. The threat of widespread social unrest prevents the utilities from cutting them off. Better metering is one solution. The InvestRomania business daily reports that the national electricity company, Transelectrica, backed by the European Bank for Reconstruction and Development, signed a $20 million contract with the Swiss firm Landis&Gyr to install remote counters of wholesale electricity. The hope is that with resumed growth and rising incomes this problem will vanish together with the currently common blackouts and brownouts. Employee and Management Owned Firms Margaret Thatcher started a world trend during her tenure as Prime Minister is Downing Street. It is called: Privatization. It consisted of the transfer of control of a state-owned enterprise to the Private Sector. This was done by selling the shares of the company. At times, the control itself was maintained by the state - but the economic benefits emanating from the ownership of shares was partly sold to privates. Such economic benefits are comprised of the dividend yield of the shares plus the appreciation in their value (due to the involvement of the private sector) known as capital gains. But the privatization process was not entirely homogeneous, uniform, transparent, or, for that matter, fair. The stock of some of the enterprises was sold to an individual, or group of individuals, by a direct, negotiated sale. A "controlling stake" (nucleus) was thus sold, ostensibly yielding to the state a premium paid by the private investors for the control of the sold firm. This method of privatization was criticized as "crony capitalism". For some reason, a select group of businessmen, all cronies of the ruling political elite, seemed to benefit the most. They bought the controlling stakes at unrealistically low prices, said the critics. To support their thesis, they pointed to the huge disparity between the price at which the "cronies" bought the shares - and the price at which they, later, sold it to the public through the stock exchange. The "cronies" cried foul: the difference in the prices was precisely because of privatization, better management and financial control. Maybe. But the recurrence of the same names in every major privatization deal still looked suspiciously odd. Then there was the second version: selling the shares of the privatized firms directly to the public. This was done using either of two methods:
But a smaller group of (smaller) countries selected a whole different way of privatizing. They chose to TRANSFORM the state-owned firm instead of subjecting them to outright privatization. Transformation - the venue adopted by Macedonia - is the transfer of the control of a firm and / or the economic benefits accruing to its shareholders to groups which were previously - or still are - connected to the firm. In this single respect, transformation constitutes a major departure - not to say deviation - from classical privatization. Ownership of the transformed firm can revert to either of the following groups, or to a combination thereof:
Sometimes, the state continues to maintain an interest in privatized - as well as in transformed - firms. This is especially true for natural monopolies, utilities, infrastructure and defence industries. All the above are considered to be strategic matters of national interest. Some countries - Russia and Israel, for ones - continue to own a "Golden Share". This highly specific type of security allows the state to exercise decision making powers, veto powers, or, at least, control over business matters that it considers vital to its security, financial viability, or even to its traditions. Israel's golden share in the national air carrier, EI AI, allows it to prevent flights in and out during the religiously holy day of Sabbath! Until very recently the common (economic) wisdom in the West had it that Transformation was - in the best case - a sterile, make - believe exercise. The worst case included cronyism and corruption. One thing was to privatize and another was to privateer. But there were some grounds for some solid criticisms as well: (1) The main ideological thrust behind privatization was the revitalization of stale and degenerated state firm. Badly managed, wrongly financially controlled, applying an incoherent admixture of business and non business (political, social, geopolitical) considerations to their decision making process - state firm were considered as anachronistic as dinosaurs. Many preferred to see them as extinct as those ancient reptiles. An injection of private initiative acquired the status of ideological panacea to the corporate malaise of the public sector. But this is precisely what was missing in the Transformation version. It offered nothing new: no new management, no new ideas (were likely to come from the same old team) and, above all and as a direct result of this preference of old over new - no new capital. To this, the supporters of Transformation answer that the one thing which is new - personal capitalistic incentives - far outweighs all the old elements. Incentive driven initiative is likely to bring in its wake and to herald the transformation - in the most complete and realistic sense - of the state firm. Change, renovation and innovation - say the latter - are immediate by products of personal profit motivation, the most powerful known to Mankind. (2) The process of Transformation blurred the distinction between labour, management and ownership. Employees acted as potential managers and as co-owners in the newly transformed companies. The very concept of hierarchy, clear chains of authority (going down) and of responsibility (going up) - was violated. A ship must have one captain lest it sinks. It is not in vain that the management function was separated from the ownership function. Employees, managers and owners, all have differing views and differences of opinion concerning every possible aspect of corporate governance and the proper conduct of business. Employees want to maximize employment and the economic benefits attached to it - managers and shareholders wish to minimize this parameter and its effects on the corporation. Managers wish to maximize their compensation - employees and owners wish to minimize or moderate it, each group for its own, disparate reasons. This break in the "chain of command", this diffusive, fog like property of the newly transformed entity lead to dysfunction, financial mismanagement, lack of clarity of vision and of day to day operations, labour unrest (when the unrealistic expectations of the workforce are not met). So, at the beginning, during the 1980s, the West preferred to privatize state owned firms - rather than to transform them. A fast accumulating body of economic research demonstrated unambiguously that privatization did miracles to the privatized firms. In certain cases, productivity shot up 6 times. Between 60 to 80 percent of GNPs in the West are private now and a vigorous trend to privatize what remains of the public sector still persists. But the same studies revealed a less pleasant phenomenon: only a select group of businessmen benefited from privatization. The paranoid allusions of the critics of this process were completely substantiated. Something was very corrupted in implementation of the seemingly wholesome idea of privatization. The public - as a whole - economically suffered. This led to the emergence of a new social consciousness. It was provoked by the unacceptable social costs of capitalism: more people under the poverty line, homelessness, a radicalization in the inequity of the distribution of income among different strata of society. But this trend was enhanced by the apparent corruption of the privatization process. This new social consciousness converged with yet another all important and all pervasive trend: the formation of small businesses by small time entrepreneurs. The latter functioned both as owners and as employees in their firms. There were 16 million such owners-workers in the USA alone (1995 figures). About 99% of the 22 million registered businesses in the USA were small businesses. No economic planner or politician could ignore these figures. Employee owned firms became the majority in the service and advanced technology sectors of the economy - the fastest growing, most lucrative sectors. In its own way, as a result of these two trends, the West was moving back to transformation and away from privatization, away from separation of ownership and labour, away from differentiation between capital and workforce. This is a major revolution. The OECD (the organization of the richer countries in the world) established an institute which follows trends in the poorer parts of the world, politely called "Economies in Transition". This is the CCET. According to the CCET's latest report, privatization continues in an uneven pace throughout the former Eastern Bloc. Some countries nearly completed it. Others have claimed to have completed it - but haven't even started it in reality. Some countries - Macedonia amongst them - have sold the shares of state owned firms (=businesses with social capital) to managers and workers - but the managers and workers have largely not paid for these shares yet. It is by no means certain that they will. If the managers and workers default on their obligations to pay the state - the ownership of the company will revert back to the state. This is paper privatization, a transformation of expectations. No one can seriously claim that the transformation is completed before the new owners of the firms respect their financial obligations to the state. In all, privatization the world over, proceeded more rapidly with small firms. Selling the bigger firms was much more difficult. Most of this behemoths were composed of numerous profit centres and loss making business activities. A solidarity of accounts and guarantees existed between the various operations. The more profitable parts of a company supported and subsidized the less competent, the losing parts. This was not very attractive to investors. The official figures are heart warming. In parentheses - the percentage of firms privatized: Albania , Czech Republic , Estonia , Hungary , Lithuania, Poland and Slovakia all privatized 90% of their small firms. In Russia and Latvia, the figure is 70%. The picture is more clouded with the larger firms: Czech Republic (81%), Hungary, Estonia (75%), Lithuania (57%), Russia (55%), Latvia and Slovakia (46%), Mongolia (41%), Poland (32%), Moldavia (27%), Romania (13%), Belarus and Bulgaria (11%), Georgia (2%). But what hides behind the figures? The Czech Republic is infamous for its cronyism and for the massive transfer of wealth to the hands of a few people close to government circles. On the face of it, the situation in Poland looks a bit better: a universal voucher system was instituted. People were allowed to deposit their shares with 14 management funds. These funds also bought some of the shares, making them part owners. They control now 500 enterprises, which make up 5% of the country's GNP. Some of these funds are 50% foreign owned, so their management and moral standards are Western. But, even there, rumours abound and not only rumours. So, what is better - privatization or transformation? Maybe the lesson is that we are all human. There is no method immune to human fallacies and desires, to corruption or to allegations of it. Transformation tends to benefit more people - so, maybe it looks more just. But long term it is inefficient and leads to the ruining of the firms involved and to permanent damage both to the economy and to the workers-owners. Is it better to be the owner of a bankrupt firm - or to work in a functioning firm, where you have no ownership stake? This is not an ideological or a philosophical question. Ask the employees of the Pelagonija Construction Group. Privatization, on the other hand, is much more open to manipulation - but at least it secures the continued existence of the firms and the continuous employment of the workers. Sometimes, in economic reality, we have to give up justice (or the appearance of it) - in order to secure the very survival of the workers involved. I, personally, prefer privatization over transformation. Enlargement (of European Union) European Union (EU) leaders, meeting in Copenhagen, are poised to sign an agreement to admit ten new members to their hitherto exclusive club. Eight of the fortunate acceders are former communist countries: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. Bulgaria and Romania are tentatively slated to join in 2007. The exercise will cost in excess of $40 billion over the next three years. The EU's population will grow by 75 million souls. In the wake of the implosion of the USSR in 1989-91, the newly independent countries of the Baltic and central Europe, traumatized by decades of brutal Soviet imperialism, sought to fend off future Russian encroachment. Entering NATO and the EU was perceived by them as the equivalent of obtaining geopolitical insurance policies against a repeat performance of their tortured histories. This existential emphasis shifted gradually to economic aspects as an enfeebled, pro-Western and contained Russia ceased to represent a threat. But the ambivalence towards the West is still there. Mild strands of paranoid xenophobia permeate public discourse in central Europe and, even more so, in east Europe. The Czechs bitterly remember how, in 1938, they were sacrificed to the Nazis by a complacent and contemptuous West. The Poles and Slovenes fear massive land purchases by well heeled foreigners (read: Germans). Everyone decries the "new Moscow" - the faceless, central planning, remote controlling bureaucracy in Brussels. It is tough to give up hard gained sovereignty and to immerse oneself in what suspiciously resembles a loose superstate. But surely comparing the EU or NATO to the erstwhile "Evil Empire" (i.e., the Soviet Union) is stretching it too far? The USSR, after all, did not hesitate to exercise overwhelming military might against ostensible allies such as Hungary (1956) and the Czechoslovaks (1968)? Try telling this to the Serbs who were demonized by west European media and then bombarded to smithereens by NATO aircraft in 1999. Though keen on rejoining the mainstream of European history, civilization and economy, the peoples of the acceding swathe are highly suspicious of Western motives and wary of becoming second-class citizens in an enlarged entity. They know next to nothing about how the EU functions. They are chary of another period of "shock therapy" and of creeping cultural imperialism. Rendered cynical by decades of repression, they resent what they regard as discriminatory accession deals imposed on them in a "take it or leave it" fashion by the EU. Anti-EU sentiment and Euroscepticism are vocal - though abating - even in countries like Poland, an erstwhile bastion of Europhilia. 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 different. Even in countries with a devout following of EU accession, such as Romania, backing for integration has declined this year. These lurking uncertainties are reciprocated in the west. The mostly Slav candidates are stereotyped and disparaged by resurgent rightwing, anti-immigration parties, by neo-nationalists, trade protectionists and vested interests. Countries like Spain, France, Ireland, Greece and Portugal stand to receive less regional aid and agricultural subsidies from the common EU till as the money flows east. Core constituencies in the west - such as farmers and low-skilled industrial workers - resent the enlargement project. Anti-Slav prejudices run rampant in Italy, Austria and Germany. The incompatibilities are deepest. For instance, according to research recently published by the Pew Center, the new members are staunchly pro-American, though less so than ten years ago. In stark contrast, the veteran core of the EU is anti-American. Many of the denizens of the candidate countries regard the EU as merely an extended Germany. It is the focus of numerous conspiracy theories, especially in the Balkan. The losers of the second world war - Japan and Germany - are out to conquer the world, this time substituting money for bullets. Germany, insist the Serbs and the Macedonians - instigated the breakdown of the Yugoslav Federation to establish a subservient Croatia. Wasn't Slobodan Milosevic, the Serb dictator, ousted in favor of the German-educated Zoran Djindjic? - they exclaim triumphantly. Germany is reasserting itself. United, it is the largest country in Europe and one of the richest. Its forces are keeping the fragile peace in Balkan hot spots, like Macedonia. It will contribute to the EU's long-heralded rapid reaction force. It owns the bulk of the, frequently overdue, sovereign debts of Russia, Ukraine and other east European countries. One tenth of Germany's trade is with the candidate countries, a turnover comparable to its exchange with the United States. German goods constitute two fifths of all EU trade with the new members. Germans are the largest foreign direct investors throughout the region - from Hungary to Croatia. German banks compete with German-owned Austrian banks over control of the region's fledgling financial sector. The study of German as a second or third language has surged. Last year alone, German corporations plunged $3.6 billion into the economies of the acceding countries. German multinationals like Volkswagen and Siemens employ almost 400,000 people in central Europe - for one tenth to one eighth their cost in the fatherland. Quoted by the World Socialist, the German Chamber of Industry and Commerce (IHK) estimates that the production costs in mechanical engineering and plant construction are 20 percent lower in Poland than in Germany, while quality is more or less the same. Germany runs the EU rather single-handedly, though with concessions to a megalomaniacally delusional France. In September, the German and French leaders, meeting tête-à-tête in a hotel, dictated to other members the fate, for the next 11 years, of half the EU's budget - the portion wasted on the Common Agricultural Policy (CAP). Germany's hegemonic role is likely to be enhanced by enlargement. Many of the new members - e.g., the Czech Republic - depend on it economically. Others - like Hungary - share with it a common history. German is spoken in the majority of the candidates. They trade with Germany and German businessmen and multinational are heavily invested in their economies. A "German Bloc" within the EU is conceivable - unless Poland defects to the increasingly marginalized French or to the British. Germany's federalist instincts - its express plan to create a "United States of Europe", central government and all - are, therefore, understandable, though spurned by the candidate countries. Germany is likely to press for even further enlargement to the east. The EU's commissioner for enlargement is a German, Gunter Verheugen. The dilapidated expanses of the former Soviet satellites are Germany's natural economic hinterland - on the way to the way more lucrative Asian markets. Hence Germany's reluctance to admit Turkey, a massive, pro-American, potential competitor for Asian favors. Integrating Russia would be next on Germany's re-emerging Ostpolitik. This firmly places Germany on an economic and military collision course with the United States. As Stratfor, the strategic forecasting consultancy, put it recently: "In Washington's opinion, America's obsessions should be NATO's obsessions." Germany, the regional superpower, has other, more pressing priorities: "maintaining stability in its region, making sure that Russian evolution is benign and avoiding costly conflicts in which it has only marginal interest". Moreover, there is an entirely different - and much less benign - interpretation of EU enlargement. It is based on the incontrovertible evidence that the German ends in Europe have remained the same - only the means have changed. The German "September Plan" to impose an economic union on the vanquished nations of Europe following a military victory, called, in 1914, for "(the establishment of) an economic organization ... through mutual customs agreements ... including France, Belgium, Holland, Denmark, Austria, Poland, and perhaps Italy, Sweden, and Norway". Europe spent the first half of the 19th century (following the 1815 Congress of Vienna) containing a post-Napoleonic France. The Concert of Europe was specifically designed to reflect the interests of the Big Powers, establish the limits to their expansion in Europe, and create a continental "balance of deterrence". For a few decades it proved to be a success. The rise of a unified, industrially mighty and narcissistic Germany led to two ineffably ruinous world wars. In an effort to prevent a repeat of Hitler, the Big Powers of the West, led by the USA, the United Kingdom and France, attempted to contain Germany from both east and west. The western plank consisted of an "ever closer" European Union and a divided Germany. The collapse of the eastern flank of anti-German containment - the USSR - led to the re-emergence of a united Germany. As the traumatic memories of the two world conflagrations receded, Germany resorted to applying its political weight - now commensurate with its economic and demographic might - to securing EU hegemony. Germany is also a natural and historical leader of central Europe - the future lebensraum of both the EU and NATO and the target of their expansionary predilections, euphemistically termed "enlargement". Thus, virtually overnight, Germany came to dominate the Western component of anti-German containment - even as the Eastern component has chaotically disintegrated. The EU - notably France - is reacting by trying to assume the role formerly played by the USSR. EU integration is an attempt to assimilate former Soviet satellites and dilute Germany's power by re-jigging rules of voting and representation. If successful, this strategy will prevent Germany from bidding yet again for a position of dominance in Europe by establishing a "German Union" separate from the EU. If this gambit fails, however, Germany will emerge triumphant, at the head of the world's second largest common market and most prominent trading bloc. Its second-among-equal neighbors will be reduced to mere markets for its products and recruitment stages for its factories. In this exegesis, EU enlargement has already degenerated into the same tiresome and antiquated mercantilist game among 19th century continental Big Powers. Even Britain has hitherto maintained its Victorian position of "splendid isolation". There is nothing wrong with that. The Concert of Europe ushered in a century of globalization, economic growth and peace. Yet, alas, this time around, it has thus far been quite a cacophony. The countries of central and east Europe - especially those slated to join the European Union (EU) in May next year - are between the American rock and the European hard place. The Czech republic, Hungary and Poland, already NATO members, have joined Spain, Britain and other EU veterans in signing the "letter of eight" in support of US policy in the Gulf. NATO and EU aspirants - including most of the nations of the Balkans - followed suit in a joint statement of the Vilnius Group. The denizens of the region wonder what is meant by "democracy" when their own governments so blithely ignore public opinion, resolutely set against the looming conflict. The heads of these newly independent polities counter by saying that leaders are meant to mold common perceptions, not merely follow them expediently. The mob opposed the war against Hitler, they remind us, somewhat non-germanely. But the political elite of Europe is, indeed, divided. France is trying to reassert its waning authority over an increasingly unruly and unmanageably expanding European Union. Yet, the new members do not share its distaste for American hegemony. On the contrary, they regard it as a guarantee of their own security. They still fear the Russians, France's and Germany's new found allies in the "Axis of Peace" (also known as the Axis of Weasels). The Czechs, for instance, recall how France (and Britain) sacrificed them to Nazi Germany in 1938 in the name of realpolitik and the preservation of peace. They think that America is a far more reliable sponsor of their long-term safety and prosperity than the fractured European "Union". Their dislike of what they regard as America's lightweight leadership and overt - and suspect - belligerence notwithstanding, the central and east Europeans are grateful to the United States for its unflinching - and spectacularly successful - confrontation with communism. France and Germany - entangled in entente and Ostpolitik, respectively - cozied up to the Kremlin, partly driven by their Euro-communist parties. So did Italy. While the Europeans were busy kowtowing to a repressive USSR and castigating the USA for its warmongering, America has liberated the Soviet satellites and bankrolled their painful and protracted transition. Historical debts aside, America is a suzerain and, as such, it is irresistible. Succumbing to the will of a Big Power is the rule in east and central Europe. The nations of the region have mentally substituted the United States for the Soviet Union as far as geopolitics are concerned. Brussels took the place of Moscow with regards to economic issues. The Czechs, Poles, Hungarians, assorted Balkanians, even the Balts - have merely switched empires. There are other reasons for these countries' pro-Americanism. The nations of central, east and southeast (Balkans) Europe have sizable and economically crucial diasporas in the united States. They admire and consume American technology and pop culture. Trade with the USA and foreign direct investment are still small but both are growing fast. Though the EU is the new and aspiring members' biggest trading partner and foreign investor - it has, to borrow from Henry Kissinger, no "single phone number". While France is enmeshed in its Byzantine machinations, Spain and Britain are trying to obstruct the ominous re-emergence of French-German dominance. By catering to popular aversion of America's policies, Germany's beleaguered Chancellor, Gerhard Schroeder, is attempting to score points domestically even as the German economy is imploding. The euro-Atlantic structures never looked worse. The European Union is both disunited and losing its European character. NATO has long been a dysfunctional alliance in search of a purpose. For a while, Balkan skirmishes provided it with a new lease on life. But now the Euro-Atlantic alliance has become the Euro-Atlantic divide. The only clear, consistent and cohesive voice is America's. The new members of NATO are trying to demonstrate their allegiance - nay, obsequiousness - to the sole identifiable leader of the free world. France's bid at European helmsmanship failed because both it and Russia are biased in favor of the current regime in Iraq. French and Russian firms have signed more than 1700 commercial contracts with Saddam's murderous clique while their British and American competitors were excluded by the policies of their governments. When sanctions against Iraq are lifted - and providing Saddam or his hand-picked successor are still in place - Russian energy behemoths are poised to explore and extract billions of barrels of oil worth dozens of billions of dollars. Iraq owes Russia $9 billion which Russia wants repaid. But the United States would be mistaken to indulge in Schadenfreude or to gleefully assume that it has finally succeeded in isolating the insolent French and the somnolent Germans. Public opinion - even where it carries little weight, like in Britain, or in the Balkans - cannot be ignored forever. Furthermore, all the countries of Europe share real concerns about the stability of the Middle East. A divided Iraq stands to unsettle neighbours near and far. Turkey has a large Kurdish minority as does Iran. Conservative regimes in the Gulf fear Iraq's newfound and American-administered democracy. In the wake of an American attack on Iraq, Islamic fundamentalism and militancy will surely surge and lead to a wave of terror. Europe has vested historical, economic and geopolitical interests in the region, unlike America. |
