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Pakistan, Economy of
Causing trouble is sometimes a profitable business. The Taliban is, to a large extent, the creation of Pakistan. Yet, it stands to benefit greatly, economically as well as politically, from the destruction of the Taliban at the hands of the anti-terror coalition. In the process, its autonomous and contumacious intelligence services keep supplying the Taliban with food and weapons. The government denies either knowledge or responsibility but the border remains porous, to the economic benefit of many. The self-appointed President of Pakistan, General Pervez Musharraf, said a few months ago that Pakistan was "on the road to economic recovery". This was incompatible with a simultaneous official reduction in the economic growth target of country (from 4.5% to 3.8%). But, in May, Pakistan's debt was being rescheduled with the blessings of the IMF (which contributed 200 million US dollars to the effort) and the World Bank (in the process of approving $700 million in soft loans). Yet another Paris Club rescheduling seemed imminent. Two months later, talk was in the air about a multinationally-managed natural (non-liquefied) gas pipeline from Iran to India, through Pakistani territory. "The Economist" (July 14, 2001) estimated that "... the pipeline might yield Pakistan anything from $250m to $600m a year in transit fees". There was cause for this optimism. To their credit, Musharraf's skilled economic team of technocrats went where their predecessors feared to tread. They imposed a highly unpopular and much protested against sales tax on all retail trade. Musharraf threatened to imprison tax evaders and debt defaulters and backed his threat with (constitutionally dubious) arrests. The immediate result was that tax collection (by the outlandishly corrupt tax authorities) increased by c. $800 million in the 12 months to June 30, 2001 (the end of the Pakistani fiscal year) - though mostly from import inhibiting exorbitant customs and indirect taxes. Funds, doled out by corrupt bank managers to defunct enterprises and used to roll over bad loans - were suddenly recalled. The hitherto symbolic prices of oft-wasted and oft-stolen oil, gas, and electricity were gradually increased and subsidies to state-owned utilities (such as cotton mills) decreased. This brought about a belated wave of painful restructuring and Pakistan's shambolic and patronage-based industries almost evaporated. Serious privatization is on the cards. The phone company is up for grabs and all privatization proceeds (optimists put them at $3 billion, realists at a billion dollars less) are earmarked to pay off foreign debt. The budget deficit stabilized around 5% of GDP (compared to 6.5% the year before), aided by a cut in defence spending (which reached 6% in 1997 but deteriorated ever since compared to India, whose defence spending increased by 40% in the same period). Despite growing energy costs, inflation was tamed, down to 4% (2000) from 8% (1999). Yet, tax revenues are still less than 17% of GDP and less than 1.5% of all taxpayers bother to file tax returns of any kind. In other words, these largely cosmetic measures failed to tackle the systemic failure that passes for Pakistan's economy. Reform - both economic and political - was still sluggish and half-hearted, Pakistan's current account deficits ballooned (to $3 billion in 1999), the geopolitical neighbourhood roughened, and the world economy dived. Pakistan's imminent economic collapse looked inevitable. Then came September 11. Weeks later, US sanctions imposed on Pakistan since 1990 and 1998 (following its nuclear tests) were waived by President Bush and he rescheduled $400 million in Pakistani debt to various agencies of the US administration. The predicted wave - which has yet to materialize - of 1.5 million Afghan refugees - was worth to Pakistan $600 million in US aid alone ($150 million of which were already disbursed). The IMF - ostensibly an independent organization bent on economic reform and impervious to geopolitical concerns - swiftly switched from tentative approval (the second tranche of the almost twentieth IMF loan was approved in August, before the attacks) to unmitigated praise regarding Pakistan's economic (mis)management. The $200 million it so reluctantly promised in May and the $1 billion a year (for a period of 2-3 years) Pakistan was hoping to secure in August gleefully mushroomed to $2.5-3.5 billion in October. The rupee shot up in response. Debt forgiveness is discussed with Pakistan accorded a status of HIPC - Highly Indebted Poor Country - which it, otherwise, doesn't deserve, on pure macroeconomic grounds. Consider this: On September 10, each citizen of Pakistan, man, woman, and infant, owed only $300 in external government debt. This represented a mere 60% of GDP per capita (or 53% of GDP) in 1997. On that same year, Pakistan's GDP per capita was 25% higher than India's, average GDP growth in the two decades to 1997 was 5.7% p.a. (India - 5.8%), and it was rated 3.4 (India - 3.7) on the economic freedom index. After a dip in 1999 (3.1%) - growth picked up again to 4.5% , fuelled by bumper cotton and wheat crops in 2000. Pakistani citizens had as many durables as Indians. Definitely not an HIPC, Pakistan is an emerging middle-class east Asian country. Admittedly, though, the picture is not entirely rosy. Pakistan's external debt - mainly used to finance consumption and to plug holes in its uninterrupted string of unsustainable government budgets - was double India's (as proportion of GDP) and it had only 4% of India's foreign exchange reserves (c. $1 billion, enough for three weeks of imports). Per capita, it had 30% as much as India's foreign exchange reserves. As default loomed, growth collapse to 2.6% in 1995-2000, barely enough to sustain the increase in population. The usual IMF prescription (austerity) served only to depress consumption and deter FDI. Foreign direct investment was identical in both 2000 and 1988 - a meager $180 million (less than FDI in Kosovo's neighbour, Macedonia, with its 2 million citizens to Pakistan's 140 million). Luckily for it, Pakistan has a (largely underground) vibrant though impromptu private sector which fills the vacuum left by the nefarious public sector. Many ostensibly public goods - from bus services to schools, from clinics to policing, from public toilettes to farming - are affordably provided by domestic, small time, entrepreneurs often aided by NGO's. Yet, an economy is more than the sum of its statistics. A failed, feeble, passive-aggressive central government is largely supplanted in Pakistan by criminally-tainted regional political networks of patronage, venality, nepotism, and cronyism. More than 50% of all food aid may be squandered, "taxed" by local functionaries. Teachers pay schoolmasters a portion of salaries not to teach. Maintenance workers, sanitary squads, telephone installers, medical doctors, surgeons, professors in universities, policemen - all demand, and receive, bribes to fulfill their duties, or, more often, to turn a blind eye. Pakistan habitually trails the The UNDP's Human Development Index (which takes into account the quality of life - things like life expectancy, literacy, and gender and income inequalities). This dismal showing is after Pakistan made strides in literacy, life expectancy and decreasing infant mortality. Since independence in 1947, Pakistan's GNP has quadrupled and income per capita has doubled. But it still spends more on defence than on health and education combined and less than most developing countries. The botched experiments with "Islamic economy" did not help. Pakistan, like certain belles, still survives on the kindness of others - remittances by expatriates and other external capital flows account for 10% of GDP and 50% of domestic investment. And the main export of this country is its skilled manpower - despite its surprisingly diverse economy. Less than one third of Pakistanis bother to vote - a clear and sad statement by abstention.
Pharmaceuticals ( in Central and East Europe) Novartis, the Swiss drug giant announced Tuesday that it will unite its 14 brands of generic drugs under the Sandoz name, harking back to its origins as a manufacturer of affordable, off-patent, medication and raw materials ("active ingredients"). The rebranding will engulf the company's central and east European units, including Biochemie in Austria and Azupharma in Germany - but not Lek in Slovenia. This exclusion signifies the strength of the pharmaceuticals sector in the formerly communist countries in transition. Even in economically abysmal Macedonia, Alkaloid, a local drug manufacturer, is thriving. It employs almost 1400 workers and dabbles in chemicals, coatings and cosmetics. It is locally renowned for its research and development, heavy investment in quality control and high wages. Alkaloid is a veritable multinational with operations in Switzerland, Russia, Slovenia, Croatia, Bosnia & Herzegovina, Yugoslavia, Bulgaria and Albania. It is partly owned by the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC). Still, with annual sales of c. $50 million, it is a minion compared to the likes of Lek Slovenia and the Croatian Pliva. Lek Slovenia has subsidiaries in twenty countries, including Nigeria, Pakistan and virtually all of central and east Europe. Besides drugs, the group manufactures - usually through autonomous companies - animal care products as well as medical devices. The group employs 4000 people worldwide. Production is distributed. Last July, Lek laid the foundation stone for a factory in Romania, for instance. This was followed in September by a cornerstone for a new logistics and production center in Poland. It maintains representative offices from Bulgaria to China. Lek is an aggressive mid-sized player. It just started marketing, in the lucrative US market, Augmentin, the generic form of GalxoSmithKline's (GSK) off-patent blockbuster. GSK promptly sued Lek and three other firms in Switzerland, India and Israel. But Lek is undeterred. It expected to sell $100 million of Amoxiclav, its version of the drug annually - but booked $27 million of orders on the first day. Lek's sales will exceed $420 million in 2002 and are slated to grow by a whopping 42 percent this year, according to its management. Most of this phenomenal growth is attributable to Amoxiclav. Pliva is by far the region's pharmaceutical behemoth. With its $750 million in consolidated revenues and 30 percent income growth rate it combines a mid-tech business with hi-tech growth. Pliva's net income in 2002 is projected to exceed $140 million and earnings before interest and taxes - excluding extraordinary items - is at a respectable, though uninspiring, 8 percent. The expiry, two years hence, of the US patent of Azithromycin, the company's flagship product, is a serious dent in its portfolio. It is feverishly developing in-house generic and specialty products to weather the anticipated blow to revenues and operating profits. Pliva has R&D collaboration agreements with leading global pharmaceutical firms, such as GlaxoSmithKline. Pliva's total assets are close to $1.5 billion with $750 million in shareholders' equity. Its current cash flow is much sounder than last year's though the picture is marred by a precipitously declining net working capital and hefty increases in liabilities. Pliva's leverage surged by almost half to 57 percent by end-September 2002. The company is expanding aggressively throughout the world, even in in rich markets such as the United States, where it purchased Sidmak Laboratories last year and Denmark, where it took over 2K Pharmaceuticals (renamed Pliva Pharma Nordic). Other target countries included Germany, France, the United Kingdom and the Czech Republic. Last year, the first drug developed in-house by Pliva was registered in the European Union. Pliva's cosmetics, food and agrochemicals production units were divested and spun off as stand alone companies. Some of these, in turn, were sold to erstwhile competitors. Like many European drug companies, Pliva subcontracts the manufacture of many of its formulas to cheaper developing countries, such as India, where, earlier this month, it inked an agreement with a production and marketing outfit called Kopran. Pliva also doubles as a distributor. Last October, for instance, it became the exclusive distributor in central and east Europe, NIS and Turkey of the British firm, Allergy Therapeutics. These regional markets - even the most advanced ones in the EU candidates - are considered so idiosyncratic and risky that western manufacturers opt to work through indigenous venues rather than establish their own presence. Consider one of the most promising - and hitherto, disappointing - markets: the Czech Republic and Slovakia. It is teeming with activity. This week, for instance, Warburg Pincus, an American investment fund, acquired Slovakofarma by merging it with Leciva, another Slovak manufacturer double its size. This yielded the largest pharmaceutical firm in central Europe with intentions to expand in Poland, Russia and the countries of the former USSR. Yet, underneath the veneer of civility and financial froth lurk serious faults. Producers are forced by Czech healthcare providers, health authorities and domestic insurance companies to trim their prices. Even so, the entire health care system in the Czech republic - especially public hospitals - is close to insolvency. The Prague Tribune reported how AVEL - the Association of Drug Distributors - decided to sue debtor hospitals. Among the litigants, pharmaceutical distributors Aliance Unichem, Phoenix, Purus, and Gehe, which account for 70% of the market, and are owed c. $25 million. This illiquidity and coercive differential pricing encourage the use of cheap generics. The Prague Tribune quotes Pavol Mazan, the executive director of the International Association of Pharmaceutical Companies (MAFS): "The Ministry of Health boasts that in this country there is a fully paid drug for every disease. But the problem is that a drug paid for (by the insurer) is the least expensive, and in many cases it is less effective. The result is that of the six most important therapeutic groups, there are no new, imported drugs in five of them." The paper notes that, in the Czech Republic, generic drugs account for 45 percent of all medications sold, compared to 15 percent in the EU. Next year's accession is supposed to improve market conditions considerably, though. The stories of drug companies in central and east Europe revolve around the same axes: international diversification, poaching the off-patent portfolios of other pharmaceuticals, mixing generic and specialty drugs, in-house research and development heavily titled towards generics, expanding through mergers and acquisitions, subcontracting production to cheaper locales, divesting non-core activities and catering to the marketing and distribution needs in central and east Europe of American and west European drug multinationals. Consolidation is inevitable. Global giants, such as Novartis (Europe's third largest) are already gobbling up mid-sized manufacturers in the countries in transition. These, in turn, look to purchase and assimilate small to puny producers, such as Alkaloid in Macedonia. Those who survive the onslaught will be either huge (by regional standards) or specialty niche players (boutiques). Such polarity will make for a much healthier industry, able to invest in the spiraling R&D costs of new product development. (Over)Population The latest census in Ukraine revealed an apocalyptic drop of 10% in its population - from 52.5 million a decade ago to a mere 47.5 million last year. Demographers predict a precipitous decline of one third in Russia's impoverished, inebriated, disillusioned, and ageing citizenry. Births in many countries in the rich, industrialized, West are below the replacement rate. These bastions of conspicuous affluence are shriveling. Scholars and decision-makers - once terrified by the Malthusian dystopia of a "population bomb" - are more sanguine now. Advances in agricultural technology eradicated hunger even in teeming places like India and China. And then there is the old idea of progress: birth rates tend to decline with higher education levels and growing incomes. Family planning has had resounding successes in places as diverse as Thailand, China, and western Africa. In the near past, fecundity used to compensate for infant mortality. As the latter declined - so did the former. Children are means of production in many destitute countries. Hence the inordinately large families of the past - a form of insurance against the economic outcomes of the inevitable demise of some of one's off-spring. Yet, despite these trends, the world's populace is augmented by 80 million people annually. All of them are born to the younger inhabitants of the more penurious corners of the Earth. There were only 1 billion people alive in 1804. The number doubled a century later. But our last billion - the sixth - required only 12 fertile years. The entire population of Germany is added every half a decade to both India and China. Clearly, Mankind's growth is out of control, as affirmed in the 1994 Cairo International Conference on Population and Development. Dozens of millions of people regularly starve - many of them to death. In only one corner of the Earth - southern Africa - food aid is the sole subsistence of entire countries. More than 18 million people in Zambia, Malawi, and Angola survived on charitable donations in 1992. More than 10 million expect the same this year, among them the emaciated denizens of erstwhile food exporter, Zimbabwe. According to Medecins Sans Frontiere, AIDS kills 3 million people a year, Tuberculosis another 2 million. Malaria decimates 2 people every minute. More than 14 million people fall prey to parasitic and infectious diseases every year - 90% of them in the developing countries. Millions emigrate every year in search of a better life. These massive shifts are facilitated by modern modes of transportation. But, despite these tectonic relocations - and despite famine, disease, and war, the classic Malthusian regulatory mechanisms - the depletion of natural resources - from arable land to water - is undeniable and gargantuan. Our pressing environmental issues - global warming, water stress, salinization, desertification, deforestation, pollution, loss of biological diversity - and our ominous social ills - crime at the forefront - are traceable to one, politically incorrect, truth: There are too many of us. We are way too numerous. The population load is unsustainable. We, the survivors, would be better off if others were to perish. Should population growth continue unabated - we are all doomed. Doomed to what? Numerous Cassandras and countless Jeremiads have been falsified by history. With proper governance, scientific research, education, affordable medicines, effective family planning, and economic growth - this planet can support even 10-12 billion people. We are not at risk of physical extinction and never have been. What is hazarded is not our life - but our quality of life. As any insurance actuary will attest, we are governed by statistical datasets. Consider this single fact: About 1% of the population suffer from the perniciously debilitating and all-pervasive mental health disorder, schizophrenia. At the beginning of the 20th century, there were 16.5 million schizophrenics - nowadays there are 64 million. Their impact on friends, family, and colleagues is exponential - and incalculable. This is not a merely quantitative leap. It is a qualitative phase transition. Or this: Large populations lead to the emergence of high density urban centers. It is inefficient to cultivate ever smaller plots of land. Surplus manpower moves to centers of industrial production. A second wave of internal migrants caters to their needs, thus spawning a service sector. Network effects generate excess capital and a virtuous cycle of investment, employment, and consumption ensues. But over-crowding breeds violence (as has been demonstrated in experiments with mice). The sheer numbers involved serve to magnify and amplify social anomies, deviate behaviour, and antisocial traits. In the city, there are more criminals, more perverts, more victims, more immigrants, and more racists per square mile. Moreover, only a planned and orderly urbanization is desirable. The blights that pass for cities in most third world countries are the outgrowth of neither premeditation nor method. These mega-cities are infested with non-disposed of waste and prone to natural catastrophes and epidemics. No one can vouchsafe for a "critical mass" of humans, a threshold beyond which the species will implode and vanish. Luckily, the ebb and flow of human numbers is subject to three regulatory demographic mechanisms, the combined action of which gives hope. The Malthusian Mechanism Limited resources lead to wars, famine, and diseases and, thus, to a decrease in human numbers. Mankind has done well to check famine, fend off disease, and staunch war. But to have done so without a commensurate policy of population control was irresponsible. The Assimilative Mechanism Mankind is not divorced from nature. Humanity is destined to be impacted by its choices and by the reverberations of its actions. Damage caused to the environment haunts - in a complex feedback loop - the perpetrators. Examples: Immoderate use of antibiotics leads to the eruption of drug-resistant strains of pathogens. A myriad types of cancer are caused by human pollution. Man is the victim of its own destructive excesses. The Cognitive Mechanism Humans intentionally limit the propagation of their race through family planning, abortion, and contraceptives. Genetic engineering will likely intermesh with these to produce "enhanced" or "designed" progeny to specifications. We must stop procreating. Or, else, pray for a reduction in our numbers.
This could be achieved benignly, for instance by colonizing space, or the ocean depths - both remote and technologically unfeasible possibilities. Yet, the alternative is cataclysmic. Unintended wars, rampant disease, and lethal famines will ultimately trim our numbers - no matter how noble our intentions and how diligent our efforts to curb them. Is this a bad thing? Not necessarily. To my mind, even a Malthusian resolution is preferable to the alternative of slow decay, uniform impecuniosity, and perdition in instalments - an alternative made inexorable by our collective irresponsibility and denial. Poverty (in Central and Eastern Europe) Many of the nations of central and east Europe have spent most of their history as components of one empire or another. People in this region are used to be at the receiving end of directives and planning from the center. Though ostensibly fervid nationalists, they are ill at ease with their re-founded and re-found nation-states. The identity of the denizens of these parts is more regional than national and evolving towards the supra-national. People are from this or that city, or district, or village. And they aspire to become citizens of Europe and the great experiment of the European Union. They are only hesitantly and tentatively Macedonians, or Moldovans, or Belarusians, or Kazakhs, or Yugoslavs. The likes of the Czechs, the Estonians and the Slovenes are well-suited to become constituents of a larger whole. They make better Europeans than the British, or the Norwegians. They have survived far mightier and more bloated bureaucracies than Brussels'. They are unsurpassed manipulators of officialdom. In the long run, the new members stand to benefit the most from the EU's enlargement and to form its unwaveringly loyal core. Not yet the full-fledged individualists of the Anglo-Saxon model of capitalism - these nations are consensus-seeking team-players. Tutored by centuries of occupation and hardship, they are instinctual multilateralists. They are avid Westerners by persuasion, if not yet in practice, or geography. Moreover, their belated conversion to the ways of the market is an undisguised blessing. Though still a promise largely unfulfilled, the countries in transition could now leapfrog whole stages of development by adopting novel technologies and through them the expensive Western research they embody. The East can learn from the West's mistakes and, by avoiding them, achieve a competitive edge. Technology is a social phenomenon with social implications. It fosters entrepreneurship and social mobility. By allowing the countries in transition to skip massive investments in outdated technologies - the cellular phone, the Internet, cable TV, and the satellite become shortcuts to prosperity. Poverty is another invaluable advantage. With the exception of Slovenia, Estonia, Croatia and the Czech Republic - the population of the countries in transition is poor, sometimes inordinately so. Looming and actual penury is a major driver of entrepreneurship, initiative and innovation. Wealth formation and profit seeking are motivated by indigence, both absolute and relative. The poor seek to better their position in the world by becoming middle-class. They invest in education, in small businesses, in consumer products, in future generations. The Germans - sated and affluent - are unlikely to experience a second economic miracle. The Serbs, Albanians, Ukrainians, Poles, or Romanians won't survive without one. The West is just discovering this truth and is opening its gates - albeit xenophobically and intermittently - to poorer foreigners. For what is immigration if not the importation of ambitious indigents, certain to revitalize the EU's rich and somnolent economies? The countries of central and eastern Europe, thus, stand to benefit twice. Their own economic Renaissance is spurred on by a striving home-grown proletariat. And they are uniquely positioned - geographically and culturally - to export destitute go-getters to the wealthy West and to reap the rewards of the inevitable spurt in entrepreneurship and innovation that follows. Remittances, returning expatriates, thriving and networked Diasporas would do more to uplift the countries of origin than any amount of oft-misallocated multilateral aid. This cornucopian vision is threatened from numerous sides. Geopolitical instability, resurgent trade protectionism, dysfunctional global capital markets and banks - can all reverse the course of a successful transition to market economies. Still, the more pernicious threats are from the inside: venal, delegitimized politicians, brain drain, crumbling infrastructure, cheap foreign competition, or inter-ethnic tensions. Perhaps the most serious hindrance to progress would be a fanatic emulation by the countries in transition of the European Union. An overly generous social safety net, a sprawling bureaucracy, inane laws and regulations about everything from the environment to the welfare of pigs, paralyzed decision-making processes and deleterious subventions - can all scupper progress and depress entrepreneurship and innovation. The cautionary tale of eastern Germany - smothered by western red tape and lethargy - should forewarn every new member and aspiring candidate. They need to join the European Union in the hope of helping to reform it from the inside. They should not succumb to the allure of German largesse, nor acquire the French, Spanish, Greek and Portuguese addiction to it. They cannot afford to. Pricing, Differential Last April, the World Health Organization (WHO), the World Trade Organization (WTO), the Norwegian Foreign Ministry, and the US-based Global Health Council held a 3-days workshop about "Pricing and Financing of Essential Drugs" in poor countries. Not surprisingly, the conclusion was: "... There was broad recognition that differential pricing could play an important role in ensuring access to existing drugs at affordable prices, particularly in the poorest countries, while the patent system would be allowed to continue to play its role in providing incentives for research and development into new drugs." The 80 experts, who attended the workshop, proposed to reconcile these two, apparently contradictory, aspirations by introducing different prices for drugs in low-income and rich countries. This could be achieved bilaterally, between companies and purchasers, patent holders and manufacturers, global suppliers and countries - or through a market mechanism. According to IMS Health, poor countries are projected to account for less than one quarter of pharmaceutical sales this year. Of every $100 spent on medicines worldwide - 42 are in the USA, 25 in Europe, 11 in Japan, 7.5 in Latin America and the Caribbean, 5 in China and South East Asia, less than 2 in East Europe and India each, about 1 in Africa and the Commonwealth of Independent States (CIS) each. Vaccines, contraceptives, and condoms are already subject to cross-border differential pricing. Lately, drug companies, were forced to introduce multi-tiered pricing following court decisions, or agreements with the authorities. Brazilians and South Africans, for instance, pay a fraction of the price paid in the West for their anti-retroviral AIDS medication. Even so, the price of a typical treatment is not affordable. Foreign donors, private foundations - such as the Bill and Melissa Gates Foundation - and international organizations had to step in to cover the shortfall. The experts acknowledged the risk that branded drugs sold cheaply in a poor country might end up being smuggled into and consumed in a much richer ones. Less likely, industrialized countries may also impose price controls, using poor country prices as benchmarks. Other participants, including dominant NGO's, such as Oxfam and Medecins Sans Frontieres, rooted for a reform of the TRIPS agreement - or the manufacturing of generic alternatives to branded drugs. The "health safeguards" built into the Trade-related Aspects of Intellectual Property Rights (TRIPS) convention allow for compulsory licensing - manufacturing a drug without the patent holder's permission - and for parallel imports - importing a drug from another country where it is sold at a lower price - in case of an health emergency. Aware of the existence of this Damocles sword, the European Union and the trans-national pharmaceutical lobby have come out last May in favor of "global tiered pricing". In its 2001 Human Development Report (HDR), the United Nations Development Program (UNDP) called to introduce differential rich versus poor country pricing for "essential high-tech products" as well. The Health GAP Coalition commented on the report:
"On the issue of differential pricing, the
Report notes that, while an effective global market would encourage different
prices in different countries for products such as pharmaceuticals, the current
system does not. With high-tech products, where the main cost to the seller is
usually research rather than production, such tiered pricing could lead to an
identical product being sold in poor countries for just one-tenth-or
one-hundredth- the price in Europe or the United States. 'Part of the battle to establish differential pricing must be won through consumer education. The citizens of rich countries must understand that it is only fair for people in developing countries to pay less for medicines and other critical technology products.' - stated Ms. Sukaki Fukuda-Parr" the lead author of the Report. Public declarations issued in Havana, Cuba, in San Jose, Costa Rica in the late 1990's touted the benefits of free online scholarship for developing countries. The WHO and the Open Society Institute initiated HINARI - Health InterNetwork Access to Research Initiative. Peter Suber, the publisher of the "Free Online Scholarship" newsletter, summarizes the initiative thus: "Under the program, the world's six largest publishers of biomedical journals have agreed to three-tiered pricing. For countries in the lowest tier (GNP per capita below $1k), online subscriptions are free of charge. For countries in the middle tier (GNP per capita between $1k and $3k), online subscriptions will be discounted by an amount to be decided this June. Countries in the top tier pay full price. The six participating publishers are Blackwell Synergy, Elsevier Science Direct, Harcourt IDEAL, Springer Link, Wiley Interscience, and Wolters Kluwer. The subscriptions are given to universities and research institutions, not to individuals. But they are identical in scope to the subscriptions received by institutions paying the full price." Of 500 bottom-tier eligible institutions, more than 200 have already signed up. Additional publishers have joined this 3-5 years program and most biomedical journals are already on offer. Mid-tier pricing will be declared by January next year. HINARI will probably be expanded to cover other scientific disciplines. Authors from developing countries also benefit from the spread of free online scholarship coupled with differential pricing. "Best of Science", for example, a free, peer-reviewed, online science journal subsists on fees paid by the authors. It charges authors from developing countries less. But differential pricing is unlikely to be confined to scholarly journals. Already, voices in developing countries demand tiered pricing for Western textbooks sold in emerging economies. Quoted in the Free Online Scholarship newsletter, Lai Ting-ming of the Taipei Times criticized, on March 26, "western publishers for selling textbooks to third world students at first world prices. There is a 'textbook pricing crisis' in developing countries, which is most commonly solved by illicit photocopying." Touchingly, the issue of the dispossessed within rich country societies was raised by two African Special Rapporteurs in a report submitted last year to the UN sub-Commission on Human Rights and titled "Globalization and its Impact on the Full Enjoyment of Human Rights". It said: " ... The emphasis on R & D investment conveniently omits mention of the fact that some of the financing for this research comes from public sources; how then can it be justifiably argued that the benefits that derive from such investment should accrue primarily to private interests? Lastly, the focus on differential pricing between (rich and poor) countries omits consideration of the fact that there are many people within developed countries who are also unable to afford the same drugs. This may be on account of an inaccessible or inhospitable health care system (in terms of cost or an absence of adequate social welfare mechanisms), or because of racial, gender, sexual orientation or other forms of discrimination." Differential pricing is often confused with dynamic pricing. Bob Gressens of Moai Technologies and Christopher Brousseau of Accenture define dynamic pricing, in their paper "The Value Propositions of Dynamic Pricing in Business-to-Business E-Commerce" as: "... The buying and selling of goods and services in markets where prices are free to move in response to supply and demand conditions." This is usually done through auctions or requests for quotes or tenders. Dynamic pricing is most often used in the liquidation of surplus inventories and for e-sourcing. Nor is differential pricing entirely identical with non-linear pricing. In the real world, prices are rarely fixed. Some prices vary with usage - "pay per view" in the cable TV industry, or "pay per print" in scholarly online reference. Other prices combine a fixed element (e.g., a subscription fee) with a variable element (e.g., payment per broadband usage). Volume discounts, sales, cross-selling, three for the price of two - are all examples of non-linear pricing. Non-linear pricing is about charging different prices to different consumers - but within the same market. Hal Varian of the School of Information Management and Systems at the University of California in Berkeley summarizes the treatment of "Price Discrimination" in A. C. Pigou's seminal 1920 tome, "The Economics of Welfare": "First-degree price discrimination means that the producer sells different units of output for different prices and these prices may differ from person to person. This is sometimes known as the case of perfect price discrimination. Second-degree price discrimination means that the producer sells different units of output for different prices, but every individual who buys the same amount of the good pays the same price. Thus prices depend on the amount of the good purchased, but not on who does the purchasing. A common example of this sort of pricing is volume discounts. Third-degree price discrimination occurs when the producer sells output to different people for different prices, but every unit of output sold to a given person sells for the same price. This is the most common form of price discrimination, and examples include senior citizens' discounts, student discounts, and so on." Varian evaluates the contribution of each of these practices to economic efficiency in a 1996 article published in "First Monday": "First-degree price discrimination yields a fully efficient outcome, in the sense of maximizing consumer plus producer surplus. Second-degree price discrimination generally provides an efficient amount of the good to the largest consumers, but smaller consumers may receive inefficiently low amounts. Nevertheless, they will be better off than if they did not participate in the market. If differential pricing is not allowed, groups with small willingness to pay may not be served at all.
Third-degree price discrimination increases
welfare when it encourages a sufficiently large increase in output. If output
doesn't increase, total welfare will fall. As in the case of second-degree price
discrimination, third-degree price discrimination is a good thing for niche
markets that would not otherwise be served under a uniform pricing policy. Strictly speaking, global differential pricing is none of the above. It involves charging different prices in different markets, in accordance with the purchasing power of the local clientele (i.e., their willingness and ability to pay) - or in deference to their political and legal clout. Differential prices are not set by supply and demand and, therefore, do not fluctuate. All the consumers within each market are charged the same - prices vary only across markets. They are determined by the manufacturer in each and every market separately in accordance with local conditions. A March 2001 WHO/WTO background paper titled "More Equitable Pricing for Essential Drugs" discovered immense variations in the prices of medicines among different national markets. But, surprisingly, these price differences were unrelated to national income. Even allowing for price differentials, the one-month cost of treatment of Tuberculosis in Tanzania was the equivalent of 500 working hours - compared to 1.4 working hours in Switzerland. The price of medicines in poor countries - from Zimbabwe to India - was clearly higher than one would have expected from income measures such as GDP per capita or average wages. Why didn't drug prices adjust to reflect indigenous purchasing power? According to the Paris-based International Chamber of Commerce (ICC), differential pricing is also - perhaps mostly - influenced by other considerations such as: transportation costs, disparate tax and customs regimes, cost of employment, differences in property rights and royalties, local safety and health standards, price controls, quality of internal distribution systems, the size of the order, the size of the market, and so on. Differential pricing was made possible by the application of mass manufacturing to the knowledge society. Many industries, both emerging ones, like telecommunications, or information technology - and mature ones, like airlines, or pharmaceuticals - defy conventional pricing theory. They involve huge sunk and fixed costs - mainly in research and development and plant. But the marginal cost of each and every manufactured unit is identical - and vanishingly low. Beyond a certain quantitative threshold returns skyrocket and revenues contribute directly to the bottom line. Consider software applications. The first units sold cover the enormous fixed and sunk costs of authoring the software and the machine tools used in the manufacturing process. The actual production ("variable" or "marginal") cost of each unit is a mere few cents - the wholesale price of the diskettes or CD-ROM's consumed. Thus, after having achieved breakeven, sales revenues translate immediately to gross profits. This bifurcation - the huge fixed costs versus the negligible marginal costs - vitiates the rule: "set price at marginal cost". At which marginal cost? To compensate for the sunk and fixed costs, the first "marginal units" must carry a much higher price tag than the last ones. Hal Varian studied this problem. His conclusions: "(i) Efficient pricing in such environments will typically involve prices that differ across consumers and type of service; (ii) producers will want to engage in product and service differentiation in order for this differential pricing to be feasible; and, (iii) differential pricing will arise naturally as a result of profit seeking by firms. It follows that differential pricing can generally be expected to contribute to economic efficiency." Differential pricing is also the outcome of globalization. As brands become ubiquitous and as the information superhighway renders prices comparable and transparent - different markets react differently to price signals. In impoverished countries, differential pricing was introduced illegally where manufacturers insisted on rigid, rich-world, price lists. Piracy of intellectual property, for instance, is a form of coercive (and illegal) differential pricing. The existence of thriving rip-off markets proves that, at the right prices, demand is rife (demand elasticity). Both piracy and differential pricing may be spreading to scholarly publishing and other form of intellectual property such as software, films, music, and e-books. Consumers are divided on the issue of multi-tiered pricing tailored to fit the customer's purchasing power. Not surprisingly, rich world buyers are apprehensive. They feel that differential pricing is a form of hidden subsidy, or a kind of "third world tax". On September 2000, Amazon.com conducted a unique poll - this time among customers - regarding differential pricing (actually, non-linear pricing) - showing different prices to different users on the same book. Forty two percent of all respondents though it was "discrimination" and "should stop" - but a surprising 31 percent regarded it as "a valid use of data mining". A quarter said it is "OK, if explained to users". The comments were telling: "I work over 80 hours a week. As a small business owner, I may make good money, but does that mean I should be charged more than unmotivated individuals who are broke because they don't want to work more than 30 hours a week. I don't think so ... Should (preferred) customers disappear in (the) off-line world? Should Gold Cards or Platinum Cards disappear? ... The interesting thing is that discrimination of pricing is very common in the insurance industry - the basis for actuarial work and in airlines - based on load factors. The key is the pricing available to groups of customers with similar profiles ... Simple supply and demand, competition from other suppliers should offset ... A dangerous policy to implement ... As a consumer I don't necessarily like it, (unless I get a lower price!). However, economically speaking, (think of a monopolist's MR curve) the ideal is to have each person pay the maximum amount that they are willing to pay." Private Armies Two years ago (2002), Christopher Deliso recounted in antiwar.com that Dutch Radio, based on reports leaked by a Dutch military analysis firm, accused the US government of aiding and abetting terrorists in Macedonia. Not for the first time, the Americans were rumored to have hired the services of MPRI (Military Professional Resources, Inc.) to train and assist the rebels of the NLA, the Albanian National Liberation Army, which skirmished for months with the Macedonian police and military throughout last year. MPRI is a leading Private Military Company (PMC) whose presence was espied in other Balkan trouble spots, such as Croatia, Kosovo, and Bosnia. The absurd is that MPRI has been training the Macedonia army - to little avail it would seem - since 1998 under a "Stability and Deterrence Program". Croatian former Foreign Minister Tonino Picula described MPRI's role thus: "We started at the beginning of the 1990’s lacking all kind of assistance. We faced a war of aggression. We needed all kinds of friends to enhance our capability to keep a schedule. I know that it (MPRI) did a significant job in Croatia as a part of US assistance to Croatia during the 1990s." Other governments - notably Colombia's and Nigeria's - were less sanguine about the utility of MPRI's services. Colombian officials complained "the MPRI's contributions were of little practical use", while according to the Center for Democracy and Development, the vociferous objections of the Nigerian military led to the dismissal by the president of senior army officers, among them General Malu, the Nigerian chief of staff. The end of the Cold War spelled the termination of many an illustrious career in the military and the secret services - as well as the destabilization and disintegration of many states. The Big Powers are either much reduced (Russia), militarily over-stretched (Europe), their armies ill-prepared for rapid deployment and low intensity warfare (everyone), or lost interest in many erstwhile "hot spots" (USA). Besieged by overwhelming civil strife, rebellions, and invasions - many countries, political parties, politicians, corporations, and businessmen seek refuge and protection. More than 5 million soldiers were let go all over the world between 1987-1994, according to Henry Sanchez of Rutgers University. Professional soldiers, suddenly unemployed in a hostile civilian environment, resorted to mercenariness. A few became rogue freelancers. The role of the Frenchman Bob Denard in the takeover of the Comoros Islands is now mythical. So is the failed coup in Seychelles in 1981, perpetrated by Colonel "Mad" Mike Hoare, a British ex-paratrooper. Private armies for hire proliferated. Executive Outcomes acted in Sierra Leone, Congo, and Angola, Sandline International in Sierra Leone and Papua New Guinea, DynCorp in Colombia, Haiti, Kosovo, and Bosnia and, of course, MPRI in Bosnia, Croatia, Kosovo, and, lately, Macedonia. Aviation Development Corporation flies surveillance planes for the CIA. Its involvement was revealed when, in Peru, it misidentified a civilian light plane as carrying narcotics. It was shot down by the Peruvian air force. But these are only the tip of a growing iceberg. Vinnell Corporation was established in the US during the Great Depression and is currently owned by TRW. It has coached militaries, operated facilities, and provided logistical support in more than 50 countries, starting in Saudi Arabia in 1975, where it won a controversial $77 million contract to train oilfield guards. BDM International, Betac, Logicon, and SAIC are competitors, but Kroll of New York and Saladin Security of London do mainly intelligence gathering. Brown and Root of Houston, Texas, provide logistical support to peacekeeping operations, for example in Kosovo. Pacific Architects and Engineering (PAE) furnishes logistical support and private security to armies the world over, mainly to the ECOMOG West African multilateral force. Control Risks Group offers corporate security, research, and intelligence solutions. It specializes in hostage situations. It boasts having advised in more than 1200 kidnappings and extortion cases in 80 countries. Armor Holdings was founded in 1969 as "American Body Armor and Equipment" and incorporated in 1996. It is a Private Security Company (PSC). Its London-based subsidiary, Defense Systems Limited, guards industrial and other sensitive sites, such as embassies and HQ's of international organizations, mainly the UN's. Armor itself manufactures police and other "non-lethal" equipment. It is a leading maker of armored passenger vehicles and the prime contractor to the U.S. Military for the supply of armoring and blast protection for High Mobility Multi-purpose Wheeled Vehicles (HMMWVs). Gray Security is another PSC with clients in both Africa and among Latin American immigrants in Florida. Some PMC's are ethnically pure. Succumbing to market realities, the legendary Gurkhas now offer their services through Gurkha International. The oil-rich region of Cabinda is air-patrolled by AirScan - Airborne Surveillance and Security Services. Big money is involved. The Los Angeles Times quoted, in its April 14th issue, Equitable Services, a security industry analyst. In 1997, it predicted that the international security market will mushroom from $56 billion in 1990 to $220 in 2010. This was long before the boost given to the sector by September 11. "The top five executives at Science Applications International Corp. of San Diego made between $825,000 and $1.8 million in salaries in 2001, and each held more than $1.5 million worth of stock options." - continued the LA Times. Control Risks Group's turnover last year exceeded $50 million. Armor Holding's 1999 revenues exceeded $150 million. Prior to its controversial demise, Executive Outcomes of South Africa was said to have earned c. $55 million in its last 4 years - excluding the $1.8 million per month contract it has signed with Sierra Leone, most of which went unpaid. There were unsubstantiated allegations of securing a share of the diamond trade in the ravaged country as well. Sandline's contract with Papua New Guinea amounted to $36 million for the first 3 months with just under $1 million for any consecutive month - or a total of c. $45 million per the first year. The country's new government at first refused to honor the commitments of its predecessor - hurling at it vague corruption charges - but then compromised with Sandline and agreed to dole out $13 million. Nor are these small ensembles. MPRI - now in its 14th year - employs over 800 people, most of them former high level US military personnel. It draws on a database of 12,500 freelancers "former defense, law enforcement, and other professionals, from which the company can identify every skill produced in the armed forces and public safety sectors". Many of its clients work under the US government's Foreign Military Sales program and abide by the GSA (General Services Administration) tariffs. Control Risks Group - founded in 1975 as a subsidiary of the Hogg Robinson insurance group - claims to have had "more than 5,300 clients (including 86 of the Fortune 100 companies) in over 130 countries". Eighty three percent Of the firms comprising the FTSE 100 use one or more of CRG's services. It has 400 employees in 16 offices around the world. It has recently acquired Network Holdings Limited, the UK's largest private forensic laboratory. The Armor Holdings Products Division is made up of nine operating companies in eight geographic locations. It offers its branded security products through a network of more than 500 distributors and agents internationally. ArmorGroup employs 5,500 people in 38 countries. Modern PMC's, such as Sandline, are veritable - though miniature - armies, replete with staff military ranks, uniforms, doctrine, training syllabi, cohesion, unit spirit, and discipline. Smaller, ad hoc, outfits from Ukraine, Russia, Belarus, France, the United Kingdom, Israel, Croatia, South Africa, the United States and other nationalities scour the Earth for emerging conflicts. Such units are often infiltrated by criminals on the run, terrorists in disguise, sadistic psychopaths, and intelligence officers. These "dogs of war" are known for their disloyalty and lack of discipline. Many have committed acts of banditry, rapes, and an array of atrocities in the mutilated host countries. Still, these are marginal groups and in the minority of PMC's - the last resort, often hired by undesirables and failed states. On February 12, the British Foreign and Commonwealth Office released a long-awaited briefing ("green") paper in support of regulating the private military sector. Quoted in "Defense News", the paper stated: "The demand for private military services is likely to increase ... A strong and reputable private military sector might have a role in enabling the (United Nations) to respond more rapidly and more effectively in crises. The cost of employing private military companies for certain functions in U.N. operations could be much lower than that of national armed forces." Regulation, though, has a poor record. All PMC's in the USA are subject to the porous and ill-enforced Arms Export Control Act overseen by the State Department. The Los Angeles Times is not impressed with the record: "Congress is notified only of contracts worth more than $50 million. Sometimes there are conflicting views of what is in the U. S. interest. And once a license is granted, there are no reporting requirements or oversight of work that typically lasts years and takes the firms' employees to remote, lawless areas." Decisions often appear to be arbitrary and are mysteriously reversed. All major PMC's maintain lobbyists in Washington and function, partly, as rent seekers. Still, PMC's are the most cost-effective alternative. According to the UN Special Representative to Sierra Leone, The UN peacekeeping mission there costs more than $500 million per year - compared to Executive Outcomes' $33 million spread over 21 months. Regulation may amount to a belated acceptance of reality. MPRI boasts that it already operates in foreign countries with the full knowledge and "licence" of the American administration. It is a way to circumvent both the oft-withheld Congressional approval needed for US military involvement abroad - and unwelcome media scrutiny. The US Army, in the framework of LOGCAP (Logistics Civil Augmentation Program), "preplans during peacetime for the use of civilian contractors to perform selected services in wartime and other contingencies. Utilization of contractors, in a theater of operation, will release military units for other missions or fill shortfalls." The ubiquitous MPRI is LOGCAP's main contractor. Bahamas-incorporated Sandline also claimed British Foreign Office tacit approval of its mission in Sierra Leone. Most PMC's are self-regulating and selective. They won't render their services to organized crime, drug cartels, rogue states, terrorists, illegal arms traders, and regimes known for flagrant violations of human rights. The privatization of hitherto exorbitantly costly peacekeeping and humanitarian operations would bestow legitimacy upon these outfits and entice them to adhere to strict regulatory codes. Still, the exercise of violence is a prerogative of states and a hallmark of often hard-gained sovereignty. Many do not take kindly to the encroachment of morally-neutral private sector replacements upon these hallowed grounds. David Isenberg wrote in the March 11th issue of "Defense News": "The only question is how best to address concerns about accountability, threats to a nation's sovereignty (i.e., usurping the state's prerogative of having a monopoly on violence), having a vested interest in perpetuating a conflict, violating human rights or acting as government proxies. The consensus opinion is that this is best accomplished through regulation." The imperceptible line between "military advisors" and combatants is often crossed. According to the Los Angeles Times, Vinnell employees may have joined Saudi National Guard units in battle against the invading army of Saddam Hussein in 1991. MPRI personnel are alleged by Ken Silverman in his book "Private warriors" and by numerous media - from the British journalist Paul Harris on Australia's Radio National's "Background Briefing" to The Scotsman - to have helped plan the Croatian occupation and ethnic cleansing of Serb-populated Krajina in 1995. Even the Foreign Military Training Report published by both the State Department and Department of Defence in May refers to these allegations against MPRI not entirely disparagingly. Sanchez describes what happened in Papua New Guinea: "When citizens of Papua New Guinea learned that their government signed a $27 million contract with EO (should be Sandline - SV) to train the Army to fight a secessionist rebel uprising it set off five days of rioting and protests. Even the Army commander (later convicted on unrelated corruption charges - SV) refused to work with the South African firm. States that hire private firms for security are usually financially poor but mineral rich. They often pay for services by offering concessions earned through diamond mining, oil drilling or other natural resources. An enterprising military firm may end up exploiting a poor nation of its modest resources. As a result there may be a new 'Scramble for Africa' over resources where no government exists or is desperate for help..." Few PMC's if any consent to any form of payment, except cash. Mineral concessions require heavy investments and existing mines require a logistical infrastructure often way beyond the expertise and financial wherewithal of the average PMC. PMC's may be involved in influence peddling on behalf of mineral extractors or receive introduction fees and commissions from multinationals, though. PMC's also make a lot of money on arms sales to their client states. Consider Sandline International. It was never a shareholder in Branch Energy, DiamondWorks, or any other real or imaginary mining firm it was associated with by sloppy researchers and journalists. Nor was it the successor to Executive Outcomes. Yet, the same people acted as directors, or advisors in all these firms. This incestuous setup led to the false assertions that Sandline - and EO before it - looted the mineral wealth of countries such as Sierra Leone and Angola. That many PMC's render security services to mining firms - both statal and private - adds to the confusion. "The Financial Times" mentioned the positive role "Southern Cross Security" played in keeping Sierra Leone's titanium-dioxide mines intact throughout the war. Others wrongly accused it of being an EO offshoot out to pillage the minerals it sought to protect. Even Sanchez acknowledges that "(others think that) a private company can deploy forces rapidly, avoid the difficulties of ad-hoc multinational forces (command is streamlined and cohesive), they usually have standing logistics for transport, appear to be cost-effective, and are willing to sustain loss of life". Isenberg concurs: "It is time to recognize that today's PMCs are far different from the ad hoc organizations of the past. As experts such as professor Herb Howe of Georgetown University have noted, many of today's companies exhibit a distinct corporate nature and a desire for good public relations. The companies' goal of obtaining contracts encourages them to control their employees' actions. Private firms have a large pool of qualified applicants, due to worldwide political realignments and defense cutbacks since 1989 ... One thing is clear: The need for security from the private sector is going to increase dramatically. And PMCs are going to fulfill that need." PMC's have embarked on a concerted effort to alter their penumbral image. MPRI - its Web site replete with literary quotes lifted from the works of Marcel Proust and other renowned soldiers of fortune - has contracted with Enterprise Strategies and Solutions under the Department of Defence's Mentor-Protégé program. MPRI explains: "ESSI's emphasis on economic well-being, technology transfer, corporate social investing, business incubation, and knowledge management complement the vital safety and security roles performed by MPRI. MPRI has the added advantage of being able to utilize the skill sets of a small, woman-owned, veteran-owned business. MPRI and ESSI form a comprehensive team that enables them to perform on a wide range of projects that would otherwise be inaccessible for one or the other." MPRI branched out to offer corporate leadership programs that include the re-enactment of historical battles. It is a major provider of training, support, and "other services" - such as strategic planning and leader development - to the US armed forces, Department of Defense, the corporate sector, and "non-DoD government agencies." Its Web site - a sincere stab at transparency - lists dozens of military and semi-military contracts. Its military contracts notwithstanding, it emphasizes the humanitarian side of its operations. It "shipped more than $900,000,000 worth of donated food and medical supplies to the newly independent states of the former Soviet Union over a five year period ... has provided peace keeping monitors for both the Department of Defense and the Department of State" and engaged in other charitable deeds, like demining. In the Winter 2002 issue of "Harvard International Review", Sean Creehan summed up this shift in public perceptions: "Today's mercenaries still fight for money, but in the context of global capitalism, some groups are becoming less morally objectionable. The organization of mercenaries into corporations that function like consulting firms has put distance between them and their activities. Mercenary corporations' increasing efficiency and self-regulation is influencing the way legitimate governments view mercenaries as instruments of state policy." In a BBC poll conducted in the wake of the British government's Green Paper about regulating "soldiers of fortune", a reader named Katie raised important points regarding the corporate structure and liabilities of PMC's: "The UK has a rather poor record of holding corporate officers responsible in any way for their actions ... Maybe military 'companies' should actually be restricted to being partnerships where the owners have unlimited liability similar to a lawyer's practice? Maybe a special class of company needs to be created, for this purpose so they can be audited and tracked and to clarify their relationship with the government (for whom they act). Essentially ... the directors of the company can be held responsible for war crimes as would ranking officers in the army. To some extent the 'corporate veil' needs to be thinner for these companies." The United Kingdom - and Australia - promote a complete re-think of the concept of national defense. Britain's public-private partnership dubbed the "Private Finance Initiative" revolves around "paying privately for the defence we cannot afford publicly". Thus, transport planes, ships, trucks, training, and accommodation - may all be on long term leases from private firms. The equipment will be leased to other customers during down time, reports the BBC. After all, when rich countries pay poor countries to send their ill-disciplined, ill-equipped, and ill-trained soldiers on peacekeeping operations - isn't this a mercenary system in all but name? And atrocities are not the preserve of "dogs of war". American regular soldiers committed them in Kosovo and Japan, Nigerian conscripts perpetrated them all over West Africa, "national armies" are feared by their own civilians more than any mercenary troupe. Time to rid ourselves of self-righteous myths and privatize peace as we, alas too often, did war. Professions (of Future) Predicting the future is a tricky business. There have been countless ridiculous failures at identifying the trends and products which will determine the future shape of our life and our environment. Even more difficult is trying to guess which of us will be deemed a useful member of the community – and which an obsolete relic. To a large extent, the answer to this question lies in determining the useful professions of the future. This is an age when people are determined, defined and categorized in strict accordance with their professions. Whereas during the Renaissance, a person might have been defined by his range of interests (remember the likes of Leonardo da Vinci), by his familial, religious, or ethnic affiliations, by his or her gender and so on – today the first and foremost question is a person's profession. The first question that we must provide a clear answer to is: What constitutes a profession (as opposed to a hobby), a vocation (as opposed to an avocation)? To qualify as a profession, the act must bear the following hallmarks: a. It must be continuous and pursued for a long time.
The second relevant question is: What are the trends which determine our future? It is useless to look at microtrends. These are too volatile and, in principle, unpredictable. Much more important are the trends that last for hundreds or even thousands of years. These are usually not the results of technological conjuncture or geopolitical upheavals. Rather, they are the outcomes of characteristic human activities which are uninterrupted. Healthcare, for instance, is such a human activity. Humans – terrified of death and infirmity – always wanted and are very likely to continue to want to improve their health and thus to postpone the inevitable and better the quality of what is available. Another such overriding tendency is education: this is a part of the human survival kit. By educating oneself, by studying a profession, by learning more about the world – one better one's chances to survive. Out of this set of human, almost deterministic activities, a group of overriding trends emerges: From Less Mobility to More Mobility People, goods and, lately, information became and become, daily, more and more mobile. Physical distance has been shrunk. A global marketplace has formed. Information is almost instantly available anywhere. This was described as the global village – an outdated concept which might soon be replaced by the global home. All the professions which has to do with more mobility will benefit and represent preferred professions of the future. The moving of people: pilots, drivers, the car industry, sophisticated traffic planners and automotive innovators, tourism related professions and so on. The moving of goods: shipping, trucking, air and modern train travel. This area is already so specialized that I do not consider it as offering opportunities in the future (put differently, I do not regard it as a growth industry). The moving of information (today dubbed: "The Service Industries"): Trading systems, the Internet, Networking and communications related professions, the field of communications within the computer industries, telecommunications, entertainment related professions, technologies of banking. The creation of destinations for people, goods and information (commonly known as Markets or Marketplaces): advertising, marketing, trading, design, image and public relations experts. The Age Polarization of Society Better medicine will lead to a polarization of the age structure of society: there will be more older people and more younger people. Gradually, as birth rates fall and contraception becomes widespread, a reverse pyramid will be formed: most people will be middle aged and old. This offers a clear view of professions which will be required in the future: Professionals to take care of older and younger people (which have very similar needs): nurses, paramedics, nannies, entertainers, leisure time professionals, companions, specialized equipment manufacturers, operators of homes for the very old or for the very young, pension planners, manufacturers of specialized medical and paramedical needs and products for both age groups, legal and accounting specialists in pension and inheritance laws and tax planning. Virtually every industry and field of human activity will have to adapt themselves to these demographic changes. Age-related expertise will develop in each one of them. This applies to the arts (mainly music and cinema) as well as to the crafts, to industry as well as to agriculture, to infrastructure as well as to government. Human society will be enormously influenced by these shifts. The Fragmentation of Society Initially, society was composed of very large units. People belonged to tribes "nations". These were groupings of up to hundreds of thousands of people. They felt amply defined by this belonging. Nothing was left out when you said that a certain person was "Hebrew". Nothing needed to be added. Stereotypes were more than sufficient and, usually accurate. Later, the concept of family fully emerged. First, in a very extended form: the family comprised a few generations and all removed family (blood) connections. Gradually, the family shed more and more layers. People began to be called by family names only 250 years ago. The nuclear family was an invention of the 19th century, when the industrial revolution and modern methods of transport and communication broke families apart. Even this relatively small units came under a debilitating attack in the last 50 years and the nuclear family underwent a nuclear implosion, it disintegrated. Today, the basic unit of society, its cell, its atom, is the individual. People will tend to isolate themselves: stay more at home, work from it with flexitime, form and break up short term attachments to other humans or be engaged in non-committal activities with others, activities which will not threaten their absolute freedom and mobility. Solitary media will be predominant: the Internet is a one-user medium (television was a family medium). The professions which will cater to the needs of individuals and separate them from society (while maintaining the survival need to communicate) will be the professions of the future: Internet, entertainment (especially customized), telecommunication, singles-related industries (dating and couple matching, for instance, single's bars, to mention another), virtual reality, small businesses which can be run from home, agencies for temporary work placement and other professions catering to the conflicting human needs of being together while being alone. All the other seeming trends are recurrent illusions. Thee have been ages of more or less democracy, more or less market orientation, more or less polarization between rich and poor people. The human race experienced numerous forms of government, of marriage, of economy, of management, of residence, of production, even of trying to predict the future. It was the wisest of all men, King Solomon, who said: "There is nothing new under the sun". True, but it is getting stronger. Five thousand years ago, people were still roaming the earth as nomads. They carried along their few precious possessions in their hands and on their backs. They hunted and gathered food at random. Then came the Agricultural Revolution: people settled down and got attached - physically, emotionally and legally - to specific plots of land. They grew their food in accordance with a pre-meditated plan. They domesticated animals. This new pattern of human existence led to enormous shifts in demographic patterns. It took yet another 4500 years before the dawn of the next Revolution: the Industrial one. Its main achievement was to separate the raw materials and the means of production from the land. It also created the need to have an educated workforce. This Revolution brought in its wake the formation of cities (which supplied workers to mega-factories), mass education systems and leisure. For the first time in history, people began to have free time on their hands. Numerous organizations, firms and institutions sprang up in an effort to satisfy the insatiable desire for entertainment and the necessity to cope with the ever growing complexity of social and economic institutions. Contrary to common opinion, the service oriented society was - and still is - an inseparable part of the industrial world. Today, we are in the eye of the biggest storm ever: the Third Wave (to borrow Alvin Toffler's excellent coinage). This is the Information and Knowledge Revolution. It is leading to an economy which will be based on the accumulation, the processing and the delivery of information (the equivalent of raw materials) and of knowledge (the equivalent of processed goods). All these will be made accessible to ever widening strata of society. This, indeed, is what separates this Revolution from its predecessors: (1) It is equitable - anyone and everyone can partake in it. To participate in the previous two Revolutions - large amounts of capital were needed. Where capital was amiss - raw force was used to obtain raw materials, capital goods, land and other means of production (including very cheap labour in the form of slavery). This Revolution is different: all that is needed is good ideas, some (ever lessening) technical background and ever cheaper infrastructure. So, this Revolution is open to young people in home garages (this is how computer giants such as Apple Computers and Microsoft were established). It is non-discriminating: age, gender, race, colour, nationality, sexual preferences - they all do not matter. This Revolution is the Great Equalizer. (2) This is the first time in human history that raw materials, production processes, finished products and marketing and distribution channels are one and the same. Let us examine the example of the sales of products (e.g., software) through the Internet: Software is written on computers using programming languages - a manipulation of electronic bits in a virtual environment. Thus, the product (=the software), the production processes (=the programming languages), the raw materials (mental algorithms translated to electronic bits) and the channels of marketing and distribution (the electronic bit streams of the Internet) - they are all made of the same elements and components. This is why the technology is so cheap. This is why the products of the forthcoming Revolution will be disseminated so easily. To manufacture and to distribute will become mundane - rather than arcane - operations. (3) Only some of our forefathers have been influenced by the Agricultural Revolution. Only some of them have been influenced by the Industrial Revolution. Gradually, the percentage of the population working the land decreased from well over 60% to less than 3% (in the USA, for instance). An equal drop can be discerned among the part of population engaged in industry. But this is not the case with the third Revolution: There is not a single human on earth who is not influenced by the third, biggest Revolution of all: the Information / Knowledge Revolution. All of us are exposed to radio, television, computers, cellular phones, the Internet. These products and services are becoming cheaper and more available and accessible by the month. The new Revolution is all- pervasive and all-encompassing. (4) All the above characteristics brought about a new form of economic development: non-centralised, high value added, fast progressing with quick business cycles. It is the first non-mercantilist, non-colonial phase in human history. All economic activity in the past was characterized by the importation of raw products at low prices from the very same markets that absorbed the final products (produced from those raw materials) at much higher prices. This form of exploitation will gradually become impossible. Today, it is no longer important where goods are produced. The demarcation lines between finished products and raw materials are so blurred (even where old-fashioned industrial products are concerned) - that the old distinctionbetween "colonizer" and "colony" has all but vanished. This holds a great promise for less-developed and developing countries. In the (near) past, they would have needed huge amounts of capital and other, non-monetary, resources to equate themselves with the more developed part of the World. Today, much less investment is needed to achieve the same results. The world is finally becoming what the sage of Western media, Marshall McLuhan called: "The Global Village". It matters less WHERE you are - it matters more WHAT you think. A global economic premium is placed on innovation, creativity, improvisation and the entrepreneurial spirit. These - the new mental commodities - are abundantly and equally available to all the countries in the world: poor and rich, off-center and on-center, developed, developing and less developed. The old economic conception of an evolution: from the agricultural to the industrial to the service economies is being replaced. The new breed of economic thinking encourages countries - such as Macedonia - to move directly from the Agricultural phase to the Third Wave: that of Information and Knowledge industries. Macedonia can better accommodate this type of industries: they are affordable, accessible, easy to understand and to implement, highly profitable, ever evolving and progressing. Macedonia will not be the first country to implement such a daring policy of leaping forward and skipping the Industrial stage - straight into the age of Information. Israel has done it before and so have Switzerland, Hong-Kong, Singapore and (to a certain and hesitant extent) India. All these countries were naturally under-privileged. Some of them are mere deserts, others isolated, barren islands or severely overpopulated. But they all managed to get heavily involved in the unfolding revolution. All of them (with the exception of India which is a new, half-hearted, entrant) possess the highest per capita GNP in the world. The gamble has paid off. But there is a fascinating side-benefit to such a choice. The shift from industry to the information technology and knowledge industries - is a shift from dealing with reality to dealing with symbols. The techniques used to manipulate symbols are the very same - no matter what the symbols are. If a country is successful at developing trained operators of symbols - they will know how to manipulate, operate and transform any kind of symbol. This is also true when it comes to the biggest symbol of all: to Money. Money - as we all know - is a symbol. It represents an agreement reached amongst members of a group of people. It has no intrinsic value. The same techniques which are used for the manipulation of information are easily applicable to the manipulation of the symbol called money. THE MORE ADEPT A COUNTRY IS AT PROCESSING SYMBOLS (=INFORMATION) - THE MORE ADEPT IT IS IN FINANCIAL TRANSACTIONS OF ALL KINDS. It is more likely to attract investments, to develop flourishing stock exchanges and money markets, to train young professionals, to trade and in general: to get enmeshed in the very fabric of the modern international economy. Public Goods I. Public Goods, Private Goods Contrary to common misconceptions, public goods are not "goods provided by the public" (read: by the government). Public goods are sometimes supplied by the private sector and private goods - by the public sector. It is the contention of this essay that technology is blurring the distinction between these two types of goods and rendering it obsolete. Pure public goods are characterized by: I. Nonrivalry - the cost of extending the service or providing the good to another person is (close to) zero. Most products are rivalrous (scarce) - zero sum games. Having been consumed, they are gone and are not available to others. Public goods, in contrast, are accessible to growing numbers of people without any additional marginal cost. This wide dispersion of benefits renders them unsuitable for private entrepreneurship. It is impossible to recapture the full returns they engender. As Samuelson observed, they are extreme forms of positive externalities (spillover effects). II. Nonexcludability - it is impossible to exclude anyone from enjoying the benefits of a public good, or from defraying its costs (positive and negative externalities). Neither can anyone willingly exclude himself from their remit. III. Externalities - public goods impose costs or benefits on others - individuals or firms - outside the marketplace and their effects are only partially reflected in prices and the market transactions. As Musgrave pointed out (1969), externalities are the other face of nonrivalry. The usual examples for public goods are lighthouses - famously questioned by one Nobel Prize winner, Ronald Coase, and defended by another, Paul Samuelson - national defense, the GPS navigation system, vaccination programs, dams, and public art (such as park concerts). It is evident that public goods are not necessarily provided or financed by public institutions. But governments frequently intervene to reverse market failures (i.e., when the markets fail to provide goods and services) or to reduce transaction costs so as to enhance consumption or supply and, thus, positive externalities. Governments, for instance, provide preventive care - a non-profitable healthcare niche - and subsidize education because they have an overall positive social effect. Moreover, pure public goods do not exist, with the possible exception of national defense. Samuelson himself suggested [Samuelson, P.A - Diagrammatic Exposition of a Theory of Public Expenditure - Review of Economics and Statistics, 37 (1955), 350-56]: "... Many - though not all - of the realistic cases of government activity can be fruitfully analyzed as some kind of a blend of these two extreme polar cases" (p. 350) - mixtures of private and public goods. (Education, the courts, public defense, highway programs, police and fire protection have an) "element of variability in the benefit that can go to one citizen at the expense of some other citizen" (p. 356). From Pickhardt, Michael's paper titled "Fifty Years after Samuelson's 'The Pure Theory of Public Expenditure': What Are We Left With?": "... It seems that rivalry and nonrivalry are supposed to reflect this "element of variability" and hint at a continuum of goods that ranges from wholly rival to wholly nonrival ones. In particular, Musgrave (1969, p. 126 and pp. 134-35) writes: 'The condition of non-rivalness in consumption (or, which is the same, the existence of beneficial consumption externalities) means that the same physical output (the fruits of the same factor input) is enjoyed by both A and B. This does not mean that the same subjective benefit must be derived, or even that precisely the same product quality is available to both. (...) Due to non-rivalness of consumption, individual demand curves are added vertically, rather than horizontally as in the case of private goods". "The preceding discussion has dealt with the case of a pure social good, i.e. a good the benefits of which are wholly non-rival. This approach has been subject to the criticism that this case does not exist, or, if at all, applies to defence only; and in fact most goods which give rise to private benefits also involve externalities in varying degrees and hence combine both social and private good characteristics' ". |
