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Scams The syntax is tortured, the grammar mutilated, but the message - sent by snail mail, telex, fax, or e-mail - is coherent: an African bigwig or his heirs wish to transfer funds amassed in years of graft and venality to a safe bank account in the West. They seek the recipient's permission to make use of his or her inconspicuous services for a percentage of the loot - usually many millions of dollars. A fee is required to expedite the proceedings, or to pay taxes, or to bribe officials - they plausibly explain. It is a scam two decades old - and it still works. Only last month, a bookkeeper for a Berkley, Michigan law firm embezzled $2.1 million and wired it to various bank accounts in South Africa and Taiwan. Other victims were kidnapped for ransom as they traveled abroad to collect their "share". Some never made it back. Every year, there are 5 such murders as well as 8-10 snatchings of American citizens alone. The usual ransom demanded is half a million to a million dollars. The scam is so widespread that the Nigerians saw fit to explicitly ban it in article 419 of their penal code. The Nigerian President, Olusegun Obasanjo castigated the fraudsters for inflicting "incalculable damage to Nigerian businesses" and for "placing the entire country under suspicion". "Wired" quotes statistics presented at the International Conference on Advance Fee (419) Frauds in New York on Sept. 17: "Roughly 1 percent of the millions of people who receive 419 e-mails and faxes are successfully scammed. Annual losses to the scam in the United States total more than $100 million, and law enforcement officials believe global losses may total over $1.5 billion." According to the "IFCC 2001 Internet Fraud Report", published by the FBI and the National White Collar Crime Center, Nigerian letter fraud cases amount to 15.5 percent of all grievances. The Internet Fraud Complaint Center refers such rip-offs to the US Secret Service. While the median loss in all manner of Internet fraud was $435 - in the Nigerian scam it was a staggering $5575. But only one in ten successful crimes is reported, says the FBI's report. The IFCC provides this advisory to potential targets:
The "419 Coalition" is more succinct and a lot more pessimistic:
The State Department's Bureau of International Narcotics and Law Enforcement Affairs published a brochure titled "Nigerian Advance Fee Fraud". It describes the history of this particular type of swindle: "AFF criminals include university-educated professionals who are the best in the world for nonviolent spectacular crimes. AFF letters first surfaced in the mid-1980s around the time of the collapse of world oil prices, which is Nigeria's main foreign exchange earner. Some Nigerians turned to crime in order to survive. Fraudulent schemes such as AFF succeeded in Nigeria, because Nigerian criminals took advantage of the fact that Nigerians speak English, the international language of business, and the country's vast oil wealth and natural gas reserves - ranked 13th in the world - offer lucrative business opportunities that attract many foreign companies and individuals." According to London's Metropolitan Police Company Fraud Department, potential targets in the UK and the USA alone receive c. 1500 solicitations a week. The US Secret Service Financial Crime Division takes in 100 calls a day from Americans approach by the con-men. It now acknowledges that "Nigerian organized crime rings running fraud schemes through the mail and phone lines are now so large, they represent a serious financial threat to the country". Sometimes even the stamps affixed to such letters are forged. Nigerian postal workers are known to be in cahoots with the fraudsters. Names and addresses are obtained from "trade journals, business directories, magazine and newspaper advertisements, chambers of commerce, and the Internet". Victims are either too intimidated to complain or else reluctant to admit their collusion in money laundering and fraud. Others try in vain to recoup their losses by ploughing more money into the scheme. Contrary to popular image, the scammers are often violent and involved in other criminal pursuits, such as drug trafficking, According to Nigeria's Drug Law Enforcement Agency. The blight has spread to other countries. Letters from Sierra Leone, Ghana, Congo, Liberia, Togo, Ivory Coast, Benin, Burkina Faso, South Africa, Taiwan, or even Canada, the United Kingdom, Oman, and Vietnam are not uncommon. The dodges fall into a few categories. Over-invoiced contract scams involve the ostensible transfer of amounts obtained through inflated invoices to the bank account of an unrelated foreign firm. Contract fraud or "trade default" is simply a bogus order accompanied by a fraudulent bank draft for the products of an export company accompanied by demand for "samples" and various transaction "fees and charges". Some of the rackets are plain outlandish. In the "wash-wash" confidence trick people have been known to pay up to $200,000 for a special solution to remove stains from millions in defaced dollar notes. Others "bought" heavily "discounted" crude oil stored in "secret" locations - or real estate in rezoned locales. "Clearing houses" or "venture capital organizations" claiming to act on behalf of the Central Bank of Nigeria launder the proceeds of the scams. In another twist, charities, academic institutions, nonprofit organizations, and religious groups are asked to pay the inheritances tax on a "donation". Some "dignitaries" and their relatives may seek to flee the country and ask the victims to advance the bribe money in return for a generous cut of the wealth they have stashed abroad. "Bankers" may find inactive accounts with millions of dollars - often in lottery winnings - waiting to be transferred to a safe off-shore haven. Bogus jobs with inflated wages are another ostensible way to defraud state-owned companies - as is the sale of the target's used vehicle to them for an extravagant price. There seems to be no end to criminal ingenuity. Lately, the correspondence purports to be coming from - often white - disinterested professional third parties. Accountants, lawyers, directors, trustees, security personnel, or bankers pretend to be acting as fiduciaries for the real dignitary in need of help. Less gullible victims are subjected to plain old extortion with verbal intimidation and stalking. The more heightened public awareness grows with over-exposure and the tighter the net of international cooperation against the scam, the wilder the stories it spawns. Letters have surfaced recently signed by dying refugees, survivors of the September 11 attacks, and serendipitous US commandos on mission in Afghanistan. Governments throughout the world have geared up to protect their businessmen. The US Department of Commerce, for instance, publishes the "World Traders data Report", compiled by US embassy in Nigeria. It "provides the following types of information: types of organizations, year established, principal owners, size, product line, and financial and trade references". Unilateral US activity, inefficacious collaboration with the Nigerian government some of whose officials are rumored to be in on the deals, multilateral efforts in the framework of the OECD and the Interpol, education and information campaigns - nothing seems to be working. The treatment of 419 fraudsters in Nigeria is so lenient that, according to the "Nigeria Tribune", the United States threatened the country with sanctions if it does not considerably improve its record on financial crime by November 2002. Both the US Treasury's Financial Crime Enforcement Network (FINCEN) and the OECD's Financial Action Task Force (FATF) had characterized the country as "one of the worst perpetrators of financial crimes in the world". The Nigerian central bank promises to get to grips with this debilitating problem. Nigerian themselves - though often victims of the scams - take the phenomenon in stride. The Nigerian "Daily Champion", proffered this insightful apologia on behalf of the ruthless and merciless 419 gangs. It is worth quoting at length: "To eradicate the 419 scourge, leaders at all levels should work assiduously to create employment opportunities and people perception of the leaders as role models. The country's very high unemployment figure has made nonsense of the so-called democracy dividends. Great majority of Nigerian youthful school leaver's including University graduates, are without visible means of livelihood... The fact remains that most of these teeming youths cannot just watch our so-called leaders siphon their God-given wealthy. So, they resorted to alternative fraudulent means of livelihood called 419, at least to be seen as have arrived... Some of these 419ers are in the National Assembly and the State Houses of Assembly while some surround the President and governors across the country."
Some swindlers seek to glorify their criminal
activities with a political and historical context. The Web site of the "419
Coalition" contains letters casting the scam as a form of forced reparation for
slavery, akin to the compensation paid by Germany to survivors of the holocaust.
The confidence tricksters boast of defrauding the "white civilization" and
unmasking the falsity of its claims for superiority. But a few delusional
individuals aside, this is nothing but a smokescreen. Strange, penumbral, characters roam the boardrooms of banks in the countries in transition. Some of them pop apparently from nowhere, others are very well connected and equipped with the most excellent introductions. They all peddle financial transactions which are too good to be true and often are. In the unctuously perfumed propinquity of their Mercedesed, Rolex waving entourage - the polydipsic natives dissolve in their irresistible charm and the temptations of the cash: mountainous returns on capital, effulgent profits, no collaterals, track record, or business plan required. Total security is cloyingly assured. These Fausts roughly belong to four tribes: The Shoppers These are the shabby operators of the marginal shadows of the world of finance. They broker financial deals with meretricious sweat only to be rewarded their meagre, humiliated fees. Most of their deals do not materialize. The principle is very simple: They approach a bank, a financial institution, or a borrower and say: "We are connected to banks or financial institutions in the West. We can bring you money in the form of credits. But to do that - you must first express interest in getting this money. You must furnish us with a bank guarantee / promissory note / letter of intent that indicates that you desire the credit and that you are willing to provide a liquid financial instrument to back it up.". Having obtained such instruments, the shoppers begin to "shop around". They approach banks and financial institutions (usually, in the West). This time, they reverse their text: "We have an excellent client, a good borrower. Are you willing to lend to it?" An informal process of tendering ensues. Sometimes it ends in a transaction and the shopper collects a small commission (between one quarter of a percentage point and two percentage points - depending on the amount). Mostly it doesn't -and the Flying Dutchman resumes his wanderings looking for more venal gulosity and less legal probity. The Con-Men These are crooks who set up elaborate schemes ("sting operations") to extract money from unsuspecting people and financial institutions. They establish "front" or "phantom" firms and offices throughout the world. They tempt the gullible by offering them enormous, immediate, tax-free, effort-free, profits. They let the victims profit in the first round or two of the scam. Then, they sting: the victims invest money and it evaporates together with the dishonest operators. The "offices" are deserted, the fake identities, the forged bank references, the falsified guarantees are all exposed (often with the help of an inside informant). Probably the most famous and enduring scam is the "Nigerian-type Connection". Letters - allegedly composed by very influential and highly placed officials - are sent out to unsuspecting businessmen. The latter are asked to make their bank accounts available to the former, who profess to need the third party bank accounts through which to funnel the sweet fruits of corruption. The account owners are promised huge financial rewards if they collaborate and if they bear some minor-by-comparison upfront costs. The con-men pocket these "expenses" and vanish. Sometimes, they even empty the accounts of their entire balance as they evaporate. The Launderers A lot of cash goes undeclared to tax authorities in countries in transition. The informal economy (the daughter of both criminal and legitimate parents) comprises between 15% (Slovenia) and 50% (Russia, Macedonia) of the official one. Some say these figures are a deliberate and ferocious understatement. These are mind boggling amounts, which circulate between financial centres and off shore havens in the world: Cyprus, the Cayman Islands, Liechtenstein (Vaduz), Panama and dozens of aspiring laundrettes. The money thus smuggled is kept in low-yielding cash deposits. To escape the cruel fate of inflationary corrosion, it has to be reinvested. It is stealthily re-introduced to the very economy that it so sought to evade, in the form of investment capital or other financial assets (loans and credits). Its anxious owners are preoccupied with legitimising their stillborn cash through the conduit of tax-fearing enterprises, or with lending it to same. The emphasis is on the word: "legitimate". The money surges in through mysterious and anonymous foreign corporations, via off-shore banking centres, even through respectable financial institutions (the Bank of New York we mentioned?). It is easy to recognize a laundering operation. Its hallmark is a pronounced lack of selectivity. The money is invested in anything and everything, as long as it appears legitimate. Diversification is not sought by these nouveau tycoons and they have no core investment strategy. They spread their illicit funds among dozens of disparate economic activities and show not the slightest interest in the putative yields on their investments, the maturity of their assets, the quality of their newly acquired businesses, their history, or real value. Never the sedulous, they pay exorbitantly for all manner of prestidigital endeavours. The future prospects and other normal investment criteria are beyond them. All they are after is a mirage of lapidarity. The Investors This is the most intriguing group. Normative, law abiding, businessmen, who stumbled across methods to secure excessive yields on their capital and are looking to borrow their way into increasing it. By cleverly participating in bond tenders, by devising ingenious option strategies, or by arbitraging - yields of up to 300% can be collected in the immature markets of transition without the normally associated risks. This sub-species can be found mainly in Russia and in the Balkans. Its members often buy sovereign bonds and notes at discounts of up to 80% of their face value. Russian obligations could be had for less in August 1998 and Macedonian ones during the Kosovo crisis. In cahoots with the issuing country's central bank, they then convert the obligations to local currency at par (=for 100% of their face value). The difference makes, needless to add, for an immediate and hefty profit, yet it is in (often worthless and vicissitudinal) local currency. The latter is then hurriedly disposed of (at a discount) and sold to multinationals with operations in the country of issue, which are in need of local tender. This fast becomes an almost addictive avocation. Intoxicated by this pecuniary nectar, the fortunate, those privy to the secret, try to raise more capital by hunting for financial instruments they can convert to cash in Western banks. A bank guarantee, a promissory note, a confirmed letter of credit, a note or a bond guaranteed by the Central Bank - all will do as deposited collateral against which a credit line is established and cash is drawn. The cash is then invested in a new cycle of inebriation to yield fantastic profits. It is easy to identify these "investors". They eagerly seek financial instruments from almost any local bank, no matter how suspect. They offer to pay for these coveted documents (bank guarantees, bankers' acceptances, letters of credit) either in cash or by lending to the bank's clients and this within a month or more from the date of their issuance. They agree to "cancel" the locally issued financial instruments by offering a "counter-financial-instrument" (safe keeping receipt, contra-guarantee, counter promissory note, etc.). This "counter-instrument" is issued by the very Prime World or European Bank in which the locally issued financial instruments are deposited as collateral. The Investors invariably confidently claim that the financial instrument issued by the local bank will never be presented or used (which is true) and that this is a risk free transaction (which is not entirely so). If they are forced to lend to the bank's clients, they often ignore the quality of the credit takers, the yields, the maturities and other considerations which normally tend to interest lenders very much. Whether a financial instrument cancelled by another is still valid, presentable and should be honoured by its issuer is still debated. In some cases it is clearly so. If something goes horribly (and rarely, admittedly) wrong with these transactions - the local bank stands to suffer, too. It all boils down to a terrible hunger, the kind of thirst that can be quelled only by the denominated liquidity of lucre. In the post nuclear landscape of this part of the world, a fantasy is shared by both predators and prey. Circling each other in marble temples, they switch their roles in dizzying progression. Tycoons and politicians, industrialists and bureaucrats all vie for the attention of Mammon. The shifting coalitions of well groomed man in back stabbed suits, an hallucinatory carousel of avarice and guile. But every circus folds and every luna park is destined to shut down. The dying music, the frozen accounts of the deceived, the bankrupt banks, the Jurassic Park of skeletal industrial beasts - a muted testimony to a wild age of mutual assured destruction and self deceit. The future of Eastern and South Europe. The present of Russia, Albania and Yugoslavia. Scandals, Financial Tulipmania - this is the name coined for the first pyramid investment scheme in history. In 1634, tulip bulbs were traded in a special exchange in Amsterdam. People used these bulbs as means of exchange and value store. They traded them and speculated in them. The rare black tulip bulbs were as valuable as a big mansion house. The craze lasted four years and it seemed that it would last forever. But this was not to be. The bubble burst in 1637. In a matter of a few days, the price of tulip bulbs was slashed by 96%! This specific pyramid investment scheme was somewhat different from the ones which were to follow it in human financial history elsewhere in the world. It had no "organizing committee", no identifiable group of movers and shakers, which controlled and directed it. Also, no explicit promises were ever made concerning the profits which the investors could expect from participating in the scheme - or even that profits were forthcoming to them. Since then, pyramid schemes have evolved into intricate psychological ploys. Modern ones have a few characteristics in common: First, they involve ever growing numbers of people. They mushroom exponentially into proportions that usually threaten the national economy and the very fabric of society. All of them have grave political and social implications. Hundreds of thousands of investors (in a population of less than 3.5 million souls) were deeply enmeshed in the 1983 banking crisis in Israel. This was a classic pyramid scheme: the banks offered their own shares for sale, promising investors that the price of the shares will only go up (sometimes by 2% daily). The banks used depositors' money, their capital, their profits and money that they borrowed abroad to keep this impossible and unhealthy promise. Everyone knew what was going on and everyone was involved. The Ministers of Finance, the Governors of the Central Bank assisted the banks in these criminal pursuits. This specific pyramid scheme - arguably, the longest in history - lasted 7 years. On one day in October 1983, ALL the banks in Israel collapsed. The government faced such civil unrest that it was forced to compensate shareholders through an elaborate share buyback plan which lasted 9 years. The total indirect damage is hard to evaluate, but the direct damage amounted to 6 billion USD. This specific incident highlights another important attribute of pyramid schemes: investors are promised impossibly high yields, either by way of profits or by way of interest paid. Such yields cannot be derived from the proper investment of the funds - so, the organizers resort to dirty tricks. They use new money, invested by new investors - to pay off the old investors. The religion of Islam forbids lenders to charge interest on the credits that they provide. This prohibition is problematic in modern day life and could bring modern finance to a complete halt. It was against this backdrop, that a few entrepreneurs and religious figures in Egypt and in Pakistan established what they called: "Islamic banks". These banks refrained from either paying interest to depositors - or from charging their clients interest on the loans that they doled out. Instead, they have made their depositors partners in fictitious profits - and have charged their clients for fictitious losses. All would have been well had the Islamic banks stuck to healthier business practices. But they offer impossibly high "profits" and ended the way every pyramid ends: they collapsed and dragged economies and political establishments with them. The latest example of the price paid by whole nations due to failed pyramid schemes is, of course, Albania 1997. One third of the population was heavily involved in a series of heavily leveraged investment plans which collapsed almost simultaneously. Inept political and financial crisis management led Albania to the verge of disintegration into civil war. But why must pyramid schemes fail? Why can't they continue forever, riding on the back of new money and keeping every investor happy, new and old? The reason is that the number of new investors - and, therefore, the amount of new money available to the pyramid's organizers - is limited. There are just so many risk takers. The day of judgement is heralded by an ominous mismatch between overblown obligations and the trickling down of new money. When there is no more money available to pay off the old investors, panic ensues. Everyone wants to draw money at the same time. This, evidently, is never possible - some of the money is usually invested in real estate or was provided as a loan. Even the most stable and healthiest financial institutions never put aside more than 10% of the money deposited with them. Thus, pyramids are doomed to collapse. But, then, most of the investors in pyramids know that pyramids are scams, not schemes. They stand warned by the collapse of other pyramid schemes, sometimes in the same place and at the same time. Still, they are attracted again and again as butterflies are to the fire and with the same results. The reason is as old as human psychology: greed, avarice. The organizers promise the investors two things:
People know that this is highly improbable and that the likelihood that they will lose all or part of their money grows with time. But they convince themselves that the high profits or interest payments that they will be able to collect before the pyramid collapses - will more than amply compensate them for the loss of their money. Some of them, hope to succeed in drawing the money before the imminent collapse, based on "warning signs". In other words, the investors believe that they can outwit the organizers of the pyramid. The investors collaborate with the organizers on the psychological level: cheated and deceiver engage in a delicate ballet leading to their mutual downfall. This is undeniably the most dangerous of all types of financial scandals. It insidiously pervades the very fabric of human interactions. It distorts economic decisions and it ends in misery on a national scale. It is the scourge of societies in transition. The second type of financial scandals is normally connected to the laundering of capital generated in the "black economy", namely: the income not reported to the tax authorities. Such money passes through banking channels, changes ownership a few times, so that its track is covered and the identities of the owners of the money are concealed. Money generated by drug dealings, illicit arm trade and the less exotic form of tax evasion is thus "laundered". The financial institutions which participate in laundering operations, maintain double accounting books. One book is for the purposes of the official authorities. Those agencies and authorities that deal with taxation, bank supervision, deposit insurance and financial liquidity are given access to this set of "engineered" books. The true record is kept hidden in another set of books. These accounts reflect the real situation of the financial institution: who deposited how much, when and under which conditions - and who borrowed what, when and under which conditions. This double standard blurs the true situation of the institution to the point of no return. Even the owners of the institution begin to lose track of its activities and misapprehend its real standing. Is it stable? Is it liquid? Is the asset portfolio diversified enough? No one knows. The fog enshrouds even those who created it in the first place. No proper financial control and audit is possible under such circumstances. Less scrupulous members of the management and the staff of such financial bodies usually take advantage of the situation. Embezzlements are very widespread, abuse of authority, misuse or misplacement of funds. Where no light shines, a lot of creepy creatures tend to develop. The most famous - and biggest - financial scandal of this type in human history was the collapse of the Bank for Credit and Commerce International LTD. (BCCI) in London in 1991. For almost a decade, the management and employees of this shady bank engaged in stealing and misappropriating 10 billion (!!!) USD. The supervision department of the Bank of England, under whose scrutinizing eyes this bank was supposed to have been - was proven to be impotent and incompetent. The owners of the bank - some Arab Sheikhs - had to invest billions of dollars in compensating its depositors. The combination of black money, shoddy financial controls, shady bank accounts and shredded documents proves to be quite elusive. It is impossible to evaluate the total damage in such cases. The third type is the most elusive, the hardest to discover. It is very common and scandal may erupt - or never occur, depending on chance, cash flows and the intellects of those involved. Financial institutions are subject to political pressures, forcing them to give credits to the unworthy - or to forgo diversification (to give too much credit to a single borrower). Only lately in South Korea, such politically motivated loans were discovered to have been given to the failing Hanbo conglomerate by virtually every bank in the country. The same may safely be said about banks in Japan and almost everywhere else. Very few banks would dare to refuse the Finance Minister's cronies, for instance. Some banks would subject the review of credit applications to social considerations. They would lend to certain sectors of the economy, regardless of their financial viability. They would lend to the needy, to the affluent, to urban renewal programs, to small businesses - and all in the name of social causes which, however justified - cannot justify giving loans. This is a private case in a more widespread phenomenon: the assets (=loan portfolios) of many a financial institution are not diversified enough. Their loans are concentrated in a single sector of the economy (agriculture, industry, construction), in a given country, or geographical region. Such exposure is detrimental to the financial health of the lending institution. Economic trends tend to develop in unison in the same sector, country, or region. When real estate in the West Coast of the USA plummets - it does so indiscriminately. A bank whose total portfolio is composed of mortgages to West Coast Realtors, would be demolished. In 1982, Mexico defaulted on the interest payments of its international debts. Its arrears grew enormously and threatened the stability of the entire Western financial system. USA banks - which were the most exposed to the Latin American debt crisis - had to foot the bulk of the bill which amounted to tens of billions of USD. They had almost all their capital tied up in loans to Latin American countries. Financial institutions bow to fads and fashions. They are amenable to "lending trends" and display a herd-like mentality. They tend to concentrate their assets where they believe that they could get the highest yields in the shortest possible periods of time. In this sense, they are not very different from investors in pyramid investment schemes. Financial mismanagement can also be the result of lax or flawed financial controls. The internal audit department in every financing institution - and the external audit exercised by the appropriate supervision authorities are responsible to counter the natural human propensity for gambling. The must help the financial organization re-orient itself in accordance with objective and objectively analysed data. If they fail to do this - the financial institution would tend to behave like a ship without navigation tools. Financial audit regulations (the most famous of which are the American FASBs) trail way behind the development of the modern financial marketplace. Still, their judicious and careful implementation could be of invaluable assistance in steering away from financial scandals. Taking human psychology into account - coupled with the complexity of the modern world of finances - it is nothing less than a miracle that financial scandals are as few and far between as they are. Scarcity Are we confronted merely with a bear market in stocks - or is it the first phase of a global contraction of the magnitude of the Great Depression? The answer overwhelmingly depends on how we understand scarcity. It will be only a mild overstatement to say that the science of economics, such as it is, revolves around the Malthusian concept of scarcity. Our infinite wants, the finiteness of our resources and the bad job we too often make of allocating them efficiently and optimally - lead to mismatches between supply and demand. We are forever forced to choose between opportunities, between alternative uses of resources, painfully mindful of their costs. This is how the perennial textbook "Economics" (seventeenth edition), authored by Nobel prizewinner Paul Samuelson and William Nordhaus, defines the dismal science: "Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people." The classical concept of scarcity - unlimited wants vs. limited resources - is lacking. Anticipating much-feared scarcity encourages hoarding which engenders the very evil it was meant to fend off. Ideas and knowledge - inputs as important as land and water - are not subject to scarcity, as work done by Nobel laureate Robert Solow and, more importantly, by Paul Romer, an economist from the University of California at Berkeley, clearly demonstrates. Additionally, it is useful to distinguish natural from synthetic resources. The scarcity of most natural resources (a type of "external scarcity") is only theoretical at present. Granted, many resources are unevenly distributed and badly managed. But this is man-made ("internal") scarcity and can be undone by Man. It is truer to assume, for practical purposes, that most natural resources - when not egregiously abused and when freely priced - are infinite rather than scarce. The anthropologist Marshall Sahlins discovered that primitive peoples he has studied had no concept of "scarcity" - only of "satiety". He called them the first "affluent societies". This is because, fortunately, the number of people on Earth is finite - and manageable - while most resources can either be replenished or substituted. Alarmist claims to the contrary by environmentalists have been convincingly debunked by the likes of Bjorn Lomborg, author of "The Skeptical Environmentalist". Equally, it is true that manufactured goods, agricultural produce, money, and services are scarce. The number of industrialists, service providers, or farmers is limited - as is their life span. The quantities of raw materials, machinery and plant are constrained. Contrary to classic economic teaching, human wants are limited - only so many people exist at any given time and not all them desire everything all the time. But, even so, the demand for man-made goods and services far exceeds the supply. Scarcity is the attribute of a "closed" economic universe. But it can be alleviated either by increasing the supply of goods and services (and human beings) - or by improving the efficiency of the allocation of economic resources. Technology and innovation are supposed to achieve the former - rational governance, free trade, and free markets the latter. The telegraph, the telephone, electricity, the train, the car, the agricultural revolution, information technology and, now, biotechnology have all increased our resources, seemingly ex nihilo. This multiplication of wherewithal falsified all apocalyptic Malthusian scenarios hitherto. Operations research, mathematical modeling, transparent decision making, free trade, and professional management - help better allocate these increased resources to yield optimal results. Markets are supposed to regulate scarcity by storing information about our wants and needs. Markets harmonize supply and demand. They do so through the price mechanism. Money is, thus, a unit of information and a conveyor or conduit of the price signal - as well as a store of value and a means of exchange. Markets and scarcity are intimately related. The former would be rendered irrelevant and unnecessary in the absence of the latter. Assets increase in value in line with their scarcity - i.e., in line with either increasing demand or decreasing supply. When scarcity decreases - i.e., when demand drops or supply surges - asset prices collapse. When a resource is thought to be infinitely abundant (e.g., air) - its price is zero. Armed with these simple and intuitive observations, we can now survey the dismal economic landscape. The abolition of scarcity was a pillar of the paradigm shift to the "new economy". The marginal costs of producing and distributing intangible goods, such as intellectual property, are negligible. Returns increase - rather than decrease - with each additional copy. An original software retains its quality even if copied numerous times. The very distinction between "original" and "copy" becomes obsolete and meaningless. Knowledge products are "non-rival goods" (i.e., can be used by everyone simultaneously). Such ease of replication gives rise to network effects and awards first movers with a monopolistic or oligopolistic position. Oligopolies are better placed to invest excess profits in expensive research and development in order to achieve product differentiation. Indeed, such firms justify charging money for their "new economy" products with the huge sunken costs they incur - the initial expenditures and investments in research and development, machine tools, plant, and branding. To sum, though financial and human resources as well as content may have remained scarce - the quantity of intellectual property goods is potentially infinite because they are essentially cost-free to reproduce. Plummeting production costs also translate to enhanced productivity and wealth formation. It looked like a virtuous cycle. But the abolition of scarcity implied the abolition of value. Value and scarcity are two sides of the same coin. Prices reflect scarcity. Abundant products are cheap. Infinitely abundant products - however useful - are complimentary. Consider money. Abundant money - an intangible commodity - leads to depreciation against other currencies and inflation at home. This is why central banks intentionally foster money scarcity. But if intellectual property goods are so abundant and cost-free - why were distributors of intellectual property so valued, not least by investors in the stock exchange? Was it gullibility or ignorance of basic economic rules? Not so. Even "new economists" admitted to temporary shortages and "bottlenecks" on the way to their utopian paradise of cost-free abundance. Demand always initially exceeds supply. Internet backbone capacity, software programmers, servers are all scarce to start with - in the old economy sense. This scarcity accounts for the stratospheric erstwhile valuations of dotcoms and telecoms. Stock prices were driven by projected ever-growing demand and not by projected ever-growing supply of asymptotically-free goods and services. "The Economist" describes how WorldCom executives flaunted the cornucopian doubling of Internet traffic every 100 days. Telecoms predicted a tsunami of clients clamoring for G3 wireless Internet services. Electronic publishers gleefully foresaw the replacement of the print book with the much heralded e-book. The irony is that the new economy self-destructed because most of its assumptions were spot on. The bottlenecks were, indeed, temporary. Technology, indeed, delivered near-cost-free products in endless quantities. Scarcity was, indeed, vanquished. Per the same cost, the amount of information one can transfer through a single fiber optic swelled 100 times. Computer storage catapulted 80,000 times. Broadband and cable modems let computers communicate at 300 times their speed only 5 years ago. Scarcity turned to glut. Demand failed to catch up with supply. In the absence of clear price signals - the outcomes of scarcity - the match between the two went awry. One innovation the "new economy" has wrought is "inverse scarcity" - unlimited resources (or products) vs. limited wants. Asset exchanges the world over are now adjusting to this harrowing realization - that cost free goods are worth little in terms of revenues and that people are badly disposed to react to zero marginal costs. The new economy caused a massive disorientation and dislocation of the market and the price mechanism. Hence the asset bubble. Reverting to an economy of scarcity is our only hope. If we don't do so deliberately - the markets will do it for us, mercilessly. Science, Financing of In the United States, Congress approved, last month, increases in the 2003 budgets of both the National Institutes of Health and National Science Foundation. America is not alone in - vainly - trying to compensate for imploding capital markets and risk-averse financiers. In 1999, chancellor Gordon Brown inaugurated a $1.6 billion program of "upgrading British science" and commercializing its products. This was on top of $1 billion invested between 1998-2002. The budgets of the Medical Research Council and the Biotechnology and Biological Sciences Research Council were quadrupled overnight. The University Challenge Fund was set to provide $100 million in seed money to cover costs related to the hiring of managerial skills, securing intellectual property, constructing a prototype or preparing a business plan. Another $30 million went to start-up funding of high-tech, high-risk companies in the UK. According to the United Nations Development Programme (UNDP), the top 29 industrialized nations invest in R&D more than $600 billion a year. The bulk of this capital is provided by the private sector. In the United Kingdom, for instance, government funds are dwarfed by private financing, according to the British Venture Capital Association. More than $80 billion have been ploughed into 23,000 companies since 1983, about half of them in the hi-tech sector. Three million people are employed in these firms. Investments surged by 36 percent in 2001 to $18 billion. But this British exuberance is a global exception. Even the - white hot - life sciences field suffered an 11 percent drop in venture capital investments last year, reports the MoneyTree Survey. According to the Ernst & Young 2002 Alberta Technology Report released on Wednesday, the Canadian hi-tech sector is languishing with less than $3 billion invested in 2002 in seed capital - this despite generous matching funds and tax credits proffered by many of the provinces as well as the federal government. In Israel, venture capital plunged to $600 million last year - one fifth its level in 2000. Aware of this cataclysmic reversal in investor sentiment, the Israeli government set up 24 hi-tech incubators. But these are able merely to partly cater to the pecuniary needs of less than 20 percent of the projects submitted. As governments pick up the monumental slack created by the withdrawal of private funding, they attempt to rationalize and economize. The New Jersey Commission of Health Science Education and Training recently proposed to merge the state's three public research universities. Soaring federal and state budget deficits are likely to exert added pressure on the already strained relationship between academe and state - especially with regards to research priorities and the allocation of ever-scarcer resources. This friction is inevitable because the interaction between technology and science is complex and ill-understood. Some technological advances spawn new scientific fields - the steel industry gave birth to metallurgy, computers to computer science and the transistor to solid state physics. The discoveries of science also lead, though usually circuitously, to technological breakthroughs - consider the examples of semiconductors and biotechnology. Thus, it is safe to generalize and say that the technology sector is only the more visible and alluring tip of the drabber iceberg of research and development. The military, universities, institutes and industry all over the world plough hundreds of billions annually into both basic and applied studies. But governments are the most important sponsors of pure scientific pursuits by a long shot. Science is widely perceived as a public good - its benefits are shared. Rational individuals would do well to sit back and copy the outcomes of research - rather than produce widely replicated discoveries themselves. The government has to step in to provide them with incentives to innovate. Thus, in the minds of most laymen and many economists, science is associated exclusively with publicly-funded universities and the defense establishment. Inventions such as the jet aircraft and the Internet are often touted as examples of the civilian benefits of publicly funded military research. The pharmaceutical, biomedical, information technology and space industries, for instance - though largely private - rely heavily on the fruits of nonrivalrous (i.e. public domain) science sponsored by the state. The majority of 501 corporations surveyed by the Department of Finance and Revenue Canada in 1995-6 reported that government funding improved their internal cash flow - an important consideration in the decision to undertake research and development. Most beneficiaries claimed the tax incentives for seven years and recorded employment growth. In the absence of efficient capital markets and adventuresome capitalists, some developing countries have taken this propensity to extremes. In the Philippines, close to 100 percent of all R&D is government-financed. The meltdown of foreign direct investment flows - they declined by nearly three fifths since 2000 - only rendered state involvement more indispensable. But this is not a universal trend. South Korea, for instance, effected a successful transition to private venture capital which now - even after the Asian turmoil of 1997 and the global downturn of 2001 - amounts to four fifths of all spending on R&D. Thus, supporting ubiquitous government entanglement in science is overdoing it. Most applied R&D is still conducted by privately owned industrial outfits. Even "pure" science - unadulterated by greed and commerce - is sometimes bankrolled by private endowments and foundations. Moreover, the conduits of government involvement in research, the universities, are only weakly correlated with growing prosperity. As Alison Wolf, professor of education at the University of London elucidates in her seminal tome "Does Education Matter? Myths about Education and Economic Growth", published last year, extra years of schooling and wider access to university do not necessarily translate to enhanced growth (though technological innovation clearly does). Terence Kealey, a clinical biochemist, vice-chancellor of the University of Buckingham in England and author of "The Economic Laws of Scientific Research", is one of a growing band of scholars who dispute the intuitive linkage between state-propped science and economic progress. In an interview published last week by Scientific American, he recounted how he discovered that: "Of all the lead industrial countries, Japan - the country investing least in science - was growing fastest. Japanese science grew spectacularly under laissez-faire. Its science was actually purer than that of the U.K. or the U.S. The countries with the next least investment were France and Germany, and were growing next fastest. And the countries with the maximum investment were the U.S., Canada and U.K., all of which were doing very badly at the time." The Economist concurs: "it is hard for governments to pick winners in technology." Innovation and science sprout in - or migrate to - locations with tough laws regarding intellectual property rights, a functioning financial system, a culture of "thinking outside the box" and a tradition of excellence. Government can only remove obstacles - especially red tape and trade tariffs - and nudge things in the right direction by investing in infrastructure and institutions. Tax incentives are essential initially. But if the authorities meddle, they are bound to ruin science and be rued by scientists. Still, all forms of science funding - both public and private - are lacking. State largesse is ideologically constrained, oft-misallocated, inefficient and erratic. In the United States, mega projects, such as the Superconducting Super Collider, with billions already sunk in, have been abruptly discontinued as were numerous other defense-related schemes. Additionally, some knowledge gleaned in government-funded research is barred from the public domain. But industrial money can be worse. It comes with strings attached. The commercially detrimental results of drug studies have been suppressed by corporate donors on more than one occasion, for instance. Commercial entities are unlikely to support basic research as a public good, ultimately made available to their competitors as a "spillover benefit". This understandable reluctance stifles innovation. There is no lack of suggestions on how to square this circle. Quoted in the Philadelphia Business Journal, Donald Drakeman, CEO of the Princeton biotech company Medarex, proposed last month to encourage pharmaceutical companies to shed technologies they have chosen to shelve: "Just like you see little companies coming out of the research being conducted at Harvard and MIT in Massachusetts and Stanford and Berkley in California, we could do it out of Johnson & Johnson and Merck." This would be the corporate equivalent of the Bayh-Dole Act of 1980. The statute made both academic institutions and researchers the owners of inventions or discoveries financed by government agencies. This unleashed a wave of unprecedented self-financing entrepreneurship. In the two decades that followed, the number of patents registered to universities increased tenfold and they spun off more than 2200 firms to commercialize the fruits of research. In the process, they generated $40 billion in gross national product and created 260,000 jobs. None of this was government financed - though, according to The Economist's Technology Quarterly, $1 in research usually requires up to $10,000 in capital to get to market. This suggests a clear and mutually profitable division of labor - governments should picks up the tab for basic research, private capital should do the rest, stimulated by the transfer of intellectual property from state to entrepreneurs. But this raises a host of contentious issues. Such a scheme may condition industry to depend on the state for advances in pure science, as a kind of hidden subsidy. Research priorities are bound to be politicized and lead to massive misallocation of scarce economic resources through pork barrel politics and the imposition of "national goals". NASA, with its "let's put a man on the moon (before the Soviets do)" and the inane International Space Station is a sad manifestation of such dangers. Science is the only public good that is produced by individuals rather than collectives. This inner conflict is difficult to resolve. On the one hand, why should the public purse enrich entrepreneurs? On the other hand, profit-driven investors seek temporary monopolies in the form of intellectual property rights. Why would they share this cornucopia with others, as pure scientists are compelled to do? The partnership between basic research and applied science has always been an uneasy one. It has grown more so as monetary returns on scientific insight have soared and as capital available for commercialization multiplied. The future of science itself is at stake. Were governments to exit the field, basic research would likely crumble. Were they to micromanage it - applied science and entrepreneurship would suffer. It is a fine balancing act and, judging by the state of both universities and startups, a precarious one as well. Serbia and Montenegro, Economy of Looking forward to a $260 million IMF loan, Serbia's current rulers can sigh in relief. A donor conference is scheduled for June 29th in Brussels. Serbia endured a decade of war, sanctions, civil wars, international pariah status, bombing, and refugees. Its infrastructure is decrepit, its industry obsolete, its agriculture shattered to inefficient smithereens, its international trade criminalized. It is destitute. The average monthly salary is 50-70 US dollars. The foreign exchange reserves are depleted by years of collapsing exports, customs evasion, and theft. The last seven months witnessed a concerted and much applauded effort at reforming the economy. It is a sad testimony to the state of Serbia's finances that a projected rate of inflation of 35% for 2001 is considered to be a major achievement. Growth (from a basis equal to 40% of Serbia's 1989 GNP) is predicted to be c. 5% this year and even higher in 2002. But such a rebound is technical. The fundamental issues of a crime-laden and dysfunctional financial sector, sagging privatization, and a private sector crowded out and bullied by the state and its reams of venal red tape - are far from being tackled. An entrenched old boys nertwork of managers, secret service operators, politicians, and downright criminals sees to that. At the other extreme, revanchism against the Milosevic era cadre is rife and creates instability and uncertainty. No amount of international aid - multilateral and bilateral pledges now amount to more than $1 billion - will suffice if these social ailments are not tackled. Serbia's physical infrastructure alone sustained damage estimated at $4 billion. And although puny in relation to the Serb economy, Montenegro's looming secession and its autonomous currency pose almost insurmountable legalistic problems as to who gets the funds alotted, how, and how much. Still, compared to the expenditures of waging war and maintainig peace, the aid pledged is small money. The USA alone has spent in excess of $21 billion in the Balkan in the 1990's. This is more than Yugoslavia's whole GDP. Some elementary reforms have surprisingly been neglected hitherto: As a result of a multi-annual spiral of mega devaluations followed by hyperinflation, Serbia's currency, the dinar, is distrusted by everyone. The DEM and Euro are widely used. Influential economic think tanks suggest to implement a currency board (as in Bulgaria) or to fully replace the dinar with the DEM or the Euro. The antiquated, centralized, and corrupt payment system needs to be wiped out. The insurance and banking markets should be thrown wide open to foreign ownership. The national accounts need to be made transparent - everything, from money supply aggreggates to levels of foreign exchange reserves, should be published regularly. The Serbs do not trust their "banks", these instruments of official corruption, cronyism, and outright theft. Introducing foreign owners and foreign management is only half the equation. The other half is injecting competition to this staid marketplace by allowing credit co-operatives and other forms of non-bank lending to operate freely. The second phase must involve a simplification of the tax code, strict enforcement and a shift from income and profit taxes to simple and easily collected consumption taxes. Whether monetary and fiscal policies should be lax to encourage growth - or strict to reduce the twin (budget and current account) deficits is now hotly debated in Serbia. Other raging debates are: which sector of the economy should most benefit from credit available to SMEs - agriculture or industry? And should state owned firms be privatized or shut down? Economic co-operation with neighbouring countries (such as Greece) and historical strategic partners (such as Russia and even Italy) is the key to the resuscitation of Serbia'a flagging economic fortunes. West - from Australia, through Israel and Sweden to the USA - and East - China, Japan - are already expressing interest and signing deals. Serbia is strategically located, a large market, with a history of capitalism, an educated workforce, and a rich export culture and history. Inevitably, Serbia's immediate neighbours (Croatia, Macedonia, Bosnia, even Slovenia) regard these developments with cautious pessimism. International aid is considered to be a zero sum game - if Serbia gains, someone must lose. Still, in the long run, the solution to Serbia's economic quagmire is in the hands of the European Union. Serbia needs unilateral transfers by Serbian workers in the European Union, open markets to its goods and services, and an actual and effective integration of Serbia into the continent's free trade zone. What Serbia has instead is a protectionist European Union which adamantly refuses to open its borders to labor and goods from the Balkans. This is not a good omen. "Turn to High Return" is the title of a glitzy campaign launched by the Economy and Privatization Ministry to get the public acquainted with the benefits of rapid privatization of state assets. The risks are clear to everyone: mass layoffs, closure of inefficient economic sectors, social tensions, and poverty. The benefits are in the long term and are likely to mainly accrue to the few members of the well-educated elite. When Zastava (in Kragujevac) was prepared for privatization, half its workforce (14,000 workers) were made redundant. Of these, 9000 joined a bogus retraining scheme, a form of covert unemployment insurance plan. Getting the citizens of Yugoslavia to willingly give up their insular, protective, and self-delusional economy is an uphill struggle. Still, at least Serbia, the regional power, is back, abuzz with business dealings, construction, and trading. Foreign investments are expected to restore Yugoslavia's devastated environment and Serb infrastructure (especially its decrepit roads, railways, and electricity grid) to their former, pre-Milosevic, glory. An Israeli group (Merhav) will irrigate 20,000 ha. in relatively prosperous Vojvodina. Serb ministers - energetically led by the Minister of Finance, Bozidar Djelic - enthuse in public about Yugoslavia's imminent (and implausible) accession into the EU and (more probable) membership in the OECD. Foreign dignitaries (the last one being the Czech Prime Minister) pile up to show their unmitigated support for Serb renewal. Yugoslavia has concluded bilateral agreements with Croatia and, in the near future, with Bosnia Hercegovina. The foreigners all promise to encourage their firms to invest in Serbia. But everyone diligently skirts the delicate issue of what is "Yugoslavia", which are its constituent components, when will it settle on a constitution, and is it really the sole successor to former Yugoslavia. Yet, the first instinct of both government and private sector is to capitalize on the renewed influx of international aid and credits - rather than develop a healthy, independent, self-sustaining economy. Virtually bankrupt state companies (such as Yugoslav Airlines) are still being subsidized and shielded from the vagaries of the free market. Salaries in the public sector are frozen by decree, heavily politicized boards of directors are appointed from high up (e.g., recently in the Oil Industry of Serbia), the media is subservient, agricultural crops (such as the sunflower harvest) are purchased by the state (subject to antiquated and harmful dual pricing), turf wars cyclically erupt between Kostunica and Djindjic and among their cronies - the more it changes, the more it stays the same. In the "new" Serbia, the Prime Minister felt free to instruct (private!) meat producers to reduce their retail prices by 10-15%. All of them promptly (and very publicly) "agreed" with him. And this, from the same people who started off by eliminating artificial price disparities (a strategy dubbed "shock therapy" by its opponents). A year after Milosevic is gone and many months after the old, cronyist, and corrupt managements of state companies and utilities were booted out - not one major industry or firm were privatized or opened to competition. Electricity prices were increased by a meager 10-15% this month only as a result of unrelenting pressure by the IMF. This week, Yugoslavia published the announcement seeking financial advisors to the privatization of 11 (out of hundreds) state companies. Yugoslavia may have missed the boat. Investors after September 11 are risk averse. Global FDI has plunged by 40% and dried up completely in emerging economies (especially in crisis regions, such as the Balkan). The only ray of hope is the financial services sector, the only one to be liberalized systematically, mainly under the influence of competent and technocratic Ministry of Finance and National Bank (led by Mladjan Dinkic). Most taxes on financial transactions are expected to be abolished soon. The currency (the dinar) has stabilized and foreign currency reserves - though still frighteningly inadequate - climbed to 1 billion US dollars by mid year. For the first time in a decade, people trust their government sufficiently to save in foreign exchange accounts. Real wages increased by 20% in the year to July (and real income by 11%), albeit from a much reduced base. The bulk of this impressive rise is attributed to climbing productivity. Thus, the failure to subdue inflation - it will exceed 40%, official proclamations to the contrary notwithstanding - is a result of fiscal, rather than monetary, dysfunction. On the budget front, tax collection is suffering due to what amounts to a civil disobedience campaign. More than 80% of taxpayers refused to pay the income tax surcharge recently imposed. Corporate taxes were reduced by an average of 10%, creating a shortfall. Social welfare benefits have been cut and some pension payments are late. The government has wisely focused its attention on reforming the customs service, preventing the smuggling of oil (down by 90%, according to official figures) and cigarettes (down by 60%), and expanding the tax base. Thousands of "financial auditors" monitor the borders and dismantle points of sale of illicit goods. The budget also benefits from foreign handouts. The French government contributed 50 million FF this year. External debts (mainly to multilateral financial institutions) have been (and are being) rescheduled. Yugoslavia should be able to make it. Economic transition takes place primarily in public opinion and in private awareness. It is here that the Yugoslav October 2000 revolution failed. No consensus in favour of free markets, privatization, and free trade has emerged. Old Milosevic-era hands are staging a comeback and gaining in popularity, although almost imperceptibly. The window of opportunity has already shut abroad and may be doing so domestically as well. Shuttle (Suitcase) Trade They all sport the same shabby clothes, haggard looks, and bulging suitcases bound with frayed ropes. These are the shuttle traders. You can find them in Mongolia and Russia, China and Ukraine, Bulgaria and Kosovo, the West Bank and Turkey. They cross the border as "tourists", sometimes as often as 10 times a year, and come back with as much merchandise as they can carry in their enormous luggage. Some of them resort to freight forwarding their "personal belongings". They distort trade figures, smuggle goods across ill-guarded borders, ignore international treaties and conventions and, in short, revive moribund economies. They are the life-blood and the only manifestation of true entrepreneurship in swathes of economic wastelands. They meet demands for consumer goods unmet by domestic manufacturers or by officially-sanctioned importers. In recognition of their vital role, the worried Kyrgyz government held a round table discussion last summer about the precarious state of Kyrgyzstan's shuttle trade. Many former Soviet republics have tightened up their border controls. In May last year, Russian officials seized half a million dollars worth of shuttle goods belonging to 1500 traders. When two million dollars worth of goods were confiscated in a similar incident last fall, eight Kyrgyz traders committed suicide. The number of Kyrgyz shuttle traders dropped to 300,000 (from 500,000 in 1996). The majority of those who remain are insolvent. Many of them emigrated to other countries. The shuttle traders asked the government to legalize and regulate their vanishing trade and thus to save them from avaricious and minacious customs officials. Even prim international financial institutions recognize the survival-value of shuttle trade to the economies of developing and transition countries. It employs millions, boosts investments in transport and infrastructure, and encourages grassroots capitalism. The IMF - in the 11th meeting of its Committee on Balance of Payments Statistics in 1998 - officially recognized shuttle trade as a business activity to be recorded under "goods". But there is a seedier and seamier side to shuttle trade where it interfaces with organized crime and official corruption. Shuttle trade also constitutes unfair competition to legitimate, tax and customs duties paying enterprises - the manufacturers of textiles, shoes, cigarettes, alcoholic drinks, and food products. Shuttled goods are not subject to health and safety inspections, or quality control. According to the March 27th issue of East West Institute's "Russian Regional Report", the value of Chinese goods shuttled into the borderlands of the Russian Far East is a whopping $50 million a month. China benefits from the serendipitous proceeds of these informal exports - but is unhappy at the lost tax revenues. EWI claims that Russian banks in the region (such as DalOVK, Primsotsbank, and Regiobank) are already offering money transfer services to China. DalOVK alone transfers $1 million a month - a fortune in local terms. But even these figures may be a serious under-estimate. The trade between Khabarovsk Territory in Russia and Heilongjiang Province in China - most of it in shuttle form - was $1.5 billion in 2001. The bulk of it was one way, from China to Russia. Shuttle trade is even more prominent between Iraq and Turkey. The Anatolia News Agency expects it to increase to $2 billion this year. By comparison, the official exports of Turkey to Iraq amount to $800 million. Prime minister Bulent Ecevit himself stated to the Ankara Anatolia news agency: "We have provided necessary support to increase shuttle trade". "The Economist" reports about the flourishing "petty trade" between China and Vietnam. Western and counterfeit goods are smuggled to bazaars in Vietnam, owned and operated by Chinese nationals. The border between these two erstwhile enemies opened in 1990. This led to the rise of criminal networks which involve border guards and policemen. Another hot spot is the Balkan. In a report dated July 2001, the Balkan Information Exchange describes the "Tulip Market" in Istanbul. Vendors are fluent in Russian, Bulgarian and Romanian and most of the clients are East European. They buy wholesale and use special vans and buses to transport the goods - mainly textiles - northwards, frequently to destinations in the Balkan. This kind of trade is estimated to be worth $8 billion a year - more than one quarter of Turkey's official exports. Bulgarian customs officials, border patrols, and policemen form part of these efficient rings - as do their Macedonian and, to a lesser extent, Greek counterparts. The Sofia-based Center for the Study of Democracy thinks that a third of the Bulgarian workforce (i.e., c. 1 million people) may be involved. Many of the traders maintain mom-and-pop establishments or stalls in public bazaars, where members of their family sell the goods. Some of the merchandise ends up in Serbia, which was subjected to UN sanctions until lately. Fuel smuggling on bikes and other forms of sanctions busting have largely ended but they have been replaced by cigarettes, alcohol, firearms, stolen cars, and mobile phones. The Serbian authorities often round up and deport Bulgarian shuttle traders, provoking furious resentment in Bulgaria. Headlines like "(Serbian) Policemen take away our countrymen's money" and "Serbs searching (Bulgarian) women's genitals for money" are pretty common. The Bulgarians are embittered. They used to smuggle medicines and fuel into embargoed Serbia - only to be abused by Serb officials now, that the embargo has been lifted. East European buyers used to reach as far as India where they shopped wholesale in winter. Russians used to buy readymade clothes, leather goods, and cheap jewelry in New Delhi and elsewhere and sell the goods in the numerous flea markets back home. To finance their purchases, they used to sell in India Russian cosmetics and consumer goods such as watches, cameras, or hair dryers. But the 1998 financial crisis and sub-standard wares offered by unscrupulous Indian traders put a stop to this particular venue. Governments are trying to stem the shuttle trade. The Russian news agency, ITAR-TASS, reports that Sergei Stepashin, the dynamic chairman of the Russian Audit Chamber (and a former short-lived prime minister of Russia) is bent on tightening the cooperation between member states of the Shanghai Cooperation Organization. The audit agencies of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan will exchange information and strive to control the thriving shuttle trade across their porous borders. China and Russia are poised to sign a bilateral accord regarding these issues in October. The WPS Monitoring Agency reported last November that the Economic Development and Trade Ministry of Russia intends to treat cargos of more than 50 kilos as a consignment of commercial goods, subject to import tariffs (on top of the current tax of 30 percent). The Ministry claimed that shuttle trade accounts for up to 90 percent of all imported goods "in certain spheres" (e.g., furs). As late as 1994, Russians were allowed to import up to $5000 of duty-free goods in their accompanied baggage - a relic of communist days when only the privileged few were allowed to travel. Up to 2 million Russian citizens may be engaged in shuttle trade and the value of "gray" goods may be as high as $10 billion annually. Goods from Turkey alone amounted to $1.5-2 billion, according to vice-premier Viktor Khristenko, but shuttle traders also operate in the United Arab Emirates, Syria, Israel, Pakistan, India, China, Poland, Hungary, and Italy. A set of figures published for the first quarter of 2001 shows that shuttle trade amounted to $2.6 billion, or 8 percent of Russia's total foreign trade. Shuttle traded goods made up 1.5 percent of exports - but a full quarter of imports. But the shuttle trade's coup de grace may well be EU enlargement. Already a new "iron curtain", comprised of visas and regulations, is rising between EU candidates and other East European and Balkan countries. Consider the EU's future eastern boundary. More than a million people cross the busy Ukrainian-Polish border every month. Enhanced regulation on the Polish side and new, IMF-inspired, tax laws on the Ukrainian side - led to a massive increase in corruption and smuggling. Truck owners now bribe customs officials to the tune of $300 per vehicle, according to a January 2001 report by CEPS. The results are grave. Following the introduction of these new measures, cross border traffic fell by 50 percent and unemployment in the Polish border zones jumped by 40 percent. It has since doubled. The IMF and the EU are much derided by the Polish minority now trapped in Western Ukraine. The situation is likely to be further exacerbated with the foreseen introduction of a reciprocal visa regime between the two countries. Shuttle trade may be decimated by the resulting bureaucratic bottlenecks. Still, it may no longer be needed by the time Poland accedes in 2004 or 2005. Shuttle trade thrives on poverty. It arbitrates between inefficient markets. It satisfies unrequited demand for goods. The single market ought to rid Europe of all these distortions - and, thus, most probably of this makeshift though resilient solution, the shuttle trader. Skoda Skoda Auto, the Czech-based carmaker, is completing its transformation from manufacturer of smoke-belching, low-budget, communist-era clunkers to producer of upscale, affordable, BMW-alikes. "Skoda" means in Czech pity or shame - an apt moniker for the company's erstwhile products. No more. In the British International Motor Show a fortnight ago, Skoda hired supermodel and heir to a chocolate dynasty, Alicia Rowntree, to launch its new Octavia vRS Estate, a 4X4, replete with a turbo-charged 1.8 liter engine producing 180 brake horsepower and a top speed of 146 miles per hour. The hatchback's price tag? Less than $24,000. Seventy percent of Skoda were purchased from the Czechoslovakian state by Volkswagen in a controversial $650 million privatization in 1991. According to The Economist, Skoda has since tripled its annual production to more than 500,000 vehicles. It now employs directly and indirectly c. 4 percent of the Czech workforce, some 150,000 people. Skoda and its suppliers generate more than $4 billion of combined yearly revenues. Skoda reinvested $2 billion of its cashflow in its manufacturing facilities. The domestic market accounted for three quarters of Skoda's sales in 1989. It now exports 80 percent of its production to more than 70 countries and constitutes one seventh of all Czech exports. Skoda Auto is a true multinational, with assembly plants in Bosnia, Poland, and India. A deal negotiated by Volkswagen to establish yet another workshop in Macedonia fell through in 1997-8. But last year was not kind to Skoda. Sales tumbled. According to Skoda's chief executive officer, Vratislav Kulhanek, quoted by the Prague Business Journal, the company will sell 16,000 fewer cars this year compared to last year. Skoda plans to slash 2000 foreign workers - Slovaks and Poles - in its plants in the Czech Republic. According to Ananova, Skoda employs nearly 3000 foreign workers and 21,700 full time Czech staff. Skoda can expect little support from its German owners. Volkswagen's profits in the quarter to September plunged by 51 percent. A combination of ageing models and weak demand in its core markets - Europe and South America - has affected the bottom line. In north America - which account for 40 percent of sales - Volkswagen failed to respond effectively to zero interest financing offered by major American manufacturers, such as General Motors. The launching of new models next year, the weakening dollar and writing-off some portfolio investments did the rest. According to Interfax, this year, Volkswagen's was the second worst performance among European automotive companies after ailing Fiat's. Relationships were further complicated by the nagging and emotionally charged issue of the Benes decrees - a series of statutes which led to the expulsion of 3 million Germans from Czechoslovakia after the war. Germany and Austria demand their revocation. The Czech Republic refuses to discuss the issue. A bigger problem is brand confusion. Volkswagen shares its platforms - in other words, it uses the same chassis to produced different models. Bernd Pischetsrieder, chairman of Volkswagen (VW), is quoted in The Economist as saying, when he was still at BMW, that Skoda's cheap brands often cannibalize Volkswagen's more profitable ones. The result, according to Keith Hayes, a motor industry analyst at Goldman Sachs, is a poor return on capital of less than 3 percent. BMW's, by comparison, is four times that. Volkswagen is in a quandary. On the one hand, models like Skoda's Octavia - and even Fabia - cannibalize the sales of models such as the Audi A3 and the Volkswagen Golf. On the other hand, Volkswagen's ability to charge more for its products due to an image of German perfectionism and quality has been adversely affected by the acquisition of the downmarket, central European, Skoda. Hence Skoda's sudden conversion to swankier models such as the Octavia. In a bizarre realignment of Volkswagen's brands last year, Skoda was grouped with Bentley in the "classic" brands. Audi, SEAT, and Lamborghini formed the "sporty brands" cluster. Risking its Audi posh marque, Volkswagen launched the upmarket loss leading Phaeton saloon car with the express intention of reviving the "halo effect" and "adding emotion to the brand". Not all is doom. Even as Western markets wither, increasing purchasing power in central and eastern Europe presents luring opportunities. Volkswagen's sales in Russia, for instance, shot up by 24 percent this year. According to Prime-TASS, Skoda increased its Russian sales by 41 percent in the nine months to September 2002. Proof of the rising importance of the central European car market is the interest Western automakers are showing in Zastava. The carpet-bombed and obsolete manufacturer of the much-derided Yugo, it currently produces at a mere 9 percent of its pre-1990 200,000 vehicles annual capacity. A $50 million reorganization effort resulted in mass layoffs. Zastava - previously a cradle to grave conglomerate - has now attractively reverted to its core competency: car assembly. If Dacia - the decrepit Romanian car maker - enticed Renault as a buyer, Zastava is bound to end up foreign-owned. With all central and east European brands in Western ownership, the real bloodbath will begin. Skoda is well placed to emerge triumphant. Slovakia, Economy of Only four months ago, delirious Slovaks celebrated a gold medal, having thrashed the Russian team in the Ice Hockey World Championship. President Rudolph Schuster hastened to publicly draw some lessons: "You are a very good example for Slovakia because it's bad when people are dividing (into groups). We need to unite one with the other." Yet, unity is no more than wishful thinking and Slovakia - a country of 5.5 million people and 50,000 sq. km. - is on ever thinner ice. This, in no small measure, is due to Schuster's blatant partisanship. Three months ago, quoted by the BBC, he exhorted his countrymen to vote for the ruling center-left coalition in a high turnout in today's and tomorrow's parliamentary elections. Slovakia gained in prestige during the current administration's reign from 1998, he explained his unseemly advice. The country's EU accession is at stake. Haunting the fragmented political scene is Vladimir Meciar, Slovakia's erstwhile strongman and prime minister between 1992-8. Besieged by serial scandals, PR gaffes, and the secession of some of its stars who formed their own party - the fortunes of his misnamed Movement for a Democratic Slovakia wax and wane in the opinion polls. But he still masters the affection of the poor, the rural, and the less educated - about one quarter of the flustered electorate. Vehement protestations to the contrary by all involved notwithstanding, Meciar may yet form a coalition government if he sweeps the poll. In 1998 he was outflanked by an anti-Meciar bloc, though he garnered the bulk of the votes. He has learned his lesson. He is lying low and he sounds respectable. But his lurid past of authoritarianism, cronyism, and corruption provoked the US and the EU to openly weigh against him. US Ambassador to NATO, Nicholas Burns told the Austrian daily Die Presse in June: "If his party were to return to power in Bratislava, that would be a fundamental obstacle to Slovakia's entry into NATO." Gunter Verheugen, the EU enlargement commissioner, chose the Danish daily "Politiken" to issue a thinly-veiled warning to the ardently pro-NATO and pro-EU Slovaks to "vote with widely open eyes". Austrian prime minister Wolfgang Schussel, notorious for his co-habitation, in a now defunct coalition, with Jorg Haider and his ultra-rightist party, cajoled the Slovaks to re-elect Mikulas Dzurinda, the prime minister. Yet, the parties of the coalition are in utter disarray. Support for the Party of the Democratic Left - once a stolid 14 percent of the electorate - has all but evaporated. The two Christian-Democratic members of the coalition, KDH and SDKU, fare no better. This unappetizing gamut gave rise to new parties, both left and right. These will decide the fate and composition of Slovakia's future governments. The West's flagrant meddling may yet backfire. ANO, the New Citizens Alliance, is headed by a Berlusconi clone, the local TV kingpin Pavol Rusko. It is reformist, liberal - and virulently nationalistic. A 38-year old lawyer, Robert Fico, has surged in popularity on a platform which consists of concomitantly blasting the government, the EU, and the Roma community. His party, "Smer" ("Direction"), boasts of its roster of fresh, untainted, faces and of its non-alliance. Fico claims to have close contacts with the British Labor Party and the German Social Democrats. Campaign finances are as murky as ever. The financial backers of Smer are ominously unknown. Conspiracy theorists talk about a Maciar ploy with Fico as his puppet. Rusko will no doubt put ANO to good use in bolstering his growing empire. The much-maligned Meciar is still heavily implicated in corruption charges though, shockingly, none of his cronies was ever brought to justice. Underlying this seething cauldron of resentments and mutual recriminations is Slovakia's identity crisis. Formerly, the poorer part of the Czechoslovak state, it has seceded peacefully in 1993. But it is teeming with restless minorities, ethnic tensions, and grievances old and new. The Hungarians, organized in their own ethnic party, have been pressing, from within the coalition, for greater political and cultural autonomy and the return of property confiscated by the Benes decrees. A recent joint report by the World Bank, the Open Society Institute, and two Slovak NGOs, "Poverty and Welfare of Roma in the Slovak Republic", states: "Living conditions are especially poor for Roma living in isolated settlements. Poverty in these areas is multidimensional - related to high levels of unemployment, poor housing conditions, and lack of access to basic public services - and is exacerbated by social exclusion." Experts reckon that Romas constitute 8-10 percent of Slovakia's population. The government's much praised reforms and prudent monetary policy have rendered one in five Slovaks unemployed despite an economy growing by 4 percent annually. In its eastern and crime-infested parts, bordering Ukraine, the rate of unemployment is a staggering 40 percent. Inflation, though subdued, has not succumbed. The Economist Intelligence Unit projects a rebound from c. 3 percent in the first quarter of this year to c. 7 percent by mid-2003 fuelled by price deregulation and adjustment to EU levels. Spiraling budget deficits recently compelled the central bank to issue a warning to the government. The current account deficit has reverted to form, climbing from 3 percent of GDP in 2000 back to more than 9 percent last year. It is - unrealistically - projected to be 5 percent of GDP this year. The health and education system have long crumbled. "The Economist" describes how patients in state hospitals have to bring their lavatory paper with them. Judges and teachers openly solicit bribes. Slovakia endured one of the worst post-communist contractions among countries in transition. Its industry's share of GDP was almost halved to less than 29 percent. The service sector now constitutes two thirds of a consumption-driven economy. GDP per capita is less than $4000. The informal economy, according to the National Bank of Slovakia, is 12 of GDP. In reality, it is at least three times that. In February, a string of pyramid schemes collapsed, leaving in its trail thousands of impoverished investors. The private sector - largely the outcome of crony privatizations and bilking the state-owned banks - is insolvent and still dominated by tottering behemoths. The banking industry - though increasingly foreign owned - is drowning in non-performing loans. Slovakia's imposing location guarantees a steady, though unimpressive, stream of foreign direct investment - pegged at 1.5 billion last year. But even so, Slovakia is closer to Romania than to Hungary in its opaqueness, venality, and misrule. It will take more than one elections to restore it to a semblance of good governance. Slovenia, Economy of The most exciting event in Slovenia last week was when a group of young army recruits spat on the national flag and sang the anthem of the now defunct former Yugoslavia. They were sent to a military psychiatrist for observation. Indeed, economically speaking, a preference for any other part of the late Federation over Slovenia would indicate mental deformity. Slovenia is by far the most prosperous and pacific of the lot. Income per capita increased by 7% between 1995-2000 and reached 75% of the EU's average. Yugoslavia and Macedonia would require half a century to reach this level at current growth rates. Slovenia's public debt is negligible (c. 26% of GDP), its unemployment rate is almost American (less than 7%), its budget deficit a mere 1.4% of GDP. Slovenia's gross national savings is almost a quarter of its GDP - as is its gross domestic investment (28%). It is a respected member of both the World Bank and the IMF. The former has disbursed c. $250 million for purposes such as structural reforms and environmental cleanups. The latter praises its monetary targeting, the managed float of its tolar, and the lack of major (budget and current account) imbalances. This, despite erratic monetary management by the Bank of Slovenia, which, together with the introduction of VAT, the oil price shock, and a totally CPI-indexed financial environment, led to escalating inflation (c. 9% annually, up from 6%). Thus, should Slovenian officials fail in their efforts to secure agricultural and regional development concessions from their counterparts in Brussels, Slovenia runs the risk of becoming a net creditor of the EU. Slovenia, contrary to most other current members, is openly unhappy with the "Big Bang" enlargement of the Union. It has successfully concluded 22 out 29 chapters to be agreed with the EU prior to accession and it is afraid of being held back by an unrealistic, politically motivated, process of enlargement which will stress the EU's deficient institutions to their breaking point. Slovenia is small. It is the size of pre-1967 Israel or New Jersey. With less than 2 million citizens (88% of which are ethnic Slovene), its population grows by a paltry 0.14% p.a. Still, had it not constituted the northern boundary of a war prone and unstable region, Slovenia might have attracted more FDI (it has one of the lowest rates among the candidate countries), bordering as it does and integrated as it is with the (relatively) large and disinflated economies of Italy, Hungary, and Austria. Many Slovenes actually live in Jorg Haider's part of Austria (Carinthia). Italians owned property (confiscated by the communists) in Slovenia before the Second World War (the source of a simmering grudge in Italy). Italians, Austrians, and Germans invest in Slovenian banks, insurance companies, and industry. Together with Poland, Hungary, and the Czech Republic (among others), it is a member of the now reawakened CEFTA (Central European Free Trade Agreement). Only 4% of Slovenia's GDP derives from agriculture (vs. 61% from services). Still, Slovenia, to its great ire, is often associated with the Balkan. But the bad neighborhood is not the only obstacle. Slovenia's privatization was as crony-infested as elsewhere in the Eastern Bloc and its legislation still incorporates investment-deterring anachronisms (restricted land and media ownership, an over-regulated labour marke |
