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Full text of "Corruption and Financial Crime"

Financial Crime and 
Corruption 



3 rd EDITION 



Sam Vaknin, Ph.D. 



Editing and Design: 

Lidija Rangelovska 



Lidija Rangelovska 
A Narcissus Publications Imprint, Skopje 2009 

Not for Sale! Non-commercial edition. 



© 2002-9 Copyright Lidija Rangelovska. 

All rights reserved. This book, or any part thereof, may not be used or reproduced in 

any manner without written permission from: 

Lidija Rangelovska - write to: 

palma@unet.com,mk 

Visit the Author Archive of Dr. Sam Vaknin in "Central Europe Review": 
http://www.ce-review.org/authorarchives/vaknin archive/vaknin main.html 

Visit Sam Vaknin's United Press International (UPI) Article Archive -Click HERE! 



ISBN: 9989-929-36-X 



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



Created by: LIDIJA RANGELOVSKA 

REPUBLIC OF MACEDONIA 



CONTENTS 



I. 


Slush Funds 


II. 


Corruption and Transparency 


III. 


Money Laundering in a Changed World 


IV. 


Hawala. the Bank that Never Was 


V. 


Straf - Corruption in Central and Eastern Europe 


VI. 


The Kleptocracies of Eastern and Central Europe 


VII. 


Russia's Missing Billions 


VIII. 


The Enrons of the East 


IX. 


The Typology of Financial Scandals, Asset Bubbles, and Ponzi 




(Pyramid) Schemes 


X. 


The Shadowy World of International Finance 


XI. 


Maritime Piracy 


XII. 


Legalizing Crime 


XIII. 


Nigerian Scams - Begging Your Trust in Africa 


XIV. 


Organ Trafficking in east Europe 


XV. 


Arms Sales to Rogue States 


XVI. 


The Industrious Spies 


XVII. 


Russia's Idled Spies 


XVIII. 


The Business of Torture 


XIX. 


The Criminality of Transition 


XX. 


The Economics of Conspiracy Theories 


XXI. 


The Demise of the Work Ethic 


XXII. 


The Morality of Child Labor 


XXIII. 


The Myth of the Earnings Yield 


XXIV. 


The Future of the SEC 


XXV. 


Trading from a Suitcase - Shuttle Trade 


XXVI. 


The Blessings of the Black Economy 


XXVII. 


Public Procurement and Very Private Benefits 


XXVIII. 


Crisis of the Bookkeepers 


XXIX. 


Competition Laws 



XXX. The Benefits of Oligopolies 

XXXI. Anarchy as an Organizing Principle 

XXXII. Narcissism in the Boardroom 

XXXIII. The Revolt of the Poor and Intellectual Property Rights 

XXXIV. The Kidnapping of Content 

XXXV. The Economics of Spam 

XXXVI. The Content Downloader's Profile 

XXXVII. The Fabric of Economic Trust 

XXXVIII. The Distributive Justice of the Market 

XXXIX. The Agent-Principal Conundrum 
XL. The Green-eyed Capitalist 

XLI. Notes on the Economics of Game Theory 
Market Impeders and Market Inefficiencies 
The Pettifogger Procurators 
Microsoft's Third Front 



XLII. 

XLIII. 

XLIV. 

XLV. 

XL VI. 

XLVII. 

XL VIII 

XLIX. 

L. 

LI. 

IH. 

LIII. 

LIV. 

LV. 

LVI. 

LVII. 

LVIII. 

LIX. 

LX. 
LXI. 

LXII. 

LXIII. 



NGOs - The Self-appointed Altruists 

Who is Guarding the Guards 

The Honorary Academic 

Rasputin in Transition 

The Eureka Connection 

The Treasure Trove of Kosovo 

Milosevic's Treasure Island 

Macedonia's Augean Stables 

The Macedonian Lottery 

Crime Fighting Computer Systems and Databases 

Using Data from Nazi Medical Experiments 

Surviving on Nuclear Waste 

Human Trafficking in Eastern Europe 

The Mendicant Journalists 

Moral Hazard and the Survival Value of Risk 

Private Armies and Private Military Companies (PMCs) 
The Con-man Cometh 

The Author 

About "After the Rain" 



Slush Funds 



According to David McClintick ("Swordfish: A True 
Story of Ambition, Savagery, and Betrayal"), in the late 
1980's, the FBI and DEA set up dummy corporations to 
deal in drugs. They funneled into these corporate fronts 
money from drug-related asset seizures. 

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

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

The Kazakh prime minister, Imanghaliy 
Tasmaghambetov, freely admitted on April 4, 2002 to his 
country's rubber-stamp parliament the existence of a $1 
billion slush fund. The money was apparently skimmed 
off the proceeds of the opaque sale of the Tengiz oilfield. 
Remitting it to Kazakhstan - he expostulated with a poker 
face - would have fostered inflation. So, the country's 
president, Nazarbaev, kept the funds abroad "for use in 
the event of either an economic crisis or a threat to 
Kazakhstan's security". 



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

The National Fund was, indeed, augmented by a transfer 
or two from the slush fund - but at least one of these 
transfers occurred only 1 1 days after the damning 
revelations. Moreover, despite incontrovertible evidence 
to the contrary, the unfazed premier denied that his 
president possesses multi-million dollar bank accounts 
abroad. 

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

On April 15, 2002 even the docile opposition had enough 
of this fuzzy logic. They established a People Oil's Fund 
to monitor, henceforth, the regime's financial shenanigans. 
By their calculations less than 7 percent of the income 
from the sale of hydrocarbon fuels (c. $4-5 billion 
annually) make it to the national budget. 

Slush funds infect every corner of the globe, not only the 
more obscure and venal ones. Every secret service - from 
the Mossad to the CIA - operates outside the stated state 
budget. Slush funds are used to launder money, shower 
cronies with patronage, and bribe decision makers. In 



some countries, setting them up is a criminal offense, as 
per the 1990 Convention on Laundering, Search, Seizure, 
and Confiscation of the Proceeds from Crime. Other 
jurisdictions are more forgiving. 

The Catholic Bishops Conference of Papua New Guinea 
and the Solomon Islands issued a press release November 
2001 in which it welcomed the government's plans to 
abolish slush funds. They described the poisonous effect 
of this practice: 

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

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

But even is the most orderly and lawful administration, 
funds are liable to be mislaid. "The Economist" reported 
recently about a $10 billion class-action suit filed by 
native- Americans against the US government. The funds, 
supposed to be managed in trust since 1880 on behalf of 



half a million beneficiaries, were "either lost or stolen" 
according to officials. 

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

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

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

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

"Next" and "China Times" - later joined by "The 
Washington Post" - accused the former Taiwanese 
president, Lee Teng-hui, of forming a $100 million 
overseas slush fund intended to finance the gathering of 
information, influence-peddling, and propaganda 
operations. Taiwan footed the bills trips by Congressional 
aides and funded academic research and think tank 
conferences. 



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

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

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

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

The Taiwanese government has yet to deny the news 
stories. 

A Japanese foreign ministry official used slush fund 
money to finance the extra-marital activities of himself 
and many of his colleagues - often in posh hotel suites. 
But this was no exception. According to Asahi Shimbun, 
more than half of the 60 divisions of the ministry 
maintained similar funds. The police and the ministry are 
investigating. One arrest has been made. The ministry's 



accounting division has discovered these corrupt practices 
twenty years before but kept mum. 

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

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

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

Secret election campaign slush funds are a fixture in 
American politics. A 5-year old bill requires disclosure of 
donors to such funds but the House is busy loosening its 
provisions. "The Economist" listed in 2002 the tsunami of 
scandals that engulfs Germany, both its major political 
parties, many of the Lander and numerous highly placed 
and mid-level bureaucrats. Secret, mainly party, funds 
seem to be involved in the majority of these lurid affairs. 

Italian firms made donations to political parties through 
slush funds, though corporate donations - providing they 
are transparent - are perfectly legal in Italy. Both the right 



and, to a lesser extent, the left in France are said to have 
managed enormous political slush funds. 

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

The epidemic hasn't skipped even staid Ottawa. Its Chief 
Electoral Officer told Sun Media in September 2001 that 
he is "concerned" about millions stashed away by Liberal 
candidates. Sundry ministers who coveted the prime 
minister's job, have raised funds covertly and probably 
illegally. 

On April 11, 2002 UPI reported that Spain's second- 
largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), 
held nearly $200 million hidden in secret offshore 
accounts, "which were allegedly used to manipulate 
politicians, pay off the 'revolutionary tax' to ETA - the 
Basque terrorist organization - and open the door for 
business deals, according to news reports." 

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

Latin American drug money launderers - from Puerto 
Rico to Colombia - may have worked through these funds 
and the bank's clandestine entities in the Cayman Islands 



and Jersey. The current Spanish Secretary of State for the 
Treasury has been the bank's tax advisor between 1992-7. 

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

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

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

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

"Slush funds are obtained from a joint stock company's 
finances, carefully managed so that the amounts 
involved do not appear on the balance sheet. They do not 
necessarily have to consist of money, but can also take 
the form of stocks and shares or other economically 
valuable goods (works of art, jewels, yachts, etc.) It is 
enough that they can be used without any particular 
difficulty or that they can be transferred to a third party. 



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

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

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

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

But slush funds are overwhelmingly used to bribe corrupt 
politicians. The fight against corruption has been titled 
against the recipients of illicit corporate largesse. But to 
succeed, well-meaning international bodies, such as the 
OECD's FATF, must attack with equal zeal those who 
bribe. Every corrupt transaction is between a venal 



politician and an avaricious businessman. Pursuing the 
one while ignoring the other is self-defeating. 

Note - The Psychology of Corruption 

Most politicians bend the laws of the land and steal 
money or solicit bribes because they need the funds to 
support networks of patronage. Others do it in order to 
reward their nearest and dearest or to maintain a lavish 
lifestyle when their political lives are over. 

But these mundane reasons fail to explain why some 
officeholders go on a rampage and binge on endless 
quantities of lucre. All rationales crumble in the face of a 
Mobutu Sese Seko or a Saddam Hussein or a Ferdinand 
Marcos who absconded with billions of US dollars from 
the coffers of Zaire, Iraq, and the Philippines, 
respectively. 

These inconceivable dollops of hard cash and valuables 
often remain stashed and untouched, moldering in bank 
accounts and safes in Western banks. They serve no 
purpose, either political or economic. But they do fulfill a 
psychological need. These hoards are not the 
megalomaniacal equivalents of savings accounts. Rather 
they are of the nature of compulsive collections. 

Erstwhile president of Sierra Leone, Momoh, amassed 
hundreds of video players and other consumer goods in 
vast rooms in his mansion. As electricity supply was 
intermittent at best, his was a curious choice. He used to 
sit among these relics of his cupidity, fondling and 
counting them insatiably. 



While Momoh relished things with shiny buttons, people 
like Sese Seko, Hussein, and Marcos drooled over money. 
The ever-heightening mountains of greenbacks in their 
vaults soothed them, filled them with confidence, 
regulated their sense of self- worth, and served as a love 
substitute. The balances in their bulging bank accounts 
were of no practical import or intent. They merely catered 
to their psychopathology. 

These politicos were not only crooks but also 
kleptomaniacs. They could no more stop thieving than 
Hitler could stop murdering. Venality was an integral part 
of their psychological makeup. 

Kleptomania is about acting out. It is a compensatory act. 
Politics is a drab, uninspiring, unintelligent, and, often 
humiliating business. It is also risky and rather arbitrary. It 
involves enormous stress and unceasing conflict. 
Politicians with mental health disorders (for instance, 
narcissists or psychopaths) react by decompensation. They 
rob the state and coerce businessmen to grease their palms 
because it makes them feel better, it helps them to repress 
their mounting fears and frustrations, and to restore their 
psychodynamic equilibrium. These politicians and 
bureaucrats "let off steam" by looting. 

Kleptomaniacs fail to resist or control the impulse to steal, 
even if they have no use for the booty. According to the 
Diagnostic and Statistical Manual IV-TR (2000), the bible 
of psychiatry, kleptomaniacs feel "pleasure, gratification, 
or relief when committing the theft." The good book 
proceeds to say that "... (T)he individual may hoard the 
stolen objects ...". 



As most kleptomaniac politicians are also psychopaths , 
they rarely feel remorse or fear the consequences of their 
misdeeds. But this only makes them more culpable and 
dangerous. 

Return 



Corruption and Transparency 



Corruption runs against the grain of meritocratic 
capitalism. It skews the level playing-field; it imposes 
onerous and unpredictable transaction costs; it guarantees 
extra returns where none should have been had; it 
encourages the misallocation of economic resources; and 
it subverts the proper functioning of institutions. It is, in 
other words, without a single redeeming feature, a 
scourge. 

Strangely, this is not how it is perceived by its 
perpetrators: both the givers and the recipients. They 
believe that corruption helps facilitate the flow and 
exchange of goods and services in hopelessly clogged and 
dysfunctional systems and markets (corruption and the 
informal economy "get things done" and "keep people 
employed"); that it serves as an organizing principle 
where chaos reins and institutions are in their early 
formative stages; that it supplements income and thus 
helps the state employ qualified and skilled personnel; and 
that it preserves peace and harmony by financing 
networks of cronyism, nepotism, and patronage. 

I. The Facts 

In 2002, just days before a much-awaited donor 
conference, the influential International Crisis Group 
(ICG) recommended to place all funds pledged to 
Macedonia under the oversight of a "corruption advisor" 
appointed by the European Commission. The donors 
ignored this and other recommendations. To appease the 
critics, the affable Attorney General of Macedonia 



charged a former Minister of Defense with abuse of duty 
for allegedly having channeled millions of DM to his 
relatives during the recent civil war. Macedonia has 
belatedly passed an anti-money laundering law recently, 
but failed, yet again, to adopt strict anti-corruption 
legislation. 

In Albania, the Chairman of the Albanian Socialist Party, 
Fatos Nano, was accused by Albanian media of 
laundering $1 billion through the Albanian government. 
Pavel Borodin, the former chief of Kremlin Property, 
decided not appeal his money laundering conviction in a 
Swiss court. The Slovak daily "Sme" described in 
scathing detail the newly acquired wealth and lavish 
lifestyles of formerly impoverished HZDS politicians. 
Some of them now reside in refurbished castles. Others 
have swimming pools replete with wine bars. 

Pavlo Lazarenko, a former Ukrainian prime minister, is 
detained in San Francisco on money laundering charges. 
His defense team accuses the US authorities of "selective 
prosecution". 

They are quoted by Radio Free Europe as saying: 

"The impetus for this prosecution comes from 
allegations made by the Kuchma regime, which itself is 
corrupt and dedicated to using undemocratic and 
repressive methods to stifle political opposition ... (other 
Ukrainian officials) including Kuchma himself and his 
closest associates, have committed conduct similar to 
that with which Lazarenko is charged but have not been 
prosecuted by the U.S. government". 



The UNDP estimated, in 1997, that, even in rich, 
industrialized, countries, 15% of all firms had to pay 
bribes. The figure rises to 40% in Asia and 60% in Russia. 

Corruption is rife and all pervasive, though many 
allegations are nothing but political mud-slinging. 
Luckily, in countries like Macedonia, it is confined to its 
rapacious elites: its politicians, managers, university 
professors, medical doctors, judges, journalists, and top 
bureaucrats. The police and customs are hopelessly 
compromised. Yet, one rarely comes across graft and 
venality in daily life. There are no false detentions (as in 
Russia), spurious traffic tickets (as in Latin America), or 
widespread stealthy payments for public goods and 
services (as in Africa). 

It is widely accepted that corruption retards growth by 
deterring foreign investment and encouraging brain drain. 
It leads to the misallocation of economic resources and 
distorts competition. It depletes the affected country's 
endowments - both natural and acquired. It demolishes the 
tenuous trust between citizen and state. It casts civil and 
government institutions in doubt, tarnishes the entire 
political class, and, thus, endangers the democratic system 
and the rule of law, property rights included. 

This is why both governments and business show a 
growing commitment to tackling it. According to 
Transparency International's "Global Corruption Report 
2001", corruption has been successfully contained in 
private banking and the diamond trade, for instance. 

Hence also the involvement of the World Bank and the 
IMF in fighting corruption. Both institutions are 
increasingly concerned with poverty reduction through 



economic growth and development. The World Bank 
estimates that corruption reduces the growth rate of an 
affected country by 0.5 to 1 percent annually. Graft 
amounts to an increase in the marginal tax rate and has 
pernicious effects on inward investment as well. 

The World Bank has appointed in 2001 a Director of 
Institutional Integrity - a new department that combines 
the Anti-Corruption and Fraud Investigations Unit and the 
Office of Business Ethics and Integrity. The Bank helps 
countries to fight corruption by providing them with 
technical assistance, educational programs, and lending. 

Anti-corruption projects are an integral part of every 
Country Assistance Strategy (CAS). The Bank also 
supports international efforts to reduce corruption by 
sponsoring conferences and the exchange of information. 
It collaborates closely with Transparency International, 
for instance. 

At the request of member-governments (such as Bosnia- 
Herzegovina and Romania) it has prepared detailed 
country corruption surveys covering both the public and 
the private sectors. Together with the EBRD, it publishes 
a corruption survey of 3000 firms in 22 transition 
countries (BEEPS - Business Environment and Enterprise 
Performance Survey). It has even set up a multilingual 
hotline for whistleblowers. 

The IMF made corruption an integral part of its country 
evaluation process. It suspended arrangements with 
endemically corrupt recipients of IMF financing. Since 
1997, it has introduced policies regarding misreporting, 
abuse of IMF funds, monitoring the use of debt relief for 
poverty reduction, data dissemination, legal and judicial 



reform, fiscal and monetary transparency, and even 
internal governance (e.g., financial disclosure by staff 
members). 

Yet, no one seems to agree on a universal definition of 
corruption. What amounts to venality in one culture 
(Sweden) is considered no more than hospitality, or an 
expression of gratitude, in another (France, or Italy). 
Corruption is discussed freely and forgivingly in one 
place - but concealed shamefully in another. Corruption, 
like other crimes, is probably seriously under-reported and 
under-penalized. 

Moreover, bribing officials is often the unstated policy of 
multinationals, foreign investors, and expatriates. Many of 
them believe that it is inevitable if one is to expedite 
matters or secure a beneficial outcome. Rich world 
governments turn a blind eye, even where laws against 
such practices are extant and strict. 

In his address to the Inter- American Development Bank 
on March 14, 2002 President Bush promised to "reward 
nations that root out corruption" within the framework of 
the Millennium Challenge Account initiative. The USA 
has pioneered global anti-corruption campaigns and is a 
signatory to the 1996 IAS Inter- American Convention 
against Corruption, the Council of Europe's Criminal Law 
Convention on Corruption, and the OECD's 1997 anti- 
bribery convention. The USA has had a comprehensive 
"Foreign Corrupt Practices Act" since 1977. 

The Act applies to all American firms, to all firms - 
including foreign ones - traded in an American stock 
exchange, and to bribery on American territory by foreign 
and American firms alike. It outlaws the payment of 



bribes to foreign officials, political parties, party officials, 
and political candidates in foreign countries. A similar law 
has now been adopted by Britain. 

Yet, "The Economist" reports that the American SEC has 
brought only three cases against listed companies until 
1997. The US Department of Justice brought another 30 
cases. Britain has persecuted successfully only one of its 
officials for overseas bribery since 1889. In the 
Netherlands bribery is tax deductible. Transparency 
International now publishes a name and shame Bribery 
Payers Index to complement its 91 -country strong 
Corruption Perceptions Index. 

Many rich world corporations and wealthy individuals 
make use of off-shore havens or "special purpose entities" 
to launder money, make illicit payments, avoid or evade 
taxes, and conceal assets or liabilities. According to Swiss 
authorities, more than $40 billion are held by Russians in 
its banking system alone. The figure may be 5 to 10 times 
higher in the tax havens of the United Kingdom. 

In a survey it conducted in February 2002 of 82 
companies in which it invests, "Friends, Ivory, and Sime" 
found that only a quarter had clear anti-corruption 
management and accountability systems in place. 

Tellingly only 35 countries signed the 1997 OECD 
"Convention on Combating Bribery of Foreign Public 
Officials in International Business Transactions" - 
including four non-OECD members: Chile, Argentina, 
Bulgaria, and Brazil. The convention has been in force 
since February 1999 and is only one of many OECD anti- 
corruption drives, among which are SIGMA (Support for 
Improvement in Governance and Management in Central 



and Eastern European countries), ACN (Anti-Corruption 
Network for Transition Economies in Europe), and FATF 
(the Financial Action Task Force on Money Laundering). 

Moreover, The moral authority of those who preach 
against corruption in poor countries - the officials of the 
IMF, the World Bank, the EU, the OECD - is strained by 
their ostentatious lifestyle, conspicuous consumption, and 
"pragmatic" morality. 

II. What to Do? What is Being Done? 

A few years ago, I proposed a taxonomy of corruption, 
venality, and graft. I suggested this cumulative definition: 

a. The withholding of a service, information, or 
goods that, by law, and by right, should have been 
provided or divulged. 

b. The provision of a service, information, or goods 
that, by law, and by right, should not have been 
provided or divulged. 

c. That the withholding or the provision of said 
service, information, or goods are in the power of 
the withholder or the provider to withhold or to 
provide AND That the withholding or the 
provision of said service, information, or goods 
constitute an integral and substantial part of the 
authority or the function of the withholder or the 
provider. 

d. That the service, information, or goods that are 
provided or divulged are provided or divulged 
against a benefit or the promise of a benefit from 



the recipient and as a result of the receipt of this 
specific benefit or the promise to receive such 
benefit. 

e. That the service, information, or goods that are 
withheld are withheld because no benefit was 
provided or promised by the recipient. 

There is also what the World Bank calls "State Capture" 
defined thus: 

"The actions of individuals, groups, or firms, both in the 
public and private sectors, to influence the formation of 
laws, regulations, decrees, and other government 
policies to their own advantage as a result of the illicit 
and non-transparent provision of private benefits to 
public officials. " 

We can classify corrupt and venal behaviors according to 
their outcomes: 

a. Income Supplement - Corrupt actions whose sole 
outcome is the supplementing of the income of the 
provider without affecting the "real world" in any 
manner. 

b. Acceleration or Facilitation Fees - Corrupt 
practices whose sole outcome is to accelerate or 
facilitate decision making, the provision of goods 
and services or the divulging of information. 

c. Decision Altering (State Capture) Fees - Bribes 
and promises of bribes which alter decisions or 
affect them, or which affect the formation of 



policies, laws, regulations, or decrees beneficial to 
the bribing entity or person. 

d. Information Altering Fees - Backhanders and 
bribes that subvert the flow of true and complete 
information within a society or an economic unit 
(for instance, by selling professional diplomas, 
certificates, or permits). 

e. Reallocation Fees - Benefits paid (mainly to 
politicians and political decision makers) in order 
to affect the allocation of economic resources and 
material wealth or the rights thereto. Concessions, 
licenses, permits, assets privatized, tenders 
awarded are all subject to reallocation fees. 

To eradicate corruption, one must tackle both giver and 
taker. 

History shows that all effective programs shared these 
common elements: 

a. The persecution of corrupt, high-profile, public 
figures, multinationals, and institutions (domestic 
and foreign). This demonstrates that no one is 
above the law and that crime does not pay. 

b. The conditioning of international aid, credits, and 
investments on a monitored reduction in 
corruption levels. The structural roots of 
corruption should be tackled rather than merely its 
symptoms. 

c. The institution of incentives to avoid corruption, 
such as a higher pay, the fostering of civic pride, 



"good behavior" bonuses, alternative income and 
pension plans, and so on. 

d. In many new countries (in Asia, Africa, and 
Eastern Europe) the very concepts of "private" 
versus "public" property are fuzzy and 
impermissible behaviors are not clearly 
demarcated. Massive investments in education of 
the public and of state officials are required. 

e. Liberalization and deregulation of the economy. 
Abolition of red tape, licensing, protectionism, 
capital controls, monopolies, discretionary, non- 
public, procurement. Greater access to information 
and a public debate intended to foster a 
"stakeholder society". 

f. Strengthening of institutions: the police, the 
customs, the courts, the government, its agencies, 
the tax authorities - under time limited foreign 
management and supervision. 

Awareness to corruption and graft is growing - though it 
mostly results in lip service. The Global Coalition for 
Africa adopted anti-corruption guidelines in 1999. The 
otherwise opaque Asia Pacific Economic Cooperation 
(APEC) forum is now championing transparency and 
good governance. The UN is promoting its pet convention 
against corruption. 

The G-8 asked its Lyon Group of senior experts on 
transnational crime to recommend ways to fight 
corruption related to large money flows and money 
laundering. The USA and the Netherlands hosted global 
forums on corruption - as did South Korea in 2003. The 



OSCE has responded with its own initiative, in 
collaboration with the US Congressional Helsinki 
Commission. 

The south-eastern Europe Stability Pact sports its own 
Stability Pact Anti-corruption Initiative (SPAI). It held its 
first conference in September 2001 in Croatia. More than 
1200 delegates participated in the 10th International Anti- 
Corruption Conference in Prague last year. The 
conference was attended by the Czech prime minister, the 
Mexican president, and the head of the Interpol. 

The most potent remedy against corruption is sunshine - 
free, accessible, and available information disseminated 
and probed by an active opposition, uncompromised 
press, and assertive civic organizations and NGO's. In the 
absence of these, the fight against official avarice and 
criminality is doomed to failure. With them, it stands a 
chance. 

Corruption can never be entirely eliminated - but it can be 
restrained and its effects confined. The cooperation of 
good people with trustworthy institutions is indispensable. 
Corruption can be defeated only from the inside, though 
with plenty of outside help. It is a process of self- 
redemption and self -transformation. It is the real 
transition. 

III. Asset Confiscation and Asset Forfeiture 

The abuse of asset confiscation and forfeiture statutes by 
governments, law enforcement agencies, and political 
appointees and cronies throughout the world is well- 
documented. In many developing countries and countries 
in transition, assets confiscated from real and alleged 



criminals and tax evaders are sold in fake auctions to 
party hacks, cronies, police officers, tax inspectors, and 
relatives of prominent politicians at bargain basement 
prices. 

That the assets of suspects in grave crimes and corruption 
should be frozen or "disrupted" until they are convicted or 
exonerated by the courts - having exhausted their appeals 
- is understandable and in accordance with the Vienna 
Convention. But there is no justification for the seizure 
and sale of property otherwise. 

In Switzerland, financial institutions are obliged to 
automatically freeze suspect transactions for a period of 
five days, subject to the review of an investigative judge. 
In France, the Financial Intelligence Unit can freeze funds 
involved in a reported suspicious transaction by 
administrative fiat. In both jurisdictions, the fast track 
freezing of assets has proven to be a more than adequate 
measure to cope with organized crime and venality. 

The presumption of innocence must fully apply and due 
process upheld to prevent self-enrichment and corrupt 
dealings with confiscated property, including the unethical 
and unseemly use of the proceeds from the sale of 
forfeited assets to close gaping holes in strained state and 
municipal budgets. 

In the United States, according to The Civil Asset 
Forfeiture Reform Act of 2000 (HR 1658), the assets of 
suspects under investigation and of criminals convicted of 
a variety of more than 400 minor and major offenses 
(from soliciting a prostitute to gambling and from 
narcotics charges to corruption and tax evasion) are often 



confiscated and forfeited ("in personam, or value-based 
confiscation"). 

Technically and theoretically, assets can be impounded or 
forfeited and disposed of even in hitherto minor Federal 
civil offenses (mistakes in fulfilling Medicare or tax 
return forms) 

The UK's Assets Recovery Agency (ARA) that is in 
charge of enforcing the Proceeds of Crime Act 2002, had 
this chilling statement to make on May 24, 2007: 

"We are pursuing the assets of those involved in a wide 
range of crime including drug dealing, people 
trafficking, fraud, extortion, smuggling, control of 
prostitution, counterfeiting, benefit fraud, tax evasion 
and environmental crimes such as illegal dumping of 
waste and illegal fishing. " (!) 

Drug dealing and illegal fishing in the same sentence. 

The British firm Bentley-Jennison, who provide Forensic 
Accounting Services, add: 

"In some cases the defendants will even have their assets 
seized at the start of an investigation, before any charges 
have been considered. In many cases the authorities will 
assume that all of the assets held by the defendant are 
illegally obtained as he has a "criminal lifestyle". It is 
then down to the defendant to prove otherwise. If the 
defendant is judged to have a criminal lifestyle then it 
will be assumed that physical assets, such as properties 
and motor vehicles, have been acquired through the use 



of criminal funds and it will be necessary to present 
evidence to contradict this. 

The defendant's bank accounts will also be scanned for 
evidence of spending and any expenditure on 
unidentified assets (and in some cases identified assets) 
is also likely to be included as alleged criminal benefit. 
This often leads to the inclusion of sums from legitimate 
sources and double counting both of which need to be 
eliminated. " 

Under the influence of the post-September 1 1 United 
States and the FATF (Financial Action Task Force on 
Money Laundering), Canada, Australia, the United 
Kingdom, Greece, South Korea, and Russia have similar 
asset recovery and money laundering laws in place. 

International treaties (for instance, the 1959 European 
Convention on Mutual Legal Assistance in Criminal 
Matters, the 1990 Convention of the Council of Europe on 
Laundering, Search, Seizure and Confiscation of the 
Proceeds from Crime (ETS 141), and The U.N. 
Convention against Corruption 2003- UNCAC) and 
European Union Directives (e.g., 2001/97/EC) allow the 
seizure and confiscation of the assets and "unexplained 
wealth" of criminals and suspects globally, even if their 
alleged or proven crime does not constitute an offense 
where they own property or have bank accounts. 

This abrogation of the principle of dual criminality 
sometimes leads to serious violations of human and civil 
rights. Hitler could have used it to ask the United 
Kingdom's Assets Recovery Agency (ARA) to confiscate 
the property of refugee Jews who committed "crimes" by 
infringing on the infamous Nuremberg race laws. 



Only offshore tax havens, such as Andorra, Antigua, 
Aruba, the British Virgin Islands, Guernsey, Monaco, the 
Netherlands Antilles, Samoa, St. Vincent, the US Virgin 
Islands, and Vanuatu still resist the pressure to join in the 
efforts to trace and seize suspects' assets and bank 
accounts in the absence of a conviction or even charges. 

Even worse, unlike in other criminal proceedings, the 
burden of proof is on the defendant who has to 
demonstrate that the source of the funds used to purchase 
the confiscated or forfeited assets is legal. When the 
defendant fails to furnish such evidence conclusively and 
convincingly, or if he has left the United States or had 
died, the assets are sold at an auction and the proceeds 
usually revert to various law enforcement agencies, to the 
government's budget, or to good social causes and 
programs. This is the case in many countries, including 
United Kingdom, United States, Germany, France, Hong 
Kong, Italy, Denmark, Belgium, Austria, Greece, Ireland, 
New Zealand, Singapore and Switzerland. 

According to a brief written by Jack Smith, Mark Pieth, 
and Guillermo Jorge at the Basel Institute on Governance, 
International Centre for Asset Recovery: 

"Article 54(l)(c) of the UNCAC recommends that states 
parties establish non-criminal systems of confiscation, 
which have several advantages for recovery actions: the 
standard of evidence is lower ("preponderance of the 
evidence" rather than "beyond a reasonable doubt"); 
they are not subject to some of the more restrictive 
traditional safeguards of international cooperation such 
as the offense for which the defendant is accused has to 
be a crime in the receiving state (dual criminality); and 
it opens more formal avenues for negotiation and 



settlements. This is already the practice in some 
jurisdictions such as the US, Ireland, the UK, Italy, 
Colombia, Slovenia, and South Africa, as well as some 
Australian and Canadian States. " 

In most countries, including the United Kingdom, the 
United States, Austria, Germany, Indonesia, Macedonia, 
and Ireland, assets can be impounded, confiscated, frozen, 
forfeited, and even sold prior to and without any criminal 
conviction. 

In Australia, Austria, Ireland, Hong-Kong, New Zealand, 
Singapore, United Kingdom, South Africa, United States 
and the Netherlands alleged and suspected criminals, their 
family members, friends, employees, and partners can be 
stripped of their assets even for crimes they have 
committed in other countries and even if they have merely 
made use of revenues obtained from illicit activities (this 
is called "in rem, or property-based confiscation"). This 
often gives rise to cases of double jeopardy. 

Typically, the defendant is notified of the impending 
forfeiture or confiscation of his or her assets and has 
recourse to a hearing within the relevant law enforcement 
agency and also to the courts. If he or she can prove 
"substantial harm" to life and business, the property may 
be released to be used, though ownership is rarely 
restored. 

When the process of asset confiscation or asset forfeiture 
is initiated, banking secrecy is automatically lifted and the 
government indemnifies the banks for any damage they 
may suffer for disclosing confidential information about 
their clients' accounts. 



In many countries from South Korea to Greece, lawyer- 
client privilege is largely waived. The same requirements 
of monitoring of clients' activities and reporting to the 
authorities apply to credit and financial institutions, 
venture capital firms, tax advisers, accountants, and 
notaries. 

Elsewhere, there are some other worrying developments: 

In Bulgaria, the assets of tax evaders have recently begun 
to be confiscated and turned over to the National Revenue 
Agency and the State Receivables Collection Agency. 
Property is confiscated even when the tax assessment is 
disputed in the courts. The Agency cannot, however, 
confiscate single-dwelling houses, bank accounts up to 
250 leva of one member of the family, salary or pension 
up to 250 leva a month, social care, and alimony, support 
money or allowances. 

Venezuela has recently reformed its Organic Tax Code to 
allow for: 

" (P)re-judgment enforcement measures (to) include 
closure of premises for up to ten days and confiscation 
of merchandise. These measures will be applied in 
addition to the attachment or sequestration of personal 
property and the prohibition against alienation or 
encumbrance of realty. During closure of premises, the 
employer must continue to pay workers, thereby 
avoiding an appeal for constitutional protection. " 

Finally, in many states in the United States, "community 
responsibility" statutes require of owners of legal 
businesses to "abate crime" by openly fighting it 
themselves. If they fail to tackle the criminals in their 



neighborhood, the police can seize and sell their property, 
including their apartments and cars. The proceeds from 
such sales accrue to the local municipality. 

In New- York City, the police confiscated a restaurant 
because one of its regular patrons was an alleged drug 
dealer. In Alabama, police seized the home of a senior 
citizen because her yard was used, without her consent, 
for drug dealing. In Maryland, the police confiscated a 
family's home and converted it into a retreat for its 
officers, having mailed one of the occupants a package of 
marijuana. 

Note - The Psychology of Corruption 

Most politicians bend the laws of the land and steal 
money or solicit bribes because they need the funds to 
support networks of patronage. Others do it in order to 
reward their nearest and dearest or to maintain a lavish 
lifestyle when their political lives are over. 

But these mundane reasons fail to explain why some 
officeholders go on a rampage and binge on endless 
quantities of lucre. All rationales crumble in the face of a 
Mobutu Sese Seko or a Saddam Hussein or a Ferdinand 
Marcos who absconded with billions of US dollars from 
the coffers of Zaire, Iraq, and the Philippines, 
respectively. 

These inconceivable dollops of hard cash and valuables 
often remain stashed and untouched, moldering in bank 
accounts and safes in Western banks. They serve no 
purpose, either political or economic. But they do fulfill a 
psychological need. These hoards are not the 



megalomaniacal equivalents of savings accounts. Rather 
they are of the nature of compulsive collections. 

Erstwhile president of Sierra Leone, Momoh, amassed 
hundreds of video players and other consumer goods in 
vast rooms in his mansion. As electricity supply was 
intermittent at best, his was a curious choice. He used to 
sit among these relics of his cupidity, fondling and 
counting them insatiably. 

While Momoh relished things with shiny buttons, people 
like Sese Seko, Hussein, and Marcos drooled over money. 
The ever-heightening mountains of greenbacks in their 
vaults soothed them, filled them with confidence, 
regulated their sense of self- worth, and served as a love 
substitute. The balances in their bulging bank accounts 
were of no practical import or intent. They merely catered 
to their psychopathology. 

These politicos were not only crooks but also 
kleptomaniacs. They could no more stop thieving than 
Hitler could stop murdering. Venality was an integral part 
of their psychological makeup. 

Kleptomania is about acting out. It is a compensatory act. 
Politics is a drab, uninspiring, unintelligent, and, often 
humiliating business. It is also risky and rather arbitrary. It 
involves enormous stress and unceasing conflict. 
Politicians with mental health disorders (for instance, 
narcissists or psychopaths) react by decompensation. They 
rob the state and coerce businessmen to grease their palms 
because it makes them feel better, it helps them to repress 
their mounting fears and frustrations, and to restore their 
psychodynamic equilibrium. These politicians and 
bureaucrats "let off steam" by looting. 



Kleptomaniacs fail to resist or control the impulse to steal, 
even if they have no use for the booty. According to the 
Diagnostic and Statistical Manual IV-TR (2000), the bible 
of psychiatry, kleptomaniacs feel "pleasure, gratification, 
or relief when committing the theft." The good book 
proceeds to say that "... (T)he individual may hoard the 
stolen objects ...". 

As most kleptomaniac politicians are also psychopaths , 
they rarely feel remorse or fear the consequences of their 
misdeeds. But this only makes them more culpable and 
dangerous. 

Return 



Money Laundering in 
A Changed World 



If you shop with a major bank, chances are that all the 
transactions in your account are scrutinized by AML (Anti 
Money Laundering) software. Billions of dollars are being 
invested in these applications. They are supposed to track 
suspicious transfers, deposits, and withdrawals based on 
overall statistical patterns. Bank directors, exposed, under 
the Patriot Act, to personal liability for money laundering 
in their establishments, swear by it as a legal shield and 
the holy grail of the on-going war against financial crime 
and the finances of terrorism. 

Quoted in Wired.com, Neil Katkov of Celent 
Communications, pegs future investments in compliance- 
related activities and products by American banks alone at 
close to $15 billion in the next 3 years (2005-2008). The 
United State's Treasury Department's Financial Crimes 
Enforcement Network (finCEN) received c. 15 million 
reports in each of the years 2003 and 2004. 

But this is a drop in the seething ocean of illicit financial 
transactions, sometimes egged on and abetted even by the 
very Western governments ostensibly dead set against 
them. 

Israel has always turned a blind eye to the origin of funds 
deposited by Jews from South Africa to Russia. In Britain 
it is perfectly legal to hide the true ownership of a 



company. Underpaid Asian bank clerks on immigrant 
work permits in the Gulf states rarely require identity 
documents from the mysterious and well-connected 
owners of multi-million dollar deposits. 

Hawaladars continue plying their paperless and trust- 
based trade - the transfer of billions of US dollars around 
the world. American and Swiss banks collaborate with 
dubious correspondent banks in off shore centres. 
Multinationals shift money through tax free territories in 
what is euphemistically known as "tax planning". Internet 
gambling outfits and casinos serve as fronts for narco- 
dollars. British Bureaux de Change launder up to 2.6 
billion British pounds annually. 

The 500 Euro note makes it much easier to smuggle cash 
out of Europe. A French parliamentary committee accused 
the City of London of being a money laundering haven in 
a 400 page report. Intelligence services cover the tracks of 
covert operations by opening accounts in obscure tax 
havens, from Cyprus to Nauru. Money laundering, its 
venues and techniques, are an integral part of the 
economic fabric of the world. Business as usual? 

Not really. In retrospect, as far as money laundering goes, 
September 1 1 may be perceived as a watershed as 
important as the precipitous collapse of communism in 
1989. Both events have forever altered the patterns of the 
global flows of illicit capital. 

What is Money Laundering? 

Strictly speaking, money laundering is the age-old process 
of disguising the illegal origin and criminal nature of 
funds (obtained in sanctions-busting arms sales, 



smuggling, trafficking in humans, organized crime, drug 
trafficking, prostitution rings, embezzlement, insider 
trading, bribery, and computer fraud) by moving them 
untraceably and investing them in legitimate businesses, 
securities, or bank deposits. But this narrow definition 
masks the fact that the bulk of money laundered is the 
result of tax evasion, tax avoidance, and outright tax 
fraud, such as the "VAT carousel scheme" in the EU 
(moving goods among businesses in various jurisdictions 
to capitalize on differences in VAT rates). Tax -related 
laundering nets between 10-20 billion US dollars annually 
from France and Russia alone. The confluence of criminal 
and tax averse funds in money laundering networks serves 
to obscure the sources of both. 

The Scale of the Problem 

According to a 1996 IMF estimate, money laundered 
annually amounts to 2-5% of world GDP (between 800 
billion and 2 trillion US dollars in today's terms). The 
lower figure is considerably larger than an average 
European economy, such as Spain's. 

The System 

It is important to realize that money laundering takes 
place within the banking system. Big amounts of cash are 
spread among numerous accounts (sometimes in free 
economic zones, financial off shore centers, and tax 
havens), converted to bearer financial instruments (money 
orders, bonds), or placed with trusts and charities. The 
money is then transferred to other locations, sometimes as 
bogus payments for "goods and services" against fake or 
inflated invoices issued by holding companies owned by 
lawyers or accountants on behalf of unnamed 



beneficiaries. The transferred funds are re-assembled in 
their destination and often "shipped" back to the point of 
origin under a new identity. The laundered funds are then 
invested in the legitimate economy. It is a simple 
procedure - yet an effective one. It results in either no 
paper trail - or too much of it. The accounts are invariably 
liquidated and all traces erased. 

Why is It a Problem? 

Criminal and tax evading funds are idle and non- 
productive. Their injection, however surreptitiously, into 
the economy transforms them into a productive (and 
cheap) source of capital. Why is this negative? 

Because it corrupts government officials, banks and their 
officers, contaminates legal sectors of the economy, 
crowds out legitimate and foreign capital, makes money 
supply unpredictable and uncontrollable, and increases 
cross-border capital movements, thereby enhancing the 
volatility of exchange rates. 

A multilateral, co-ordinated, effort (exchange of 
information, uniform laws, extra-territorial legal powers) 
is required to counter the international dimensions of 
money laundering. Many countries opt in because money 
laundering has also become a domestic political and 
economic concern. The United Nations, the Bank for 
International Settlements, the OECD's FATF (Financial 
Action Task Force), the EU, the Council of Europe, the 
Organisation of American States, all published anti- 
money laundering standards. Regional groupings were 
formed (or are being established) in the Caribbean, Asia, 
Europe, southern Africa, western Africa, and Latin 
America. 



Money Laundering in the Wake of the September 11 
Attacks 

Regulation 

The least important trend is the tightening of financial 
regulations and the establishment or enhancement of 
compulsory (as opposed to industry or voluntary) 
regulatory and enforcement agencies. 

New legislation in the US which amounts to extending the 
powers of the CIA domestically and of the DOJ extra- 
territorially, was rather xenophobically described by a 
DOJ official, Michael Chertoff, as intended to "make sure 
the American banking system does not become a haven 
for foreign corrupt leaders or other kinds of foreign 
organized criminals." 

Privacy and bank secrecy laws have been watered down. 
Collaboration with off shore "shell" banks has been 
banned. Business with clients of correspondent banks was 
curtailed. Banks were effectively transformed into law 
enforcement agencies, responsible to verify both the 
identities of their (foreign) clients and the source and 
origin of their funds. Cash transactions were partly 
criminalized. And the securities and currency trading 
industry, insurance companies, and money transfer 
services are subjected to growing scrutiny as a conduit for 
"dirty cash". 

Still, such legislation is highly ineffective. The American 
Bankers' Association puts the cost of compliance with the 
laxer anti-money-laundering laws in force in 1998 at 10 
billion US dollars - or more than 10 million US dollars per 
obtained conviction. Even when the system does work, 



critical alerts drown in the torrent of reports mandated by 
the regulations. One bank actually reported a suspicious 
transaction in the account of one of the September 1 1 
hijackers - only to be ignored. 

The Treasury Department established Operation Green 
Quest, an investigative team charged with monitoring 
charities, NGOs, credit card fraud, cash smuggling, 
counterfeiting, and the Hawala networks. This is not 
without precedent. Previous teams tackled drug money, 
the biggest money laundering venue ever, BCCI (Bank of 
Credit and Commerce International), and ... Al Capone. 
The more veteran, New- York based, El-Dorado anti 
money laundering Task Force (established in 1992) will 
lend a hand and share information. 

More than 150 countries promised to co-operate with the 
US in its fight against the financing of terrorism - 81 of 
which (including the Bahamas, Argentina, Kuwait, 
Indonesia, Pakistan, Switzerland, and the EU) actually 
froze assets of suspicious individuals, suspected charities, 
and dubious firms, or passed new anti money laundering 
laws and stricter regulations (the Philippines, the UK, 
Germany). 

A EU directive now forces lawyers to disclose 
incriminating information about their clients' money 
laundering activities. Pakistan initiated a "loyalty 
scheme", awarding expatriates who prefer official bank 
channels to the much maligned (but cheaper and more 
efficient) Hawala , with extra baggage allowance and 
special treatment in airports. 

The magnitude of this international collaboration is 
unprecedented. But this burst of solidarity may yet fade. 



China, for instance, refuses to chime in. As a result, the 
statement issued by APEC in November 2001 on 
measures to stem the finances of terrorism was lukewarm 
at best. And, protestations of close collaboration to the 
contrary, Saudi Arabia has done nothing to combat money 
laundering "Islamic charities" (of which it is proud) on its 
territory. 

Still, a universal code is emerging, based on the work of 
the OECD's FATF (Financial Action Task Force) since 
1989 (its famous "40 recommendations") and on the 
relevant UN conventions. All countries are expected by 
the West, on pain of possible sanctions, to adopt a 
uniform legal platform (including reporting on suspicious 
transactions and freezing assets) and to apply it to all 
types of financial intermediaries, not only to banks. This 
is likely to result in... 

The Decline of off Shore Financial Centres and Tax 
Havens 

By far the most important outcome of this new-fangled 
juridical homogeneity is the acceleration of the decline of 
off shore financial and banking centres and tax havens. 
The distinction between off-shore and on-shore will 
vanish. Of the FATF's "name and shame" blacklist of 19 
"black holes" (poorly regulated territories, including 
Israel, Indonesia, and Russia) - 1 1 have substantially 
revamped their banking laws and financial regulators. 

Coupled with the tightening of US, UK, and EU laws and 
the wider interpretation of money laundering to include 
political corruption, bribery, and embezzlement - this 
would make life a lot more difficult for venal politicians 
and major tax evaders. The likes of Sani Abacha (late 



President of Nigeria), Ferdinand Marcos (late President of 
the Philippines), Vladimiro Montesinos (former, now 
standing trial, chief of the intelligence services of Peru), 
or Raul Salinas (the brother of Mexico's President) - 
would have found it impossible to loot their countries to 
the same disgraceful extent in today's financial 
environment. And Osama bin Laden would not have been 
able to wire funds to US accounts from the Sudanese Al 
Shamal Bank, the "correspondent" of 33 American banks. 

Quo Vadis, Money Laundering? 

Crime is resilient and fast adapting to new realities. 
Organized crime is in the process of establishing an 
alternative banking system, only tangentially connected to 
the West's, in the fringes, and by proxy. This is done by 
purchasing defunct banks or banking licences in territories 
with lax regulation, cash economies, corrupt politicians, 
no tax collection, but reasonable infrastructure. 

The countries of Eastern Europe - Yugoslavia 
(Montenegro and Serbia), Macedonia, Ukraine, Moldova, 
Belarus, Albania, to mention a few - are natural targets. In 
some cases, organized crime is so all-pervasive and local 
politicians so corrupt that the distinction between criminal 
and politician is spurious. 

Gradually, money laundering rings move their operations 
to these new, accommodating territories. The laundered 
funds are used to purchase assets in intentionally botched 
privatizations, real estate, existing businesses, and to 
finance trading operations. The wasteland that is Eastern 
Europe craves private capital and no questions are asked 
by investor and recipient alike. 



The next frontier is cyberspace. Internet banking, Internet 
gambling, day trading, foreign exchange cyber 
transactions, e-cash, e-commerce, fictitious invoicing of 
the launderer's genuine credit cards - hold the promise of 
the future. Impossible to track and monitor, ex-territorial, 
totally digital, amenable to identity theft and fake 
identities - this is the ideal vehicle for money launderers. 
This nascent platform is way too small to accommodate 
the enormous amounts of cash laundered daily - but in ten 
years time, it may. The problem is likely to be 
exacerbated by the introduction of smart cards, electronic 
purses, and payment-enabled mobile phones. 

In its "Report on Money Laundering Typologies" 
(February 2001) the FATF was able to document concrete 
and suspected abuses of online banking, Internet casinos, 
and web-based financial services. It is difficult to identify 
a customer and to get to know it in cyberspace, was the 
alarming conclusion. It is equally complicated to establish 
jurisdiction. 

Many capable professionals - stockbrokers, lawyers, 
accountants, traders, insurance brokers, real estate agents, 
sellers of high value items such as gold, diamonds, and art 
- are employed or co-opted by money laundering 
operations. Money launderers are likely to make increased 
use of global, around the clock, trading in foreign 
currencies and derivatives. These provide instantaneous 
transfer of funds and no audit trail. 

The underlying securities involved are susceptible to 
market manipulation and fraud. Complex insurance 
policies (with the "wrong" beneficiaries), and the 
securitization of receivables, leasing contracts, mortgages, 
and low grade bonds are already used in money 



laundering schemes. In general, money laundering goes 
well with risk arbitraging financial instruments. 

Trust-based, globe-spanning, money transfer systems 
based on authentication codes and generations of 
commercial relationships cemented in honour and blood - 
are another wave of the future. The Hawala and Chinese 
networks in Asia, the Black Market Peso Exchange 
(BMPE) in Latin America, other evolving courier systems 
in Eastern Europe (mainly in Russia, Ukraine, and 
Albania) and in Western Europe (mainly in France and 
Spain). 

In conjunction with encrypted e-mail and web 
anonymizers, these networks are virtually impenetrable. 
As emigration increases, diasporas established, and 
transport and telecommunications become ubiquitous, 
"ethnic banking" along the tradition of the Lombards and 
the Jews in medieval Europe may become the the 
preferred venue of money laundering. September 1 1 may 
have retarded world civilization in more than one way. 

Return 



Hawala, or 
The Bank that Never Was 



/. OVERVIEW 

In the wake of the September 1 1 terrorist attacks on the 
USA, attention was drawn to the age-old, secretive, and 
globe- spanning banking system developed in Asia and 
known as "Hawala" (to change, in Arabic). It is based on a 
short term, discountable, negotiable, promissory note (or 
bill of exchange) called "Hundi". While not limited to 
Moslems, it has come to be identified with "Islamic 
Banking". 

Islamic Law (Sharia'a) regulates commerce and finance in 
the Fiqh Al Mua'malat, (transactions amongst people). 
Modern Islamic banks are overseen by the Shari'a 
Supervisory Board of Islamic Banks and Institutions 
("The Shari'a Committee"). 

The Shi'a "Islamic Laws according to the Fatawa of 
Ayatullah al Uzama Syed Ali al-Husaini Seestani" has this 
to say about Hawala banking: 

"2298. If a debtor directs his creditor to collect his debt 
from the third person, and the creditor accepts the 
arrangement, the third person will, on completion of all 
the conditions to be explained later, become the debtor. 
Thereafter, the creditor cannot demand his debt from the 
first debtor. " 



The prophet Muhammad (a cross border trader of goods 
and commodities by profession) encouraged the free 
movement of goods and the development of markets. 
Numerous Moslem scholars railed against hoarding and 
harmful speculation (market cornering and manipulation 
known as "Gharar"). Moslems were the first to use 
promissory notes and assignment, or transfer of debts via 
bills of exchange ("Hawala"). Among modern banking 
instruments, only floating and, therefore, uncertain, 
interest payments ("Riba" and "Jahala"), futures contracts, 
and forfeiting are frowned upon. But agile Moslem traders 
easily and often circumvent these religious restrictions by 
creating "synthetic Murabaha (contracts)" identical to 
Western forward and futures contracts. Actually, the only 
allowed transfer or trading of debts (as distinct from the 
underlying commodities or goods) is under the Hawala. 

"Hawala" consists of transferring money (usually across 
borders and in order to avoid taxes or the need to bribe 
officials) without physical or electronic transfer of funds. 
Money changers ("Hawaladar") receive cash in one 
country, no questions asked. Correspondent hawaladars in 
another country dispense an identical amount (minus 
minimal fees and commissions) to a recipient or, less 
often, to a bank account. E-mail, or letter ("Hundi") 
carrying couriers are used to convey the necessary 
information (the amount of money, the date it has to be 
paid on) between Hawaladars. The sender provides the 
recipient with code words (or numbers, for instance the 
serial numbers of currency notes), a digital encrypted 
message, or agreed signals (like handshakes), to be used 
to retrieve the money. Big Hawaladars use a chain of 
middlemen in cities around the globe. 



But most Hawaladars are small businesses. Their Hawala 
activity is a sideline or moonlighting operation. "Chits" 
(verbal agreements) substitute for certain written records. 
In bigger operations there are human "memorizers" who 
serve as arbiters in case of dispute. The Hawala system 
requires unbounded trust. Hawaladars are often members 
of the same family, village, clan, or ethnic group. It is a 
system older than the West. The ancient Chinese had their 
own "Hawala" - "fei qian" (or "flying money"). Arab 
traders used it to avoid being robbed on the Silk Road. 
Cheating is punished by effective ex-communication and 
"loss of honour" - the equivalent of an economic death 
sentence. Physical violence is rarer but not unheard of. 
Violence sometimes also erupts between money recipients 
and robbers who are after the huge quantities of physical 
cash sloshing about the system. But these, too, are rare 
events, as rare as bank robberies. One result of this 
effective social regulation is that commodity traders in 
Asia shift hundreds of millions of US dollars per trade 
based solely on trust and the verbal commitment of their 
counterparts. 

Hawala arrangements are used to avoid customs duties, 
consumption taxes, and other trade-related levies. 
Suppliers provide importers with lower prices on their 
invoices, and get paid the difference via Hawala. 
Legitimate transactions and tax evasion constitute the bulk 
of Hawala operations. Modern Hawala networks emerged 
in the 1960's and 1970's to circumvent official bans on 
gold imports in Southeast Asia and to facilitate the 
transfer of hard earned wages of expatriates to their 
families ("home remittances") and their conversion at 
rates more favourable (often double) than the 
government's. Hawala provides a cheap (it costs c. 1% of 
the amount transferred), efficient, and frictionless 



alternative to morbid and corrupt domestic financial 
institutions. It is Western Union without the hi-tech gear 
and the exorbitant transfer fees. 

Unfortunately, these networks have been hijacked and 
compromised by drug traffickers (mainly in Afganistan 
and Pakistan), corrupt officials, secret services, money 
launderers, organized crime, and terrorists. Pakistani 
Hawala networks alone move up to 5 billion US dollars 
annually according to estimates by Pakistan's Minister of 
Finance, Shaukut Aziz. In 1999, Institutional Investor 
Magazine identified 1 100 money brokers in Pakistan and 
transactions that ran as high as 10 million US dollars 
apiece. As opposed to stereotypes, most Hawala networks 
are not controlled by Arabs, but by Indian and Pakistani 
expatriates and immigrants in the Gulf. The Hawala 
network in India has been brutally and ruthlessly 
demolished by Indira Ghandi (during the emergency 
regime imposed in 1975), but Indian nationals still play a 
big part in international Hawala networks. Similar 
networks in Sri Lanka, the Philippines, and Bangladesh 
have also been eradicated. 

The OECD's Financial Action Task Force (FATF) says 
that: 

"Hawala remains a significant method for large 
numbers of businesses of all sizes and individuals to 
repatriate funds and purchase gold.... It is favoured 
because it usually costs less than moving funds through 
the banking system, it operates 24 hours per day and 
every day of the year, it is virtually completely reliable, 
and there is minimal paperwork required. " 



(Organisation for Economic Co-Operation and 
Development (OECD), "Report on Money Laundering 
Typologies 1999-2000," Financial Action Task Force, 
FATF-XI, February 3, 2000, at 

http://www.oecd.ors/fatf/pdf/TY2000 en.pdf ) 

Hawala networks closely feed into Islamic banks 
throughout the world and to commodity trading in South 
Asia. There are more than 200 Islamic banks in the USA 
alone and many thousands in Europe, North and South 
Africa, Saudi Arabia, the Gulf states (especially in the free 
zone of Dubai and in Bahrain), Pakistan, Malaysia, 
Indonesia, and other South East Asian countries. By the 
end of 1998, the overt (read: tip of the iceberg) liabilities 
of these financial institutions amounted to 148 billion US 
dollars. They dabbled in equipment leasing, real estate 
leasing and development, corporate equity, and 
trade/structured trade and commodities financing (usually 
in consortia called "Mudaraba"). 

While previously confined to the Arab peninsula and to 
south and east Asia, this mode of traditional banking 
became truly international in the 1970's, following the 
unprecedented flow of wealth to many Moslem nations 
due to the oil shocks and the emergence of the Asian 
tigers. Islamic banks joined forces with corporations, 
multinationals, and banks in the West to finance oil 
exploration and drilling, mining, and agribusiness. Many 
leading law firms in the West (such as Norton Rose, 
Freshfields, Clyde and Co. and Clifford Chance) have 
"Islamic Finance" teams which are familiar with Islam- 
compatible commercial contracts. 



//. HAWALA AND TERRORISM 

Recent anti-terrorist legislation in the US and the UK 
allows government agencies to regularly supervise and 
inspect businesses that are suspected of being a front for 
the "Hawala" banking system, makes it a crime to 
smuggle more than $10,000 in cash across USA borders, 
and empowers the Treasury secretary (and its Financial 
Crimes Enforcement Network - FinCEN) to tighten 
record-keeping and reporting rules for banks and financial 
institutions based in the USA. A new inter-agency Foreign 
Terrorist Asset Tracking Center (FT AT) was set up. A 
1993 moribund proposed law requiring US-based 
Halawadar to register and to report suspicious transactions 
may be revived. These relatively radical measures reflect 
the belief that the al-Qaida network of Osama bin Laden 
uses the Hawala system to raise and move funds across 
national borders. A Hawaladar in Pakistan (Dihab Shill) 
was identified as the financier in the attacks on the 
American embassies in Kenya and Tanzania in 1998. 

But the USA is not the only country to face terrorism 
financed by Hawala networks. 

In mid-2001, the Delhi police, the Indian government's 
Enforcement Directorate (ED), and the Military 
Intelligence (MI) arrested six Jammu Kashmir Islamic 
Front (JKIF) terrorists. The arrests led to the exposure of 
an enormous web of Hawala institutions in Delhi, aided 
and abetted, some say, by the ISI (Inter Services 
Intelligence, Pakistan's security services). The Hawala 
network was used to funnel money to terrorist groups in 
the disputed Kashmir Valley. 



Luckily, the common perception that Hawala financing is 
paperless is wrong. The transfer of information regarding 
the funds often leaves digital (though heavily encrypted) 
trails. Couriers and "contract memorizers", gold dealers, 
commodity merchants, transporters, and moneylenders 
can be apprehended and interrogated. Written, physical, 
letters are still the favourite mode of communication 
among small and medium Hawaladars, who also 
invariably resort to extremely detailed single entry 
bookkeeping. And the sudden appearance and 
disappearance of funds in bank accounts still have to be 
explained. Moreover, the sheer scale of the amounts 
involved entails the collaboration of off shore banks and 
more established financial institutions in the West. Such 
flows of funds affect the local money markets in Asia and 
are instantaneously reflected in interest rates charged to 
frequent borrowers, such as wholesalers. Spending and 
consumption patterns change discernibly after such 
influxes. Most of the money ends up in prime world banks 
behind flimsy business facades. Hackers in Germany 
claimed (without providing proof) to have infiltrated 
Hawala- related bank accounts. 

The problem is that banks and financial institutions - and 
not only in dodgy offshore havens ("black holes" in the 
lingo) - clam up and refuse to divulge information about 
their clients. Banking is largely a matter of fragile trust 
between bank and customer and tight secrecy. Bankers are 
reluctant to undermine either. Banks use mainframe 
computers which can rarely be hacked through cyberspace 
and can be compromised only physically in close co- 
operation with insiders. The shadier the bank - the more 
formidable its digital defenses. The use of numbered 
accounts (outlawed in Austria, for instance, only recently) 
and pseudonyms (still possible in Lichtenstein) 



complicates matters. Bin Laden's accounts are unlikely to 
bear his name. He has collaborators. 

Hawala networks are often used to launder money, or to 
evade taxes. Even when employed for legitimate 
purposes, to diversify the risk involved in the transfer of 
large sums, Hawaladars apply techniques borrowed from 
money laundering. Deposits are fragmented and wired to 
hundreds of banks the world over ("starburst"). 
Sometimes, the money ends up in the account of origin 
("boomerang"). 

Hence the focus on payment clearing and settlement 
systems. Most countries have only one such system, the 
repository of data regarding all banking (and most non- 
banking) transactions in the country. Yet, even this is a 
partial solution. Most national systems maintain records 
for 6-12 months, private settlement and clearing systems 
for even less. 

Yet, the crux of the problem is not the Hawala or the 
Hawaladars. The corrupt and inept governments of Asia 
are to blame for not regulating their banking systems, for 
over-regulating everything else, for not fostering 
competition, for throwing public money at bad debts and 
at worse borrowers, for over- taxing, for robbing people of 
their life savings through capital controls, for tearing at 
the delicate fabric of trust between customer and bank 
(Pakistan, for instance, froze all foreign exchange 
accounts two years ago). Perhaps if Asia had reasonably 
expedient, reasonably priced, reasonably regulated, user- 
friendly banks - Osama bin Laden would have found it 
impossible to finance his mischief so invisibly. 

Return 



Straf- Corruption in 
Central and Eastern Europe 



The three policemen barked "straf", "straf" in unison. It 
was a Russianized version of the German word for "fine" 
and a euphemism for bribe. I and my fiancee were 
stranded in an empty ally at the heart of Moscow, 
physically encircled by these young bullies, an ominous 
propinquity. They held my passport ransom and began to 
drag me to a police station nearby. We paid. 

To do the fashionable thing and to hold the moral high 
ground is rare. Yet, denouncing corruption and fighting it 
satisfies both conditions. Such hectoring is usually the 
preserve of well-heeled bureaucrats, driving utility 
vehicles and banging away at wireless laptops. The 
General Manager of the IMF makes 400,000 US dollars a 
year, tax-free, and perks. This is the equivalent of 2,300 
(!) monthly salaries of a civil servant in Macedonia - or 
7,000 monthly salaries of a teacher or a doctor in 
Yugoslavia, Moldova, Belarus, or Albania. He flies only 
first class and each one of his air tickets is worth the bi- 
annual income of a Macedonian factory worker. His 
shareholders - among them poor and developing countries 
- are forced to cough up these exorbitant fees and to 
finance the luxurious lifestyle of the likes of Kohler and 
Wolfensohn. And then they are made to listen to the IMF 
lecture them on belt tightening and how uncompetitive 
their economies are due to their expensive labour force. 
To me, such a double standard is the epitome of 



corruption. Organizations such as the IMF and World 
Bank will never be possessed of a shred of moral 
authority in these parts of the world unless and until they 
forgo their conspicuous consumption. 

Yet, corruption is not a monolithic practice. Nor are its 
outcomes universally deplorable or damaging. One would 
do best to adopt a utilitarian and discerning approach to it. 
The advent of moral relativism has taught us that "right" 
and "wrong" are flexible, context dependent and culture- 
sensitive yardsticks. 

What amounts to venality in one culture (Slovenia) is 
considered no more than gregariousness or hospitality in 
another (Macedonia). 

Moreover, corruption is often "imported" by 
multinationals, foreign investors, and expats. It is 
introduced by them to all levels of governments, often in 
order to expedite matters or secure a beneficial outcome. 
To eradicate corruption, one must tackle both giver and 
taker. 

Thus, we are better off asking "cui bono" than "is it the 
right thing to do". Phenomenologically, "corruption" is a 
common - and misleading - label for a group of 
behaviours. One of the following criteria must apply: 

(a) The withholding of a service, information, or goods 
that, by law, and by right, should have been provided or 
divulged. 

To have a phone installed in Russia one must openly bribe 
the installer (according to a rather rigid tariff). In many of 
the former republics of Yugoslavia, it is impossible to 



obtain statistics or other data (the salaries of senior public 
officeholders, for instance) without resorting to kickbacks. 

(b) The provision of a service, information, or goods that, 
by law, and by right, should not have been provided or 
divulged. 

Tenders in the Czech Republic are often won through 
bribery. The botched privatizations all over the former 
Eastern Bloc constitute a massive transfer of wealth to 
select members of a nomenklatura. Licences and 
concessions are often granted in Bulgaria and the rest of 
the Balkan as means of securing political allegiance or 
paying off old political "debts". 

(c) That the withholding or the provision of said service, 
information, or goods are in the power of the withholder 
or the provider to withhold or to provide AND That the 
withholding or the provision of said service, information, 
or goods constitute an integral and substantial part of the 
authority or the function of the withholder or the provider. 

The post-communist countries in transition are a 
dichotomous lot. On the one hand, they are intensely and 
stiflingly bureaucratic. On the other hand, none of the 
institutions functions properly or lawfully. While these 
countries are LEGALISTIC - they are never LAWFUL. 
This fuzziness allows officials in all ranks to usurp 
authority, to trade favours, to forge illegal consensus and 
to dodge criticism and accountability. There is a direct 
line between lack of transparency and venality. Eran 
Fraenkel of Search for Common Ground in Macedonia 
has coined the phrase "ambient corruption" to capture this 
complex of features. 



(d) That the service, information, or goods that are 
provided or divulged are provided or divulged against a 
benefit or the promise of a benefit from the recipient and 
as a result of the receipt of this specific benefit or the 
promise to receive such benefit. 

It is wrong to assume that corruption is necessarily, or 
even mostly, monetary or pecuniary. Corruption is built 
on mutual expectations. The reasonable expectation of a 
future benefit is, in itself, a benefit. Access, influence 
peddling, property rights, exclusivity, licences, permits, a 
job, a recommendation - all constitute benefits. 

(e) That the service, information, or goods that are 
withheld are withheld because no benefit was provided or 
promised by the recipient. 

Even then, in CEE, we can distinguish between a few 
types of corrupt and venal behaviours in accordance with 
their OUTCOMES (utilities): 

(1) Income Supplement 

Corrupt actions whose sole outcome is the supplementing 
of the income of the provider without affecting the "real 
world" in any manner. 

Though the perception of corruption itself is a negative 
outcome - it is so only when corruption does not 
constitute an acceptable and normative part of the playing 
field. When corruption becomes institutionalised - it also 
becomes predictable and is easily and seamlessly 
incorporated into decision making processes of all 
economic players and moral agents. They develop "by- 
passes" and "techniques" which allow them to restore an 



efficient market equilibrium. In a way, all-pervasive 
corruption is transparent and, thus, a form of taxation. 

This is the most common form of corruption exercised by 
low and mid-ranking civil servants, party hacks and 
municipal politicians throughout the CEE. 

More than avarice, the motivating force here is sheer 
survival. The acts of corruption are repetitive, structured 
and in strict accordance with an un- written tariff and code 
of conduct. 

(2) Acceleration Fees 

Corrupt practices whose sole outcome is to 
ACCELERATE decision making, the provision of goods 
and services or the divulging of information. None of the 
outcomes or the utility functions are altered. Only the 
speed of the economic dynamics is altered. This kind of 
corruption is actually economically BENEFICIAL. It is a 
limited transfer of wealth (or tax) which increases 
efficiency. This is not to say that bureaucracies and venal 
officialdoms, over-regulation and intrusive political 
involvement in the workings of the marketplace are good 
(efficient) things. They are not. But if the choice is 
between a slow, obstructive and passive-aggressive civil 
service and a more forthcoming and accommodating one 
(the result of bribery) - the latter is preferable. 

Acceleration fees are collected mostly by mid-ranking 
bureaucrats and middle rung decision makers in both the 
political echelons and the civil service. 



(3) Decision Altering Fees 

This is where the line is crossed from the point of view of 
aggregate utility. When bribes and promises of bribes 
actually alter outcomes in the real world - a less than 
optimal allocation of resources and distribution of means 
of production is obtained. The result is a fall in the general 
level of production. The many is hurt by the few. The 
economy is skewed and economic outcomes are distorted. 
This kind of corruption should be uprooted on utilitarian 
grounds as well as on moral ones. 

(4) Subversive Outcomes 

Some corrupt collusions lead to the subversion of the flow 
of information within a society or an economic unit. 
Wrong information often leads to disastrous outcomes. 
Consider a medical doctor or an civil engineer who bribed 
their way into obtaining a professional diploma. 

Human lives are at stake. The wrong information, in this 
case is the professional validity of the diplomas granted 
and the scholarship (knowledge) that such certificates 
stand for. But the outcomes are lost lives. This kind of 
corruption, of course, is by far the most damaging. 

Unfortunately, it is widespread in CEE. It is proof of the 
collapse of the social treaty, of social solidarity and of the 
fraying of the social fabric. 

No Western country accepts CEE diplomas without 
further accreditation, studies and examinations. Many 
"medical doctors" and "engineers" who emigrated to 
Israel from Russia and the former republics of the USSR - 
were suspiciously deficient professionally. Israel was 



forced to re-educate them prior to granting them a licence 
to practice locally. 

(5) Reallocation Fees 

Benefits paid (mainly to politicians and political decision 
makers) in order to affect the allocation of economic 
resources and material wealth or the rights thereto. 
Concessions, licences, permits, assets privatised, tenders 
awarded are all subject to reallocation fees. Here the 
damage is materially enormous (and visible) but, because 
it is widespread, it is "diluted" in individual terms. Still, it 
is often irreversible (like when a sold asset is purposefully 
under- valued) and pernicious, a factory sold to avaricious 
and criminally minded managers is likely to collapse and 
leave its workers unemployed. 

Corruption pervades daily life even in the prim and often 
hectoring countries of the West. It is a win- win game (as 
far as Game Theory goes) - hence its attraction. We are all 
corrupt to varying degrees. But it is wrong and wasteful - 
really, counterproductive - to fight corruption in CEE in a 
wide front and indiscriminately. It is the kind of 
corruption whose evil outcomes outweigh its benefits that 
should be fought. This fine (and blurred) distinction is too 
often lost on decision makers and law enforcement 
agencies in both East and West. 

ERADICATING CORRUPTION 

An effective program to eradicate corruption must include 
the following elements: 

1 . Egregiously corrupt, high-profile, public figures, 
multinationals, and institutions (domestic and 



foreign) must be singled out for harsh (legal) 
treatment and thus demonstrate that no one is 
above the law and that crime does not pay. 

2. All international aid, credits, and investments must 
be conditioned upon a clear, performance-based, 
plan to reduce corruption levels and intensity. 
Such a plan should be monitored and revised as 
needed. Corruption retards development and 
produces instability by undermining the 
credentials of democracy, state institutions, and 
the political class. Reduced corruption is, 
therefore, a major target of economic and 
institutional developmental. 

3. Corruption cannot be reduced only by punitive 
measures. A system of incentives to avoid 
corruption must be established. Such incentives 
should include a higher pay, the fostering of civic 
pride, educational campaigns, "good behaviour" 
bonuses, alternative income and pension plans, 
and so on. 

4. Opportunities to be corrupt should be minimized 
by liberalizing and deregulating the economy. Red 
tape should be minimized, licensing abolished, 
international trade freed, capital controls 
eliminated, competition introduced, monopolies 
broken, transparent public tendering be made 
mandatory, freedom of information enshrined, the 
media should be directly supported by the 
international community, and so on. Deregulation 
should be a developmental target integral to every 
program of international aid, investment, or credit 
provision. 



5. Corruption is a symptom of systemic institutional 
failure. Corruption guarantees efficiency and 
favourable outcomes. The strengthening of 
institutions is of critical importance. The police, 
the customs, the courts, the government, its 
agencies, the tax authorities, the state owned 
media - all must be subjected to a massive 
overhaul. Such a process may require foreign 
management and supervision for a limited period 
of time. It most probably would entail the 
replacement of most of the current - irredeemably 
corrupt - personnel. It would need to be open to 
public scrutiny. 

6. Corruption is a symptom of an all-pervasive sense 
of helplessness. The citizen (or investor, or firm) 
feels dwarfed by the overwhelming and capricious 
powers of the state. It is through corruption and 
venality that the balance is restored. To minimize 
this imbalance, potential participants in corrupt 
dealings must be made to feel that they are real 
and effective stakeholders in their societies. A 
process of public debate coupled with 
transparency and the establishment of just 
distributive mechanisms will go a long way 
towards rendering corruption obsolete. 

Return 



The Kleptocracies of 
Eastern and Central Europe 



The process of transition from communism to capitalism 
was largely hijacked either by outright criminals in 
budding outfits of organized crime - or by pernicious and 
all-pervasive kleptocracies: politicians and political 
parties bent on looting the state and suppressing the 
opposition, sometimes fatally. 

In the past 16 years, industrial production in the 
economies in transition tumbled in real terms by more 
than 60 percent. The monthly salary in the poorer bits 
equals the daily wage of a skilled German industrial 
worker, or one seventh the European Union's average. 
Gross domestic product per capita is less than one third 
the EU's. Infrastructure, internal and export markets, state 
institutions - all crumbled with dizzying speed. 

In some countries - not the least Russia - privatization 
amounted to a mass transfer of assets to cronies and 
insiders, often well-connected members of the communist 
nomenclature: managers, members of the security services 
and other penumbral figures. Laws were passed and 
institutions tweaked to reflect the special interests of these 
groupings. 

"Classical" forms of crime flourished throughout the 
benighted region. Prostitution, gambling, drugs, 
smuggling, kidnapping, organ trafficking and other 
varieties of delinquency yielded to their perpetrators 
billions of dollars annually. In the impoverished 



economies of the east, these fantastic revenues - laundered 
through off shore accounts - were leveraged by criminals 
to garner political favors, to buy into legitimate businesses 
and to infiltrate civil society. 

None of this is new to Western publics. Rogues and 
"robber barons" have always doubled as entrepreneurs. 
The oil, gaming and railways industries in America, for 
instance, owe their existence to dubious personas and 
questionable practices. Well into the 17th century, the 
British sovereign maintained a monopoly on chartering 
businesses and awarded the coveted licenses to loyal 
servants and obsequious sycophants. 

Still, the ubiquity of crime in east Europe and its reach are 
unprecedented in European annals. In the void-like 
interregnum between centrally planned and free market 
economies only criminals, politicians, managers, and 
employees of the security services were positioned to 
benefit from the upheaval. 

At the outset of transition, the underworld constituted an 
embryonic private sector, replete with international 
networks of contacts, cross-border experience, capital 
agglomeration and wealth formation, sources of venture 
(risk) capital, an entrepreneurial spirit, and a diversified 
portfolio of investments and revenue generating assets. 
Criminals were used to private sector practices: price 
signals, competition, joint venturing, and third party 
dispute settlement. 

Crime - alone among all economic activities in communist 
societies - obeyed the laws of the free market. Criminals 
had to be entrepreneurial and profitable to survive. Their 



instincts sharpened by - often lethal - competition, they 
were never corrupted by central planning. 

Deprived of access to state largesse, criminals invested 
their own capital in efficiently-run small to medium size 
enterprises. Attuned to the needs and wishes of their 
customers, criminals engaged in primitive forms of 
market research, through neighborhood and grassroots 
"pollsters" and "activists". They responded with agility 
and in real time to changes in the patterns of supply and 
demand by altering their product mix and their pricing. 
They have always been pioneers of bleeding-edge 
technologies. 

Criminals are effective organizers and managers. They 
excel at enforcing workplace discipline with irresistible 
incentives and irreversible disincentives, at setting targets 
and at networking. The superior felonious echelons are 
upwardly mobile and have a clear career path. Every 
management fad - from territorially exclusive franchises 
to "stock" options - has been invented by criminals long 
before they triumphed in the boardroom. 

In east Europe, criminals on all levels, from the organized 
to the petty, often substituted for the dysfunctional, or 
ideologically hidebound organs of the state. Consider the 
dispensation of justice. The criminal code of conduct and 
court system replaced the compromised and lethargic 
official judiciary. Debt collectors and enforcers stood in 
for venal and incompetent police forces. 

Crime is a growth industry and sustains hordes of 
professionals: accountants and lawyers, forgers and cross 
border guides, weapons experts and bankers, mechanics 
and hit-men. Expertise, know-how and acumen, amassed 



over centuries of practice, are taught in the criminal 
universities known as penitentiaries: roads less traveled, 
countries more lenient, passports to be bought, sold, or 
forged, how-to manuals, goods and services on offer and 
demand. 

Profit margins in crime are outlandish and lead to feverish 
wealth accumulation. The banking system is used both to 
stash the proceeds and to launder them. Tax havens, off 
shore financial institutions and money couriers - all form 
part of a global web. Thus cleansed and rendered 
untraceable, the money is invested in legitimate activities. 
In some countries - especially on the drug path, or on the 
trail of white slavery - crime is a major engine of 
economic growth. 

As opposed to the visible sectors of the east's demonetized 
economies, criminal enterprises never run out of liquidity 
and thus are always keen to invest. Moreover, crime is 
international and cosmopolitan. It is accustomed to 
sophisticated export-import transactions. 

Many criminals - as opposed to the vast majority of their 
countrymen - are polyglot, well-traveled, aware of world 
prices, the international financial system and demand and 
supply in various markets. They are experienced 
negotiators. In short: criminals are well-heeled 
international businessmen, well-connected both abroad 
and with the various indigenous elites. 

The Wild East in Europe is often compared to the Wild 
West in America a century or so ago. The Russian 
oligarchs, goes the soothing analogy, are local versions of 
Morgan, Rockefeller, Pullman and Vanderbilt. But this 
affinity is spurious, the United States always had a civic 



culture with civic values and an aspiration to, ultimately, 
create a harmonious and benevolent civic society. 
Criminality was regarded as a shameful stepping stone on 
the way to an orderly community of learned, civilized, 
law-abiding citizens. 

This cannot be said about Russia, for instance. The 
criminal there is, if anything, admired and emulated. Even 
the language of legal business in countries in transition is 
suffused with underworld parlance. There is no - and 
never was - a civic tradition in the countries of eastern 
Europe, a Bill of Rights, a veritable Constitution, a 
modicum of self rule, a true abolition of classes and 
nomenclatures. These territories are accustomed to being 
governed by paranoiac and murderous tyrants akin to the 
current crop of delinquents. That some criminals are 
members of the new political, financial and industrial 
elites (and vice versa) - tends to support this long-rooted 
association. 

In all the countries of the region, politicians and managers 
abuse the state and its simulacrum institutions in close 
symbiosis with felons. Patronage and sinecures extend to 
collaborating lawbreakers. Veritable villains gain access 
to state owned assets and resources in a cycle of money 
laundering. Law enforcement agencies and the courts are 
"encouraged" to turn a blind eye, or even to help criminals 
eliminate internal and external competition in their turf. 

Criminals, in return, serve as the "long and anonymous 
arm" of politicians, obtaining for them illicit goods, or 
providing "black" services. Corruption often flows 
through criminal channels or via the mediation and 
conduit of delinquents. Within the shared sphere of the 
informal economy, assets are shifted among these 



economic players. Both players oppose attempts at reform 
and transparency and encourage - even engender - 
nationalism and racism, paranoias and grievances to 
recruit foot soldiers. 

Fortunately, there is the irrepressible urge to become 
legitimate. Politicians, who grope for a new ideological 
cover for their opportunism, partner with legitimacy- 
seeking, established crime lords. Both groups benefit from 
a swelling economic pie. They fight against other, less 
successful, criminals, who wish to persist in their old 
ways and, thus, hamper economic growth. The battle is 
never won but at least it succeeds to firmly drive crime 
where it belongs: underground. 

Return 



FIMACO - Russia's Missing Billions 



Russia's Audit Chamber - with the help of the Swiss 
authorities and their host of dedicated investigators - may 
be about to solve a long standing mystery. An 
announcement by the Prosecutor's General Office is said 
to be imminent. The highest echelons of the Yeltsin 
entourage - perhaps even Yeltsin himself - may be 
implicated - or exonerated. A Russian team has been 
spending the better part of the last two months poring over 
documents and interviewing witnesses in Switzerland, 
France, Italy, and other European countries. 

About $4.8 billion of IMF funds are alleged to have gone 
amiss during the implosion of the Russian financial 
markets in August 1998. They were supposed to prop up 
the banking system (especially SB S -Agro) and the ailing 
and sharply devalued ruble. Instead, they ended up in the 
bank accounts of obscure corporations - and, then, 
incredibly, vanished into thin air. 

The person in charge of the funds in 1998 was none other 
than Mikhail Kasyanov, Russia's current Prime Minister - 
at the time, Deputy Minister of Finance for External Debt. 
His signature on all foreign exchange transactions - even 
those handled by the central bank - was mandatory. In 
July 2000, he was flatly accused by the Italian daily, La 
Reppublica, of authorizing the diversion of the disputed 
funds. 



Following public charges made by US Treasury Secretary 
Robert Rubin as early as March 1999, both Russian and 
American media delved deeply over the years into the 
affair. Communist Duma Deputy Viktor Ilyukhin jumped 
on the bandwagon citing an obscure "trustworthy foreign 
source" to substantiate his indictment of Kremlin cronies 
and oligarchs contained in an open letter to the Prosecutor 
General, Yuri Skuratov. 

The money trail from the Federal Reserve Bank of New 
York to Swiss and German subsidiaries of the Russian 
central Bank was comprehensively reconstructed. Still, 
the former Chairman of the central bank, Sergei Dubinin, 
called Ilyukhin's allegations and the ensuing Swiss 
investigations - "a black PR campaign ... a lie". 

Others pointed to an outlandish coincidence: the ruble 
collapsed twice in Russia's post-Communist annals. Once, 
in 1994, when Dubinin was Minister of Finance and was 
forced to resign. The second time was in 1998, when 
Dubinin was governor of the central bank and was, again, 
ousted. 

Dubinin himself seems to be unable to make up his mind. 
In one interview he says that IMF funds were used to prop 
up the ruble - in others, that they went into "the national 
pot" (i.e., the Ministry of Finance, to cover a budgetary 
shortfall). 

The Chairman of the Federation Council at the time, 
Yegor Stroev, appointed an investigative committee in 
1999. Its report remains classified but Stroev confirmed 
that IMF funds were embezzled in the wake of the 1998 
forced devaluation of the ruble. 



This conclusion was weakly disowned by Eleonora 
Mitrofanova, an auditor within the Duma's Audit 
Chamber who said that they discovered nothing "strictly 
illegal" - though, incongruously, she accused the central 
bank of suppressing the Chamber's damning report. The 
Chairman of the Chamber of Accounts, Khachim 
Karmokov, quoted by PwC, said that "the audits 
performed by the Chamber revealed no serious procedural 
breaches in the bank's performance". 

But Nikolai Gonchar, a Duma Deputy and member of its 
Budget Committee, came close to branding both as liars 
when he said that he read a copy of the Audit Chamber 
report and that it found that central bank funds were 
siphoned off to commercial accounts in foreign banks. 

The Moscow Times cited a second Audit Chamber report 
which revealed that the central bank was simultaneously 
selling dollars for rubles and extending ruble loans to a 
few well-connected commercial banks, thus subsidizing 
their dollar purchases. The central bank went as far as 
printing rubles to fuel this lucrative arbitrage. The dollars 
came from IMF disbursements. 

Radio Free Europe/Radio Liberty, based on its own 
sources and an article in the Russian weekly "Novaya 
Gazeta", claims that half the money was almost instantly 
diverted to shell companies in Sydney and London. The 
other half was mostly transferred to the Bank of New 
York and to Credit Suisse. 

Why were additional IMF funds transferred to a chaotic 
Russia, despite warnings by many and a testimony by a 
Russian official that previous tranches were squandered? 
Moreover, why was the money sent to the Central Bank, 



then embroiled in a growing scandal over the 
manipulation of treasury bills, known as GKO's and other 
debt instruments, the OFZ's - and not to the Ministry of 
Finance, the beneficiary of all prior transfers? The central 
bank did act as MinFin's agent - but circumstances were 
unusual, to say the least. 

There isn't enough to connect the IMF funds with the 
money laundering affair that engulfed the Bank of New 
York a year later to the day, in August 1999 - though 
several of the personalities straddled the divide between 
the bank and its clients. Swiss efforts to establish a firm 
linkage failed as did their attempt to implicate several 
banks in the Italian canton of Ticino. The Swiss - in 
collaboration with half a dozen national investigation 
bureaus, including the FBI - were more successful in Italy 
proper, where they were able to apprehend a few dozen 
suspects in an elaborate undercover operation. 

FIMACO's name emerged rather early in the swirl of 
rumors and denials. At the IMF's behest, 
PricewaterhouseCoopers (PwC) was commissioned by 
Russia's central bank to investigate the relationship 
between the Russian central bank and its Channel Islands 
offshoot, Financial Management Company Limited, 
immediately when the accusations surfaced. 

Skuratov unearthed $50 billion in transfers of the nation's 
hard currency reserves from the central bank to FIMACO, 
which was majority-owned by Eurobank, the central 
bank's Paris-based daughter company. According to PwC, 
Eurobank was 23 percent owned by "Russian companies 
and private individuals". 



Dubinin and his successor, Gerashchenko, admit that 
FIMACO was used to conceal Russia's assets from its 
unrelenting creditors, notably the Geneva-based Mr. 
Nessim Gaon, whose companies sued Russia for $600 
million. Gaon succeeded to freeze Russian accounts in 
Switzerland and Luxemburg in 1993. PwC alerted the 
IMF to this pernicious practice, but to no avail. 

Moreover, FIMACO paid exorbitant management fees to 
self-liquidating entities, used funds to fuel the speculative 
GKO market, disbursed non-reported profits from its 
activities, through "trust companies", to Russian subjects, 
such as schools, hospitals, and charities - and, in general, 
transformed itself into a mammoth slush fund and source 
of patronage. Russia admitted to lying to the IMF in 1996. 
It misstated its reserves by $1 billion. 

Some of the money probably financed the fantastic 
salaries of Dubinin and his senior functionaries. He earned 
$240,000 in 1997 - when the average annual salary in 
Russia was less than $2000 and when Alan Greenspan, 
Chairman of the Federal Reserve of the USA, earned 
barely half as much. 

Former Minister of Finance, Boris Fedorov, asked the 
governor of the central bank and the prime minister in 
1993 to disclose how were the country's foreign exchange 
reserves being invested. He was told to mind his own 
business. To Radio Free Europe/Radio Liberty he said, six 
years later, that various central bank schemes were set up 
to "allow friends to earn handsome profits ... They 
allowed friends to make profits because when companies 
are created without any risk, and billions of dollars are 
transferred, somebody takes a (quite big) commission ... a 
minimum of tens of millions of dollars. The question is: 



Who received these commissions? Was this money 
repatriated to the country in the form of dividends?" 

Dubinin's vehement denials of FIMACO's involvement in 
the GKO market are disingenuous. Close to half of all 
foreign investment in the money- spinning market for 
Russian domestic bonds were placed through FIMACO's 
nominal parent company, Eurobank and, possibly, through 
its subsidiary, co-owned with FIMACO, Eurofinance 
Bank. 

Nor is Dubinin more credible when he denies that profits 
and commissions were accrued in FIMACO and then 
drained off. FIMACO's investment management 
agreement with Eurobank, signed in 1993, entitled it to 
0.06 percent of the managed funds per quarter. 

Even accepting the central banker's ludicrous insistence 
that the balance never exceeded $1.4 billion - FIMACO 
would have earned $3.5 million per annum from 
management fees alone - investment profits and brokerage 
fees notwithstanding. Even Eurobank's president at the 
time, Andrei Movchan, conceded that FIMACO earned 
$1.7 million in management fees. 

The IMF insisted that the PwC reports exonerated all the 
participants. It is, therefore, surprising and alarming to 
find that the online copies of these documents, previously 
made available on the IMF's Web site, were "Removed 
September 30, 1999 at the request of 
PricewaterhouseCoopers" . 

The cover of the main report carried a disclaimer that it 
was based on procedures dictated by the central bank and 
"...consequently, we (PwC) make no representation 



regarding the sufficiency of the procedures described 
below ... The report is based solely on financial and other 
information provided by, and discussions with, the 
persons set out in the report. The accuracy and 
completeness of the information on which the report is 
based is the sole responsibility of those persons. ... 
PricewaterhouseCoopers have not carried out any 
verification work which may be construed to represent 
audit procedures ... We have not been provided access to 
Ost West Handelsbank (the recipient of a large part of the 
$4.8 IMF tranche)." 

The scandal may have hastened the untimely departure of 
the IMF's Managing Director at the time, Michel 
Camdessus, though this was never officially 
acknowledged. The US Congress was reluctant to 
augment the Fund's resources in view of its controversial 
handling of the Asian and Russian crises and contagion. 

This reluctance persisted well into the new millennium. A 
congressional delegation, headed by James Leach (R, 
Iowa), Chairman of the Banking and Financial Services 
Committee, visited Russia in April 2000, accompanied by 
the FBI, to investigate the persistent contentions about the 
misappropriation of IMF funds. 

Camdessus himself went out of his way to defend his 
record and reacted in an unprecedented manner to the 
allegations. In a letter to Le Mond, dated August 18, 1999 
- and still posted on the IMF's Web site, three years later - 
he wrote, inadvertently admitting to serious 
mismanagement: 

"I wish to express my indignation at the false statements, 
allegations, and insinuations contained in the articles and 



editorial commentary appearing in Le Monde on August 
6, 8, and 9 on the content of the PricewaterhouseCoopers 
(PWC) audit report relating to the operations of the 
Central Bank of Russia and its subsidiary, FIMACO. 

Your readers will be shocked to learn that the report in 
question, requested and made public at the initiative of the 
IMF ... (concludes that) no misuse of funds has been 
proven, and the report does not criticize the IMF's 
behavior ... I would also point out that your representation 
of the IMF's knowledge and actions is misleading. We did 
know that part of the reserves of the Central Bank of 
Russia was held in foreign subsidiaries, which is not an 
illegal practice; however, we did not learn of FIMACO's 
activities until this year— because the audit reports for 
1993 and 1994 were not provided to us by the Central 
Bank of Russia. 

The IMF, when apprised of the possible range of 
FIMACO activities, informed the Russian authorities that 
it would not resume lending to Russia until a report on 
these activities was available for review by the IMF and 
corrective actions had been agreed as needed ... I would 
add that what the IMF objected to in FIMACO's 
operations extends well beyond the misrepresentation of 
Russia's international reserves in mid- 1996 and includes 
several other instances where transactions through it had 
resulted in a misleading representation of the reserves and 
of monetary and exchange policies. These include loans to 
Russian commercial banks and investments in the GKO 
market." 

No one accepted - or accepts - the IMF's convoluted post- 
facto "clarifications" at face value. Nor was Dubinin's 
tortured sophistry - IMF funds cease to be IMF funds 



when they are transferred from the Ministry of Finance to 
the central bank - countenanced. 

Even the compromised office of the Russian Prosecutor- 
General urged Russian officials, as late as July 2000, to 
re-open the investigation regarding the diversion of the 
funds. The IMF dismissed this sudden burst of rectitude as 
the rehashing of old stories. But Western officials - 
interviews by Radio Free Europe/Radio Liberty - begged 
to differ. 

Yuri Skuratov, the former Prosecutor-General, ousted for 
undue diligence, wrote in a book he published two years 
ago, that only c. $500 million of the $4.8 were ever used 
to stabilize the ruble. Even George Bush Jr., when still a 
presidential candidate accused Russia's former Prime 
Minister Viktor Chernomyrdin of complicity in 
embezzling IMF funds. Chernomyrdin threatened to sue. 

The rot may run even deeper. The Geneva daily "Le 
Temps", which has been following the affair relentlessly, 
accused, two years ago, Roman Abramovich, a Yeltsin- 
era oligarch and a member of the board of directors of 
Sibneft, of colluding with Runicom, Sibneft's trading arm, 
to misappropriate IMF funds. Swiss prosecutors raided 
Runicom's offices just one day after Russian Tax Police 
raided Sibneft's Moscow headquarters. 

Absconding with IMF funds seemed to have been a 
pattern of behavior during Yeltsin's venal regime. The 
columnist Bradley Cook recounts how Aldrich Ames, the 
mole within the CIA, "was told by his Russian control 
officer during their last meeting, in November 1993, that 
the $130,000 in fresh $100 bills that he was being bribed 
with had come directly from IMF loans." Venyamin 



Sokolov, who headed the Audit Chamber prior to Sergei 
Stepashin, informed the US Senate of $2 billion that 
evaporated from the coffers of the central bank in 1995. 

Even the IMF reluctantly admits: 

"Capital transferred abroad from Russia may represent 
such legal activities as exports, or illegal sources. But it is 
impossible to determine whether specific capital flows 
from Russia-legal or illegal-come from a particular 
inflow, such as IMF loans or export earnings. To put the 
scale of IMF lending to Russia into perspective, Russia's 
exports of goods and services averaged about $80 billion a 
year in recent years, which is over 25 times the average 
annual disbursement from the IMF since 1992." 

DISCLAIMER 

Sam Vaknin served in various senior capacities in Mr. 
Gaon 's firms and advises governments in their 
negotiations with the IMF. 

Return 



The Enrons of the East 



Hermitage Capital Management, an international 
investment firm owned by HSBC London, is suing PwC 
(PricewaterhouseCoopers), the biggest among the big four 
accounting firms (Andersen, the fifth, is being 
cannibalized by its competitors). 

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

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

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



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

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

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

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

Andrei Sharonov, deputy minister in the federal Ministry 
of Economics said, in an interview he granted "Business 
Week" last February: "Auditors have been working on 



behalf of management rather than shareholders." In a 
series of outlandish ads, published in Russian business 
dailies in late February, senior partners in the PwC 
Moscow office made this incredible statement: "(Audit) 
does not represent a review of each transaction, or a 
qualitative assessment of a company's performance." 

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

PwC should know. When it mentioned suspicious heavily 
discounted sales of oil to Rosneft in a 1998 audit report, 
its client, Purneftegaz, replaced it with Arthur Andersen. 
The dubious deals dutifully vanished from the audit 
reports, though they continue apace. Andersen claims 
such transactions do not require disclosure under Russian 
law. 

How times change! Throughout the 1990's, Russia and its 
nascent private sector were subjected to self-righteous 
harangues from visiting Big Five accountants. The 
hectoring targeted the lack of good governance among 
Russia's corporations and public administration alike. 
Hordes of pampered speakers and consultants espoused 
transparent accounting, minority shareholders' rights, 
management accessibility and accountability and other 
noble goals. 

That was before Enron. The tables have turned. The Big 
Five - from disintegrating Andersen to KPMG - are being 



chastised and fined for negligent practices, flagrant 
conflicts of interests, misrepresentation, questionable 
ethics and worse. Their worldwide clout, moral authority, 
and professional standing have been considerably dented. 

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

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

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



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

Many Russian managers - as avaricious and venal as ever 
- now can justify hiring malleable and puny local auditors 
instead of big international or domestic ones. 
Surgutneftegaz - with $2 billion net profit last year and 
on-going dispute with its shareholders about dividends - 
wants to sack "Rosexperitza", a respectable Russian 
accountancy, and hire 'Aval", a little known accounting 
outfit. Aval does not even make it to the list of 200 largest 
accounting firms in Russia, according to Renaissance 
Capital, an investment bank. 

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

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



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

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

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

Return 



The Typology of Financial Scandals, Asset 
Bubbles, and Ponzi (Pyramid) Schemes 



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 (also known as 
"Ponzi scheme", after a notorious swindler) 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 (Ponzi) 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: 

1 . That they could draw their money anytime that 
they want to, and 

2. That in the meantime, they will be able to continue 
to receive high returns on their money. 



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 money generated in the 
"black economy", namely: the income not reported to the 
tax authorities. Such capital 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. 

I. Overview 

Also published by United Press International (UPI) 

The recent implosion of the global equity markets - from 
Hong Kong to New York - engendered yet another round 
of the semipternal debate: should central banks 
contemplate abrupt adjustments in the prices of assets - 
such as stocks or real estate - as they do changes in the 
consumer price indices? Are asset bubbles indeed 
inflationary and their bursting deflationary? 

Central bankers counter that it is hard to tell a bubble until 
it bursts and that market intervention bring about that 
which it is intended to prevent. There is insufficient 
historical data, they reprimand errant scholars who insist 
otherwise. This is disingenuous. Ponzi and pyramid 
schemes have been a fixture of Western civilization at 
least since the middle Renaissance. 

Assets tend to accumulate in "asset stocks". Residences 
built in the 19th century still serve their purpose today. 
The quantity of new assets created at any given period is, 
inevitably, negligible compared to the stock of the same 
class of assets accumulated over decades and, sometimes, 
centuries. This is why the prices of assets are not anchored 



- they are only loosely connected to their production costs 
or even to their replacement value. 

Asset bubbles are not the exclusive domain of stock 
exchanges and shares. "Real" assets include land and the 
property built on it, machinery, and other tangibles. 
"Financial" assets include anything that stores value and 
can serve as means of exchange - from cash to securities. 
Even tulip bulbs will do. 

In 1634, in what later came to be known as "tulipmania", 
tulip bulbs were traded in a special marketplace in 
Amsterdam, the scene of a rabid speculative frenzy. Some 
rare black tulip bulbs changed hands for the price of a big 
mansion house. For four feverish years it seemed like the 
craze would last forever. But the bubble burst in 1637. In 
a matter of a few days, the price of tulip bulbs was slashed 
by 96%! 

Uniquely, tulipmania was not an organized scam with an 
identifiable group of movers and shakers, which 
controlled and directed it. Nor has anyone made explicit 
promises to investors regarding guaranteed future profits. 
The hysteria was evenly distributed and fed on itself. 
Subsequent investment fiddles were different, though. 

Modern dodges entangle a large number of victims. Their 
size and all-pervasiveness sometimes threaten the national 
economy and the very fabric of society and incur grave 
political and social costs. 

There are two types of bubbles. 

Asset bubbles of the first type are run or fanned by 
financial intermediaries such as banks or brokerage 



houses. They consist of "pumping" the price of an asset or 
an asset class. The assets concerned can be shares, 
currencies, other securities and financial instruments - or 
even savings accounts. To promise unearthly yields on 
one's savings is to artificially inflate the "price", or the 
"value" of one's savings account. 

More than one fifth of the population of 1983 Israel were 
involved in a banking scandal of Albanian proportions. It 
was a classic pyramid scheme. All the banks, bar one, 
promised to gullible investors ever increasing returns on 
the banks' own publicly-traded shares. 

These explicit and incredible promises were included in 
prospectuses of the banks' public offerings and won the 
implicit acquiescence and collaboration of successive 
Israeli governments. The banks used deposits, their 
capital, retained earnings and funds illegally borrowed 
through shady offshore subsidiaries to try to keep their 
impossible and unhealthy promises. Everyone knew what 
was going on and everyone was involved. It lasted 7 
years. The prices of some shares increased by 1-2 percent 
daily. 

On October 6, 1983, the entire banking sector of Israel 
crumbled. Faced with ominously mounting civil unrest, 
the government was forced to compensate shareholders. It 
offered them an elaborate share buyback plan over 9 
years. The cost of this plan was pegged at $6 billion - 
almost 15 percent of Israel's annual GDP. The indirect 
damage remains unknown. 

Avaricious and susceptible investors are lured into 
investment swindles by the promise of impossibly high 
profits or interest payments. The organizers use the money 



entrusted to them by new investors to pay off the old ones 
and thus establish a credible reputation. Charles Ponzi 
perpetrated many such schemes in 1919-1925 in Boston 
and later the Florida real estate market in the USA. Hence 
a "Ponzi scheme". 

In Macedonia, a savings bank named TAT collapsed in 
1997, erasing the economy of an entire major city, Bitola. 
After much wrangling and recriminations - many 
politicians seem to have benefited from the scam - the 
government, faced with elections in September, has 
recently decided, in defiance of IMF diktats, to offer 
meager compensation to the afflicted savers. TAT was 
only one of a few similar cases. Similar scandals took 
place in Russia and Bulgaria in the 1990's. 

One third of the impoverished population of Albania was 
cast into destitution by the collapse of a series of nation- 
wide leveraged investment plans in 1997. Inept political 
and financial crisis management led Albania to the verge 
of disintegration and a civil war. Rioters invaded police 
stations and army barracks and expropriated hundreds of 
thousands of weapons. 

Islam forbids its adherents to charge interest on money 
lent - as does Judaism. To circumvent this onerous decree, 
entrepreneurs and religious figures in Egypt and in 
Pakistan established "Islamic banks". These institutions 
pay no interest on deposits, nor do they demand interest 
from borrowers. Instead, depositors are made partners in 
the banks' - largely fictitious - profits. Clients are charged 
for - no less fictitious - losses. A few Islamic banks were 
in the habit of offering vertiginously high "profits". They 
went the way of other, less pious, pyramid schemes. They 



melted down and dragged economies and political 
establishments with them. 

By definition, pyramid schemes are doomed to failure. 
The number of new "investors" - and the new money they 
make available to the pyramid's organizers - is limited. 
When the funds run out and the old investors can no 
longer be paid, panic ensues. In a classic "run on the 
bank", everyone attempts to draw his money 
simultaneously. Even healthy banks - a distant relative of 
pyramid schemes - cannot cope with such stampedes. 
Some of the money is invested long-term, or lent. Few 
financial institutions keep more than 10 percent of their 
deposits in liquid on-call reserves. 

Studies repeatedly demonstrated that investors in pyramid 
schemes realize their dubious nature and stand forewarned 
by the collapse of other contemporaneous scams. But they 
are swayed by recurrent promises that they could draw 
their money at will ("liquidity") and, in the meantime, 
receive alluring returns on it ("capital gains", "interest 
payments", "profits"). 

People know that they are likelier to lose all or part of 
their money as time passes. But they convince themselves 
that they can outwit the organizers of the pyramid, that 
their withdrawals of profits or interest payments prior to 
the inevitable collapse will more than amply compensate 
them for the loss of their money. Many believe that they 
will succeed to accurately time the extraction of their 
original investment based on - mostly useless and 
superstitious - "warning signs". 

While the speculative rash lasts, a host of pundits, 
analysts, and scholars aim to justify it. The "new 



economy" is exempt from "old rules and archaic modes of 
thinking". Productivity has surged and established a 
steeper, but sustainable, trend line. Information 
technology is as revolutionary as electricity. No, more 
than electricity. Stock valuations are reasonable. The Dow 
is on its way to 33,000. People want to believe these 
"objective, disinterested analyses" from "experts". 

Investments by households are only one of the engines of 
this first kind of asset bubbles. A lot of the money that 
pours into pyramid schemes and stock exchange booms is 
laundered, the fruits of illicit pursuits. The laundering of 
tax-evaded money or the proceeds of criminal activities, 
mainly drugs, is effected through regular banking 
channels. The money changes ownership a few times to 
obscure its trail and the identities of the true owners. 

Many offshore banks manage shady investment ploys. 
They maintain two sets of books. The "public" or 
"cooked" set is made available to the authorities - the tax 
administration, bank supervision, deposit insurance, law 
enforcement agencies, and securities and exchange 
commission. The true record is kept in the second, 
inaccessible, set of files. 

This second set of accounts reflects reality: who deposited 
how much, when and subject to which conditions - and 
who borrowed what, when and subject to what terms. 
These arrangements are so stealthy and convoluted that 
sometimes even the shareholders of the bank lose track of 
its activities and misapprehend its real situation. 
Unscrupulous management and staff sometimes take 
advantage of the situation. Embezzlement, abuse of 
authority, mysterious trades, misuse of funds are more 
widespread than acknowledged. 



The thunderous disintegration of the Bank for Credit and 
Commerce International (BCCI) in London in 1991 
revealed that, for the better part of a decade, the 
executives and employees of this penumbral institution 
were busy stealing and misappropriating $10 billion. The 
Bank of England's supervision department failed to spot 
the rot on time. Depositors were - partially - compensated 
by the main shareholder of the bank, an Arab sheikh. The 
story repeated itself with Nick Leeson and his 
unauthorized disastrous trades which brought down the 
venerable and veteran Barings Bank in 1995. 

The combination of black money, shoddy financial 
controls, shady bank accounts and shredded documents 
renders a true account of the cash flows and damages in 
such cases all but impossible. There is no telling what 
were the contributions of drug barons, American off-shore 
corporations, or European and Japanese tax-evaders - 
channeled precisely through such institutions - to the 
stratospheric rise in Wall-Street in the last few years. 

But there is another - potentially the most pernicious - 
type of asset bubble. When financial institutions lend to 
the unworthy but the politically well-connected, to 
cronies, and family members of influential politicians - 
they often end up fostering a bubble. South Korean 
chaebols, Japanese keiretsu, as well as American 
conglomerates frequently used these cheap funds to prop 
up their stock or to invest in real estate, driving prices up 
in both markets artificially. 

Moreover, despite decades of bitter experiences - from 
Mexico in 1982 to Asia in 1997 and Russia in 1998 - 
financial institutions still bow to fads and fashions. They 
act herd-like in conformity with "lending trends". They 



shift assets to garner the highest yields in the shortest 
possible period of time. In this respect, they are not very 
different from investors in pyramid investment schemes. 



II. Case Study - The Savings and Loans Associations 
Bailout 

Also published by United Press International (UPI) 

Asset bubbles - in the stock exchange, in the real estate or 
the commodity markets - invariably burst and often lead 
to banking crises. One such calamity struck the USA in 
1986-1989. It is instructive to study the decisive reaction 
of the administration and Congress alike. They tackled 
both the ensuing liquidity crunch and the structural flaws 
exposed by the crisis with tenacity and skill. Compare this 
to the lackluster and hesitant tentativeness of the current 
lot. True, the crisis - the result of a speculative bubble - 
concerned the banking and real estate markets rather than 
the capital markets. But the similarities are there. 

The savings and loans association, or the thrift, was a 
strange banking hybrid, very much akin to the building 
society in Britain. It was allowed to take in deposits but 
was really merely a mortgage bank. The Depository 
Institutions Deregulation and Monetary Control Act of 
1980 forced S&L's to achieve interest parity with 
commercial banks, thus eliminating the interest ceiling on 
deposits which they enjoyed hitherto. 

But it still allowed them only very limited entry into 
commercial and consumer lending and trust services. 
Thus, these institutions were heavily exposed to the 
vicissitudes of the residential real estate markets in their 



respective regions. Every normal cyclical slump in 
property values or regional economic shock - e.g., a 
plunge in commodity prices - affected them 
disproportionately. 

Interest rate volatility created a mismatch between the 
assets of these associations and their liabilities. The 
negative spread between their cost of funds and the yield 
of their assets - eroded their operating margins. The 1982 
Garn-St. Germain Depository Institutions Act encouraged 
thrifts to convert from mutual - i.e., depositor-owned - 
associations to stock companies, allowing them to tap the 
capital markets in order to enhance their faltering net 
worth. 

But this was too little and too late. The S&L's were 
rendered unable to further support the price of real estate 
by rolling over old credits, refinancing residential equity, 
and underwriting development projects. Endemic 
corruption and mismanagement exacerbated the ruin. The 
bubble burst. 

Hundreds of thousands of depositors scrambled to 
withdraw their funds and hundreds of savings and loans 
association (out of a total of more than 3,000) became 
insolvent instantly, unable to pay their depositors. They 
were besieged by angry - at times, violent - clients who 
lost their life savings. 

The illiquidity spread like fire. As institutions closed their 
gates, one by one, they left in their wake major financial 
upheavals, wrecked businesses and homeowners, and 
devastated communities. At one point, the contagion 
threatened the stability of the entire banking system. 



The Federal Savings and Loans Insurance Corporation 
(FSLIC) - which insured the deposits in the savings and 
loans associations - was no longer able to meet the claims 
and, effectively, went bankrupt. Though the obligations of 
the FSLIC were never guaranteed by the Treasury, it was 
widely perceived to be an arm of the federal government. 
The public was shocked. The crisis acquired a political 
dimension. 

A hasty $300 billion bailout package was arranged to 
inject liquidity into the shriveling system through a 
special agency, the FHFB. The supervision of the banks 
was subtracted from the Federal Reserve. The role of the 
Federal Deposit Insurance Corporation (FDIC) was 
greatly expanded. 

Prior to 1989, savings and loans were insured by the now- 
defunct FSLIC. The FDIC insured only banks. Congress 
had to eliminate FSLIC and place the insurance of thrifts 
under FDIC. The FDIC kept the Bank Insurance Fund 
(BIF) separate from the Savings Associations Insurance 
Fund (SAIF), to confine the ripple effect of the meltdown. 

The FDIC is designed to be independent. Its money comes 
from premiums and earnings of the two insurance funds, 
not from Congressional appropriations. Its board of 
directors has full authority to run the agency. The board 
obeys the law, not political masters. The FDIC has a 
preemptive role. It regulates banks and savings and loans 
with the aim of avoiding insurance claims by depositors. 

When an institution becomes unsound, the FDIC can 
either shore it up with loans or take it over. If it does the 
latter, it can run it and then sell it as a going concern, or 
close it, pay off the depositors and try to collect the loans. 



At times, the FDIC ends up owning collateral and trying 
to sell it. 

Another outcome of the scandal was the Resolution Trust 
Corporation (RTC). Many savings and loans were treated 
as "special risk" and placed under the jurisdiction of the 
RTC until August 1992. The RTC operated and sold these 
institutions - or paid off the depositors and closed them. A 
new government corporation (Resolution Fund 
Corporation, RefCorp) issued federally guaranteed bailout 
bonds whose proceeds were used to finance the RTC until 
1996. 

The Office of Thrift Supervision (OTS) was also 
established in 1989 to replace the dismantled Federal 
Home Loan Board (FHLB) in supervising savings and 
loans. OTS is a unit within the Treasury Department, but 
law and custom make it practically an independent 
agency. 

The Federal Housing Finance Board (FHFB) regulates the 
savings establishments for liquidity. It provides lines of 
credit from twelve regional Federal Home Loan Banks 
(FHLB). Those banks and the thrifts make up the Federal 
Home Loan Bank System (FHLBS). FHFB gets its funds 
from the System and is independent of supervision by the 
executive branch. 

Thus a clear, streamlined, and powerful regulatory 
mechanism was put in place. Banks and savings and loans 
abused the confusing overlaps in authority and regulation 
among numerous government agencies. Not one regulator 
possessed a full and truthful picture. Following the 
reforms, it all became clearer: insurance was the FDIC's 



job, the OTS provided supervision, and liquidity was 
monitored and imparted by the FHLB. 

Healthy thrifts were coaxed and cajoled to purchase less 
sturdy ones. This weakened their balance sheets 
considerably and the government reneged on its promises 
to allow them to amortize the goodwill element of the 
purchase over 40 years. Still, there were 2,898 thrifts in 
1989. Six years later, their number shrank to 1,612 and it 
stands now at less than 1,000. The consolidated 
institutions are bigger, stronger, and better capitalized. 

Later on, Congress demanded that thrifts obtain a bank 
charter by 1998. This was not too onerous for most of 
them. At the height of the crisis the ratio of their 
combined equity to their combined assets was less than 
1%. But in 1994 it reached almost 10% and remained 
there ever since. 

This remarkable turnaround was the result of serendipity 
as much as careful planning. Interest rate spreads became 
highly positive. In a classic arbitrage, savings and loans 
paid low interest on deposits and invested the money in 
high yielding government and corporate bonds. The 
prolonged equity bull market allowed thrifts to float new 
stock at exorbitant prices. 

As the juridical relics of the Great Depression - chiefly 
amongst them, the Glass- Steagall Act - were repealed, 
banks were liberated to enter new markets, offer new 
financial instruments, and spread throughout the USA. 
Product and geographical diversification led to enhanced 
financial health. 



But the very fact that S&L's were poised to exploit these 
opportunities is a tribute to politicians and regulators alike 
- though except for setting the general tone of urgency and 
resolution, the relative absence of political intervention in 
the handling of the crisis is notable. It was managed by 
the autonomous, able, utterly professional, largely a- 
political Federal Reserve. The political class provided the 
professionals with the tools they needed to do the job. 
This mode of collaboration may well be the most 
important lesson of this crisis. 

III. Case Study - Wall Street, October 1929 

Also published by United Press International (UPI) 

Claud Cockburn, writing for the "Times of London" from 
New- York, described the irrational exuberance that 
gripped the nation just prior to the Great Depression. As 
Europe wallowed in post-war malaise, America seemed to 
have discovered a new economy, the secret of 
uninterrupted growth and prosperity, the fount of 
transforming technology: 

"The atmosphere of the great boom was savagely exciting, 
but there were times when a person with my European 
background felt alarmingly lonely. He would have liked to 
believe, as these people believed, in the eternal upswing 
of the big bull market or else to meet just one person with 
whom he might discuss some general doubts without 
being regarded as an imbecile or a person of deliberately 
evil intent - some kind of anarchist, perhaps." 

The greatest analysts with the most impeccable credentials 
and track records failed to predict the forthcoming crash 
and the unprecedented economic depression that followed 



it. Irving Fisher, a preeminent economist, who, according 
to his biographer- son, Irving Norton Fisher, lost the 
equivalent of $140 million in today's money in the crash, 
made a series of soothing predictions. On October 22 he 
uttered these avuncular statements: "Quotations have not 
caught up with real values as yet ... (There is) no cause for 
a slump ... The market has not been inflated but merely 
readjusted..." 

Even as the market convulsed on Black Thursday, 
October 24, 1929 and on Black Tuesday, October 29 - the 
New York Times wrote: "Rally at close cheers brokers, 
bankers optimistic". 

In an editorial on October 26, it blasted rabid speculators 
and compliant analysts: "We shall hear considerably less 
in the future of those newly invented conceptions of 
finance which revised the principles of political economy 
with a view solely to fitting the stock market's vagaries." 
But it ended thus: "(The Federal Reserve has) insured the 
soundness of the business situation when the speculative 
markets went on the rocks." 

Compare this to Alan Greenspan Congressional testimony 
this summer: "While bubbles that burst are scarcely 
benign, the consequences need not be catastrophic for the 
economy ... (The Depression was brought on by) ensuing 
failures of policy." 

Investors, their equity leveraged with bank and broker 
loans, crowded into stocks of exciting "new technologies", 
such as the radio and mass electrification. The bull market 
- especially in issues of public utilities - was fueled by 
"mergers, new groupings, combinations and good 



earnings" and by corporate purchasing for "employee 
stock funds". 

Cautionary voices - such as Paul Warburg, the influential 
banker, Roger Babson, the "Prophet of Loss" and 
Alexander Noyes, the eternal Cassandra from the New 
York Times - were derided. The number of brokerage 
accounts doubled between March 1927 and March 1929. 

When the market corrected by 8 percent between March 
18-27 - following a Fed induced credit crunch and a series 
of mysterious closed-door sessions of the Fed's board - 
bankers rushed in. The New York Times reported: 
"Responsible bankers agree that stocks should now be 
supported, having reached a level that makes them 
attractive." By August, the market was up 35 percent on 
its March lows. But it reached a peak on September 3 and 
it was downhill since then. 

On October 19, five days before "Black Thursday", 
Business Week published this sanguine prognosis: 

"Now, of course, the crucial weaknesses of such periods - 
price inflation, heavy inventories, over-extension of 
commercial credit - are totally absent. The security market 
seems to be suffering only an attack of stock indigestion... 
There is additional reassurance in the fact that, should 
business show any further signs of fatigue, the banking 
system is in a good position now to administer any needed 
credit tonic from its excellent Reserve supply." 

The crash unfolded gradually. Black Thursday actually 
ended with an inspiring rally. Friday and Saturday - 
trading ceased only on Sundays - witnessed an upswing 
followed by mild profit taking. The market dropped 12.8 



percent on Monday, with Winston Churchill watching 
from the visitors' gallery - incurring a loss of $10-14 
billion. 

The Wall Street Journal warned naive investors: 

"Many are looking for technical corrective reactions from 
time to time, but do not expect these to disturb the upward 
trend for any prolonged period." 

The market plummeted another 1 1.7 percent the next day 
- though trading ended with an impressive rally from the 
lows. October 3 1 was a good day with a "vigorous, 
buoyant rally from bell to bell". Even Rockefeller joined 
the myriad buyers. Shares soared. It seemed that the worst 
was over. 

The New York Times was optimistic: 

"It is thought that stocks will become stabilized at their 
actual worth levels, some higher and some lower than the 
present ones, and that the selling prices will be guided in 
the immediate future by the worth of each particular 
security, based on its dividend record, earnings ability and 
prospects. Little is heard in Wall Street these days about 
'putting stocks up." 

But it was not long before irate customers began blaming 
their stupendous losses on advice they received from their 
brokers. Alec Wilder, a songwriter in New York in 1929, 
interviewed by Stud Terkel in "Hard Times" four decades 
later, described this typical exchange with his money 
manager: 



"I knew something was terribly wrong because I heard 
bellboys, everybody, talking about the stock market. 
About six weeks before the Wall Street Crash, I persuaded 
my mother in Rochester to let me talk to our family 
adviser. I wanted to sell stock which had been left me by 
my father. He got very sentimental: 'Oh your father 
wouldn't have liked you to do that.' He was so persuasive, 
I said O.K. I could have sold it for $160,000. Four years 
later, I sold it for $4,000." 

Exhausted and numb from days of hectic trading and back 
office operations, the brokerage houses pressured the 
stock exchange to declare a two day trading holiday. 
Exchanges around North America followed suit. 

At first, the Fed refused to reduce the discount rate. 
"(There) was no change in financial conditions which the 
board thought called for its action." - though it did inject 
liquidity into the money market by purchasing 
government bonds. Then, it partially succumbed and 
reduced the New York discount rate, which, curiously, 
was 1 percent above the other Fed districts - by 1 percent. 
This was too little and too late. The market never 
recovered after November 1 . Despite further reductions in 
the discount rate to 4 percent, it shed a whopping 89 
percent in nominal terms when it hit bottom three years 
later. 

Everyone was duped. The rich were impoverished 
overnight. Small time margin traders - the forerunners of 
today's day traders - lost their shirts and much else 
besides. The New York Times: 

"Yesterday's market crash was one which largely affected 
rich men, institutions, investment trusts and others who 



participate in the market on a broad and intelligent scale. 
It was not the margin traders who were caught in the rush 
to sell, but the rich men of the country who are able to 
swing blocks of 5,000, 10,000, up to 100,000 shares of 
high-priced stocks. They went overboard with no more 
consideration than the little trader who was swept out on 
the first day of the market's upheaval, whose prices, even 
at their lowest of last Thursday, now look high by 
comparison ... To most of those who have been in the 
market it is all the more awe-inspiring because their 
financial history is limited to bull markets." 

Overseas - mainly European - selling was an important 
factor. Some conspiracy theorists, such as Webster 
Tarpley in his "British Financial Warfare", supported by 
contemporary reporting by the likes of "The Economist", 
went as far as writing: 

"When this Wall Street Bubble had reached gargantuan 
proportions in the autumn of 1929, (Lord) Montagu 
Norman (governor of the Bank of England 1920-1944) 
sharply (upped) the British bank rate, repatriating British 
hot money, and pulling the rug out from under the Wall 
Street speculators, thus deliberately and consciously 
imploding the US markets. This caused a violent 
depression in the United States and some other countries, 
with the collapse of financial markets and the contraction 
of production and employment. In 1929, Norman 
engineered a collapse by puncturing the bubble." 

The crash was, in large part, a reaction to a sharp reversal, 
starting in 1928, of the reflationary, "cheap money", 
policies of the Fed intended, as Adolph Miller of the Fed's 
Board of Governors told a Senate committee, "to bring 
down money rates, the call rate among them, because of 



the international importance the call rate had come to 
acquire. The purpose was to start an outflow of gold - to 
reverse the previous inflow of gold into this country (back 
to Britain)." But the Fed had already lost control of the 
speculative rush. 

The crash of 1929 was not without its Enrons and 
World. corn's. Clarence Hatry and his associates admitted 
to forging the accounts of their investment group to show 
a fake net worth of $24 million British pounds - rather 
than the true picture of 19 billion in liabilities. This led to 
forced liquidation of Wall Street positions by harried 
British financiers. 

The collapse of Middle West Utilities, run by the energy 
tycoon, Samuel Insull, exposed a web of offshore holding 
companies whose only purpose was to hide losses and 
disguise leverage. The former president of NYSE, Richard 
Whitney was arrested for larceny. 

Analysts and commentators thought of the stock exchange 
as decoupled from the real economy. Only one tenth of 
the population was invested - compared to 40 percent 
today. "The World" wrote, with more than a bit of 
Schadenfreude: "The country has not suffered a 
catastrophe ... The American people ... has been gambling 
largely with the surplus of its astonishing prosperity." 

"The Daily News" concurred: "The sagging of the stocks 
has not destroyed a single factory, wiped out a single farm 
or city lot or real estate development, decreased the 
productive powers of a single workman or machine in the 
United States." In Louisville, the "Herald Post" 
commented sagely: "While Wall Street was getting rid of 
its weak holder to their own most drastic punishment, 



grain was stronger. That will go to the credit side of the 
national prosperity and help replace that buying power 
which some fear has been gravely impaired." 

During the Coolidge presidency, according to the 
Encyclopedia Britannica, "stock dividends rose by 108 
percent, corporate profits by 76 percent, and wages by 33 
percent. In 1929, 4,455,100 passenger cars were sold by 
American factories, one for every 27 members of the 
population, a record that was not broken until 1950. 
Productivity was the key to America's economic growth. 
Because of improvements in technology, overall labour 
costs declined by nearly 10 percent, even though the 
wages of individual workers rose." 

Jude Waninski adds in his tome "The Way the World 
Works" that "between 1921 and 1929, GNP grew to 
$103.1 billion from $69.6 billion. And because prices 
were falling, real output increased even faster." Tax rates 
were sharply reduced. 

John Kenneth Galbraith noted these data in his seminal 
"The Great Crash": 

"Between 1925 and 1929, the number of manufacturing 
establishments increased from 183,900 to 206,700; the 
value of their output rose from $60.8 billions to $68 
billions. The Federal Reserve index of industrial 
production which had averaged only 67 in 1921 ... had 
risen to 1 10 by July 1928, and it reached 126 in June 1929 
... (but the American people) were also displaying an 
inordinate desire to get rich quickly with a minimum of 
physical effort." 



Personal borrowing for consumption peaked in 1928 - 
though the administration, unlike today, maintained twin 
fiscal and current account surpluses and the USA was a 
large net creditor. Charles Kettering, head of the research 
division of General Motors described consumeritis thus, 
just days before the crash: "The key to economic 
prosperity is the organized creation of dissatisfaction." 

Inequality skyrocketed. While output per man-hour shot 
up by 32 percent between 1923 and 1929, wages crept up 
only 8 percent. In 1929, the top 0.1 percent of the 
population earned as much as the bottom 42 percent. 
Business-friendly administrations reduced by 70 percent 
the exorbitant taxes paid by those with an income of more 
than $1 million. But in the summer of 1929, businesses 
reported sharp increases in inventories. It was the 
beginning of the end. 

Were stocks overvalued prior to the crash? Did all stocks 
collapse indiscriminately? Not so. Even at the height of 
the panic, investors remained conscious of real values. On 
November 3, 1929 the shares of American Can, General 
Electric, Westinghouse and Anaconda Copper were still 
substantially higher than on March 3, 1928. 

John Campbell and Robert Shiller, author of "Irrational 
Exuberance", calculated, in a joint paper titled "Valuation 
Ratios and the Lon-Run Market Outlook: An Update" 
posted on Yale University' s Web Site, that share prices 
divided by a moving average of 10 years worth of 
earnings reached 28 just prior to the crash. Contrast this 
with 45 on March 2000. 

In an NBER working paper published December 2001 and 
tellingly titled "The Stock Market Crash of 1929 - Irving 



Fisher was Right", Ellen McGrattan and Edward Prescott 
boldly claim: "We find that the stock market in 1929 did 
not crash because the market was overvalued. In fact, the 
evidence strongly suggests that stocks were undervalued, 
even at their 1929 peak." 

According to their detailed paper, stocks were trading at 
19 times after- tax corporate earning at the peak in 1929, a 
fraction of today's valuations even after the recent 
correction. A March 1999 "Economic Letter" published 
by the Federal Reserve Bank of San-Francisco 
wholeheartedly concurs. It notes that at the peak, prices 
stood at 30.5 times the dividend yield, only slightly above 
the long term average. 

Contrast this with an article published in June 1990 issue 
of the "Journal of Economic History" by Robert Barsky 
and Bradford De Long and titled "Bull and Bear Markets 
in the Twentieth Century": 

"Major bull and bear markets were driven by shifts in 
assessments of fundamentals: investors had little 
knowledge of crucial factors, in particular the long run 
dividend growth rate, and their changing expectations of 
average dividend growth plausibly lie behind the major 
swings of this century." 

Jude Waninski attributes the crash to the disintegration of 
the pro-free-trade coalition in the Senate which later led to 
the notorious Smoot-Hawley Tariff Act of 1930. He traces 
all the important moves in the market between March 
1929 and June 1930 to the intricate protectionist danse 
macabre in Congress. 



This argument may never be decided. Is a similar crash on 
the cards? This cannot be ruled out. The 1990's resembled 
the 1920's in more than one way. Are we ready for a 
recurrence of 1929? About as we were prepared in 1928. 
Human nature - the prime mover behind market 
meltdowns - seemed not to have changed that much in 
these intervening seven decades. 

Will a stock market crash, should it happen, be followed 
by another "Great Depression"? It depends which kind of 
crash. The short term puncturing of a temporary bubble - 
e.g., in 1962 and 1987 - is usually divorced from other 
economic fundamentals. But a major correction to a 
lasting bull market invariably leads to recession or worse. 

As the economist Hernan Cortes Douglas reminds us in 
"The Collapse of Wall Street and the Lessons of History" 
published by the Friedberg Mercantile Group, this was the 
sequence in London in 1720 (the infamous "South Sea 
Bubble"), and in the USA in 1835-40 and 1929-32. 

IV. Britain's Real Estate 

Also published by United Press International (UPI) 

The five ghastly "Jack the Ripper" murders took place in 
an area less than a quarter square mile in size. Houses in 
this haunting and decrepit no man's land straddling the 
City and metropolitan London could be had for 25-50,000 
British pounds as late as a decade ago. How things 
change! 

The general buoyancy in real estate prices in the capital 
coupled with the adjacent Spitalfields urban renewal 
project have lifted prices. A house not 50 yards from the 



scene of the Ripper's last - and most ghoulish - slaying 
now sells for over 1 million pounds. In central London, 
one bedroom apartments retail for an outlandish half a 
million. 

According to research published in September 2002 by 
Halifax, the UK's largest mortgage lender, the number of 
1 million pound homes sold has doubled in 1999-2002 to 
2600. By 2002, it has increased elevenfold since 1995. 
According to The Economist's house price index, prices 
rose by a further 15.6% in 2003, 10.2% in 2004 and a 
whopping 147% in total since 1997. In Greater London, 
one in every 90 homes fetches even a higher price. The 
average UK house now costs 100,000 pounds. In the 
USA, the ratios of house prices to rents and to median 
income are at historic highs. 

One is reminded of the Japanese boast, at the height of 
their realty bubble, that the grounds of the royal palace in 
Tokyo are worth more than the entire real estate of 
Manhattan. Is Britain headed the same way? 

A house - much like a Big Mac - is a basket of raw 
materials, goods, and services. But, unlike the Big Mac - 
and the purchasing power index it spawned - houses are 
also investment vehicles and stores of value. They yield 
often tax exempt capital gains, rental income, or benefits 
from occupying them (rent payments saved). Real estate is 
used to hedge against inflation, save for old age, and 
speculate. Prices of residential and commercial property 
reflect scarcity, investment fads, and changing moods. 

Homeowners in both the UK and the USA - spurred on by 
aggressive marketing and the lowest interest rates in 30 
years - have been refinancing old, more expensive, 



mortgages and heavily borrowing against their "equity" - 
i.e., against the meteoric rise in the market prices of their 
abodes. 

According to the Milken Institute in Los Angeles, asset 
bubbles tend to both enhance and cannibalize each other. 
Profits from surging tradable securities are used to buy 
property and drive up its values. Borrowing against 
residential equity fuels overvaluations in fervid stock 
exchanges. When one bubble bursts - the other initially 
benefits from an influx of funds withdrawn in panic from 
the shrivelling alternative. 

Quantitatively, a considerably larger share of the nation's 
wealth is tied in real estate than in the capital markets. 
Yet, the infamous wealth effect - an alleged fluctuation in 
the will to consume as a result of changing fortunes in the 
stock exchange - is equally inconspicuous in the realty 
markets. It seems that consumption is correlated with 
lifelong projected earnings rather than with the state of 
one's savings and investments. 

This is not the only counter- intuitive finding. Asset 
inflation - no matter how vertiginous - rarely spills into 
consumer prices. The recent bubbles in Japan and the 
USA, for instance, coincided with a protracted period of 
disinflation. The bursting of bubbles does have a 
deflationary effect, though. 

In a late 2002 survey of global house price movements, 
"The Economist" concluded that real estate inflation is a 
global phenomenon. Though Britain far outpaces the 
United States and Italy (65% rise since 1997), it falls 
behind Ireland (179%) and South Africa (195%). It is in 
league with Australia (with 113%) and Spain (132%). 



The paper notes wryly: 

"Just as with equities in the late 1990s, property bulls 
are now coming up with bogus arguments for why 
rampant house-price inflation is sure to continue. 
Demographic change ... Physical restrictions and tough 
planning laws ... Similar arguments were heard in 
Japan in the late 1980s and Germany in the early 1990s 
- and yet in recent years house prices in these two 
countries have been falling. British house prices also 
tumbled in the late 1980s. " 

They are bound to do so again. In the long run, the rise in 
house prices cannot exceed the increase in disposable 
income. The effects of the bursting of a property bubble 
are invariably more pernicious and prolonged than the 
outcomes of a bear market in stocks. Real estate is much 
more leveraged. Debt levels can well exceed home equity 
("negative equity") in a downturn. Nowadays, loans are 
not eroded by high inflation. Adjustable rate mortgages - 
one third of the annual total in the USA - will make sure 
that the burden of real indebtedness mushrooms as interest 
rates rise. 

The Economist (April 2005): 

"An IMF study on asset bubbles estimates that 40% of 
housing booms are followed by housing busts, which last 
for an average of four years and see an average decline 
of roughly 30% in home values. But given how many 
homebuyers in booming markets seem to be basing their 
purchasing decisions on expectations of outsized 
returns — a recent survey of buyers in Los Angeles 
indicated that they expected their homes to increase in 



value by a whopping 22% a year over the next decade — 
nasty downturns in at least some markets seem likely. " 

With both the equity and realty markets in gloom, people 
revert to cash and bonds and save more - leading to 
deflation or recession or both. Japan is a prime example of 
such a shift of investment preferences. When prices 
collapse sufficiently to become attractive, investors pile 
back into both the capital and real estate markets. This 
cycle is as old and as inevitable as human greed and fear. 

Post Script 

In 2007, a collapse in the subprime mortgage market in 
the United States precipitated a sharp global decline in 
housing starts and prices - as predicted. The year after, 
this led to a global credit crunch, the destabilization of the 
banking system, the demise of all the major investment 
banks in the USA, and recession throughout the 
industrialized world. The resultant drop in commodity and 
energy prices caused the slowdown to spread to 
developing countries as well. 

IV. Notes on the Credit Crisis of 2007-9 



The global crisis of 2007-9 was, actually, a confluence of 
unrelated problems on three continents. In the United 
States, investment banks were brought down by hyper- 
leveraged investments in ill-understood derivatives. As 
stock exchanges plummeted, the resulting devastation and 
wealth destruction spilled over into the real economy and 
caused a recession which is bound to be mild by historical 
standards. 



Depending heavily on imported energy and exported 
goods, Europe's economy faced a marked slowdown as 
the region's single currency, the euro, appreciated strongly 
against all major currencies; as China, India, and other 
low-wage Asian countries became important exporters; as 
the price of energy products and oil skyrocketed; and as 
real estate bubbles burst in countries like Spain and 
Ireland. Additionally, European banks were heavily 
leveraged and indebted - far more than their counterparts 
across the Atlantic. Governments throughout the continent 
were forced to bail out one ailing institution after another, 
taxing further their limited counter-cyclical resources. 

Simultaneously, in Asia, growth rates began to decelerate. 
Massive exposure to American debt, both public and 
private, served a vector of contagion. The weakening of 
traditional export markets affected adversely industries 
and employment. Stock exchanges tumbled. 

The 2007-9 upheaval was so all-pervasive and so 
reminiscent of the beginnings of the Great Depression that 
it brought about a realignment and re-definition of the 
roles of the main economic actors: the state, the central 
banks, financial institutions of all stripes (both those 
regulated and in the "shadow banking" sector), the 
investment industries, and the various marketplaces (the 
stock exchanges, foremost). 

/. Central Banks 

The global credit crunch induced by the subprime 
mortgage crisis in the United States, in the second half of 
2007, engendered a tectonic and paradigmatic shift in the 
way central banks perceive themselves and their role in 
the banking and financial systems. 



On December 12, 2007, America's Federal Reserve, the 
Bank of England, the European Central Bank (ECB), the 
Bank of Canada and the Swiss National Bank, as well as 
Japan's and Sweden's central banks joined forces in a plan 
to ease the worldwide liquidity squeeze. 

This collusion was a direct reaction to the fact that more 
conventional instruments have failed. Despite soaring 
spreads between the federal funds rate and the LIBOR 
(charged in interbank lending), banks barely touched 
money provided via the Fed's discount window. Repeated 
and steep cuts in interest rates and the establishment of 
reciprocal currency-swap lines fared no better. 

The Fed then proceeded to establish a "Term Auction 
Facility (TAF)", doling out one-month loans to eligible 
banks. The Bank of England multiplied fivefold its regular 
term auctions for three months maturities. On December 
18, the ECB lent 350 million euros to 390 banks at below 
market rates. 

In March 2008, the Fed lent 29 billion USD to JP Morgan 
Chase to purchase the ailing broker-dealer Bear Stearns 
and hundreds of billions of dollars to investment banks 
through its discount window, hitherto reserved for 
commercial banks. The Fed agreed to accept as collateral 
securities tied to "prime" mortgages (by then in as much 
trouble as their subprime brethren). 

The Fed doled the funds out through anonymous auctions, 
allowing borrowers to avoid the stigma attached to 
accepting money from a lender of last resort. Interest rates 
for most lines of credit, though, were set by the markets in 
(sometimes anonymous) auctions, rather than directly by 
the central banks, thus removing the central banks' ability 



to penalize financial institutions whose lax credit policies 
were, to use a mild understatement, negligent. 

Moreover, central banks broadened their range of 
acceptable collateral to include prime mortgages and 
commercial paper. This shift completed their 
transformation from lenders of last resort. Central banks 
now became the equivalents of financial marketplaces, 
and akin to many retail banks. Fighting inflation - their 
erstwhile raison d'etre - has been relegated to the back 
burner in the face of looming risks of recession and 
protectionism. In September 2008, the Fed even borrowed 
money from the Treasury when its own resources were 
depleted. 

As The Economist neatly summed it up (in an article titled 
"A dirty job, but Someone has to do it", dated December 
13, 2007): 

"(C)entral banks will now be more intricately involved 
in the unwinding of the credit mess. Since more banks 
have access to the liquidity auction, the central banks 
are implicitly subsidising weaker banks relative to 
stronger ones. By broadening the range of acceptable 
collateral, the central banks are taking more risks onto 
their balance sheets. " 

Regulatory upheaval is sure to follow. Investment banks 
are likely to be subjected to the same strictures, reserve 
requirements, and prohibitions that have applied to 
commercial banks since 1934. Supervisory agencies and 
functions will be consolidated and streamlined. 

Ultimately, the state is the mother of all insurers, the 
master policy, the supreme underwriter. When markets 



fail, insurance firm recoil, and financial instruments 
disappoint - the government is called in to pick up the 
pieces, restore trust and order and, hopefully, retreat more 
gracefully than it was forced to enter. 

The state would, therefore, do well to regulate all financial 
instruments: deposits, derivatives, contracts, loans, 
mortgages, and all other deeds that are exchanged or 
traded, whether publicly (in an exchange) or privately. 
Trading in a new financial instrument should be allowed 
only after it was submitted for review to the appropriate 
regulatory authority; a specific risk model was 
constructed; and reserve requirements were established 
and applied to all the players in the financial services 
industry, whether they are banks or other types of 
intermediaries. 

2. Common Investment Schemes 

The credit and banking crisis of 2007-9 has cast in doubt 
the three pillars of modern common investment schemes. 
Mutual funds (known in the UK as "unit trusts"), hedge 
funds, and closed-end funds all rely on three assumptions: 

Assumption number one 

That risk inherent in assets such as stocks can be 
"diversified away". If one divides one's capital and invests 
it in a variety of financial instruments, sectors, and 
markets, the overall risk of one's portfolio of investments 
is lower than the risk of any single asset in said portfolio. 

Yet, in the last decade, markets all over the world have 
moved in tandem. These highly-correlated ups and downs 
gave the lie to the belief that they were in the process of 



"decoupling" and could, therefore, be expected to 
fluctuate independently of each other. What the crisis has 
revealed is that contagion transmission vectors and 
mechanisms have actually become more potent as barriers 
to flows of money and information have been lowered. 

Assumption number two 

That investment "experts" can and do have an advantage 
in picking "winner" stocks over laymen, let alone over 
random choices. Market timing coupled with access to 
information and analysis were supposed to guarantee the 
superior performance of professionals. Yet, they didn't. 

Few investment funds beat the relevant stock indices on a 
regular, consistent basis. The yields on "random walk" 
and stochastic (random) investment portfolios often 
surpass managed funds. Index or tracking funds (funds 
who automatically invest in the stocks that compose a 
stock market index) are at the top of the table, leaving 
"stars", "seers", "sages", and "gurus" in the dust. 

This manifest market efficiency is often attributed to the 
ubiquity of capital pricing models. But, the fact that 
everybody uses the same software does not necessarily 
mean that everyone would make the same stock picks. 
Moreover, the CAPM and similar models are now being 
challenged by the discovery and incorporation of 
information asymmetries into the math. Nowadays, not all 
fund managers are using the same mathematical models. 

A better explanation for the inability of investment 
experts to beat the overall performance of the market 
would perhaps be information overload. Recent studies 



have shown that performance tends to deteriorate in the 
presence of too much information. 

Additionally, the failure of gatekeepers - from rating 
agencies to regulators - to force firms to provide reliable 
data on their activities and assets led to the ascendance of 
insider information as the only credible substitute. But, 
insider or privileged information proved to be as 
misleading as publicly disclosed data. Finally, the market 
acted more on noise than on signal. As we all know, noise 
it perfectly randomized. Expertise and professionalism 
mean nothing in a totally random market. 

Assumption number three 

That risk can be either diversified away or parceled out 
and sold. This proved to be untenable, mainly because the 
very nature of risk is still ill-understood: the samples used 
in various mathematical models were biased as they relied 
on data pertaining only to the recent bull market, the 
longest in history. 

Thus, in the process of securitization, "risk" was 
dissected, bundled and sold to third parties who were 
equally at a loss as to how best to evaluate it. Bewildered, 
participants and markets lost their much- vaunted ability to 
"discover" the correct prices of assets. Investors and banks 
got spooked by this apparent and unprecedented failure 
and stopped investing and lending. Illiquidity and panic 
ensued. 

If investment funds cannot beat the market and cannot 
effectively get rid of portfolio risk, what do we need them 
for? 



The short answer is: because it is far more convenient to 
get involved in the market through a fund than directly. 
Another reason: index and tracking funds are excellent 
ways to invest in a bull market. 

3. Capital-Allocating Institutions 

The main role of banks, well into the 1920, was to allocate 
capital to businesses (directly and through consumer 
credits and mortgages). Deposit- taking was a core 
function and the main source of funding. As far as 
depositors were concerned, banks guaranteed the safety 
and liquidity of the store of value (cash and cash- 
equivalents). 

In the 1920, stock exchanges began to compete with 
banks by making available to firms other means of raising 
capital (IPOs - initial public offerings). This activity 
gradually became as important as the stock exchange's 
traditional competence: price discovery (effected through 
the structured interactions of willing buyers and sellers). 

This territorial conflict led to an inevitable race to the 
bottom in terms of the quality of debtors and, ultimately, 
to the crash of 1929 and the Great Depression that ensued. 
Banks then were reduced to retail activities, having lost 
their investment services to hybrids known as "investment 
banks". 



The invention of junk bonds in the 1980s heralded a 
whole new era. A parallel, unregulated financial system 
has emerged which catered to the needs of businesses to 
raise risk capital and to the needs of those who provided 
such funds to rid themselves of the hazards inherent in 
their investments. Consumer credits and mortgages, for 
instance, were financed by traditional banking businesses. 
The risks associated with such lending were securitized 
and sold to third parties. 

As expertise evolved and experience accumulated, 
financial operators learned to slice the hazards, evaluate 
them using value-at-risk mathematical models, tailor them 
to the needs of specific customer profiles, hedge them 
with complex derivatives, and trade them in unofficial, 
unregulated, though highly liquid amorphous, virtual 
"marketplaces". 

Thus, stock exchanges have begun to lose their capital 
allocation functions to private equity funds, hedge funds, 
investment banks, and pension funds. In the process, such 
activities have become even more opaque and less 
regulated than before. This lack of transparency led to 
pervasive counterparty distrust and difficulties in price 
discovery. Ultimately, when the prices of underlying 
assets (such as housing) began to tumble, all liquidity 
drained and markets seized and froze. 



Thus, at the end of 2006, the global financial system was 
comprised of three main groups of actors: traditional retail 
banks whose main role was deposit taking and doling out 
consumer credits; exchanges whose main functions were 
price discovery and the provision of liquidity; and 
investment banks and their surrogates and special purpose 
vehicles whose principal job was the allocation of capital 
to businesses and the mitigation of risk via securitization 
and insurance (hedging). 

Yet, these unregulated investment banks were also often 
under-capitalized and hyper-leveraged partnerships (at 
least until the late 1990s, when some of them went 
public). This is precisely why they had invented all 
manner of complex financial instruments intended to 
remove credit-related risks from their books by selling it 
to third parties. Physicists, analysts, and rating agencies 
all agreed that the risk attendant to these derivatives can 
be calculated and determined and that many of them were 
risk-free (as long as markets were liquid, of course). 

The business strategy of the investment banks was viable. 
It should have worked perfectly had they not committed a 
primal sin: they have entered the fray not only as brokers, 
dealers, and mediators, but also as investors and gamblers 
(principals), taking on huge positions, often improperly 
hedged ("naked"). When these bets soured, the capital 



base of these institutions was wiped out, sometimes 
literally overnight. The very financial instruments that 
were meant to alleviate and reallocate risk (such as 
collateralized debt obligations - CDOs) have turned into 
hazardous substances, as investors (and investment banks) 
gambled on the direction of the economy, specific sectors, 
or firms. 

In hindsight, the "shadow banks" subverted the very 
foundations of modern finance: they created money 
(modifying the money-printing monopoly of central 
banks); they obfuscated the process of price discovery and 
thus undermined the price signal (incidentally casting 
doubt on symmetrical asset pricing models); they 
interfered with the ability of cash and cash-equivalents to 
serve as value stores and thus shook the trust in the entire 
financial system; they amplified the negative 
consequences of unbridled speculation (that is not related 
to real-life economic activities and values); they leveraged 
the instant dissemination of information to render markets 
inefficient and unstable (a fact which requires a major 
revision of efficient market hypotheses). 

This systemic dysfunctioning of financial markets led 
risk- averse investors to flee into safer havens: 
commodities, oil, metals, real estate and, finally, 
currencies and bonds. This was not merely a flight to 



quality: it was an attempt to avoid the abstract and 
fantastic "Alice in Wonderland" markets fostered by 
investment banks and to reconnect with tangible reality 

With the disappearance of investment banks (those who 
survived became bank holding companies), traditional 
banks are likely to regain some of their erstwhile 
functions: the allocation to businesses and creditworthy 
consumers and homeowners of deposit-based capital. The 
various exchanges will also survive, but will largely be 
confined to price discovery and the allocation of risk 
capital. Some financial instruments will flourish (credit- 
default swaps of all types), others will vanish (CDOs). 

All in all, the financial scenery of 2010 will resemble 
1910's more than it will 2005's. Back to basics and home- 
grown truths. At least until the next cataclysm. 

V. The Crisis in Historical Context 

Housing and financial crises often precede, or follow the 
disintegration of empires. The dissolution of the Habsburg 
and the British empires, as well as the implosion of the 
USSR were all marked by the eruption and then 
unwinding of imbalances in various asset, banking, and 
financial markets. 



The collapse of Communism in Europe and Asia led to 
the emergence of a new middle class in these territories. 
Flushed with enhanced earnings and access to bank 
credits, its members unleashed a wave of unbridled 
consumption (mainly of imported goods); and with a 
rising mountain of savings, they scoured the globe for 
assets to invest their capital in: from football clubs to 
stocks and bonds. 

The savings glut and the lopsided expansion of 
international trade led to severe asymmetries in capital 
flows and to the distortion of price signals. These, in turn, 
encouraged leveraged speculation and arbitrage and 
attempts to diversify away investment risks. The former 
resulted in extreme volatility and the latter in opaqueness 
and the breakdown of trust among market players and 
agents. 

VI. The Next Crisis: Imploding Bond Markets 

Written: November 3, 2008 

To finance enormous bailout packages for the financial 
sector (and potentially the auto and mining industries) as 
well as fiscal stimulus plans, governments will have to 
issue trillions of US dollars in new bonds. Consequently, 
the prices of bonds are bound to come under pressure 
from the supply side. 



But the demand side is likely to drive the next global 
financial crisis: the crash of the bond markets. 

As the Fed takes US dollar interest rates below 1% (and 
with similar moves by the ECB, the Bank of England, and 
other central banks), buyers are likely to lose interest in 
government bonds and move to other high-quality, safe 
haven assets. Risk-aversion, mitigated by the evident 
thawing of the credit markets will cause investors to 
switch their portfolios from cash and cash-equivalents to 
more hazardous assets. 

Moreover, as countries that hold trillions in government 
bonds (mainly US treasuries) begin to feel the pinch of the 
global crisis, they will be forced to liquidate their 
bondholdings in order to finance their needs. 

In other words, bond prices are poised to crash 
precipitously. In the last 50 years, bond prices have 
collapsed by more than 35% at least on three occasions. 
This time around, though, such a turn of events will be 
nothing short of cataclysmic: more than ever, 
governments are relying on functional primary and 
secondary bond markets for their financing needs. There 
is no other way to raise the massive amounts of capital 
needed to salvage the global economy. 



Crashing and Cashing, Pumping and Dumping: Stock 
Manipulation in the USA 

In 2008, America's Securities and Exchange Commission 
(SEC), the Financial Industry Regulatory Authority and 
New York Stock Exchange Regulation announced that 
they will investigate the spreading of unsubstantiated or 
patently false rumors in order to manipulate the prices of 
stocks. Networks of broker-dealers, hedge funds and 
investment advisers allegedly participate in these 
activities on behalf of short-sellers (clients who make a 
profit when the prices of stocks collapse). 

Other shady operators act through the Internet: they target 
"penny stocks" (illiquid shares with low market 
capitalization). They spam millions of e-mail inboxes with 
"good news", "exclusive tips", and "privileged 
information". When gullible victims buy the shares, they 
sell at a huge profit. These operations are known as 
"pump and dump". 

Still, it is not easy to prove that a broker or an investment 
advisor knew that the information he was parlaying was 
false. Gossip spreads through ephemeral means, such as 
texting (SMS), EVI (Instant Messaging), and anonymous 
or encrypted re-mailing. Moreover, the unhampered flow 
of information is at the foundation of both free speech and 
the efficient operation of financial markets. 

Still, maliciously planted false data can undermine trust 
among market players, dry out liquidity, and ruin 
perfectly healthy firms. Banks and brokerage houses are 
especially vulnerable as their main asset is their 
reputation. 



Some people have already been brought to justice. On 
July 14, 2008, the New- York Times reported: 

"In April, the S.E.C. settled a securities-fraud and market- 
manipulation charge against Paul S. Berliner, a trader 
formerly with the Schottenfeld Group. The S.E.C. charged 
he had spread a false rumor about the price of the 
Blackstone Group's potential acquisition of Alliance Data 
Systems, and profited from short-selling Alliance's 
stock." 

Seven Concepts in Derivatives 

The implosion of the markets in some complex 
derivatives in 2007-9 drew attention to this obscure corner 
of the financial realm. Derivatives are nothing new. They 
consist of the transfer of risk to third parties and the 
creation of a strong correlation or linkage between the 
prices of one or more underlying assets and the derivative 
contract or instrument itself. Thus, whenever guarantors 
sign on a loan or credit agreement, they, in effect, are 
creating a derivative contract. Similarly, insurance 
policies can be construed as derivatives as well as options, 
futures, and forward contracts . 

There are two types of risk: specific to the firm or sector 
and systemic, usually the outcome of an external shock to 
the entire economy. Derivatives aim to mitigate risks, but 
what they actually do is concentrate them in the hands of a 
few major players. Risk markets encourage the 
transmission of financial contagion across borders and 
continents, exactly as do international trade and foreign 
investment (both direct and portfolio, or "hot money"). 
Indeed, liquidity: the uninterrupted availability of buyers 
and sellers in relevant marketplaces factors in the 



valuation of derivatives. In a way liquidity is another 
name for the solvency of markets. 

The value of derivatives reflects mainly the specific risk 
with a touch of systemic risk added (measured via value - 
at-risk, or VAR models). It takes into account the 
solvency of issuers and traders of both the derivatives and 
of the the underlying securities or assets (known as 
"counterparty risk"). The simplest measure of solvency is 
the capital to debt ratio ("capital adequacy" and debt 
service measures). Earnings are also important: both 
historical and projected. High or rising earnings guarantee 
the wherewithal to pay at a future date. Debt to capital (or 
to earnings, or to net income, or to assets) ratios are basic 
gauges of leverage or gearing. A high leverage translates 
to an increased risk of default on financial obligations, 
such as the ones represented by derivative contracts. 
Worse 

Still, it is not easy to evaluate a firm (especially in the 
financial services sector). There is no agreement on how 
to put a number to intangibles such as brand names, 
networks of clients and suppliers (loyalty), and 
intellectual property and, on the other side of the ledger, 
how to estimate contingent and off-balance-sheet 
liabilities (such as derivatives). Whether one is an issuer 
or a buyer, accounting standards (such as the IAS or 
FASB) are fuzzy on how to incorporate derivatives in 
financial statements. Primitive, automatic, supposedly 
pre-emptive mechanisms for the management of the risk 
of default, such as margin calls (a requirement to add 
fresh capital as losses mount on a position) often run into 
difficulties as gearing skyrockets and with it a 
commensurate counterparty risk. Put simply: margin calls 
are useless post-facto, when the issuer of a derivative, or 



its buyer (speculator or hedger) have gone insolvent 
owing to a high leverage or to losses incurred elsewhere. 

There is also the question of recourse, or who owns what 
and who owes what to whom and when. Securitization has 
led to the emergence of spliced, diced, and sliced 
derivative instruments whose origin is obscured in pools 
of primary and secondary and even tertiary securities. 
Often, the same asset gives rise to conflicting claims by 
the holders of a bewildering zoo of derivative contracts 
which were supposed to function as clear conduits, but 
whose passthrough mechanisms were far from 
unambiguous or unequivocal. This intentional fuzziness 
prevented the formation of clearing and settlement houses 
or systems, exchanges, or even registries, akin to the ones 
used in the stock markets. The lack of transparency in the 
derivatives markets was deliberate, aimed at fostering 
insider advantages in a "shadow system" with "dark 
pools". 

Conflicts of interest were thus swept under a carpet of 
complexity and obscurity. Financial firms traded nostro 
(for their own accounts) and against their clients. 
Preferential customers received benefits that were denied 
their less privileged brethren. Accounting rules were 
abused to engender the appearance of health where rot and 
decay have long set in (for instance, high default swap 
rates - indicating imminent collapse - allowed firms to 
book lower loan loss provisions and show higher 
profitability!) Agents (executives and traders) ran amok, 
blindly robbing shareholders in a perfect illustration of the 
Agency Problem (or agent-principal conundrum ). 

A pervasive lack of disclosure allowed a culture of insider 
trading to flourish. Auditors were compromised by huge 



fees. They could not afford to lose the bigger clients, 
which often constituted the bulk of their practice. Rating 
agencies - whose fees were doled out by the very firms 
and issuers they were supposed to evaluate professionally 
and without prejudice - proved to be venal and their work 
disastrously misleading. The name of the game was 
asymmetric information: a rapacious elite amplified the 
inefficiencies of the market to indulge in arbitrage and 
rake in baroque personal profits. 

Regulatory and supervision authorities were helpless to 
prevent the slide along the slippery slope into mayhem: 
they suffer from inefficiencies, the inevitable outcomes of 
overlapping jurisdictions; inherent conflicts of remit (for 
instance, central banks clashed with bank supervisors over 
whether asset bubbles should be deflated and the stability 
of the financial system thus threatened); a revolving door 
syndrome (regulators became banking and Wall Street 
executives and vice versa); deficient training; and a lack 
of supra-national coordination and exchange of 
information. 

None of these pernicious facts was a secret. Everyone 
treated the derivatives markets as glorified gambling dens . 
Losses were expected and a Ponzi scheme fatalism 
prevailed long before the cash dried out in 2007. The lack 
of trust that manifested later and the resultant lack of 
liquidity were no surprise (though the financial 
community feigned a collective shock). 

Return 



The Shadowy World of International Finance 



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. 

Return 



Treasure Island Revisited 
On Maritime Piracy 



In the second half of 2008, pirates based in Somalia 
have hijacked dozens seafaring vessels: yachts, fishing 
boats, small freighters, cruise ships (the Nautica), 
military cargo (the freighter Faina), a chemical tanker 
(the Biscagila), and an oil carrier (The Sirius Star), 
which contained a reported two million barrels of crude 
oil. Ship-owners and governments have openly admitted 
to paying ransom in excess of 200 million USD in the 
last two months alone. The pirates suffered one minor 
loss throughout this rampage: a "mother ship " (a 
previously hijacked boat) sunk in November 2008 by the 
intrepid Indian navy. 

The rumors concerning the demise of maritime piracy 
back in the 19th century were a tad premature. The 
scourge has so resurged that the International Maritime 
Board (1MB), founded by the International Chamber of 
Commerce (ICC) in 1981, is forced to broadcast daily 
piracy reports to all shipping companies by satellite from 
its Kuala Lumpur Piracy Reporting Center, established in 
1992 and partly funded by maritime insurers. The reports 
carry this alarming disclaimer: 

"For statistical purposes, the 1MB defines piracy and 
armed robbery as: An act of boarding or attempting to 
board any ship with the apparent intent to commit theft or 



any other crime and with the apparent intent or capability 
to use force in the furtherance of that act. This definition 
thus covers actual or attempted attacks whether the ship is 
berthed, at anchor or at sea. Petty thefts are excluded, 
unless the thieves are armed." 

The 1994 United Nations Convention on the Law of the 
Sea defines piracy as "any illegal acts of violence or 
detention, or any act of depredation, committed by 
individuals (borne aboard a pirate vessel) for private ends 
against a private ship or aircraft (the victim vessel)". 
When no "pirate vessel" is involved - for instance, when 
criminals embark on a ship and capture it - the legal term 
is hijacking. 

On July 8, 2002 seven pirates, armed with long knives 
attacked an officer of a cargo ship berthed in Chittagong 
port in Bangladesh, snatched his gold chain and watch and 
dislocated his arm. This was the third such attack since the 
ship dropped anchor in this minacious port. 

Three days earlier, in Indonesia, similarly- armed pirates 
escaped with the crew's valuables, having tied the hands 
of the duty officer. Pirates in small boats stole anodes 
from the stern of a bulk carrier in Bangladesh. Others, in 
Indonesia, absconded with a life raft. 

The pirates of Guyana are either unlucky or untrained. 
They were consistently scared off by flares hurled at them 
and alarms set by vigilant hands on deck. A Colombian 
band, riding a high speed boat, attempted to board a 
container ship. Warring parties in Somalia hijacked yet 
another ship in June 2002. 



A particularly egregious case - and signs of growing 
sophistication and coordinated action - is described in the 
July 1-8, 2002 report of the 1MB: 

"Six armed pirates boarded a chemical tanker from a 
small boat and stole ship's stores. Another group of pirates 
broke in to engine room and stole spare parts. Thefts took 
place in spite of the ship engaging three shore security 
watchmen." Piracy incidents have been reported in India, 
Malaysia, Philippines, Thailand, Vietnam, the Red Sea, 
the Gulf of Aden, Nigeria, Brazil, Colombia, Dominican 
Republic, Ecuador, Peru, Venezuela. 

According to the ICC Year 2001 Piracy Report, more than 
330 attacks on seafaring vessels were reported in 2001 - 
down by a quarter compared to 2000 but 10 percent 
higher than 1999 and four times the 1991 figure. Piracy 
rose 40 percent between 1998 and 1999 alone. 

Sixteen ships - double the number in 2000 - were captured 
and taken over in 2001. Eighty seven attacks were 
reported during the first quarter of 2002 - up from 68 in 
the corresponding period the year before. Seven of these 
were hijackings - compared to only 1 in the first quarter of 
2001. Nine of every 10 hijacked ships are ultimately 
recovered, often with the help of the 1MB. 

Many masters and shipowners do not report piracy for 
fear of delays due to protracted investigations, increased 
insurance premiums, bad publicity, and stifling red tape. 
The number of unreported attacks in 1999 was estimated 
by the World Maritime Piracy Report to be 130. 

According to "The Economist", the IMO believes that half 
of all incidents remain untold. Still, increased patrols and 



international collaboration among law enforcement 
agencies dented the clear upward trend in maritime crime 
- even in the piracy capital, Indonesia. 

The number of incidents in the pirate-infested Malacca 
Straits dropped from 75 in 2000 to 17 in 2001 - though the 
number of crew "kidnap and ransom" operations, 
especially in Aceh, has increased. Owners usually pay the 
"reasonable" amounts demanded - c. $100,000 per ship. 
Contrary to folklore, most ships are attacked while at 
anchor. 

Twenty one people, including passengers, were killed in 
2001 - and 210 taken hostage. Assaults involving guns 
were up 50 percent to 73 - those involving mere knives 
down by a quarter to 105. Piracy seems to ebb and flow 
with the business cycles of the host economies. The Asian 
crisis, triggered by the freefall of the Thai baht in 1997-8, 
gave a boost to East Asian maritime robbers. So did the 
debt crises of Latin America a decade earlier. Drug 
transporters - armed with light aircraft and high speed 
motorboats - sometimes double as pirates during the dry 
season of crop growth. 

Pirates endanger ship and crew. But they often cause 
collateral damage as well. Pirates have been known to 
dump noxious cargo into the sea, or tie up the crew and let 
an oil tanker steam ahead, its navigational aides smashed, 
or tamper with substances dangerous to themselves and to 
others, or cast crew and passengers adrift in tiny rafts with 
little food and water. 

Many shipowners resorted to installing on-board satellite 
tracking systems, such as Shiploc, and aircraft-like "black 
boxes". A bulletproof life vest, replete with an integral 



jagged edged knife, was on display in the millennium 
exhibition at the Millennium Dome two years ago. The 
International Maritime Organization (IMO) is considering 
to compel shipowners to tag their vessels with visibly 
embossed numbers in compliance with the Safety of Life 
at Sea Convention. 

The 1MB also advises shipping companies to closely 
examine the papers of crew and masters, thousands of 
whom carry forged documents. In 54 maritime 
administrations surveyed in 2001 by the Seafarers' 
International Research Centre, Cardiff University in 
Wales, more than 12,000 cases of forged certificates of 
competency were unearthed. 

Many issuing authorities are either careless or venal or 
both. The 1MB accused the Coast Guard Office of Puerto 
Rico for issuing 500 such "suspicious" certificates. The 
Chinese customs and navy - especially along the southern 
coast - have often been decried for working hand in glove 
with pirates. 

False documents are an integral - and crucial - part of 
maritime piracy. The 1MB says: 

"Many of the phantom ships that set off to sea with a 
cargo and then disappear are sailed by crewmen with false 
passports and competency certificates. They usually 
escape detection by the port authorities. In a recent case of 
a vessel located and arrested in South-East Asia further to 
1MB investigations, it has emerged that all the senior 
officers had false passports. The ship's registry documents 
were also false." 



As documents go electronic and integrated in proprietary 
or common cargo tracking systems, such forgery will 
wane. Bolero - an international digital bill of lading ledger 
- is backed by the European Union, banks, shipping and 
insurance companies. The IMO is a proponent of a 
technology to apply encrypted "digital signatures" to 
electronic bills of lading. Still, the industry is highly 
fragmented and many ships and ports don't even possess 
rudimentary information technology. The protection 
afforded by the likes of Bolero is at least five years away. 

Pirates sometimes work hand in hand with conspiring 
crew members (or, less often, stowaways). In many 
countries - in East Asia, Latin America, and Africa - 
Coast Guard operatives, corrupt drug agents, and other 
law enforcement officials, moonlight as pirates. Renegade 
members of British trained Indonesian anti-piracy squads 
are still roaming the Malacca Straits. 

Pirates also enjoy the support of an insidious and vast 
network of suborned judges and bureaucrats. Local 
villagers along the coasts of Indonesia and Malaysia - and 
Africa - welcome pirate business and provide the 
perpetrators with food and shelter. 

Moreover, large tankers, container ships, and cargo 
vessels are largely computerized and their crew members 
few. The value of an average vessel's freight has increased 
dramatically with improvements in container and oil 
storage technologies. "Flag of convenience" registration 
has assumed monstrous proportions, allowing ship owners 
and managers to conceal their identity effectively. Belize, 
Honduras, and Panama are the most notorious, no 
questions asked, havens. 



Piracy has matured into a branch of organized crime. 
Hijacking requires money, equipment, weapons, planning, 
experience and contacts with corrupt officials. The loot 
per vessel ranges from $8 million to $200 million. 
Pottengal Mukundan, Director of ICC's Commercial 
Crime Services states in an 1MB press release: 

"(Piracy) typically involves a mother ship from which to 
launch the attacks, a supply of automatic weapons, false 
identity papers for the crew and vessel, fake cargo 
documents, and a broker network to sell the stolen goods 
illegally. Individual pirates don't have these resources. 
Hijackings are the work of organized crime rings." 

The 1MB describes the aftermath of a typical hijacking: 

"The Global Mars has probably been given a new name 
and repainted. Armed with false registration papers and 
bills of lading, the pirates - or more likely the mafia 
bosses pulling the strings - will then try to dispose of their 
booty. The vessel has probably put in to a port where the 
false identity of vessel and cargo may escape detection. 
Even when identified, the gangs have been known to bribe 
local officials to allow them to sell the cargo and leave the 
port." 

Such a ship is often "recycled" a few times. It earns its 
operators an average of $40-50 million per "cycle", 
according to "The Economist". The pirates contract with 
sellers or shipping agents to load it with a legitimate 
consignment of goods or commodities. The sellers and 
agents are unaware of the true identity of the ship, or of its 
unsavory "owners/managers". 



The pirates invariably produce an authentic vessel 
registration certificate that they acquired from crooked 
officials - and provide the sellers or agents with a bill of 
lading. The payload is then sold to networks of traders in 
stolen merchandise or to gullible buyers in a different port 
of destination - and the ship is ready for yet another 
round. 

In January 2002, the Indonesian Navy has permanently 
stationed six battleships in the Malacca Straits, three of 
them off the coast of the secessionist region of Aceh. A 
further 20-30 ships and 10 aircraft conduct daily patrols of 
the treacherous traffic lane. Some 200-600 ships cross the 
Straits daily. A mere 50 ships or so are boarded and 
searched every month. 

The Greek government has gunboats patrolling the 2 
miles wide Corfu Channel, where yachts frequently fall 
prey to Albanian pirates. Brazil has imposed an unpopular 
anti-piracy inspection fee on berthing vessels and used the 
proceeds to finance a SWAT team to protect ships and 
their crews while in port. Both India and Thailand have 
similar units. 

International cooperation is also on the rise. About one 
third of the world's shipping traffic goes through the 
South China Sea. A conference convened by Japan in 
March 2000 - Japanese vessels have become favored 
targets of piracy in the last few years - pushed for the 
ratification of the International Maritime Organisation's 
(IMO) 1988 Rome Convention on the Suppression of 
Unlawful Acts against the Safety of Maritime Navigation 
by Asian and ASEAN countries. 



The Convention makes piracy an extraterritorial crime 
and, thus, removes the thorny issue of jurisdiction in cases 
of piracy carried in another country's territorial waters or 
out on the high seas. The Comite Maritime International - 
the umbrella organization of national maritime law 
associations - promulgated a model anti-piracy law last 
year. 

Though it rejected Japan's offer for collaboration, in a 
sharp reversal of its previous policy, China started 
handing down death sentences against murderous pirates. 
The 13 marauders who seized the Cheung Son and 
massacred its 23 Chinese sailors were executed five years 
ago in the southern city of Shanwei. Another 25 people 
received long prison sentences. The - declared - booty 
amounted to a mere $300,000. 

India and Iran - two emerging "pirates safe harbor" 
destinations - have also tightened up sentencing and port 
inspections. In the Alondra Rainbow hijacking, the Indian 
Navy captured the Indonesian culprits in a cinematic 
chase off Goa. They were later sentenced severely under 
both the Indian Penal Code and international law. Even 
the junta in Myanmar has taken tentative steps against 
compatriots with piratical predilections. 

Law enforcement does not tolerate a vacuum. "The 
Economist" reports about two private military companies 
- Marine Risk Management and Satellite Protection 
Services (SPS) - which deploy airborne mercenaries to 
deal with piracy. SPS has even suggested to station 2500 
former Dutch marines in Subic Bay in the Philippines - 
for a mere $2500 per day per combatant. 



Shipowners are desperate. Quoted by "The Economist", 
they "suggest that the region's governments negotiate the 
right for navies to chase pirates across national 
boundaries: the so-called 'right of hot pursuit'. So far, only 
Singapore and Indonesia have negotiated limited rights. 
Some suggest that the American navy should be invited 
into territorial waters to combat piracy, a 'live' exercise it 
might relish. At the very least, countries such as Indonesia 
should advertise which bits of their territorial waters at 
any time are patrolled and safe from pirates. No countries 
currently do this." 

Return 



Legalizing Crime 



"Those who have the command of the arms in a country 
are masters of the state, and have it in their power to 
make what revolutions they please. [Thus,] there is no 
end to observations on the difference between the 
measures likely to be pursued by a minister backed by a 
standing army, and those of a court awed by the fear of 
an armed people. " 

Aristotle (384-322 BC), Greek philosopher 

"Murder being the very foundation of our social 
institutions, it is consequently the most imperious 
necessity of civilised life. If there were no murder, 
government of any sort would be inconceivable. For the 
admirable fact is that crime in general, and murder in 
particular, not simply excuses it but represents its only 
reason to exist ... Otherwise we would live in complete 
anarchy, something we find unimaginable ... " 

Octave Mirbeau (1848-1917), The Torture Garden 

The state has a monopoly on behaviour usually deemed 
criminal. It murders, kidnaps, and locks up people. 
Sovereignty has come to be identified with the unbridled - 
and exclusive - exercise of violence. The emergence of 
modern international law has narrowed the field of 
permissible conduct. A sovereign can no longer commit 
genocide or ethnic cleansing with impunity, for instance. 

Many acts - such as the waging of aggressive war, the 
mistreatment of minorities, the suppression of the freedom 



of association - hitherto sovereign privilege, have 
thankfully been criminalized. Many politicians, hitherto 
immune to international prosecution, are no longer so. 
Consider Yugoslavia's Milosevic and Chile's Pinochet. 

But, the irony is that a similar trend of criminalization - 
within national legal systems - allows governments to 
oppress their citizenry to an extent previously unknown. 
Hitherto civil torts, permissible acts, and common 
behaviour patterns are routinely criminalized by 
legislators and regulators. Precious few are 
decriminalized. 

Consider, for instance, the criminalization in the 
Economic Espionage Act (1996) of the misappropriation 
of trade secrets and the criminalization of the violation of 
copyrights in the Digital Millennium Copyright Act 
(2000) - both in the USA. These used to be civil torts. 
They still are in many countries. Drug use, common 
behaviour in England only 50 years ago - is now criminal. 
The list goes on. 

Criminal laws pertaining to property have malignantly 
proliferated and pervaded every economic and private 
interaction. The result is a bewildering multitude of laws, 
regulations statutes, and acts. 

The average Babylonian could have memorizes and 
assimilated the Hammurabic code 37 centuries ago - it 
was short, simple, and intuitively just. 

English criminal law - partly applicable in many of its 
former colonies, such as India, Pakistan, Canada, and 
Australia - is a mishmash of overlapping and 
contradictory statutes - some of these hundreds of years 



old - and court decisions, collectively known as "case 
law". 

Despite the publishing of a Model Penal Code in 1962 by 
the American Law Institute, the criminal provisions of 
various states within the USA often conflict. The typical 
American can't hope to get acquainted with even a 
negligible fraction of his country's fiendishly complex and 
hopelessly brobdignagian criminal code. Such inevitable 
ignorance breeds criminal behaviour - sometimes 
inadvertently - and transforms many upright citizens into 
delinquents. 

In the land of the free - the USA - close to 2 million adults 
are behind bars and another 4.5 million are on probation, 
most of them on drug charges. The costs of 
criminalization - both financial and social - are mind 
boggling. According to "The Economist", America's 
prison system cost it $54 billion a year - disregarding the 
price tag of law enforcement, the judiciary, lost product, 
and rehabilitation. 

What constitutes a crime? A clear and consistent 
definition has yet to transpire. 

There are five types of criminal behaviour: crimes against 
oneself, or "victimless crimes" (such as suicide, abortion, 
and the consumption of drugs), crimes against others 
(such as murder or mugging), crimes among consenting 
adults (such as incest, and in certain countries, 
homosexuality and euthanasia), crimes against collectives 
(such as treason, genocide, or ethnic cleansing), and 
crimes against the international community and world 
order (such as executing prisoners of war). The last two 
categories often overlap. 



The Encyclopaedia Britannica provides this definition of a 
crime: "The intentional commission of an act usually 
deemed socially harmful or dangerous and specifically 
defined, prohibited, and punishable under the criminal 
law. " 

But who decides what is socially harmful? What about 
acts committed unintentionally (known as "strict liability 
offences" in the parlance)? How can we establish 
intention - "mens rea", or the "guilty mind" - beyond a 
reasonable doubt? 

A much tighter definition would be: "The commission of 
an act punishable under the criminal law. " A crime is 
what the law - state law, kinship law, religious law, or any 
other widely accepted law - says is a crime. Legal systems 
and texts often conflict. 

Murderous blood feuds are legitimate according to the 
15th century "Qanoon", still applicable in large parts of 
Albania. Killing one's infant daughters and old relatives is 
socially condoned - though illegal - in India, China, 
Alaska, and parts of Africa. Genocide may have been 
legally sanctioned in Germany and Rwanda - but is 
strictly forbidden under international law. 

Laws being the outcomes of compromises and power 
plays, there is only a tenuous connection between justice 
and morality. Some "crimes" are categorical imperatives. 
Helping the Jews in Nazi Germany was a criminal act - 
yet a highly moral one. 

The ethical nature of some crimes depends on 
circumstances, timing, and cultural context. Murder is a 
vile deed - but assassinating Saddam Hussein may be 



morally commendable. Killing an embryo is a crime in 
some countries - but not so killing a fetus. A "status 
offence" is not a criminal act if committed by an adult. 
Mutilating the body of a live baby is heinous - but this is 
the essence of Jewish circumcision. In some societies, 
criminal guilt is collective. All Americans are held 
blameworthy by the Arab street for the choices and 
actions of their leaders. All Jews are accomplices in the 
"crimes" of the "Zionists". 

In all societies, crime is a growth industry. Millions of 
professionals -judges, police officers, criminologists, 
psychologists, journalists, publishers, prosecutors, 
lawyers, social workers, probation officers, wardens, 
sociologists, non-governmental-organizations, weapons 
manufacturers, laboratory technicians, graphologists, and 
private detectives - derive their livelihood, parasitically, 
from crime. They often perpetuate models of punishment 
and retribution that lead to recidivism rather than to to the 
reintegration of criminals in society and their 
rehabilitation. 

Organized in vocal interest groups and lobbies, they harp 
on the insecurities and phobias of the alienated urbanites. 
They consume ever growing budgets and rejoice with 
every new behaviour criminalized by exasperated 
lawmakers. In the majority of countries, the justice system 
is a dismal failure and law enforcement agencies are part 
of the problem, not its solution. 

The sad truth is that many types of crime are considered 
by people to be normative and common behaviours and, 
thus, go unreported. Victim surveys and self-report studies 
conducted by criminologists reveal that most crimes go 
unreported. The protracted fad of criminalization has 



rendered criminal many perfectly acceptable and recurring 
behaviours and acts. Homosexuality, abortion, gambling, 
prostitution, pornography, and suicide have all been 
criminal offences at one time or another. 

But the quintessential example of over-criminalization is 
drug abuse. 

There is scant medical evidence that soft drugs such as 
cannabis or MDMA ("Ecstasy") - and even cocaine - have 
an irreversible effect on brain chemistry or functioning. 
Last month an almighty row erupted in Britain when Jon 
Cole, an addiction researcher at Liverpool University, 
claimed, to quote "The Economist" quoting the 
"Psychologist", that: 

"Experimental evidence suggesting a link between 
Ecstasy use and problems such as nerve damage and brain 
impairment is flawed ... using this ill- substantiated cause- 
and-effect to tell the 'chemical generation' that they are 
brain damaged when they are not creates public health 
problems of its own." 

Moreover, it is commonly accepted that alcohol abuse and 
nicotine abuse can be at least as harmful as the abuse of 
marijuana, for instance. Yet, though somewhat curbed, 
alcohol consumption and cigarette smoking are legal. In 
contrast, users of cocaine - only a century ago 
recommended by doctors as tranquilizer - face life in jail 
in many countries, death in others. Almost everywhere pot 
smokers are confronted with prison terms. 

The "war on drugs" - one of the most expensive and 
protracted in history - has failed abysmally. Drugs are 
more abundant and cheaper than ever. The social costs 



have been staggering: the emergence of violent crime 
where none existed before, the destabilization of drug- 
producing countries, the collusion of drug traffickers with 
terrorists, and the death of millions - law enforcement 
agents, criminals, and users. 

Few doubt that legalizing most drugs would have a 
beneficial effect. Crime empires would crumble 
overnight, users would be assured of the quality of the 
products they consume, and the addicted few would not 
be incarcerated or stigmatized - but rather treated and 
rehabilitated. 

That soft, largely harmless, drugs continue to be illicit is 
the outcome of compounded political and economic 
pressures by lobby and interest groups of manufacturers 
of legal drugs, law enforcement agencies, the judicial 
system, and the aforementioned long list of those who 
benefit from the status quo. 

Only a popular movement can lead to the 
decriminalization of the more innocuous drugs. But such a 
crusade should be part of a larger campaign to reverse the 
overall tide of criminalization. Many "crimes" should 
revert to their erstwhile status as civil torts. Others should 
be wiped off the statute books altogether. Hundreds of 
thousands should be pardoned and allowed to reintegrate 
in society, unencumbered by a past of transgressions 
against an inane and inflationary penal code. 

This, admittedly, will reduce the leverage the state has 
today against its citizens and its ability to intrude on their 
lives, preferences, privacy, and leisure. Bureaucrats and 
politicians may find this abhorrent. Freedom loving 
people should rejoice. 



APPENDIX - Should Drugs be Legalized? 

The decriminalization of drugs is a tangled issue 
involving many separate moral/ethical and practical 
strands which can, probably, be summarized thus: 

(a) Whose body is it anyway? Where do I start and the 
government begins? What gives the state the right to 
intervene in decisions pertaining only to my self and 
contravene them? 

PRACTICAL: 

The government exercises similar "rights" in other cases 
(abortion, military conscription, sex) 

(b) Is the government the optimal moral agent, the best or 
the right arbiter, as far as drug abuse is concerned? 

PRACTICAL: 

For instance, governments collaborate with the illicit drug 
trade when it fits their realpolitik purposes. 

(c) Is substance abuse a. personal or a social choice? Can 
one limit the implications, repercussions and outcomes of 
one's choices in general and of the choice to abuse drugs, 
in particular? If the drug abuser in effect makes decisions 
for others, too - does it justify the intervention of the 
state? Is the state the agent of society, is it the only agent 
of society and is it the right agent of society in the case of 
drug abuse? 

(d) What is the difference (in rigorous philosophical 
principle) between legal and illegal substances? Is it 



something in the nature of the substances? In the usage 
and what follows? In the structure of society! Is it a moral 
fashion? 

PRACTICAL: 

Does scientific research support or refute common myths 
and ethos regarding drugs and their abuse? 

Is scientific research influenced by the current anti-drugs 
crusade and hype? Are certain facts suppressed and 
certain subjects left unexplored? 

(e) Should drugs be decriminalized for certain purposes 
(e.g., marijuana and glaucoma)? If so, where should the 
line be drawn and by whom? 

PRACTICAL: 

Recreational drugs sometimes alleviate depression. 
Should this use be permitted? 

Note: The Rule of Law vs. Obedience to the Law 

We often misconstrue the concept of the "rule of Law " 
and take it to mean automatic "obedience to laws ". But 
the two are antithetical. 

Laws have to earn observance and obeisance. To do so, 
they have to meet a series of rigorous criteria: they have to 
be unambiguous, fair, just, pragmatic, and equitable; they 
have to be applied uniformly and universally to one and 
all, regardless of sex, age, class, sexual preference, race, 
ethnicity, skin color, or opinion; they must not entrench 
the interests of one group or structure over others; they 



must not be leveraged to yield benefits to some at the 
expense of others; and, finally, they must accord with 
universal moral and ethical tenets. 

Most dictatorships and tyrannies are "legal", in the strict 
sense of the word. The spirit of the Law and how it is 
implemented in reality are far more important that its 
letter. There are moral and, under international law, legal 
obligations to oppose and resist certain laws and to 
frustrate their execution. 

Return 



Nigerian Scams - Begging Your Trust in Africa 



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. A 
recent (2005) variant involves payment with expertly 
forged postal money orders for goods exported to a transit 
address. 

It is a scam two decades old - and it still works. In 
September 2002, 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 snatching s 
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, 2002: 

"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 
(renamed the Internet Crime Complaint Center, or IC3) 
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: 

• Be skeptical of individuals representing 
themselves as Nigerian or other foreign 
government officials asking for your help in 
placing large sums of money in overseas bank 
accounts. 

• Do not believe the promise of large sums of 
money for your cooperation. 

• Do not give out any personal information 
regarding your savings, checking, credit, or other 
financial accounts. 

• If you are solicited, do not respond and quickly 
notify the appropriate authorities. 



The "419 Coalition" is more succinct and a lot more 
pessimistic: 

1 . "NEVER pay anything up front for ANY reason. 

2. NEVER extend credit for ANY reason. 

3. NEVER do ANYTHING until their check clears. 

4. NEVER expect ANY help from the Nigerian 
Government. 

5. NEVER rely on YOUR Government to bail you 
out." 

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 (or fake postal or 
other money order) 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, tsunami victims, survivors of the September 1 1 
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. 

Greed outweighs fear and avarice enmeshes people in 
clearly criminal enterprises. The "victims" of advance fee 
scams are rarely incognizant of their alleged role. They 
knowingly and intentionally collude with self -professed 
criminals to fleece governments and institutions. This is 



one of the rare crimes where prey and perpetrator may 
well deserve each other. 

Return 



Organ Trafficking in Eastern Europe 



A kidney fetches $2700 in Turkey. According to the 
October 2002 issue of the Journal of the American 
Medical Association, this is a high price. An Indian or 
Iraqi kidney enriches its former owner by a mere $1000. 
Wealthy clients later pay for the rare organ up to 
$150,000. 

CBS News aired, five years ago, a documentary, filmed 
by Antenna 3 of Spain, in which undercover reporters in 
Mexico were asked, by a priest acting as a middleman for 
a doctor, to pay close to 1 million dollars for a single 
kidney. An auction of a human kidney on eBay in 
February 2000 drew a bid of $100,000 before the 
company put a stop to it. Another auction in September 
1999 drew $5.7 million - though, probably, merely as a 
prank. 

Organ harvesting operations flourish in Turkey, in central 
Europe, mainly in the Czech Republic, and in the 
Caucasus, mainly in Georgia. They operate on Turkish, 
Moldovan, Russian, Ukrainian, Belarusian, Romanian, 
Bosnian, Kosovar, Macedonian, Albanian and assorted 
east European donors. 

They remove kidneys, lungs, pieces of liver, even corneas, 
bones, tendons, heart valves, skin and other sellable 
human bits. The organs are kept in cold storage and air 
lifted to illegal distribution centers in the United States, 
Germany, Scandinavia, the United Kingdom, Israel, South 



Africa, and other rich, industrialized locales. It gives 
"brain drain" a new, spine chilling, meaning. 

Organ trafficking has become an international trade. It 
involves Indian, Thai, Philippine, Brazilian, Turkish and 
Israeli doctors who scour the Balkan and other destitute 
regions for tissues. The Washington Post reported, in 
November 2002, that in a single village in Moldova, 14 
out of 40 men were reduced by penury to selling body 
parts. 

Four years ago, Moldova cut off the thriving baby 
adoption trade due to an - an unfounded - fear the toddlers 
were being dissected for spare organs. According to the 
Israeli daily, Ha'aretz, the Romanians are investigating 
similar allegations in Israel and have withheld permission 
to adopt Romanian babies from dozens of eager and out of 
pocket couples. American authorities are scrutinizing a 
two year old Moldovan harvesting operation based in the 
United States. 

Organ theft and trading in Ukraine is a smooth operation. 
According to news agencies, in August 2002, three 
Ukrainian doctors were charged in Lvov with trafficking 
in the organs of victims of road accidents. The doctors 
used helicopters to ferry kidneys and livers to colluding 
hospitals. They charged up to $19,000 per organ. 

The West Australian daily surveyed in January 2002 the 
thriving organs business in Bosnia-Herzegovina. Sellers 
are offering their wares openly, through newspaper ads. 
Prices reach up to $68,000. Compared to an average 
monthly wage of less than $200, this is an unimaginable 
fortune. 



National health insurance schemes turn a blind eye. 
Israel's participates in the costs of purchasing organs 
abroad, though only subject to rigorous vetting of the 
sources of the donation. Still, a May 2001 article in a the 
New York Times Magazine, quotes "the coordinator of 
kidney transplantation at Hadassah University Hospital in 
Jerusalem (as saying that) 60 of the 244 patients currently 
receiving post-transplant care purchased their new kidney 
from a stranger - just short of 25 percent of the patients at 
one of Israel's largest medical centers participating in the 
organ business". 

Many Israelis - attempting to avoid scrutiny - travel to 
east Europe, accompanied by Israeli doctors, to perform 
the transplantation surgery. These junkets are 
euphemistically known as "transplant tourism". Clinics 
have sprouted all over the benighted region. Israeli 
doctors have recently visited impoverished Macedonia, 
Bulgaria, Kosovo and Yugoslavia to discuss with local 
businessmen and doctors the setting up of kidney 
transplant clinics. 

Such open involvement in what can be charitably 
described as a latter day slave trade gives rise to a new 
wave of thinly disguised anti-Semitism. The Ukrainian 
Echo, quoting the Ukrinform news agency, reported, on 
January 7, 2002, that, implausibly, a Ukrainian guest 
worker died in Tel- Aviv in mysterious circumstances and 
his heart was removed. The Interpol, according to the 
paper, is investigating this lurid affair. 

According to scholars, reports of organ thefts and related 
abductions, mainly of children, have been rife in Poland 
and Russia at least since 1991. The buyers are supposed to 
be rich Arabs. 



Nancy Scheper-Hughes, an anthropologist at the 
University of California at Berkeley and co-founder of 
Organs Watch, a research and documentation center, is 
also a member and co-author of the Bellagio Task Force 
Report on Transplantation, Bodily Integrity and the 
International Traffic in Organs. In a report presented in 
June 2001 to the House Subcommittee on International 
Operations and Human Rights, she substantiated at least 
the nationality of the alleged buyers, though not the urban 
legends regarding organ theft: 

"In the Middle East residents of the Gulf States (Kuwait, 
Saudi Arabia, and Oman) have for many years traveled to 
India, the Philippines, and to Eastern Europe to purchase 
kidneys made scarce locally due to local fundamentalist 
Islamic teachings that allow organ transplantation (to save 
a life), but prohibit organ harvesting from brain-dead 
bodies. 

Meanwhile, hundreds of kidney patients from Israel, 
which has its own well -developed, but under-used 
transplantation centers (due to ultra-orthodox Jewish 
reservations about brain death) travel in 'transplant tourist' 
junkets to Turkey, Moldova, Romania where desperate 
kidney sellers can be found, and to Russia where an 
excess of lucrative cadaveric organs are produced due to 
lax standards for designating brain death, and to South 
Africa where the amenities in transplantation clinics in 
private hospitals can resemble four star hotels. 

We found in many countries - from Brazil and Argentina 
to India, Russia, Romania, Turkey to South Africa and 
parts of the United States - a kind of 'apartheid medicine' 
that divides the world into two distinctly different 



populations of 'organs supplies' and 'organs receivers'." 

Russia, together with Estonia, China and Iraq, is, indeed, a 
major harvesting and trading centre. International news 
agencies described, five years ago, how a grandmother in 
Ryazan tried to sell her grandchild to a mediator. The boy 
was to be smuggled to the West and there dismembered 
for his organs. The uncle, who assisted in the matter, was 
supposed to collect $70,000 - a fortune in Russian terms. 

When confronted by the European Union on this issue, 
Russia responded that it lacks the resources required to 
monitor organ donations. The Italian magazine, Happy 
Web, reports that organ trading has taken to the Internet. 
A simple query on the Google search engine yields 
thousands of Web sites purporting to sell various body 
parts - mostly kidneys - for up to $125,000. The sellers are 
Russian, Moldovan, Ukrainian and Romanian. 

Scheper- Hughes, an avid opponent of legalizing any form 
of trade in organs, says that "in general, the movement 
and flow of living donor organs - mostly kidneys - is from 
South to North, from poor to rich, from black and brown 
to white, and from female to male bodies". 

Yet, in the summer of 2002, bowing to reality, the 
American Medical Association commissioned a study to 
examine the effects of paying for cadaveric organs would 
have on the current shortage. The 1984 National Organ 
Transplant Act that forbids such payments is also under 
attack. Bills to amend it were submitted recently by 
several Congressmen. These are steps in the right 
direction. 

Organ trafficking is the outcome of the international ban 



on organ sales and live donor organs. But wherever there 
is demand there is a market. Excruciating poverty of 
potential donors, lengthening patient waiting lists and the 
better quality of organs harvested from live people make 
organ sales an irresistible proposition. The medical 
professions and authorities everywhere would do better to 
legalize and regulate the trade rather than transform it into 
a form of organized crime. The denizens of Moldova 
would surely appreciate it. 

Return 



Selling Arms to Rogue States 



In a desperate bid to fend off sanctions, the Bosnian 
government banned yesterday all trade in arms and 
munitions. A local, Serb-owned company was 
documented by the State Department selling spare parts 
and maintenance for military aircraft to Iraq via Yugoslav 
shell companies. 

Heads rolled. In the Republika Srpska, the Serb 
component of the ramshackle Bosnian state, both the 
Defense Minister Slobodan Bilic and army Chief of Staff 
Novica Simic resigned. Another casualty was the general 
director of the Orao Aircraft Institute of Bijeljina - Milan 
Prica. On the Yugoslav side, Jugoimport chief Gen Jovan 
Cekovic and federal Deputy Defense Minister Ivan Djokic 
stood down. 

Bosnia's is only the latest in a series of embarrassing 
disclosures in practically every country of the former 
eastern bloc, including all the EU accession candidates. 



With the crumbling of the Warsaw pact and the 
economies of the region, millions of former military and 
secret service operators resorted to peddling weapons and 
martial expertise to rogue states, terrorist outfits, and 
organized crime. The confluence - and, lately, 
convergence - of these interests is threatening Europe's 
very stability. 

Last week, the Polish "Rzeczpospolita" accused the 
Military Information services (WSI) of illicit arms sales 
between 1992-6 through both private and state-run 
entities. The weapons were plundered from the Polish 
army and sold at half price to Croatia and Somalia, both 
under UN arms embargo. 

Deals were struck with the emerging international 
operations of the Russian mafia. Terrorist middlemen and 
Latvian state officials were involved. Breaching Poland's 
democratic veneer, the Polish Ministry of Defense 
threatened to sue the paper for disclosing state secrets. 

Police in Lodz is still investigating the alarming 
disappearance of 4 Arrow anti-aircraft missiles from a 
train transporting arms from a factory to the port of 
Gdansk, to be exported. The private security escort claim 
innocence. 

The Czech Military Intelligence Services (VZS) have long 
been embroiled in serial scandals. The Czech defense 
attache to India, Miroslav Kvasnak, was recently fired for 
disobeying explicit orders from the minister of defense. 



According to Jane's, Kvasnak headed URNA - the elite 
anti-terrorist unit of the Czech National Police. He was 
sacked in 1995 for selling Semtex, the notorious Czech 
plastic explosive, as well as weapons and munitions to 
organized crime gangs. 

In late August, the Czechs arrested arms traffickers, 
members of an international ring, for selling Russian 
weapons - including, incredibly, tanks, fighter planes, 
naval vessels, long range rockets, and missile platforms - 
to Iraq. The operation has lasted 3 years and was 
conducted from Prague. 

According to the "Wall Street Journal", the Czech 
intelligence services halted the sale of $300 million worth 
of the Tamara radar systems to Iraq in 1997. Czech firms, 
such as Agroplast, a leading waste processing company, 
have often been openly accused of weapons smuggling. 
"The Guardian" tracked in February a delivery of missiles 
and guidance systems from the Czech Republic through 
Syria to Iraq. 

German go-betweens operate in the Baltic countries. In 
May a sale of more than two pounds of the radioactive 
element cesium- 137 was thwarted in Vilnius, the capital 
of Lithuania. The substance was sold to terrorist groups 
bent on producing a "dirty bomb", believe US officials 
quoted by "The Guardian". The Director of the CIA, John 
Deutsch, testified in Congress in 1996 about previous 
cases in Lithuania involving two tons of radioactive 
wolfram and 220 pounds of uranium-238. 



Still, the epicenters of the illicit trade in weapons are in 
the Balkan, in Russia, and in the republics of the former 
Soviet Union. Here, domestic firms intermesh with 
Western intermediaries, criminals, terrorists, and state 
officials to engender a pernicious, ubiquitous and 
malignant web of smuggling and corruption. 

According to the Center for Public Integrity and the 
Western media, over the last decade, renegade Russian 
army officers have sold weapons to every criminal and 
terrorist organization in the world - from the IRA to al- 
Qaida and to every failed state, from Liberia to Libya. 

They are protected by well-connected, bribe-paying, arms 
dealers and high-level functionaries in every branch of 
government. They launder the proceeds through Russian 
oil multinationals, Cypriot, Balkan, and Lebanese banks, 
and Asian, Swiss, Austrian, and British trading 
conglomerates - all obscurely owned and managed. 

The most serious breach of the united international front 
against Iraq may be the sale of the $100 million anti- 
stealth Ukrainian Kolchuga radar to the pariah state two 
years ago. Taped evidence suggests that president Leonid 
Kuchma himself instructed the General Director of the 
Ukrainian arms sales company, UkrSpetzExport, Valery 
Malev to conclude the deal. Malev died in a mysterious 
car accident on March 6, three days after his taped 
conversation with Kuchma surfaced. 

The Ukrainians insist that they were preempted by 
Russian dealers who sold a similar radar system to Iraq - 
but this is highly unlikely as the Russian system was still 
in development at the time, the American and British are 
currently conducting a high-profile investigation in Kyiv. 



In Russia, illegal arms are traded mainly by the Western 
Group of Forces in cahoots with private companies, both 
domestic and foreign. The Air Defense Army specializes 
in selling light arms. The army is the main source of 
weapons - plastic explosives, grenade launchers, 
munitions - of both Chechen rebels and Chechen 
criminals. Contrary to received opinion, volunteer- 
soldiers, not conscripts, control the arms trade. The state 
itself is involved in arms proliferation. Sales to China and 
Iran were long classified. From June, all sales of materiel 
enjoy "state secret" status. 

There is little the US can do. The Bush administration has 
imposed in May sanctions on Armenian and Moldovan 
companies, among others, for aiding and abetting Iran's 
efforts to obtain weapons of mass destruction. Armenian 
president, Robert Kocharian, indignantly denied 
knowledge of such transactions and vowed to get to the 
bottom of the American allegations. 

The Foreign Policy Research Institute, quoted by Radio 
Free Europe/Radio Liberty, described a "Department of 
Energy (DOE) initiative, underway since 1993, to 
improve 'material protection, control and accountability' at 
former Soviet nuclear enterprises. The program enjoys 
substantial bipartisan support in the United States and is 
considered the first line of defense 
against unwanted proliferation episodes." 



"As of February 2000, more than 8 years after the collapse 
of the USSR, new security systems had been installed at 
113 buildings, most of them in Russia; however, these 
sites contained only 7 percent of the estimated 650 tons of 
weapons-usable material considered at risk for theft or 
diversion. DOE plans call for safeguarding 60 percent of 
the material by 2006 and the rest in 10 to 15 years or 
longer." 

Russian traders learned to circumvent official channels 
and work through Belarus. Major General Stsyapan 
Sukharenka, the first deputy chief of the Belarusian KGB, 
denied, in March, any criminal arms trading in his 
country. This vehement protest is gainsaid by the 
preponderance of Belarusian arms traders replete with 
fake end-user certificates in Croatia during the Yugoslav 
wars of secession (1992-5). 

Deputy Assistant Secretary of State Steven Pifer said that 
UN inspectors unearthed Belarusian artillery in Iraq in 
1996. Iraqis are also being trained in Belarus to operate 
various advanced weapons systems. The secret services 
and armies of Ukraine, Russia, and even Romania use 
Belarus to mask the true origin of weapons sold in 
contravention of UN sanctions. 

Western arms manufacturers lobby their governments to 
enhance their sales. Legitimate Russian and Ukrainian 
sales are often thwarted by Western political arm-twisting. 
When Macedonia, in the throes of a civil war it was about 
to lose, purchased helicopter gunships from Ukraine, the 
American Embassy leaned on the government to annul the 
contracts and threatened to withhold aid and credits if it 
does not succumb. 



The duopoly, enjoyed by the USA and Russia, forces 
competitors to go underground and to seek rogue or 
felonious customers. Yugoslav scientists, employed by 
Jugoimport and other firms run by former army officers, 
are developing cruise missiles for Iraq, alleges the 
American administration. The accusation, though, is 
dubious as Iraq has no access to satellites to guide such 
missiles. 

Another Yugoslav firm, Brunner, constructed a Libyan 
rocket propellant manufacturing facility. In an interview 
to the "Washington Post", Yugoslavia's president Vojislav 
Kostunica brushed off the American complaints about, as 
he put it disdainfully, "overhauling older-generation 
aircraft engines". 

Such exploits are not unique to Yugoslavia or Bosnia. The 
Croat security services are notorious for their collusion in 
drug and arms trafficking, mainly via Hungary. 
Macedonian construction companies collaborate with 
manufacturers of heavy machinery and purveyors of 
missile technology in an effort to recoup hundreds of 
millions of dollars in Iraqi debts. Albanian crime gangs 
collude with weapon smugglers based in Montenegro and 
Kosovo. The Balkan - from Greece to Hungary - is 
teeming with these penumbral figures. 

Arms smuggling is a by-product of criminalized societies, 
destitution, and dysfunctional institutions. The prolonged 
period of failed transition in countries such as Yugoslavia, 
Macedonia, Bosnia, Moldova, Belarus, and Ukraine has 
entrenched organized crime. It now permeates every 
legitimate economic sphere and every organ of the state. 



Whether this situation is reversible is the subject of heated 
debate. But it is the West which pays the price in 
increased crime rates and, probably in Iraq, in added 
fatalities once it launches war against that murderous 
regime. 

Return 



The Industrious Spies 
Also published by United Press International (UPI) 



The Web site of GURPS (Generic Universal Role Playing 
System) lists 18 "state of the art equipments (sic) used for 
advanced spying". These include binoculars to read lips, 
voice activated bugs, electronic imaging devices, 
computer taps, electromagnetic induction detectors, 
acoustic stethoscopes, fiber optic scopes, detectors of 
acoustic emissions (e.g., of printers), laser mikes that can 
decipher and amplify voice- activated vibrations of 
windows, and other James Bond gear. 

Such contraptions are an integral part of industrial 
espionage. The American Society for Industrial Security 
(ASIC) estimated a few years ago that the damage caused 
by economic or commercial espionage to American 
industry between 1993-5 alone was c. $63 billion. 

The average net loss per incident reported was $19 million 
in high technology, $29 million in services, and $36 
million in manufacturing. ASIC than upped its estimate to 
$300 billion in 1997 alone - compared to $100 billion 
assessed by the 1995 report of the White House Office of 
Science and Technology. 

This figures are mere extrapolations based on anecdotal 
tales of failed espionage. Many incidents go unreported. 
In his address to the 1998 World Economic Forum, Frank 
Ciluffo, Deputy Director of the CSIS Global Organized 
Crime Project, made clear why: 



"The perpetrators keep quiet for obvious reasons. The 
victims do so out of fear. It may jeopardize shareholder 
and consumer confidence. Employees may lose their jobs. 
It may invite copycats by inadvertently revealing 
vulnerabilities. And competitors may take advantage of 
the negative publicity. In fact, they keep quiet for all the 
same reasons corporations do not report computer 
intrusions." 

Interactive Television Technologies complained - in a 
press release dated August 16, 1996 - that someone broke 
into its Amherst, NY, offices and stole "three computers 
containing the plans, schematics, diagrams and 
specifications for the BUTLER, plus a number of 
computer disks with access codes." BUTLER is a 
proprietary technology which helps connect television to 
computer networks, such as the Internet. It took four years 
to develop. 

In a single case, described in the Jan/Feb 1996 issue of 
"Foreign Affairs", Ronald Hoffman, a software scientist, 
sold secret applications developed for the Strategic 
Defense Initiative to Japanese corporations, such as 
Nissan Motor Company, Mitsubishi Electric, Mitsubishi 
Heavy Industries, and Ishikawajima-Harima Heavy 
Industries. He was caught in 1992, having received 
$750,000 from his "clients", who used the software in 
their civilian aerospace projects. 

Canal Plus Technologies, a subsidiary of French media 
giant Vivendi, filed a lawsuit last March against NDS, a 
division of News Corp. Canal accused NDS of hacking 
into its pay TV smart cards and distributing the cracked 
codes freely on a piracy Web site. It sued NDS for $1.1 
billion in lost revenues. This provided a rare glimpse into 



information age, hacker-based, corporate espionage 
tactics. 

Executives of publicly traded design software developer 
Avant! went to jail for purchasing batches of computer 
code from former employees of Cadence in 1997. 

Reuters Analytics, an American subsidiary of Reuters 
Holdings, was accused in 1998 of theft of proprietary 
information from Bloomberg by stealing source codes 
from its computers. 

In December 2001, Say Lye Ow, a Malaysian subject and 
a former employee of Intel, was sentenced to 24 months in 
prison for illicitly copying computer files containing 
advanced designs of Intel's Merced (Itanium) 
microprocessor. It was the crowning achievement of a 
collaboration between the FBI's High-Tech squad and the 
US Attorney's Office CHIP - Computer Hacking and 
Intellectual Property - unit. 

U.S. Attorney David W. Shapiro said: "People and 
companies who steal intellectual property are thieves just 
as bank robbers are thieves. In this case, the Itanium 
microprocessor is an extremely valuable product that took 
Intel and HP years to develop. These cases should send 
the message throughout Silicon Valley and the Northern 
District that the U.S. Attorney's Office takes seriously the 
theft of intellectual property and will prosecute these 
cases to the full extent of the law." 

Yet, such cases are vastly more common than publicly 
acknowledged. 



"People have struck up online friendships with employers 
and then lured them into conspiracy to commit espionage. 
People have put bounties on laptops of executives. People 
have disguised themselves as janitors to gain physical 
access," Richard Power, editorial director of the Computer 
Security Institute told MSNBC. 

Marshall Phelps, IBM Vice President for Commercial and 
Industry Relations admitted to the Senate Judiciary 
Committee as early as April 1992: 

"Among the most blatant actions are outright theft of 
corporate proprietary assets. Such theft has occurred from 
many quarters: competitors, governments seeking to 
bolster national industrial champions, even employees. 
Unfortunately, IBM has been the victim of such acts." 

Raytheon, a once thriving defense contractor, released 
"SilentRunner", a $25,000-65,000 software package 
designed to counter the "insider threat". Its brochure, 
quoted by "Wired", says: 

"We know that 84 percent of your network threats can be 
expected to come from inside your organization.... This 
least intrusive of all detection systems will guard the 
integrity of your network against abuses from 
unauthorized employees, former employees, hackers or 
terrorists and competitors." 

This reminds many of the FBI's Carnivore massive 
network sniffer software. It also revives the old dilemma 
between privacy and security. An Omni Consulting 
survey of 3200 companies worldwide pegged damage 
caused by insecure networks at $12 billion. 



There is no end to the twists and turns of espionage cases 
and to the creativity shown by the perpetrators. 

On June 2001 an indictment was handed down against 
Nicholas Daddona. He stands accused of a unique 
variation on the old theme of industrial espionage: he was 
employed by two firms - transferring trade secrets from 
one (Fabricated Metal Products) to the other (Eyelet). 

Jungsheng Wang was indicted last year for copying the 
architecture of the Sequoia ultrasound machine developed 
by Acuson Corporation. He sold it to Bell Imaging, a 
Californian company which, together with a Chinese firm, 
owns a mainland China corporation, also charged in the 
case. The web of collaboration between foreign - or 
foreign born - scientists with access to trade and 
technology secrets, domestic corporations and foreign 
firms, often a cover for government interests - is clearly 
exposed here. 

Kenneth Cullen and Bruce Zak were indicted on April 
2001 for trying to purchase a printed or text version of the 
source code of a computer application for the processing 
of health care benefit claim forms developed by ZirMed. 
The legal status of printed source code is unclear. It is 
undoubtedly intellectual property - but of which kind? Is it 
software or printed matter? 

Peter Morch, a senior R&D team leader for CISCO was 
accused on March 2001 for simply burning onto compact 
discs all the intellectual property he could lay his hands on 
with the intent of using it in his new workplace, Calix 
Networks, a competitor of CISCO. 



Perhaps the most bizarre case involves Fausto Estrada. He 
was employed by a catering company that served the 
private lunches to Mastercard's board of directors. He 
offered to sell Visa proprietary information that he 
claimed to have stolen from Mastercard. In a letter signed 
"Cagliostro", Fausto demanded $1 million. He was caught 
red-handed in an FBI sting operation on February 2001. 

Multinationals are rarely persecuted even when known to 
have colluded with offenders. Steven Louis Davis pleaded 
guilty on January 1998 to stealing trade secrets and 
designs from Gillette and selling them to its competitors, 
such as Bic Corporation, American Safety Razor, and 
Warner Lambert. Yet, it seems that only he paid the price 
for his misdeeds - 27 months in prison. Bic claims to have 
immediately informed Gillette of the theft and to have 
collaborated with Gillette's Legal Department and the 
FBI. 

Nor are industrial espionage or the theft of intellectual 
property limited to industry. Mayra Justine Trujillo-Cohen 
was sentenced on October 1998 to 48 months in prison for 
stealing proprietary software from Deloitte-Touche, where 
she worked as a consultant, and passing it for its own. 
Caroll Lee Campbell, the circulation manager of Gwinette 
Daily Post (GDP), offered to sell proprietary business and 
financial information of his employer to lawyers 
representing a rival paper locked in bitter dispute with 
GDP. 

Nor does industrial espionage necessarily involve 
clandestine, cloak and dagger, operations. The Internet 
and information technology are playing an increasing role. 



In a bizarre case, Caryn Camp developed in 1999 an 
Internet-relationship with a self-proclaimed entrepreneur, 
Stephen Martin. She stole he employer's trade secrets for 
Martin in the hope of attaining a senior position in 
Martin's outfit - or, at least, of being richly rewarded. 
Camp was exposed when she mis-addressed an e-mail 
expressing her fears - to a co-worker. 

Steven Hallstead and Brian Pringle simply advertised their 
wares - designs of five advanced Intel chips - on the Web. 
They were, of course, caught and sentenced to more than 
5 years in prison. David Kern copied the contents of a 
laptop inadvertently left behind by a serviceman of a 
competing firm. Kern trapped himself. He was forced to 
plead the Fifth Amendment during his deposition in a civil 
lawsuit he filed against his former employer. This, of 
course, provoked the curiosity of the FBI. 

Stolen trade secrets can spell the difference between 
extinction and profitability. Jack Shearer admitted to 
building an $8 million business on trade secrets pilfered 
from Caterpillar and Solar Turbines. 

United States Attorney Paul E. Coggins stated: "This is 
the first EEA case in which the defendants pled guilty to 
taking trade secret information and actually converting the 
stolen information into manufactured products that were 
placed in the stream of commerce. The sentences handed 
down today (June 15, 2000) are among the longest 
sentences ever imposed in an Economic Espionage case." 

Economic intelligence gathering - usually based on open 
sources - is both legitimate and indispensable. Even 
reverse engineering - disassembling a competitor's 
products to learn its secrets - is a grey legal area. Spying is 



different. It involves the purchase or theft of proprietary 
information illicitly. It is mostly committed by firms. But 
governments also share with domestic corporations and 
multinationals the fruits of their intelligence networks. 

Former - and current - intelligence operators (i.e., spooks), 
political and military information brokers, and assorted 
shady intermediaries - all switched from dwindling Cold 
War business to the lucrative market of "competitive 
intelligence". 

US News and World Report described on May 6, 1996, 
how a certain Mr. Kota - an alleged purveyor of secret 
military technology to the KGB in the 1980's - conspired 
with a scientist, a decade later, to smuggle 
bio technologic ally modified hamster ovaries to India. 

This transition fosters international tensions even among 
allies. "Countries don't have friends - they have interests!" 
- screamed a DOE poster in the mid-nineties. France has 
vigorously protested US spying on French economic and 
technological developments - until it was revealed to be 
doing the same. French relentless and unscrupulous 
pursuit of purloined intellectual property in the USA is 
described in Peter Schweizer's "Friendly Spies: How 
America's Allies Are Using Economic Espionage to Steal 
Our Secrets." 

"Le Mond" reported back in 1996 about intensified 
American efforts to purchase from French bureaucrats and 
legislators information regarding France's WTO, 
telecommunications, and audio-visual policies. Several 
CIA operators were expelled. 



Similarly, according to Robert Dreyfuss in the January 
1995 issue of "Mother Jones", Non Official Cover (NOC) 
CIA operators - usually posing as businessmen - are 
stationed in Japan. These agents conduct economic and 
technological espionage throughout Asia, including in 
South Korea and China. 

Even the New York Times chimed in, accusing American 
intelligence agents of assisting US trade negotiators by 
eavesdropping on Japanese officials during the car 
imports row in 1995. And President Clinton admitted 
openly that intelligence gathered by the CIA regarding the 
illegal practices of French competitors allowed American 
aerospace firms to win multi-billion dollar contracts in 
Brazil and Saudi Arabia. 

The respected German weekly, Der Spiegel, castigated the 
USA, in 1990, for arm-twisting the Indonesian 
government into splitting a $200 million satellite contract 
between the Japanese NEC and US manufacturers. The 
American, alleged the magazines, intercepted messages 
pertaining to the deal, using the infrastructure of the 
National Security Agency (NSA). Brian Gladwell, a 
former NATO computer expert, calls it "state- sponsored 
information piracy". 

Robert Dreyfuss, writing in "Mother Jones", accused the 
CIA of actively gathering industrial intelligence (i.e., 
stealing trade secrets) and passing them on to America's 
Big Three carmakers. He quoted Clinton administration 
officials as saying: "(the CIA) is a good source of 
information about the current state of technology in a 
foreign country ... We've always managed to get 
intelligence to the business community. There is contact 



between business people and the intelligence community, 
and information flows both ways, informally." 

A February 1995 National Security Strategy statement 
cited by MSNBC declared: 

"Collection and analysis can help level the economic 
playing field by identifying threats to U.S. companies 
from foreign intelligence services and unfair trading 
practices." 

The Commerce Department's Advocacy Center solicits 
commercial information thus: 

"Contracts pursued by foreign firms that receive 
assistance from their home governments to pressure a 
customer into a buying decision; unfair treatment by 
government decision-makers, preventing you from a 
chance to compete; tenders tied up in bureaucratic red 
tape, resulting in lost opportunities and unfair advantage 
to a competitor. If these or any similar export issues are 
affecting your company, it's time to call the Advocacy 
Center." 

And then, of course, there is Echelon. 

Exposed two years ago by the European Parliament in 
great fanfare, this telecommunications interception 
network, run by the US, UK, New Zealand, Australia, and 
Canada has become the focus of bitter mutual 
recriminations and far flung conspiracy theories. 

These have abated following the brutal terrorist attacks of 
September 1 1 when the need for Echelon-like system with 
even laxer legal control was made abundantly clear. 



France, Russia, and 28 other nations operate indigenous 
mini-Echelons, their hypocritical protestations to the 
contrary notwithstanding. 

But, with well over $600 billion a year invested in easily 
pilfered R&D, the US is by far the prime target and main 
victim of such activities rather than their chief perpetrator. 
The harsh - and much industry lobbied - "Economic 
Espionage (and Protection of Proprietary Economic 
Information) Act of 1996" defines the criminal offender 
thus: 

"Whoever, intending or knowing that the offense will 
benefit any foreign government, foreign instrumentality, 
or foreign agent, knowingly" and "whoever, with intent to 
convert a trade secret, that is related to or included in a 
product that is produced for or placed in interstate or 
foreign commerce, to the economic benefit of anyone 
other than the owner thereof, and intending or knowing 
that the offense will , injure any owner of that trade 
secret": 

"(1) steals, or without authorization appropriates, takes, 
carries away, or conceals, or by fraud, artifice, or 
deception obtains a trade secret (2) without authorization 
copies, duplicates, sketches, draws, photographs, 
downloads, uploads, alters, destroys, photocopies, 
replicates, transmits, delivers, sends, mails, 
communicates, or conveys a trade secret (3) receives, 
buys, or possesses a trade secret, knowing the same to 
have been stolen or appropriated, obtained, or converted 
without authorization (4) attempts to commit any offense 
described in any of paragraphs (1) through (3); or (5) 
conspires with one or more other persons to commit any 
offense described in any of paragraphs (1) through (4), 



and one or more of such persons do any act to effect the 
object of conspiracy." 

Other countries either have similar statutes (e.g., France) - 
or are considering to introduce them. Taiwan's National 
Security Council has been debating a local version of an 
economic espionage law lat month. There have been 
dozens of prosecutions under the law hitherto. Companies 
- such as "Four Pillars" which stole trade secrets from 
Avery Dennison - paid fines of millions of US dollars. 
Employees - such as PPG's Patrick Worthing - and their 
accomplices were jailed. 

Foreign citizens - like the Taiwanese Kai-Lo Hsu and 
Prof. Charles Ho from National Chiao Tung university - 
were detained. Mark Halligan of Welsh and Katz in 
Chicago lists on his Web site more than 30 important 
economic espionage cases tried under the law by July last 
year. 

The Economic Espionage law authorizes the FBI to act 
against foreign intelligence gathering agencies toiling on 
US soil with the aim of garnering proprietary economic 
information. During the Congressional hearings that 
preceded the law, the FBI estimated that no less that 23 
governments, including the Israeli, French, Japanese, 
German, British, Swiss, Swedish, and Russian, were busy 
doing exactly that. Louis Freeh, the former director of the 
FBI, put it succinctly: "Economic Espionage is the 
greatest threat to our national security since the Cold 
War." 

The French Ministry of Foreign Affairs runs a program 
which commutes military service to work at high tech US 
firms. Program-enrolled French computer engineers were 



arrested attempting to steal proprietary source codes from 
their American employers. 

In an interview he granted to the German ZDF Television 
quoted by "Daily Yomiuri" and Netsafe, the former 
Director of the French foreign counterintelligence service, 
the DGSE, freely confessed: 

"....All secret services of the big democracies undertake 
economic espionage ... Their role is to peer into hidden 
corners and in that context business plays an important 
part ... In France the state is not just responsible for the 
laws, it is also an entrepreneur. There are state-owned and 
semi-public companies. And that is why it is correct that 
for decades the French state regulated the market with its 
right hand in some ways and used its intelligence service 
with its left hand to furnish its commercial companies ... It 
is among the tasks of the secret services to shed light on 
and analyze the white, grey and black aspects of the 
granting of such major contracts, particularly in far-off 
countries." 

The FBI investigated 400 economic espionage cases in 
1995 - and 800 in 1996. It interfaces with American 
corporations and obtains investigative leads from them 
through its 26 years old Development of Espionage, 
Counterintelligence, and Counter terrorism Awareness 
(DECA) Program renamed ANSIR (Awareness of 
National Security Issues and Response). Every local FBI 
office has a White Collar Crime squad in charge of 
thwarting industrial espionage. The State Department runs 
a similar outfit called the Overseas Security Advisory 
Council (OSAC). 



These are massive operations. In 1993-4 alone, the FBI 
briefed well over a quarter of a million corporate officers 
in more than 20,000 firms. By 1995, OSAC collaborated 
on overseas security problems with over 1400 private 
enterprises. "Country Councils", comprised of embassy 
official and private American business, operate in dozens 
of foreign cities. They facilitate the exchange of timely 
"unclassified" and threat-related security information. 

More than 1600 US companies and organization are 
currently permanently affiliated wit OSAC. Its Advisory 
Council is made up of twenty-one private sector and four 
public sector member organizations that, according to 
OSAC, "represent specific industries or agencies that 
operate abroad. Private sector members serve for two to 
three years. More than fifty U.S. companies and 
organizations have already served on the Council. 
Member organizations designate representatives to work 
on the Council. 

These representatives provide the direction and guidance 
to develop programs that most benefit the U.S. private 
sector overseas. Representatives meet quarterly and staff 
committees tasked with specific projects. Current 
committees include Transnational Crime, Country 
Council Support, Protection of Information and 
Technology, and Security Awareness and Education." 

But the FBI is only one of many agencies that deal with 
the problem in the USA. The President's Annual Report to 
Congress on "Foreign Economic Collection and Industrial 
Espionage" dated July 1995, describes the multiple 
competitive intelligence (CI) roles of the Customs 
Service, the Department of Defense, the Department of 
Energy, and the CIA. 



The federal government alerts its contractors to CI threats 
and subjects them to "awareness programs" under the 
DOD's Defense Information Counter Espionage (DICE) 
program. The Defense Investigative Service (DIS) 
maintains a host of useful databases such as the Foreign 
Ownership, Control, or Influence (FOCI) register. It is 
active otherwise as well, conducting personal security 
interviews by industrial security representatives and 
keeping tabs on the foreign contacts of security cleared 
facilities. And the list goes on. 

According to the aforementioned report to Congress: 

"The industries that have been the targets in most cases of 
economic espionage and other collection activities include 
biotechnology; aerospace; telecommunications, including 
the technology to build the 'information superhighway'; 
computer software/ hardware; advanced transportation 
and engine technology; advanced materials and coatings, 
including 'stealth' technologies; energy research; defense 
and armaments technology; manufacturing processes; and 
semiconductors. Proprietary business information-that is, 
bid, contract, customer, and strategy in these sectors is 
aggressively targeted. Foreign collectors have also shown 
great interest in government and corporate financial and 
trade data." 

The collection methods range from the traditional - agent 
recruitment and break ins - to the technologically 
fantastic. Mergers, acquisitions, joint ventures, research 
and development partnerships, licensing and franchise 
agreements, friendship societies, international exchange 
programs, import-export companies - often cover up for 
old fashioned reconnaissance. Foreign governments 



disseminate disinformation to scare off competitors - or 
lure then into well-set traps. 

Foreign students, foreign employees, foreign tourist 
guides, tourists, immigrants, translators, affable 
employees of NGO's, eager consultants, lobbyists, spin 
doctors, and mock journalists are all part of national 
concerted efforts to prevail in the global commercial 
jungle. Recruitment of traitors and patriots is at its peak in 
international trade fairs, air shows, sabbaticals, scientific 
congresses, and conferences. 

On May 2001, Takashi Okamoto and Hiroaki Serizwa 
were indicted of stealing DNA and cell line reagents from 
Lerner Research Institute and the Cleveland Clinic 
Foundation. This was done on behalf of the Institute of 
Physical and Chemical Research (RIKEN) in Japan - an 
outfit 94 funded by the Japanese government. The 
indictment called RIKEN "an instrumentality of the 
government of Japan". 

The Chinese Ministry of Posts and Telecommunications 
was involved on May 2001 in an egregious case of theft of 
intellectual property. Two development scientists of 
Chinese origin transferred the PathStar Access Server 
technology to a Chinese corporation owned by the 
ministry. The joint venture it formed with the 
thieves promptly came out with its own product probably 
based on the stolen secrets. 

The following ad appeared in the Asian Wall Street 
Journal in 1991 - followed by a contact phone number in 
western Europe: 



"Do you have advanced/privileged information of any 
type of project/contract that is going to be carried out in 
your country? We hold commission/agency agreements 
with many large European companies and could introduce 
them to your project/contract. Any commission received 
would be shared with yourselves." 

Ben Venzke, publisher of Intelligence Watch Report, 
describes how Mitsubishi filed c. 1500 FOIA (Freedom of 
Information Act) requests in 1987 alone, in an effort to 
enter the space industry. The US Patent office is another 
great source of freely available proprietary information. 

Industrial espionage is not new. In his book, "War by 
Other Means: Economic Espionage in America", The 
Wall Street Journal's John Fialka, vividly describes how 
Frances Cabot Lowell absconded from Britain with the 
plans for the cutting edge Cartwright loom in 1813. 

Still, the phenomenon has lately become more egregious 
and more controversial. As Cold War structures - from 
NATO to the KGB and the CIA - seek to redefine 
themselves and to assume new roles and new functions, 
economic espionage offers a tempting solution. 

Moreover, decades of increasing state involvement in 
modern economies have blurred the traditional 
demarcation between the private and the public sectors. 
Many firms are either state-owned (in Europe) or state- 
financed (in Asia) or sustained by state largesse and 
patronage (the USA). Many businessmen double as 
politicians and numerous politicians serve on corporate 
boards. 



Eisenhower's "military-industrial complex" though not as 
sinister as once imagined is, all the same, a reality. The 
deployment of state intelligence assets and resources to 
help the private sector gain a competitive edge is merely 
its manifestation. 

As foreign corporate ownership becomes widespread, as 
multinationals expand, as nation-states dissolve into 
regions and coalesce into supranational states - the classic, 
exclusionary, and dichotomous view of the world ("we" 
versus "they") will fade. But the notion of "proprietary 
information" is here to stay. And theft will never cease as 
long as there is profit to be had. 

Return 



Russia 's Idled Spies 



On November 11, 2002, Sweden expelled two Russian 
diplomats for spying on radar and missile guidance 
technologies for the JAS 39 British-Swedish Gripen 
fighter jet developed by Telefon AB LM Ericsson, the 
telecommunications multinational. The Russians 
threatened to reciprocate. Five current and former 
employees of the corporate giant are being investigated. 
Ironically, the first foreign buyer of the aircraft may well 
be Poland, a former Soviet satellite state and a current 
European Union candidate. 

Sweden arrested in February 2001 a worker of the Swiss- 
Swedish engineering group, ABB, on suspicion of spying 
for Russia. The man was released after two days for lack 
of evidence and reinstated. But the weighty Swedish 
daily, Dagens Nyheter, speculated that the recent Russian 
indiscretion was in deliberate retaliation for Swedish 
espionage in Russia. Sweden is rumored to have been in 
the market for Russian air radar designs and the JAS radar 
system is said by some observers to uncannily resemble 
its eastern counterparts. 

The same day, a Russian military intelligence (GRU) 
colonel, Aleksander Sipachev, was sentenced in Moscow 
to eight years in prison and stripped of his rank. 
According to Russian news agencies, he was convicted of 
attempting to sell secret documents to the CIA. Russian 
secret service personnel, idled by the withering of Russia's 
global presence, resort to private business or are re- 
deployed by the state to spy on industrial and economic 
secrets in order to aid budding Russian multinationals. 



According to the FBI and the National White-collar Crime 
Center, Russian former secret agents have teamed with 
computer hackers to break into corporate networks to steal 
vital information about product development and 
marketing strategies. Microsoft has admitted to such a 
compromising intrusion. 

In a December 1999 interview to Segodnya, a Russia 
paper, Eyer Winkler, a former high-ranking staffer with 
the National Security Agency (NSA) confirmed that 
"corruption in the Russian Government, the Foreign 
Intelligence Service, and the Main Intelligence 
Department allows Russian organized criminal groups to 
use these departments in their own interests. Criminals 
receive the major part of information collected by the 
Russian special services by means of breaking into 
American computer networks." 

When the KGB was dismantled and replaced by a host of 
new acronyms, Russian industrial espionage was still in 
diapers, as a result, it is a bureaucratic no-man's land 
roamed by agents of the GRU, the Foreign Intelligence 
Service (SVR), and smaller outfits, such as the Federal 
Agency on Government Communications and Information 
(FAPSI). 

According to Stratfor, the strategic forecasting 
consultancy, "the SVR and GRU both handle manned 
intelligence on U.S. territory, with the Russian Federal 
Security Service (FSB) doing counterintelligence in 
America. Also, both the SVR and GRU have internal 
counterintelligence units created for finding foreign 
intelligence moles." This, to some extent, is the division 
of labor in Europe as well. 



Germany's Federal Prosecutor has consistently warned 
against $5 billion worth of secrets pilfered annually from 
German industrial firms by foreign intelligence services, 
especially from east Europe and Russia. The 
Counterintelligence News and Developments newsletter 
pegs the damage at $13 billion in 1996 alone: 

"Modus operandi included placing agents in 
international organizations, setting up joint-ventures 
with German companies, and setting up bogus 
companies. The (Federal Prosecutor's) report also 
warned business leaders to be particularly wary of 
former diplomats or people who used to work for foreign 
secret services because they often had the language 
skills and knowledge of Germany that made them 
excellent agents. " 

Russian spy rings now operate from Canada to Japan. 
Many of the spies have been dormant for decades and 
recalled to service following the implosion of the USSR. 
According to Asian media, Russians have become 
increasingly active in the Far East, mainly in Japan, South 
Korea, Taiwan, and mainland China. 

Russia is worried about losing its edge in avionics, 
electronics, information technology and some emerging 
defense industries such as laser shields, positronics, 
unmanned vehicles, wearable computing, and real time 
triple C (communication, command and control) 
computerized battlefield management. The main targets 
are, surprisingly, Israel and France. According to media 
reports, the substantive clients of Russia's defense 
industry - such as India - insist on hollowing out Russian 
craft and installing Israeli and west European systems 
instead. 



Russia's paranoid state of mind extends to its interior. 
Uralinformbureau reported earlier in 2002 that the Yamal- 
Nenets autonomous okrug (district) restricted access to 
foreigners citing concerns about industrial espionage and 
potential sabotage of oil and gas companies. The Kremlin 
maintains an ever-expanding list of regions and territories 
with limited - or outright - forbidden - access to 
foreigners. 

The FSB, the KGB's main successor, is busy arresting 
spies all over the vast country. To select a random events 
of the dozens reported every year - and many are not - the 
Russian daily Kommersant recounted in February 2002 
how when the Trunov works at the Novolipetsk 
metallurgical combine concluded an agreement with a 
Chinese company to supply it with slabs, its chief 
negotiator was nabbed as a spy working for "circles in 
China". His crime? He was in possession of certain 
documents which contained "intellectual property" of the 
crumbling and antiquated mill pertaining to a slab quality 
enhancement process. 

Foreigners are also being arrested, though rarely. An 
American businessman, Edmund Pope, was detained in 
April 2000 for attempting to purchase the blueprints of an 
advanced torpedo from a Russian scientist. There have 
been a few other isolated apprehensions, mainly for 
"proper", military, espionage. But Russians bear the brunt 
of the campaign against foreign economic intelligence 
gathering. 

Strana.ru reported in December 2001 that, speaking on the 
occasion of Security Services Day, Putin - himself a KGB 
alumnus - warned veterans that the most crucial task 



facing the services today is "protecting the country's 
economy against industrial espionage". 

This is nothing new. According to History of Espionage 
Web site, long before they established diplomatic 
relations with the USA in 1933, the Soviets had Amtorg 
Trading Company. Ostensibly its purpose was to 
encourage joint ventures between Russian and American 
firms. Really it was a hub of industrial undercover 
activities. Dozens of Soviet intelligence officers 
supervised, at its peak during the Depression, 800 
American communists. The Soviet Union's European 
operations in Berlin (Handelsvertretung) and in London 
(Arcos, Ltd.) were even more successful. 



Return 



The Business of Torture 



On January 16, 2003, the European Court of Human 
Rights agreed - more than two years after the applications 
have been filed - to hear six cases filed by Chechens 
against Russia. The claimants accuse the Russian military 
of torture and indiscriminate killings. The Court has ruled 
in the past against the Russian Federation and awarded 
assorted plaintiffs thousands of euros per case in 
compensation. 

As awareness of human rights increased, as their 
definition expanded and as new, often authoritarian 
polities, resorted to torture and repression - human rights 
advocates and non-governmental organizations 
proliferated. It has become a business in its own right: 
lawyers, consultants, psychologists, therapists, law 
enforcement agencies, scholars and pundits tirelessly 
peddle books, seminars, conferences, therapy sessions for 
victims, court appearances and other services. 

Human rights activists target mainly countries and 
multinationals. 

In June 2001, the International Labor Rights Fund filed a 
lawsuit on behalf of 1 1 villagers against the American oil 
behemoth, ExxonMobile, for "abetting" abuses in Aceh, 
Indonesia. They alleged that the company provided the 
army with equipment for digging mass graves and helped 
in the construction of interrogation and torture centers. 

In November 2002, the law firm of Cohen, Milstein, 
Hausfeld & Toll joined other American and South African 



law firms in filing a complaint that "seeks to hold 
businesses responsible for aiding and abetting the 
apartheid regime in South Africa ... forced labor, 
genocide, extrajudicial killing, torture, sexual assault, and 
unlawful detention". 

Among the accused: "IBM and ICL which provided the 
computers that enabled South Africa to ... control the 
black South African population. Car manufacturers 
provided the armored vehicles that were used to patrol the 
townships. Arms manufacturers violated the embargoes 
on sales to South Africa, as did the oil companies. The 
banks provided the funding that enabled South Africa to 
expand its police and security apparatus." 

Charges were leveled against Unocal in Myanmar and 
dozens of other multinationals. In September 2002, Berger 
& Montague filed a class action complaint against Royal 
Dutch Petroleum and Shell Transport. The oil giants are 
charged with "purchasing ammunition and using ... 
helicopters and boats and providing logistical support for 
'Operation Restore Order in Ogoniland'" which was 
designed, according to the law firm, to "terrorize the 
civilian population into ending peaceful protests against 
Shell's environmentally unsound oil exploration and 
extraction activities". 

The defendants in all these court cases strongly deny any 
wrongdoing. 

But this is merely one facet of the torture business. 

Torture implements are produced - mostly in the West - 
and sold openly, frequently to nasty regimes in developing 
countries and even through the Internet. Hi-tech devices 



abound: sophisticated electroconvulsive stun guns, painful 
restraints, truth serums, chemicals such as pepper gas. 
Export licensing is universally minimal and non-intrusive 
and completely ignores the technical specifications of the 
goods (for instance, whether they could be lethal, or 
merely inflict pain). 

Amnesty International and the UK-based Omega 
Foundation, found more than 150 manufacturers of stun 
guns in the USA alone. They face tough competition from 
Germany (30 companies), Taiwan (19), France (14), 
South Korea (13), China (12), South Africa (nine), Israel 
(eight), Mexico (six), Poland (four), Russia (four), Brazil 
(three), Spain (three) and the Czech Republic (two). 

Many torture implements pass through "off-shore" supply 
networks in Austria, Canada, Indonesia, Kuwait, Lebanon, 
Lithuania, Macedonia, Albania, Russia, Israel, the 
Philippines, Romania and Turkey. This helps European 
Union based companies circumvent legal bans at home. 
The US government has traditionally turned a blind eye to 
the international trading of such gadgets. 

American high-voltage electro- shock stun shields turned 
up in Turkey, stun guns in Indonesia, and electro- shock 
batons and shields, and dart-firing taser guns in torture- 
prone Saudi Arabia. American firms are the dominant 
manufacturers of stun belts. Explains Dennis Kaufman, 
President of Stun Tech Inc, a US manufacturer of this 
innovation: "Electricity speaks every language known to 
man. No translation necessary. Everybody is afraid of 
electricity, and rightfully so." (Quoted by Amnesty 
International). 



The Omega Foundation and Amnesty claim that 49 US 
companies are also major suppliers of mechanical 
restraints, including leg-irons and thumbcuffs. But they 
are not alone. Other suppliers are found in Germany (8), 
France (5), China (3), Taiwan (3), South Africa (2), Spain 
(2), the UK (2) and South Korea (1). 

Not surprisingly, the Commerce Department doesn't keep 
tab on this category of exports. 

Nor is the money sloshing around negligible. Records 
kept under the export control commodity number A985 
show that Saudi Arabia alone spent in the United States 
more than $1 million a year between 1997-2000 merely 
on stun guns. Venezuela's bill for shock batons and such 
reached $3.7 million in the same period. Other clients 
included Hong Kong, Taiwan, Mexico and - surprisingly - 
Bulgaria. Egypt's notoriously brutal services - already 
well-equipped - spent a mere $40,000. 

The United States is not the only culprit. The European 
Commission, according to an Amnesty International 
report titled "Stopping the Torture Trade" and published 
in 2001: 



"Gave a quality award to a Taiwanese electro-shock 
baton, but when challenged could not cite evidence as to 
independent safety tests for such a baton or whether 
member states of the European Union (EU) had been 
consulted. Most EU states have banned the use of such 
weapons at home, but French and German companies are 
still allowed to supply them to other countries." 

Torture expertise is widely proffered by former soldiers, 
agents of the security services made redundant, retired 



policemen and even rogue medical doctors. China, Israel, 
South Africa, France, Russia, the United kingdom and the 
United States are founts of such useful knowledge and its 
propagators. 

How rooted torture is was revealed in September 1996 
when the US Department of Defense admitted that 
"intelligence training manuals" were used in the Federally 
sponsored School of the Americas - one of 150 such 
facilities - between 1982 and 1991. The manuals, written 
in Spanish and used to train thousands of Latin American 
security agents, "advocated execution, torture, beatings 
and blackmail", says Amnesty International. 

Where there is demand there is supply. Rather than ignore 
the discomfiting subject, governments would do well to 
legalize and supervise it. Alan Dershowitz, a prominent 
American criminal defense attorney, proposed, in an op- 
ed article in the Los Angeles Times, published November 
8, 2001, to legalize torture in extreme cases and to have 
judges issue "torture warrants". This may be a radical 
departure from the human rights tradition of the civilized 
world. But dispensing export carefully reviewed licenses 
for dual-use implements is a different matter altogether - 
and long overdue. 

Return 



The Criminality of Transition 

Lecture given at the Netherlands Economic Institute 
(NEI) on 18/4/2001 



Human vice is the most certain thing after death and taxes, 
to paraphrase Benjamin Franklin. The only variety of 
economic activity, which will surely survive even a 
nuclear holocaust, is bound to be crime. Prostitution, 
gambling, drugs and, in general, expressly illegal 
activities generate c. 400 billion USD annually to their 
perpetrators, thus making crime the third biggest industry 
on Earth (after the medical and pharmaceutical 
industries). 

Many of the so called Economies in Transition and of 
HPICs (Highly Indebted Poor Countries) do resemble 
post-nuclear-holocaust ashes. GDPs in most of these 
economies either tumbled nominally or in real terms by 
more than 60% in the space of less than a decade. The 
average monthly salary is the equivalent of the average 
daily salary of the German industrial worker. The GDP 
per capita - with very few notable exceptions - is around 
20% of the EU's average and the average wages are 14% 
the EU's average (2000). These are the telltale overt signs 
of a comprehensive collapse of the infrastructure and of 
the export and internal markets. Mountains of internal 
debt, sky high interest rates, cronyism, other forms of 
corruption, environmental, urban and rural dilapidation - 
characterize these economies. 

Into this vacuum - the interregnum between centrally 
planned and free market economies - crept crime. In most 



of these countries criminals run at least half the economy, 
are part of the governing elites (influencing them behind 
the scenes through money contributions, outright bribes, 
or blackmail) and - through the mechanism of money 
laundering - infiltrate slowly the legitimate economy. 

What gives crime the edge, the competitive advantage 
versus the older, ostensibly more well established elites? 

The free market does. When communism collapsed, only 
criminals, politicians, managers, and employees of the 
security services were positioned to benefit from the 
upheaval. Criminals, for instance, are much better 
equipped to deal with the onslaught of this new 
conceptual beast, the mechanism of the market, than most 
other economic players in these tattered economies are. 

Criminals, by the very nature of their vocation, were 
always private entrepreneurs. They were never state 
owned or subjected to any kind of central planning. Thus, 
they became the only group in society that was not 
corrupted by these un-natural inventions. They invested 
their own capital in small to medium size enterprises and 
ran them later as any American manager would have 
done. To a large extent the criminals, single handedly, 
created a private sector in these derelict economies. 

Having established a private sector business, devoid of 
any involvement of the state, the criminal-entrepreneurs 
proceeded to study the market. Through primitive forms 
of market research (neighbourhood activists) they were 
able to identify the needs of their prospective customers, 
to monitor them in real time and to respond with agility to 
changes in the patterns of supply and demand. Criminals 
are market-animals and they are geared to respond to its 



gyrations and vicissitudes. Though they were not likely to 
engage in conventional marketing and advertising, they 
always stayed attuned to the market's vibrations and 
signals. They changed their product mix and their pricing 
to fit fluctuations in demand and supply. 

Criminals have proven to be good organizers and 
managers. They have very effective ways of enforcing 
discipline in the workplace, of setting revenue targets, of 
maintaining a flexible hierarchy combined with rigid 
obeisance - with very high upward mobility and a clear 
career path. A complex system of incentives and 
disincentives drives the workforce to dedication and 
industriousness. The criminal rings are well run 
conglomerates and the more classic industries would have 
done well to study their modes of organization and 
management. Everything - from sales through territorially 
exclusive licences (franchises) to effective "stock" options 
- has been invented in the international crime 
organizations long before it acquired the respectability of 
the corporate boardroom. 

The criminal world has replicated those parts of the state 
which were rendered ineffective by unrealistic ideology or 
by pure corruption. The court system makes a fine 
example. The criminals instituted their own code of 
justice ("law") and their own court system. A unique - 
and often irreversible - enforcement arm sees to it that 
respect towards these indispensable institutions is 
maintained. Effective - often interactive - legislation, an 
efficient court system, backed by ominous and ruthless 
agents of enforcement - ensure the friction-free 
functioning of the giant wheels of crime. Crime has 
replicated numerous other state institutions. Small wonder 
that when the state disintegrated - crime was able to 



replace it with little difficulty. The same pattern is 
discernible in certain parts of the world where terrorist 
organizations duplicate the state and overtake it, in time. 
Schools, clinics, legal assistance, family support, taxation, 
the court system, transportation and telecommunication 
services, banking and industry - all have a criminal 
doppelganger. 

To summarize: 

At the outset of transition, the underworld constituted an 
embryonic private sector, replete with international 
networks of contacts, cross-border experience, capital 
agglomeration and wealth formation, sources of venture 
(risk) capital, an entrepreneurial spirit, and a diversified 
portfolio of investments, revenue generating assets, and 
sources of wealth. Criminals were used to private sector 
practices: price signals, competition, joint venturing, and 
third party dispute settlement. 

To secure this remarkable achievement - the underworld 
had to procure and then maintain - infrastructure and 
technologies. Indeed, criminals are great at innovating and 
even more formidable at making use of cutting edge 
technologies. There is not a single technological advance, 
invention or discovery that criminals were not the first to 
utilize or the first to contemplate and to grasp its full 
potential. There are enormous industries of services 
rendered to the criminal in his pursuits. Accountants and 
lawyers, forgers and cross border guides, weapons experts 
and bankers, mechanics and hit-men - all stand at the 
disposal of the average criminal. The choice is great and 
prices are always negotiable. These auxiliary 
professionals are no different to their legitimate 
counterparts, despite the difference in subject matter. A 



body of expertise, know-how and acumen has 
accumulated over centuries of crime and is handed down 
the generations in the criminal universities known as jail- 
houses and penitentiaries. Roads less travelled, countries 
more lenient, passports to be bought, sold, or forged, how 
to manuals, classified ads, goods and services on offer and 
demand - all feature in this mass media cum educational 
(mostly verbal) bulletins. This is the real infrastructure of 
crime. As with more mundane occupations, human capital 
is what counts. 

Criminal activities are hugely profitable (though wealth 
accumulation and capital distribution are grossly non- 
egalitarian). Money is stashed away in banking havens 
and in more regular banks and financial institutions all 
over the globe. Electronic Document Interchange and 
electronic commerce transformed what used to be an 
inconveniently slow and painfully transparent process - 
into a speed-of-light here-I-am, here-I-am-gone type of 
operation. Money is easily movable and virtually 
untraceable. Special experts take care of that: tax havens, 
off shore banks, money transactions couriers with the 
right education and a free spirit. This money, in due time 
and having cooled off - is reinvested in legitimate 
activities. Crime is a major engine of economic growth in 
some countries (where drugs are grown or traded, or in 
countries such as Italy, in Russia and elsewhere in CEE). 
In many a place, criminals are the only ones who have any 
liquidity at all. The other, more visible, sectors of the 
economy are wallowing in the financial drought of a 
demonetized economy. People and governments tend to 
lose both their scruples and their sense of fine distinctions 
under these unhappy circumstances. They welcome any 
kind of money to ensure their very survival. This is where 



crime comes in. In Central and Eastern Europe the process 
was code-named: "privatization". 

Moreover, most of the poor economies are also closed 
economies. They are the economies of nations 
xenophobic, closed to the outside world, with currency 
regulations, limitations on foreign ownership, constrained 
(instead of free) trade. The vast majority of the populace 
of these economic wretches has never been further than 
the neighbouring city - let alone outside the borders of 
their countries. Freedom of movement is still restricted. 
The only ones to have travelled freely - mostly without 
the required travel documents - were the criminals. Crime 
is international. It involves massive, intricate and 
sophisticated operations of export and import, knowledge 
of languages, extensive and frequent trips, an intimate 
acquaintance with world prices, the international financial 
system, demand and supply in various markets, frequent 
business negotiations with foreigners and so on. This list 
would fit any modern businessman as well. Criminals are 
international businessmen. Their connections abroad 
coupled with their connections with the various elites 
inside their country and coupled with their financial 
prowess - made them the first and only true businessmen 
of the economies in transition. There simply was no one 
else qualified to fulfil this role - and the criminals stepped 
in willingly. 

They planned and timed their moves as they always do: 
with shrewdness, an uncanny knowledge of human 
psychology and relentless cruelty. There was no one to 
oppose them - and so they won the day. It will take one or 
more generations to get rid of them and to replace them by 
a more civilized breed of entrepreneurs. But it will not 
happen overnight. 



In the 19 th century, the then expanding USA went through 
the same process. Robber barons seized economic 
opportunities in the Wild East and in the Wild West and 
really everywhere else. Morgan, Rockefeller, Pullman, 
Vanderbilt - the most ennobled families of latter day 
America originated with these rascals. But there is one 
important difference between the USA at that time and 
Central and Eastern Europe today. A civic culture with 
civic values and an aspiration to, ultimately, create a civic 
society permeated the popular as well as the high-brow 
culture of America. Criminality was regarded as a 
shameful stepping stone on the way to an orderly society 
of learned, civilized, law-abiding citizens. This cannot be 
said about Russia, for instance. The criminal there is, if 
anything, admired and emulated. The language of 
business in countries in transition is suffused with the 
criminal parlance of violence. The next generation is 
encouraged to behave similarly because no clear (not to 
mention well embedded) alternative is propounded. There 
is no - and never was - a civic tradition in these countries, 
a Bill of Rights, a veritable Constitution, a modicum of 
self rule, a true abolition of classes and nomenclatures. 
The future is grim because the past was grim. Used to 
being governed by capricious, paranoiac, criminal tyrants 
- these nations know no better. The current criminal class 
seems to them to be a natural continuation and extension 
of generations-long trends. That some criminals are 
members of the new political, financial and industrial 
elites (and vice versa) - surprises them not. 

In most countries in transition, the elites (the political- 
managerial complex) make use of the state and its 
simulacrum institutions in close symbiosis with the 
criminal underworld. The state is often an oppressive 
mechanism deployed in order to control the populace and 



manipulate it. Politicians allocate assets, resources, rights, 
and licences to themselves, and to their families and 
cronies. Patronage extends to collaborating criminals. 
Additionally, the sovereign state is regarded as a means to 
extract foreign aid and credits from donors, multilaterals, 
and NGOs. 

The criminal underworld exploits the politicians. 
Politicians give criminals access to state owned assets and 
resources. These are an integral part of the money 
laundering cycle. "Dirty" money is legitimized through 
the purchase of businesses and real estate from the state. 
Politicians induce state institutions to turn a blind eye to 
the criminal activities of their collaborators and ensure 
lenient law enforcement. They also help criminals 
eliminate internal and external competition in their 
territories. 

In return, criminals serve as the "long and anonymous 
arm" of politicians. They obtain illicit goods for them and 
provide them with illegal services. Corruption often flows 
through criminal channels or via the mediation and 
conduit of delinquents. Within the shared sphere of the 
informal economy, assets are often shifted among these 
economic players. Both have an interest to maintain a 
certain lack of transparency, a bureaucracy (=dependence 
on state institutions and state employees) and NAIRU 
(Non Abating Internal Recruitment Unemployment). 
Nationalism and racism, the fostering of paranoia and 
grievances are excellent tactics of mobilization of foot 
soldiers. And the needs to dispense with a continuous 
stream of patronage and provide venues for the 
legitimization of illegally earned funds delay essential 
reforms and the disposal of state assets. 



This urge to become legitimate - largely the result of 
social pressure - leads to a deterministic, four stroke cycle 
of co-habitation between politicians and criminals. In the 
first phase, politicians grope for a new ideological cover 
for their opportunism. This is followed by a growing 
partnership between the elites and the crime world. A 
divergence then occurs. Politicians team up with 
legitimacy- seeking, established crime lords. Both groups 
benefit from a larger economic pie. They fight against 
other, less successful, criminals, who wish to persist in 
their old ways. This is low intensity warfare and it 
inevitably ends in the triumph of the former over the 
latter. 

Return 



The Economics of 
Conspiracy Theories 



Barry Chamish is convinced that Shimon Peres, Israel's 
wily old statesman, ordered the assassination of Yitzhak 
Rabin, back in 1995, in collaboration with the French. He 
points to apparent tampering with evidence. The blood- 
stained song sheet in Mr. Rabin's pocket lost its bullet 
hole between the night of the murder and the present. 

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

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

The distrust of appearances and official versions was 
further enhanced by the Watergate scandal in 1973-4. 
Conspiracies and urban legends offer meaning and 
purposefulness in a capricious, kaleidoscopic, 
maddeningly ambiguous, and cruel world. They empower 
their otherwise helpless and terrified believers. 



New Order one world government, Zionist and Jewish 
cabals, Catholic, black, yellow, or red subversion, the 
machinations attributed to the freemasons and the 
illuminati - all flourished yet again from the 1970's 
onwards. Paranoid speculations reached frenzied nadirs 
following the deaths of celebrities, such as "Princess Di". 
Books like "The Da Vinci Code" (which deals with an 
improbable Catholic conspiracy to erase from history the 
true facts about the fate of Jesus) sell millions of copies 
worldwide. 

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

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

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

The monthly "Fortean Times" is the leading brand in 
"strange phenomena and experiences, curiosities, 
prodigies and portents". It is widely available on both 
sides of the Atlantic. In its 29 years of existence it has 



covered the bizarre, the macabre, and the ominous with 
panache and open-mindedness. 

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

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

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

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

"Conspiracy theories certainly are sexy at the moment ... 
I've been contacted by five or six TV companies in the 
past six months - two last week - all interested in making 
programmes about conspiracy theories. I even got a call 
from the Big Breakfast Show, from a researcher who had 
no idea who I was, asking me if I'd like to appear on it ... 
These days we've got conspiracy theories everywhere; and 
about almost everything." 



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

There are more than 186,600 Web sites dedicated to 
conspiracy theories in Google's database of 3 billion 
pages. The "conspiracy theories" category in the Open 
Directory Project, a Web directory edited by volunteers, 
contains hundreds of entries. 

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

In a disclaimer, Amazon states: 

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

Yet, cinema and TV did more to propagate modern 
nightmares than all the books combined. The Internet is 
starting to have a similar impact compounded by its 
networking capabilities and by its environment of 
simulated reality - "cyberspace". In his tome, "Enemies 
Within: The Culture of Conspiracy in Modern America", 
Robert Alan Goldberg comes close to regarding the 



paranoid mode of thinking as a manifestation of 
mainstream American culture. 

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

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

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

It is impossible to tell how many people feed off the 
paranoid frenzy of the lunatic fringe. I found more than 
3000 lecturers on these subjects listed by the Google 



search engine alone. Even assuming a conservative 
schedule of one lecture a month with a modest fee of $250 
per appearance - we are talking about an industry of c. 
$10 million. 

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

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

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

Majestic creates almost 30 primary Web sites per episode. 
It has dozens of "bio" sites and hundreds of Web sites 
created by fans and linked to the main conspiracy threads. 



The imaginary gaming firm at the core of its plots, 
"Amin-X", has often been confused with the real thing. It 
even won the E3 Critics Award for best original product... 

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

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

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

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



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

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

Swine Flu as a Conspiracy 

The Internet has rendered global gossip that in previous 
epochs would have remained local. It also allowed 
rumour-mongers to leverage traditional and trusted means 
of communication - texts and images - to lend credence 
to the most outlandish claims. Some bloggers and posters 
have not flinched from doctoring photos and video clips. 
Still, the most efficient method of disseminating 
disinformation and tall tales in the wild is via text. 

In May 2009, as swine flu was surging through the 
dilapidated shanties of Mexico, I received a mass- 
distribution letter from someone claiming to have worked 
at the National Institutes of Health in Virology: "I worked 
in the Laboratory of Structural Biology Research under 
the NIAMS division of NIH from 2002 - 2004." 
Atypically, the source provided a name, an e-mail address, 
and a phone number. He stated that the newly-minted 
pandemic was the outcome of a "recombinant virus has 
been unleashed upon mankind" by a surrealistic coalition: 
"the Executive Branch of our (USA) government, the 



World Health Organization (WHO), as well as Baxter 
Pharmaceutical", the latter being "involved in 
international biological weapons programs." The media 
was lying blatantly about the number of casualties. 

The e-mail letter cautioned against "a martial law type 
scenario" in which the government will "ban public 
gatherings, enforce travel restrictions ... forced 
vaccination or forced quarantine." He advised people to 
hoard food, obtain N95 or PI 00 masks, and "Have a 
means of self-defence". Tamiflu and, more generally, 
neuraminidase inhibitors are not effective, he warned. 
Instead, he recommended organic food (including garlic), 
drops of Colloidal Silver Hydrosol, Atomic (nascent) 
iodine, Allicin, Medical Grade, and NAC (N-acetyl- 
cysteine). 

Blaming government and the pharmaceutical industry for 
instigating the very diseases they are trying to contain and 
counter is old hat. It is founded on the dubious assertion 
of cui bono: pandemics are worth anywhere from 8 to 18 
billion USD is extra annual income from the enhanced 
sales of vaccines, anti-virals, antibiotics, wipes, masks, 
sanitizers, and the like. That's a drop in the industry's 
bucket (close to 1 trillion USD in sales last year), yet it 
comes handy in times of economic slowdown. Luckily for 
the drug-makers, most major epidemics and pandemics 
have occurred during recessions, perfectly timed to shore 
their balance sheets. 

The sales or profits of drug-makers not involved in the 
swine flu panic (such as Pfizer) actually went down in the 
third quarter of 2009 as opposed to the revenues and net 
income of those who were. Novartis expects to make an 
extra 400-700 million USD in the last quarter of 2009 and 



first quarter of 2010. Sanofi-Aventis has sold a mere 120 
million worth of swine flu related goods, but this will 
shoot up to 1 billion in the six months to March 2010. 
Similarly, While Astra-Zeneca's tally is a meagre 152 
million USD, yet it constitutes 2% of its growth and one 
third of its sales in the USA. It foresees another 300 
million USD in revenues. Finally, GlaxoSmithKline has 
pushed whopping 1.6 billion USD worth of swine flu 
vaccine out the door plus an extra 250 million USD in 
related products till end-September 2009. Pandemics are 
good for business, no two ways about it. 

The aura of the pharmaceutical industry is such that 
people seamlessly lump it together with weapons 
manufacturers, the CIA, Big Tobacco, and other usual 
culprits and suspects. Drug manufacturers' advertising 
budgets are huge and may exert disproportionate influence 
on editorial decisions in the print media. Pharma 
companies are big contributors to campaign coffers and 
can and do bend politicians' ears in times of need. There 
is a thinly- veiled revolving door between underpaid and 
over- worked bureaucrats in regulatory agencies and the 
plush offices of the ostensibly regulated. Academic 
studies are often funded by the industry. People naturally 
are suspicious and apprehensive of this confluence of 
power, money, and access. Recent scandals at the FDA 
(America's much-vaunted and hitherto-venerated Food 
and Drug Administration) did not help matters. 

The truth is that pharmaceutical companies are very 
reluctant to develop vaccines, or to cope with pandemics, 
whose sufferers are often the indigent inhabitants of 
developing and poor countries. To amortize their huge 
sunk costs (mainly in research and development) they 
resort to supply- side and demand- side measures. 



On the demand side, they often insist on advance market 
commitments: guaranteed purchases by governments, 
universities, and NGOs . They also enjoy tax credits and 
breaks, grants, and awards. Differential pricing is used to 
skew decision-making and re-allocate the economic 
resources of the governments of impoverished countries in 
favour of purchasing larger quantities of products such as 
vaccines. On the supply side, they create artificial scarcity 
by patenting the processes that are involved in the 
production of vaccines and drugs; by licensing 
technologies only to a handful of carefully-placed 
factories; and by producing under the maximum capacity 
so as to induce rationing within tight release and delivery 
schedules (which, in itself, induces panic). 

Still, collude as they may in profiteering, governments 
and the pharma industry do not create new diseases, 
spread them, or sustain them. This job is best left to the 
poor and the ignorant whose living conditions encourage 
cross-species infections and whose superstitions foment 
hysteria every time a new strain of virus is discovered. 
You can count on them to render the rich drug- 
manufacturer even richer every single time. 

Return 



The Demise of the Work Ethic 



"When work is a pleasure, life is a joy! When work is a 
duty, life is slavery. " 

Maxim Gorky (1868-1936), Russian novelist, author, 
and playright 

Airplanes, missiles, and space shuttles crash due to lack of 
maintenance, absent-mindedness, and pure ignorance. 
Software support personnel, aided and abetted by 
Customer Relationship Management application suites, 
are curt (when reachable) and unhelpful. Despite 
expensive, state of the art supply chain management 
systems, retailers, suppliers, and manufacturers habitually 
run out of stocks of finished and semi-finished products 
and raw materials. People from all walks of life and at all 
levels of the corporate ladder skirt their responsibilities 
and neglect their duties. 

Whatever happened to the work ethic? Where is the pride 
in the immaculate quality of one's labor and produce? 

Both dead in the water. A series of earth-shattering social, 
economic, and technological trends converged to render 
their jobs loathsome to many - a tedious nuisance best 
avoided. 

1 . Job security is a thing of the past. Itinerancy in various 
McJobs reduces the incentive to invest time, effort, and 
resources into a position that may not be yours next week. 
Brutal layoffs and downsizing traumatized the workforce 
and produced in the typical workplace a culture of 
obsequiousness, blind obeisance, the suppression of 



independent thought and speech, and avoidance of 
initiative and innovation. Many offices and shop floors 
now resemble prisons. 

2. Outsourcing and offshoring of back office (and, more 
recently, customer relations and research and 
development) functions sharply and adversely effected the 
quality of services from helpdesks to airline ticketing and 
from insurance claims processing to remote maintenance. 
Cultural mismatches between the (typically Western) 
client base and the offshore service department (usually in 
a developing country where labor is cheap and plenty) 
only exacerbated the breakdown of trust between 
customer and provider or supplier. 

3. The populace in developed countries are addicted to 
leisure time. Most people regard their jobs as a necessary 
evil, best avoided whenever possible. Hence phenomena 
like the permanent temp - employees who prefer a 
succession of temporary assignments to holding a proper 
job. The media and the arts contribute to this perception of 
work as a drag - or a potentially dangerous addiction 
(when they portray raging and abusive workaholics). 

4. The other side of this dismal coin is workaholism - the 
addiction to work. Far from valuing it, these addicts resent 
their dependence. The job performance of the typical 
workaholic leaves a lot to be desired. Workaholics are 
fatigued, suffer from ancillary addictions, and short 
attention spans. They frequently abuse substances, are 
narcissistic and destructively competitive (being driven, 
they are incapable of team work). 

5. The depersonalization of manufacturing - the 
intermediated divorce between the artisan/worker and his 



client - contributed a lot to the indifference and alienation 
of the common industrial worker, the veritable 
"anonymous cog in the machine". 

Not only was the link between worker and product broken 
- but the bond between artisan and client was severed as 
well. Few employees know their customers or patrons first 
hand. It is hard to empathize with and care about a 
statistic, a buyer whom you have never met and never 
likely to encounter. It is easy in such circumstances to feel 
immune to the consequences of one's negligence and 
apathy at work. It is impossible to be proud of what you 
do and to be committed to your work - if you never set 
eyes on either the final product or the customer! Charlie 
Chaplin's masterpiece, "Modern Times" captured this 
estrangement brilliantly. 

6. Many former employees of mega-corporations abandon 
the rat race and establish their own businesses - small and 
home enterprises. Undercapitalized, understaffed, and 
outperformed by the competition, these fledging and 
amateurish outfits usually spew out shoddy products and 
lamentable services - only to expire within the first year of 
business. 

7. Despite decades of advanced notice, globalization 
caught most firms the world over by utter surprise. El- 
prepared and fearful of the onslaught of foreign 
competition, companies big and small grapple with 
logistical nightmares, supply chain calamities, culture 
shocks and conflicts, and rapacious competitors. Mere 
survival (and opportunistic managerial plunder) replaced 
client satisfaction as the prime value. 



8. The decline of the professional guilds on the one hand 
and the trade unions on the other hand greatly reduced 
worker self-discipline, pride, and peer-regulated quality 
control. Quality is monitored by third parties or 
compromised by being subjected to Procrustean financial 
constraints and concerns. 

The investigation of malpractice and its punishment are 
now at the hand of vast and ill-informed bureaucracies, 
either corporate or governmental. Once malpractice is 
exposed and admitted to, the availability of malpractice 
insurance renders most sanctions unnecessary or toothless. 
Corporations prefer to bury mishaps and malfeasance 
rather than cope with and rectify them. 

9. The quality of one's work, and of services and products 
one consumed, used to be guaranteed. One's personal 
idiosyncrasies, eccentricities, and problems were left at 
home. Work was sacred and one's sense of self- worth 
depended on the satisfaction of one's clients. You simply 
didn't let your personal life affect the standards of your 
output. 

This strict and useful separation vanished with the rise of 
the malignant-narcissistic variant of individualism. It led 
to the emergence of idiosyncratic and fragmented 
standards of quality. No one knows what to expect, when, 
and from whom. Transacting business has become a form 
of psychological warfare. The customer has to rely on the 
goodwill of suppliers, manufacturers, and service 
providers - and often finds himself at their whim and 
mercy. "The client is always right" has gone the way of 
the dodo. "It's my (the supplier's or provider's) way or the 
highway" rules supreme. 



This uncertainty is further exacerbated by the pandemic 
eruption of mental health disorders - 15% of the 
population are severely pathologized according to the 
latest studies. Antisocial behaviors - from outright crime 
to pernicious passive-aggressive sabotage - once rare in 
the workplace, are now abundant. 

The ethos of teamwork, tempered collectivism, and 
collaboration for the greater good is now derided or 
decried. Conflict on all levels has replaced negotiated 
compromise and has become the prevailing narrative. 
Litigiousness, vigilante justice, use of force, and "getting 
away with it" are now extolled. Yet, conflicts lead to the 
misallocation of economic resources. They are non- 
productive and not conducive to sustaining good relations 
between producer or provider and consumer. 

10. Moral relativism is the mirror image of rampant 
individualism. Social cohesion and discipline diminished, 
ideologies and religions crumbled, and anomic states 
substituted for societal order. The implicit contracts 
between manufacturer or service provider and customer 
and between employee and employer were shredded and 
replaced with ad-hoc negotiated operational checklists. 
Social decoherence is further enhanced by the 
anonymization and depersonalization of the modern chain 
of production (see point 5 above). 

Nowadays, people facilely and callously abrogate their 
responsibilities towards their families, communities, and 
nations. The mushrooming rate of divorce, the decline in 
personal thrift, the skyrocketing number of personal 
bankruptcies, and the ubiquity of venality and corruption 
both corporate and political are examples of such 



dissipation. No one seems to care about anything. Why 
should the client or employer expect a different treatment? 

11. The disintegration of the educational systems of the 

West made it difficult for employers to find qualified and 
motivated personnel. Courtesy, competence, ambition, 
personal responsibility, the ability to see the bigger picture 
(synoptic view), interpersonal aptitude, analytic and 
synthetic skills, not to mention numeracy, literacy, access 
to technology, and the sense of belonging which they 
foster - are all products of proper schooling. 

12. Irrational beliefs , pseudo-sciences, and the occult 
rushed in to profitably fill the vacuum left by the 
crumbling education systems. These wasteful 
preoccupations encourage in their followers an 
overpowering sense of fatalistic determinism and hinder 
their ability to exercise judgment and initiative. The 
discourse of commerce and finance relies on unmitigated 
rationality and is, in essence, contractual. Irrationality is 
detrimental to the successful and happy exchange of 
goods and services. 

13. Employers place no premium on work ethic. Workers 
don't get paid more or differently if they are more 
conscientious, or more efficient, or more friendly. In an 
interlinked, globalized world, customers are fungible. 
There are so many billions of potential clients that 
customer loyalty has been rendered irrelevant. Marketing, 
showmanship, and narcissistic bluster are far better 
appreciated by workplaces because they serve to attract 
clientele to be bilked and then discarded or ignored. 

Return 



The Morality of Child Labor 



From the comfort of their plush offices and five to six 
figure salaries, self-appointed NGO's often denounce 
child labor as their employees rush from one five star 
hotel to another, $3000 subnotebooks and PDA's in hand. 
The hairsplitting distinction made by the ILO between 
"child work" and "child labor" conveniently targets 
impoverished countries while letting its budget 
contributors - the developed ones - off-the-hook. 

Reports regarding child labor surface periodically. 
Children crawling in mines, faces ashen, body deformed. 
The agile fingers of famished infants weaving soccer balls 
for their more privileged counterparts in the USA. Tiny 
figures huddled in sweatshops, toiling in unspeakable 
conditions. It is all heart-rending and it gave rise to a 
veritable not-so-cottage industry of activists, 
commentators, legal eagles, scholars, and 
opportunistically sympathetic politicians. 

Ask the denizens of Thailand, sub-Saharan Africa, Brazil, 
or Morocco and they will tell you how they regard this 
altruistic hyperactivity - with suspicion and resentment. 
Underneath the compelling arguments lurks an agenda of 
trade protectionism, they wholeheartedly believe. 
Stringent - and expensive - labor and environmental 
provisions in international treaties may well be a ploy to 
fend off imports based on cheap labor and the competition 
they wreak on well-ensconced domestic industries and 
their political stooges. 



This is especially galling since the sanctimonious West 
has amassed its wealth on the broken backs of slaves and 
kids. The 1900 census in the USA found that 18 percent 
of all children - almost two million in all - were gainfully 
employed. The Supreme Court ruled unconstitutional laws 
banning child labor as late as 1916. This decision was 
overturned only in 1941. 

The GAO published a report last week in which it 
criticized the Labor Department for paying insufficient 
attention to working conditions in manufacturing and 
mining in the USA, where many children are still 
employed. The Bureau of Labor Statistics pegs the 
number of working children between the ages of 15-17 in 
the USA at 3.7 million. One in 16 of these worked in 
factories and construction. More than 600 teens died of 
work-related accidents in the last ten years. 

Child labor - let alone child prostitution, child soldiers, 
and child slavery - are phenomena best avoided. But they 
cannot and should not be tackled in isolation. Nor should 
underage labor be subjected to blanket castigation. 
Working in the gold mines or fisheries of the Philippines 
is hardly comparable to waiting on tables in a Nigerian or, 
for that matter, American restaurant. 

There are gradations and hues of child labor. That 
children should not be exposed to hazardous conditions, 
long working hours, used as means of payment, physically 
punished, or serve as sex slaves is commonly agreed. That 
they should not help their parents plant and harvest may 
be more debatable. 

As Miriam Wasserman observes in "Eliminating Child 
Labor", published in the Federal Bank of Boston's 



"Regional Review", second quarter of 2000, it depends on 
"family income, education policy, production 
technologies, and cultural norms." About a quarter of 
children under- 14 throughout the world are regular 
workers. This statistic masks vast disparities between 
regions like Africa (42 percent) and Latin America (17 
percent). 

In many impoverished locales, child labor is all that 
stands between the family unit and all-pervasive, life 
threatening, destitution. Child labor declines markedly as 
income per capita grows. To deprive these bread-earners 
of the opportunity to lift themselves and their families 
incrementally above malnutrition, disease, and famine - is 
an apex of immoral hypocrisy. 

Quoted by "The Economist", a representative of the much 
decried Ecuador Banana Growers Association and 
Ecuador's Labor Minister, summed up the dilemma 
neatly: "Just because they are under age doesn't mean we 
should reject them, they have a right to survive. You can't 
just say they can't work, you have to provide alternatives." 

Regrettably, the debate is so laden with emotions and self- 
serving arguments that the facts are often overlooked. 

The outcry against soccer balls stitched by children in 
Pakistan led to the relocation of workshops ran by Nike 
and Reebok. Thousands lost their jobs, including 
countless women and 7000 of their progeny. The average 
family income - anyhow meager - fell by 20 percent. 
Economists Drusilla Brown, Alan Deardorif, and Robert 
Stern observe wryly: 



"While Baden Sports can quite credibly claim that their 
soccer balls are not sewn by children, the relocation of 
their production facility undoubtedly did nothing for their 
former child workers and their families." 

Such examples abound. Manufacturers - fearing legal 
reprisals and "reputation risks" (naming-and-shaming by 
overzealous NGO's) - engage in preemptive sacking. 
German garment workshops fired 50,000 children in 
Bangladesh in 1993 in anticipation of the American 
never-legislated Child Labor Deterrence Act. 

Quoted by Wasserstein, former Secretary of Labor, Robert 
Reich, notes: 

"Stopping child labor without doing anything else could 
leave children worse off. If they are working out of 
necessity, as most are, stopping them could force them 
into prostitution or other employment with greater 
personal dangers. The most important thing is that they be 
in school and receive the education to help them leave 
poverty." 

Contrary to hype, three quarters of all children work in 
agriculture and with their families. Less than 1 percent 
work in mining and another 2 percent in construction. 
Most of the rest work in retail outlets and services, 
including "personal services" - a euphemism for 
prostitution. UNICEF and the ILO are in the throes of 
establishing school networks for child laborers and 
providing their parents with alternative employment. 

But this is a drop in the sea of neglect. Poor countries 
rarely proffer education on a regular basis to more than 
two thirds of their eligible school-age children. This is 



especially true in rural areas where child labor is a 
widespread blight. Education - especially for women - is 
considered an unaffordable luxury by many hard-pressed 
parents. In many cultures, work is still considered to be 
indispensable in shaping the child's morality and strength 
of character and in teaching him or her a trade. 

"The Economist" elaborates: 

"In Africa children are generally treated as mini-adults; 
from an early age every child will have tasks to perform in 
the home, such as sweeping or fetching water. It is also 
common to see children working in shops or on the 
streets. Poor families will often send a child to a richer 
relation as a housemaid or houseboy, in the hope that he 
will get an education." 

A solution recently gaining steam is to provide families in 
poor countries with access to loans secured by the future 
earnings of their educated offspring. The idea - first 
proposed by Jean-Marie Baland of the University of 
Namur and James A. Robinson of the University of 
California at Berkeley - has now permeated the 
mainstream. 

Even the World Bank has contributed a few studies, 
notably, in June, "Child Labor: The Role of Income 
Variability and Access to Credit Across Countries" 
authored by Rajeev Dehejia of the NBER and Roberta 
Gatti of the Bank's Development Research Group. 

Abusive child labor is abhorrent and should be banned 
and eradicated. All other forms should be phased out 
gradually. Developing countries already produce millions 
of unemployable graduates a year - 100,000 in Morocco 



alone. Unemployment is rife and reaches, in certain 
countries - such as Macedonia - more than one third of the 
workforce. Children at work may be harshly treated by 
their supervisors but at least they are kept off the far more 
menacing streets. Some kids even end up with a skill and 
are rendered employable. 

Return 



The Myth of the Earnings Yield 



In American novels, well into the 1950's, one finds 
protagonists using the future stream of dividends 
emanating from their share holdings to send their kids to 
college or as collateral. Yet, dividends seemed to have 
gone the way of the Hula-Hoop. Few companies distribute 
erratic and ever-declining dividends. The vast majority 
don't bother. The unfavorable tax treatment of distributed 
profits may have been the cause. 

The dwindling of dividends has implications which are 
nothing short of revolutionary. Most of the financial 
theories we use to determine the value of shares were 
developed in the 1950's and 1960's, when dividends were 
in vogue. They invariably relied on a few implicit and 
explicit assumptions: 

1 . That the fair "value" of a share is closely 
correlated to its market price; 

2. That price movements are mostly random, though 
somehow related to the aforementioned "value" of 
the share. In other words, the price of a security is 
supposed to converge with its fair "value" in the 
long term; 

3. That the fair value responds to new information 
about the firm and reflects it - though how 
efficiently is debatable. The strong efficiency 
market hypothesis assumes that new information is 
fully incorporated in prices instantaneously. 



But how is the fair value to be determined? 

A discount rate is applied to the stream of all future 
income from the share - i.e., its dividends. What should 
this rate be is sometimes hotly disputed - but usually it is 
the coupon of "riskless" securities, such as treasury bonds. 
But since few companies distribute dividends - 
theoreticians and analysts are increasingly forced to deal 
with "expected" dividends rather than "paid out" or actual 
ones. 

The best proxy for expected dividends is net earnings. The 
higher the earnings - the likelier and the higher the 
dividends. Thus, in a subtle cognitive dissonance, retained 
earnings - often plundered by rapacious managers - came 
to be regarded as some kind of deferred dividends. 

The rationale is that retained earnings, once re-invested, 
generate additional earnings. Such a virtuous cycle 
increases the likelihood and size of future dividends. Even 
undistributed earnings, goes the refrain, provide a rate of 
return, or a yield - known as the earnings yield. The 
original meaning of the word "yield" - income realized by 
an investor - was undermined by this Newspeak. 

Why was this oxymoron - the "earnings yield" - 
perpetuated? 

According to all current theories of finance, in the absence 
of dividends - shares are worthless. The value of an 
investor's holdings is determined by the income he stands 
to receive from them. No income - no value. Of course, an 
investor can always sell his holdings to other investors 
and realize capital gains (or losses). But capital gains - 



though also driven by earnings hype - do not feature in 
financial models of stock valuation. 

Faced with a dearth of dividends, market participants - 
and especially Wall Street firms - could obviously not live 
with the ensuing zero valuation of securities. They 
resorted to substituting future dividends - the outcome of 
capital accumulation and re-investment - for present ones. 
The myth was born. 

Thus, financial market theories starkly contrast with 
market realities. 

No one buys shares because he expects to collect an 
uninterrupted and equiponderant stream of future income 
in the form of dividends. Even the most gullible novice 
knows that dividends are a mere apologue, a relic of the 
past. So why do investors buy shares? Because they hope 
to sell them to other investors later at a higher price. 

While past investors looked to dividends to realize income 
from their shareholdings - present investors are more into 
capital gains. The market price of a share reflects its 
discounted expected capital gains, the discount rate being 
its volatility. It has little to do with its discounted future 
stream of dividends, as current financial theories teach us. 

But, if so, why the volatility in share prices, i.e., why are 
share prices distributed? Surely, since, in liquid markets, 
there are always buyers - the price should stabilize around 
an equilibrium point. 

It would seem that share prices incorporate expectations 
regarding the availability of willing and able buyers, i.e., 
of investors with sufficient liquidity. Such expectations 



are influenced by the price level - it is more difficult to 
find buyers at higher prices - by the general market 
sentiment, and by externalities and new information, 
including new information about earnings. 

The capital gain anticipated by a rational investor takes 
into consideration both the expected discounted earnings 
of the firm and market volatility - the latter being a 
measure of the expected distribution of willing and able 
buyers at any given price. Still, if earnings are retained 
and not transmitted to the investor as dividends - why 
should they affect the price of the share, i.e., why should 
they alter the capital gain? 

Earnings serve merely as a yardstick, a calibrator, a 
benchmark figure. Capital gains are, by definition, an 
increase in the market price of a security. Such an increase 
is more often than not correlated with the future stream of 
income to the firm - though not necessarily to the 
shareholder. Correlation does not always imply causation. 
Stronger earnings may not be the cause of the increase in 
the share price and the resulting capital gain. But 
whatever the relationship, there is no doubt that earnings 
are a good proxy to capital gains. 

Hence investors' obsession with earnings figures. Higher 
earnings rarely translate into higher dividends. But 
earnings - if not fiddled - are an excellent predictor of the 
future value of the firm and, thus, of expected capital 
gains. Higher earnings and a higher market valuation of 
the firm make investors more willing to purchase the 
stock at a higher price - i.e., to pay a premium which 
translates into capital gains. 



The fundamental determinant of future income from share 
holding was replaced by the expected value of share- 
ownership. It is a shift from an efficient market - where all 
new information is instantaneously available to all rational 
investors and is immediately incorporated in the price of 
the share - to an inefficient market where the most critical 
information is elusive: how many investors are willing 
and able to buy the share at a given price at a given 
moment. 

A market driven by streams of income from holding 
securities is "open". It reacts efficiently to new 
information. But it is also "closed" because it is a zero 
sum game. One investor's gain is another's loss. The 
distribution of gains and losses in the long term is pretty 
even, i.e., random. The price level revolves around an 
anchor, supposedly the fair value. 

A market driven by expected capital gains is also "open" 
in a way because, much like less reputable pyramid 
schemes, it depends on new capital and new investors. As 
long as new money keeps pouring in, capital gains 
expectations are maintained - though not necessarily 
realized. 

But the amount of new money is finite and, in this sense, 
this kind of market is essentially a "closed" one. When 
sources of funding are exhausted, the bubble bursts and 
prices decline precipitously. This is commonly described 
as an "asset bubble". 

This is why current investment portfolio models (like 
CAPM) are unlikely to work. Both shares and markets 
move in tandem (contagion) because they are exclusively 
swayed by the availability of future buyers at given prices. 



This renders diversification inefficacious. As long as 
considerations of "expected liquidity" do not constitute an 
explicit part of income -based models, the market will 
render them increasingly irrelevant. 

APPENDIX: Introduction to the book "Facts and 
Fictions in the Securities Industry " (2009) 

The securities industry worldwide is constructed upon the 
quicksand of self-delusion and socially-acceptable 
confabulations. These serve to hold together players and 
agents whose interests are both disparate and 
diametrically opposed. In the long run, the securities 
markets are zero-sum games and the only possible 
outcome is win-lose. 

The first "dirty secret" is that a firm's market 
capitalization often stands in inverse proportion to its 
value and valuation (as measured by an objective, neutral, 
disinterested party). This is true especially when agents 
(management) are not also principals (owners) . 

Owing to its compensation structure, invariably tied to the 
firms' market capitalization, management strives to 
maximize the former by manipulating the latter. Very 
often, the only way to affect the firm's market 
capitalization in the short-term is to sacrifice the firm's 
interests and, therefore, its value in the medium to long- 
term (for instance, by doling out bonuses even as the firm 
is dying; by speculating on leverage; and by cooking the 
books). 

The second open secret is that all modern financial 
markets are Ponzi (pyramid) schemes . The only viable 
exit strategy is by dumping one's holdings on future 



entrants. Fresh cash flows are crucial to sustaining ever 
increasing prices. Once these dry up, markets collapse in a 
heap. 

Thus, the market prices of shares and, to a lesser extent 
debt instruments (especially corporate ones) are 
determined by three cash flows: 

(i) The firm's future cash flows (incorporated into 
valuation models, such as the CAPM or FAR) 

(ii) Future cash flows in securities markets (i.e., the ebb 
and flow of new entrants) 

(iii) The present cash flows of current market participants 

The confluence of these three cash streams translates into 
what we call "volatility" and reflects the risks inherent in 
the security itself (the firm's idiosyncratic risk) and the 
hazards of the market (known as alpha and beta 
coefficients). 

In sum, stocks and share certificates do not represent 
ownership of the issuing enterprise at all. This is a myth, a 
convenient piece of fiction intended to pacify losers and 
lure "new blood" into the arena. Shareholders' claims on 
the firm's assets in cases of insolvency, bankruptcy, or 
liquidation are of inferior, or subordinate nature. 

Stocks are shares are merely options (gambles) on the 
three cash flows enumerated above. Their prices wax and 
wane in accordance with expectations regarding the future 
net present values of these flows. Once the music stops, 
they are worth little. Return 



The Future of the Securities and Exchange 
Commission (SEC) 

Interview with Gary Goodenow 



In June 2005, William H. Donaldson was forced to resign 
as Chairman of the Securities and Exchange Commission 
(SEC). The reason? As the New York Times put it: 
"criticism that his enforcement was too heavy-handed". 
President Bush chose California Rep. Christopher Cox, a 
Republican, to replace him. 

Gary Langan Goodenow is an attorney licensed to 
practice in the State of Florida and the District of 
Columbia. The Webmaster of 

www.RealityAtTheSEC.com , he worked at the Miami 
office of the SEC for about six years, in the Division of 
Enforcement. 

His experience is varied. As a staff attorney, he 
investigated and prosecuted cases enforcing the federal 
securities laws. As a branch chief, he supervised the work 
of several staff attorneys. As a Senior Trial Counsel, he 
was responsible for litigating about thirty enforcement 
cases at any one time in federal court. As Senior Counsel, 
he made the final recommendations on which cases the 
office would investigate and prosecute, or decline. 

He describes an experience he had after he left the SEC. 



"I represented an Internet financial writer with a Web 
site that touted stocks, Mr. Ted Melcher ofSGA Whisper 
Stocks. The SEC sued Ted because as he was singing 
the praises of certain stocks in his articles, he was selling 
them into a rising market. He got his shares from the 
issuers in exchange for doing the promotional 
touting. Unfortunately for him, the SEC and the 
Department of Justice made an example of his case, and 
he went to jail. " 

Q. The SEC is often accused of lax and intermittent 
enforcement of the law. Is the problem with the 
enforcement division - or with the law? Can you describe 
a typical SEC investigation from start to finish? 

A. The problem lies with both. 

At the SEC, the best argument in support of a proposed 
course of action is "that's what we did last time". That will 
inevitably please the staff attorney's superiors. 

SEC rules and regulations remind me of an old farmhouse 
that has been altered and adapted, sometimes for 
convenience, other times for necessity. But it has never 
been just plain pulled down and rebuilt despite incredible 
changes around it. To the uninitiated, the house is 
rambling with hidden passages, dark corners, low ceilings, 
folklore and horror stories, and accumulations of tons of 
antique rubbish that sometimes no one - not even some 
SEC Commissioners - can wade through. 



Wandering from room to room in this farmhouse are the 
SEC staff. Regretfully, I found that many are ignorant or 
indifferent to their mission, or scornful of investors' 
plight, too addicted to their petty specializations in their 
detailed job descriptions, and way too prone to follow 
only the well-trodden path. 

They are stunned by the rapidity, multiplicity, immensity 
and intelligence behind the scams. Their tools of research, 
investigation and prosecution are confusingly changed 
periodically when Congress passes some new "reform" 
legislation, or a new Chairman or new Enforcement 
Director issues some memo edict on a "new approach". 

Staff attorneys typically bring investors only bad news 
and are numbed by the latters' emotional reactions, in a 
kind of "shell shock". The SEC lost one quarter of its staff 
in the last two years. The turnover of its 1200 attorneys, at 
14%, is nearly double the government's average. 

One SEC official was quoted as saying "We are losing our 
future - the people who would have had the experience to 
move into the senior ranks". Those that stay behind and 
rise in the ranks are often the least inspired. At the SEC 
enforcement division, one is often confronted with the 
"evil of banality". 

The SEC is empowered by the Securities Act of 1933 
and the Securities Exchange Act of 1934 to seek 
injunctive relief where it appears that a person is engaged 



or about to engage in violations of the federal securities 
laws. This is a civil remedy, not a criminal law 
sanction. Under well-settled case law, the purpose of 
injunctive relief is deterrence, rather than punishment, of 
those who commit violations. Investors do not know that, 
and are uniformly shocked when told. 

The "likelihood requirement" means that, once the 
Commission demonstrates a violation, for injunctive relief 
it needs only show that there is some reasonable 
likelihood of future violations. "Positive proof of 
likelihood, as one court demanded, is hard to provide. At 
the other extreme, I had one former Commissioner tell me 
that, as he understood the law, if the person is alive and 
breathing, the Commission enforcement staff can show 
likelihood of future violations. 

The broad powers of the federal courts are used in 
actions brought by the Commission to prevent securities 
violators from enjoying the fruits of their misconduct. But 
because this is a civil and not a criminal remedy, the SEC 
has a unique rule where defendants can consent to an 
injunction without "admitting or denying the allegations 
of the complaint". This leads to what are called "waivers", 
and I submit that "waivers" are the fundamental flaw in 
U.S. securities laws enforcement. 

In a nutshell, here is the problem. A "fraudster" 
commits a fraud. The Commission sues for an injunction. 



The fraudster consents to the injunction as per above. The 
Court then orders the fraudster to "disgorge" his "ill gotten 
gains" from the scam, usually within 30 days and with 
interest. 

In most cases, the fraudster doesn't pay it all and the 
Commission moves to hold him in civil contempt for 
disobeying the Court's order. The fraudster claims to the 
Court that it is impossible for him to comply because the 
money is gone and he is "without the financial means to 
pay". The Commission then issues a "waiver" and that's 
the way many cases end. Thus both sides can put the case 
behind them. The fraudster agrees to the re-opening of the 
case if he turns out to have lied. 

This procedure is problematic. The Commission 
typically alleges that these fraudsters have lied through 
their teeth in securities sales - but is forced to accept their 
word in an affidavit swearing that they have no money to 
pay the disgorgement. So the waivers are based on an 
assumption of credibility that has no basis in experience 
and possibly none in fact. 

Moreover, the Division of Enforcement has no 
mechanism in place to check if the fraudster has, indeed, 
lied. After the waiver, the files of the case get stored. The 
case is closed. I don't know if there's even a central place 
where the records of waivers are kept. 



In the six years I was at the Commission, I never heard 
of a case involving a breach of waiver affidavit. I doubt if 
one has ever been brought by the Commission - 
anywhere. UPI ought to do a Freedom Of Information Act 
Request on that. 

Something similar happens with the Commission's 
much vaunted ability to levy civil penalties. The statute 
requires that a court trial be held to determine the 
egregiousness of the fraud. Based on its findings, the court 
can levy the fines. But, according to some earlier non- 
SEC case law, a fraudster can ask for a jury trial regarding 
the amount of the civil penalties because he or she lack 
the means to pay them. U.S. district courts being as busy 
as they are, there's no way the court is going to hold a jury 
trial. 

Instead, the fraudster consents to a court order "noting 
the appropriateness of civil penalties for the case, but 
declining to set them based on a demonstrated inability to 
pay". Again, if the fraudster lied, the Commission can ask 
the Court to revisit the issue. 

Q. Internet fraud, corporate malfeasance, derivatives, off- 
shore special purpose entities, multi-level marketing, 
scams, money laundering - is the SEC up to it? Isn't its 
staff overwhelmed and under-qualified? 

A. The staff is overwhelmed. The longest serving are 
often the least qualified because the talented usually leave. 



We've already got the criminal statutes on the books for 
criminal prosecution of securities fraud at the federal 
level. Congress should pass a law deputizing staff 
attorneys of the Commission Division of Enforcement, 
with at least one-year experience and high performance 
ratings, as Special Assistant United States Attorneys for 
the prosecution of securities fraud. In other words, make 
them part of the Department of Justice to make criminal, 
not just civil cases, against the fraudsters. 

The US Department of Justice does not have the person 
power to pursue enough criminal securities cases in the 
Internet Age. Commission attorneys have the expertise, 
but not the legal right, to bring criminal prosecution. The 
afore-described waiver system only makes the fraudsters 
more confident that the potential gain from fraud 
outweighs the risk. 

I'd keep the civil remedies. In an ongoing fraud, with no 
time to make out a criminal case, the Commission staff 
can seek a Temporary Restraining Order and an asset 
freeze. This more closely resembles the original intent of 
Congress in the 1930s. But after the dust settles, the 
investing public deserves to demand criminal 
accountability for the fraud, not just waivers. 

Q. Is the SEC - or at least its current head - in hock to 
special interests, e.g., the accounting industry? 



A. "In hock to special interests" is too explicit a statement 
about US practice. It makes a good slogan for a Marxist 
law school professor, but reality is far subtler. 

By unwritten bipartisan agreement, the Chairman of the 
SEC is always a political figure. Two of the five SEC 
Commissioners are always Democrats, two Republicans, 
and the Chairman belongs to the political party of the 
President. I am curious to see if this same agreement will 
apply to the boards established under the Sarbannes-Oxley 
Act. 

Thus, both parties typically choose a candidate for 
Chairman of impeccable partisan credentials and 
consistent adherence to the "party line". The less 
connected, the less partisan, and academicians serve as 
Commissioners, not Chairmen. 

The Chairman's tenure normally overlaps with a specific 
President's term in office, even when, as with President 
Bush the elder following President Reagan, the same party 
remains in power. SEC jobs lend themselves to lucrative 
post-Commission employment. This explains the dearth of 
"loyal opposition". Alumni pride themselves on their 
connections following their departure. 

The Chairman is no more and no less "in hock" than any 
leading member of a US political party. Still, I faulted 
Chairman Pitt, and became the first former member of 
SEC management to call for his resignation, in an Op/Ed 



item in the Miami Herald . In my view, he was 
impermissibly indulgent of his former law clients at the 
expense of SEC enforcement. 

Q. What more could stock exchanges do to help the SEC? 

A. At the risk of being flippant, enforce their own 
rules. The major enforcement action against the 
NASDAQ brokers a few years ago, for instance, was 
toothless. Presently, Merrill Lynch is being scrutinized by 
the State of New York, but there is not a word from the 
NYSE. 

Q. Do you regard the recent changes to the law - 
especially the Sarbanes-Oxley Act - as toothless or an 
important enhancement to the arsenal of law enforcement 
agencies? Do you think that the SEC should have any 
input in professional self -regulating and regulatory bodies, 
such as the recently established accountants board? 

A. It remains to be seen. The Act establishes a Public 
Accounting Oversight Board ("the Board"). It reflects one 
major aspect of SEC enforcement practice: unlike in many 
countries, the SEC does not recognize an 
accountant/client privilege, though it does recognize an 
attorney/client privilege. 

Regrettably, in my experience, attorneys organize at least 
as much securities fraud as accountants. Yet in the US, 



one would never see an "attorneys oversight board". For 
one thing, Congress has more attorneys than accountants. 

Section 3 of the Act, titled "Commission Rules and 
Enforcement", treats a violation of the Rules of the 
Public Company Accounting Oversight Board as a 
violation of the '34 Act, giving rise to the same 
penalties. It is unclear if this means waiver after waiver, 
as in present SEC enforcement. Even if it does, the Rules 
may still be more effective because US state regulators 
can forfeit an accountant's license based on a waived 
injunction. 

The Act's provision, in Section 101, for the membership 
of said Board has yet to be fleshed out. Appointed to five- 
year terms, two of the members must be - or have been - 
certified public accountants, and the remaining three must 
not be and cannot have been CPAs. Lawyers are the 
likeliest to be appointed to these other seats. The 
Chairmanship may be held by one of the CPA members, 
provided that he or she has not been engaged as a 
practicing CPA for five years, meaning, ab initio, that he 
or she will be behind the practice curb at a time when 
change is rapid. 

No Board member may, during their service on the Board, 
"share in any of the profits of, or receive payments from, a 
public accounting firm," other than "fixed continuing 



payments," such as retirement payments. This mirrors 
SEC practice with the securities industry, but does little to 
tackle "the revolving door". 

The Board members are appointed by the SEC, "after 
consultation with" the Federal Reserve Board Chairman 
and the Treasury Secretary. Given the term lengths, it is 
safe to predict that every new presidential administration 
will bring with it a new Board. 

The major powers granted to the Board will effectively 
change the accounting profession in the USA, at least with 
regards to public companies, from a self -regulatory body 
licensed by the states, into a national regulator. 

Under Act Section 103, the Board shall: (1) register public 
accounting firms; (2) establish "auditing, quality control, 
ethics, independence, and other standards relating to the 
preparation of audit reports for issuers;" (3) inspect 
accounting firms; and (4) investigate and discipline firms 
to enforce compliance with the Act, the Rules, 
professional standards and the federal securities 
laws. This is a sea change in the US. 

As to professional standards, the Board must "cooperate 
on an on-going basis" with certain accountants advisory 
groups. Yet, US federal government Boards do not "co- 



operate" - they dictate. The Board can "to the extent that it 
determines appropriate" adopt proposals by such groups. 

More importantly, it has authority to reject any standards 
proffered by said groups. This will then be reviewed by 
the SEC, because the Board must report on its standards to 
the Commission every year. The SEC may - by rule - 
require the Board to cover additional ground. The Board, 
and the SEC through the Board, now run the US 
accounting profession. 

The Board is also augments the US effort to establish 
hegemony over the global practice of accounting. Act 
Section 106, Foreign Public Accounting Firms, subjects 
foreigners who audit U.S. companies - including foreign 
firms that perform audit work that is used by the primary 
auditor on a foreign subsidiary of a U.S. company - to 
registration with the Board. 

I am amazed that the EU was silent on this inroad to their 
sovereignty. This may prove more problematic in US 
operations in China. I do not think the US can force its 
accounting standards on China without negatively 
affecting our trade there. 

Under Act Section 108, the SEC now decides what are 
"generally" accepted accounting principles. Registered 
public accounting firms are barred from providing certain 



non-audit services to an issuer they audit. Thus, the split, 
first proposed by the head of Arthur Anderson in 1974, is 
now the law. 

Act Section 203, Audit Partner Rotation, is a gift to the 
accounting profession. The lead audit or coordinating 
partner and the reviewing partner must rotate every 5 
years. That means that by law, the work will be spread 
around. Note that the law says "partner", not 
"partnership". Thus, we are likely to continue to see 
institutional clients serviced by "juntas" at accounting 
firms, not by individuals. This will likely end forever the 
days when a single person controlled major amounts of 
business at an accounting firm. US law firms would never 
countenance such a change, as the competition for major 
clients is intense. 

Act Section 209, Consideration by Appropriate State 
Regulatory Authorities, "throws a bone" to the states. It 
requires state regulators to make an independent 
determination whether Board standards apply to small and 
mid-size non-registered accounting firms. No one can 
seriously doubt the outcome of these determinations. But 
we now pretend that we still have real state regulation of 
the accounting profession, just as we pretend that we have 
state regulation of the securities markets through "blue 
sky laws". The reality is that the states will be confined 



hence to the initial admission of persons to the accounting 
profession. Like the "blue sky laws", it will be a revenue 
source, but the states will be completely junior to the 
Board and the SEC. 

Act Section 302, Corporate Responsibility For Financial 

Reports, mandates that the CEO and CFO of each issuer 
shall certify the "appropriateness of the financial 
statements and disclosures contained in the periodic 
report, and that those financial statements and disclosures 
fairly present, in all material respects, the operations and 
financial condition of the issuer". This may prove 
problematic with global companies. We have already seen 
resistance by Daimler-Benz of Germany. 

Act Section 305: Officer And Director Bars And 
Penalties; Equitable Relief, will be used by the SEC to 
counterattack arguments arising out of the Central Bank 
case. As I maintained in the American Journal of Trial 
Advocacy, the real significance of the Supreme Court 
decision in Central Bank was that the remedial sanctions 
of the federal securities laws should be narrowly 
construed . 

Well, now the SEC has a Congressional mandate. Federal 
courts are authorized to "grant any equitable relief that 
may be appropriate or necessary for the benefit of 
investors". That is an incredibly broad delegation of 



rights, and is an end run around Central Bank . I was 
surprised that this received no publicity. 

Lastly, Act Section 402, Prohibition on Personal Loans 
to Executives, shows how low this generation of US 
leadership has sunk. President Bush has signed a law that 
makes illegal the type of loans from which he and his 
extended family have previously benefited. 

Tacitly, the Act admits that some practices of Enron were 
not illegal inter se. Act Section 401, Study and Report on 
Special Purpose Entities, provides that the SEC should 
study off-balance sheet disclosures to determine their 
extent and whether they are reported in a sufficiently 
transparent fashion. The answer will almost certainly be 
no, and the Board will change GAAP accordingly. 

Q. Does the SEC collaborate with other financial 
regulators and law enforcement agencies internationally? 
Does it share information with other US law enforcement 
agencies? Is there interagency rivalry and does it hamper 
investigations? Can you give us an example? 

A. The SEC and other regulators - as well as two House 
subcommittees - have only very recently begun 
considering information sharing between financial 
regulators. 



This comes too late for the victims of Martin Frankel, 
who, having been barred for life from the securities 
industry by the SEC and NASD in 1992, simply moved 
over to the insurance industry to perpetrate a scam where 
investors have lost an estimated $200 million dollars. 

Had the state insurance regulators known this person's 
background, he would have been unable to set up multiple 
insurance companies. Failure to share information is a 
genuine problem, but "turf" considerations generally 
trump any joint efforts. 

Return 



Trading from a Suitcase 
The Case of Shuttle 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 in fall 2001, eight 
Kyrgyz traders committed suicide. 



The number of Kyrgyz shuttle traders dropped in 2002 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 2002 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 expected it to 
increase to $2 billion in 2002. By comparison, the official 
exports of Turkey to Iraq amount to $800 million. The 
then 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 in 2002 to $1.5-2 billion, according to then 
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 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 in 2002 alone. It has since doubled. The IMF and 
the EU are much decried by the Polish minority now 
trapped in Western Ukraine. 

The situation is likely to be further exacerbated with the 
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 now that Poland acceded 
to the EU. 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. 

Return 



The Blessings of the Black Economy 



Some call it the "unofficial" or "informal" economy, 
others call it the "grey economy" but the old name fits it 
best: the "black economy". In the USA "black" means 
"profitable, healthy" and this is what the black economy 
is. Macedonia should count its blessings for having had a 
black economy so strong and thriving to see it through the 
transition. If Macedonia had to rely only on its official 
economy it would have gone bankrupt long ago. 

The black economy is made up of two constituent 
activities: 

1 . Legal activities that are not reported to the tax 
authorities and the income from which goes 
untaxed and unreported. For instance: it is not 
illegal to clean someone's house, to feed people or 
to drive them. It is, however, illegal to hide the 
income generated by these activities and not to pay 
tax on it. In most countries of the world, this is a 
criminal offence, punishable by years in prison. 

2. Illegal activities which, needless to say, are also 
not reported to the state (and, therefore, not taxed). 

These two types of activities together are thought to 
comprise between 15% (USA, Germany) to 60% (Russia) 
of the economic activity (as measured by the GDP), 
depending on the country. It would probably be an 
underestimate to say that 40% of the GDP in Macedonia 
is "black". This equals 1.2 billion USD per annum. The 
money generated by these activities is largely held in 



foreign exchange outside the banking system or smuggled 
abroad (even through the local banking system). 
Experience in other countries shows that circa 15% of the 
money "floats" in the recipient country and is used to 
finance consumption. This should translate to 1 billion 
free floating dollars in the hands of the 2 million citizens 
of Macedonia. Billions are transferred to the outside world 
(mostly to finance additional transactions, some of it to be 
saved in foreign banks away from the long hand of the 
state). A trickle of money comes back and is "laundered" 
through the opening of small legal businesses. 

These are excellent news for Macedonia. It means that 
when the macro-economic, geopolitical and (especially) 
the micro-economic climates will change - billions of 
USD will flow back to Macedonia. People will bring their 
money back to open businesses, to support family 
members and just to consume it. It all depends on the 
mood and on the atmosphere and on how much these 
people feel that they can rely on the political stability and 
rational management. Such enormous flows of capital 
happened before: in Argentina after the Generals and their 
corrupt regime were ousted by civilians, in Israel when 
the peace process started and in Mexico following the 
signature of NAFTA, to mention but three cases. These 
reserves can be lured back and transform the economy. 

But the black economy has many more important 
functions. 

The black economy is a cash economy. It is liquid and 
fast. It increases the velocity of money. It injects much 
needed foreign exchange to the economy and 
inadvertently increases the effective money supply and the 
resulting money aggregates. In this sense, it defies the 



dictates of "we know better" institutions such as the IMF. 
It fosters economic activity and employs people. It 
encourages labour mobility and international trade. Black 
economy, in short, is very positive. With the exception of 
illegal activities, it does everything that the official 
economy does - and, usually, more efficiently. 

So, what is morally wrong with the black economy? The 
answer, in brief: it is exploitative. Other parts of the 
economy, which are not hidden (though would have liked 
to be), are penalized for their visibility. They pay taxes. 
Workers in a factory owned by the state or in the 
government service cannot avoid paying taxes. The 
money that the state collects from them is invested, for 
instance, in infrastructure (roads, phones, electricity) or 
used to pay for public services (education, defence, 
policing). The operators of the black economy enjoy these 
services without paying for them, without bearing the 
costs and worse: while others bear the costs. These 
encourages them, in theory to use these resources less 
efficiently. 

And all this might be true in a highly efficient, almost 
ideal market economy. The emphasis is on the word 
"market". Unfortunately, we all live in societies which are 
regulated by bureaucracies which are controlled (in 
theory, rarely in practice) by politicians. These elites have 
a tendency to misuse and to abuse resources and to 
allocate them in an inefficient manner. Even economic 
theory admits that any dollar left in the hands of the 
private sector is much more efficiently used than the same 
dollar in the hands of the most honest and well meaning 
and well planning civil servant. Governments all over the 
world distort economic decisions and misallocate scarce 
economic resources. 



Thus, if the goals are to encourage employment and 
economic growth - the black economy should be 
welcomed. This is precisely what it does and, by 
definition, it does so more efficiently than the 
government. The less tax dollars a government has - the 
less damage it does. This is an opinion shares by most 
economists in the world today. Lower tax rates are an 
admission of this fact and a legalization of parts of the 
black economy. 

The black economy is especially important in times of 
economic hardships. Countries in transition are a private 
case of emerging economies which are a private case of 
developing countries which used to be called (in less 
politically correct times) "Third World Countries". They 
suffer from all manner of acute economic illnesses. They 
lost their export markets, they are technologically 
backward, their unemployment skyrockets, their plant and 
machinery are dilapidated, their infrastructure decrepit 
and dysfunctional, they are lethally illiquid, they become 
immoral societies (obligations not honoured, crime 
flourishes), their trade deficits and budget deficits balloon 
and they are conditioned to be dependent on handouts and 
dictates from various international financial institutions 
and donor countries. 

Read this list again: isn't the black economy a perfect 
solution until the dust settles? 

It enhances exports (and competitiveness through 
imports), it encourages technology transfers, it employs 
people, it invests in legitimate businesses (or is practised 
by them), it adds to the wealth of the nation (black 
marketeers are big spenders, good consumers and build 
real estate), it injects liquidity to an otherwise dehydrated 



market. Mercifully, the black economy is out of the reach 
of zealous missionaries such as the IMF. It goes its own 
way, unnoticed, unreported, unbeknownst, untamed. It 
doesn't pay attention to money supply targets (it is much 
bigger than the official money supply figure), or to 
macroeconomic stability goals. It plods on: doing business 
and helping the country to survive the double scourges of 
transition and Western piousness and patronizing. As long 
as it is there, Macedonia has a real safety net. The 
government is advised to turn a blind eye to it for it is a 
blessing in disguise. 

There is one sure medicine: eliminate the population and 
both unemployment and inflation will be eliminated. 
Without the black economy, the population of Macedonia 
would not have survived. This lesson must be 
remembered as the government prepares to crack down on 
the only sector of the economy which is still alive and 
kicking. 

Operational Recommendations 

The implementation of these recommendations and 
reforms should be obliged to be GRADUAL. The 
informal economy is an important pressure valve for the 
release of social pressures, it ameliorates the social costs 
inherent to the period of transition and it constitutes an 
important part of the private sector. 

As we said in the body of our report, these are the reasons 
for the existence of an informal economy and they should 
be obliged to all be tackled: 

• High taxation level (in Macedonia, high payroll 
taxes); 



• Onerous labour market regulations; 

• Red tape and bureaucracy (which often leads to 
corruption); 

• Complexity and unpredictability of the tax system. 

Reporting Requirements and Transparency 

• All banks should be obliged to report foreign 
exchange transactions of more than 10,000 DM 
(whether in one transaction or cumulatively by the 
same legal entity). The daily report should be 
submitted to the Central Bank. In extreme cases, 
the transactions should be investigated. 

• All the ZPP account numbers of all the firms in 
Macedonia should be publicly available through 
the Internet and in printed form. 

• Firms should be obliged by law to make a list of 
all their bank accounts available to the ZPP, to the 
courts and to plaintiffs in lawsuits. 

• All citizens should be obliged to file annual, 
personal tax returns (universal tax returns, like in 
the USA). This way, discrepancies between 
personal tax returns and other information can lead 
to investigations and discoveries of tax evasion 
and criminal activities. 

• All citizens should be obliged to file bi-annual 
declarations of personal wealth and assets 
(including real estate, vehicles, movables, 
inventory of business owned or controlled by the 
individual, financial assets, income from all 
sources, shares in companies, etc.). 



All retail outlets and places of business should be 
required to install - over a period of 3 years - cash 
registers with "fiscal brains". These are cash 
registers with an embedded chip. The chips are 
built to save a trail (detailed list) of all the 
transactions in the place of business. Tax 
inspectors can pick the chip at random, download 
its contents to the tax computers and use it to issue 
tax assessments. The information thus gathered 
can also be crossed with and compared to 
information from other sources (see: "Databases 
and Information Gathering"). This can be done 
only after the full implementation of the 
recommendations in the section titled "Databases 
and Information Gathering". I do not regard it as 
an effective measure. While it increases business 
costs - it is not likely to prevent cash or otherwise 
unreported transactions. 

All taxis should be equipped with taximeters, 
which include a printer. This should be a licencing 
condition. 

Industrial norms (for instance, the amount of sugar 
needed to manufacture a weight unit of chocolate, 
or juice) should be revamped. Norms should NOT 
be determined according to statements provided by 
the factory - but by a panel of experts. Each norm 
should be signed by three people, of which at least 
one is an expert engineer or another expert in the 
relevant field. Thought should be dedicated to the 
possibility of employing independent laboratories 
to determine norms and supervise them. 



• Payments in wholesale markets should be done 
through a ZPP counter or branch in the wholesale 
market itself. Release of the goods and exiting the 
physical location of the wholesale market should 
be allowed only against presentation of a ZPP 
payment slip. 

Reduction of Cash Transactions 

• Cash transactions are the lifeblood of the informal 
economy. Their reduction and minimization is 
absolutely essential in the effort to contain it. One 
way of doing it is by issuing ZPP payment (debit) 
cards to businesses, firm and professionals. Use of 
the payment cards should be mandatory in certain 
business-to-business transactions. 

• All exchange offices should be obliged to issue 
receipt for every cash transaction above 100 DM 
and to report to the Central Bank all transactions 
above 1000 DM. Suspicious transactions (for 
instance, transactions which exceed the financial 
wherewithal of the client involved) should be duly 
investigated. 

• The government can reduce payroll taxes if the 
salary is not paid in cash (for instance, by a 
transfer to the bank account of the employee). The 
difference between payroll taxes collected on cash 
salaries and lower payroll taxes collected on 
noncash salaries - should be recovered by 
imposing a levy on all cash withdrawals from 
banks. The banks can withhold the tax and transfer 
it to the state monthly. 



• Currently, checks issued to account-holders by 
banks are virtually guaranteed by the issuing 
banks. This transforms checks into a kind of cash 
and checks are used as cash in the economy. To 
prevent this situation, it is recommended that all 
checks will be payable to the beneficiary only. The 
account-holder will be obliged to furnish the bank 
with a monthly list of checks he or she issued and 
their details (to whom, date, etc.). Checks should 
be valid for 5 working days only. 

• An obligation can be imposed to oblige businesses 
to effect payments only through their accounts 
(from account to account) or using their debit 
cards. Cash withdrawals should be subject to a 
withholding tax deducted by the bank. The same 
withholding tax should be applied to credits given 
against cash balances or to savings houses 
(stedilnicas). Alternatively, stedilnicas should also 
be obliged to deduct, collect and transfer the cash 
withdrawal withholding tax. 

• In the extreme and if all other measures fail after a 
reasonable period of time, all foreign trade related 
payments should be conducted through the Central 
Bank. But this is really a highly irregular, 
emergency measure, which I do not recommend at 
this stage. 

• The interest paid on cash balances and savings 
accounts in the banks should be increased (starting 
with bank reserves and deposits in the central 
bank). 



• The issuance of checkbook should be made easy 
and convenient. Every branch should issue 
checkbooks. All the banks and the post office 
should respect and accept each other's checks. 

• A Real Time Gross Settlement System should be 
established to minimize float and facilitate 
interbank transfers. 

Government Tenders 

• Firms competing for government tenders should 
be obliged to acquire a certificate from the tax 
authorities that they owe no back-taxes. 
Otherwise, they should be barred from bidding in 
government tenders and RFPs (Requests for 
Proposals). 

Databases and Information Gathering 

• Estimating the informal economy should be a 
priority objective of the Bureau of Statistics, 
which should devote considerable resources to this 
effort. In doing so, the Bureau of Statistics should 
coordinate closely with a wide variety of relevant 
ministries and committees that oversee various 
sectors of the economy. 

• All registrars should be computerized: land, real 
estate, motor vehicles, share ownership, 
companies registration, tax filings, import and 
export related documentation (customs), VAT, 
permits and licences, records of flights abroad, 
ownership of mobile phones and so on. The tax 
authorities and the Public Revenue Office (PRO) 



should have unrestricted access to ALL the 
registers of all the registrars. Thus, they should be 
able to find tax evasion easily (ask for sources of 
wealth- how did you build this house and buy a 
new car if you are earning 500 DM monthly 
according to your tax return?). 

The PRO should have complete access to the 
computers of the ZPP and to all its computerized 
and non-computerized records. 

The computer system should constantly compare 
VAT records and records and statements related to 
other taxes in order to find discrepancies between 
them. 

Gradually, submissions of financial statements, tax 
returns and wealth declarations should be 
computerized and done even on a monthly basis 
(for instance, VAT statements). 

A system of informants and informant rewards 
should be established, including anonymous phone 
calls. Up to 10% of the intake or seizure value 
related to the information provided by the 
informant should go to the informant. 



Law Enforcement 



Tax inspectors and customs officials should 
receive police powers and much higher salaries 
(including a percentage of tax revenues). The 
salaries of all tax inspectors - regardless of their 
original place of employment - should be 



equalized (of course, taking into consideration 
tenure, education, rank, etc.). 

Judges should be trained and educated in matters 
pertaining to the informal economy. Special courts 
for taxes, for instance, are a good idea (see 
recommendation below). Judges have to be trained 
in tax laws and the state tax authorities should 
provide BINDING opinions to entrepreneurs, 
businessmen and investors regarding the tax 
implications of their decisions and actions. 

It is recommended to assign tax inspectors to the 
public prosecutors' office to work as teams on 
complex or big cases. 

To establish an independent Financial and Tax 
Police with representatives from all relevant 
ministries but under the exclusive jurisdiction of 
the PRO. The remit of this Police should include 
all matters financial (including foreign exchange 
transactions, property and real estate transactions, 
payroll issues, etc.). 

Hiring and firing procedures in all the branches of 
the tax administration should be simplified. The 
number of administrative posts should be reduced 
and the number of tax inspectors and field agents 
increased. 

Tax arrears and especially the interest accruing 
thereof should be the first priority of the ZPP, 
before all other payments. 



• All manufacturers and sellers of food products 
(including soft drinks, sweetmeats and candy, 
meat products, snacks) should purchase a licence 
from the state and be subjected to periodic and 
rigorous inspections. 

• All contracts between firms should be registered in 
the courts and stamped to become valid. Contracts 
thus evidenced should be accompanied by the 
registration documents (registrar extract) of the 
contracting parties. Many "firms" doing business 
in Macedonia are not even legally registered. 

Reforms and Amnesty 

• A special inter-ministerial committee with 
MINISTER-MEMBERS and headed by the PM 
should be established. Its roles: to reduce 
bureaucracy, to suggest appropriate new 
legislation and to investigate corruption. 

• Bureaucracy should be pared down drastically. 
The more permits, licences, tolls, fees and 
documents needed - the more corruption. Less 
power to state officials means less corruption. The 
One Stop Shop concept should be implemented 
everywhere. 

• A general amnesty should be declared. Citizens 
declaring their illegal wealth should be pardoned 
BY LAW and either not taxed or taxed at a low 
rate once and forever on the hitherto undeclared 
wealth. 

The Tax Code 



To impose a VAT system. VAT is one the best 
instruments against the informal economy because 
it tracks the production process throughout a chain 
of value added suppliers and manufacturers. 

The Tax code needs to be simplified. Emphasis 
should be placed on VAT, consumption taxes, 
customs and excise taxes, fees and duties. To 
restore progressivity, the government should 
directly compensate the poor for the excess 
relative burden. 

After revising the tax code in a major way, the 
government should declare a moratorium on any 
further changes for at least four years. 

The self-employed and people whose main 
employment is directorship in companies should 
be given the choice between paying a fixed % of 
the market value of their assets (including 
financial assets) or income tax. 

All property rental contracts should be registered 
with the courts. Lack of registration in the courts 
and payment of a stamp tax should render the 
contract invalid. The courts should be allowed to 
evidence and stamp a contract only after it carries 
the stamp of the Public Revenue Office (PRO). 
The PRO should register the contract and issue an 
immediate tax assessment. Contracts, which are 
for less than 75% of the market prices, should be 
subject to tax assessment at market prices. Market 
prices should be determined as the moving average 
of the last 100 rental contracts from the same 
region registered by the PRO. 



Filing of tax returns - including for the self- 
employed - should be only with the PRO and not 
with any other body (such as the ZPP). 



Legal Issues 



The burden of proof in tax court cases should shift 
from the tax authorities to the person or firm 
assessed. 

Special tax courts should be established within the 
existing courts. They should be staffed by 
specifically trained judges. Their decisions should 
be appealed to the Supreme Court. They should 
render their decisions within 180 days. All other 
juridical and appeal instances should be cancelled 
- except for an appeal instance within the PRO. 
Thus, the process of tax collection should be 
greatly simplified. A tax assessment should be 
issued by the tax authorities, appealed internally 
(within the PRO), taken to a tax court session (by a 
plaintiff) and, finally, appealed to the Supreme 
Court (in very rare cases). 

The law should allow for greater fines, prison 
terms and for the speedier and longer closure of 
delinquent businesses. 

Seizure and sale procedures should be specified in 
all the tax laws and not merely by way of 
reference to the Income Tax Law. Enforcement 
provisions should be incorporated in all the tax 
laws. 



• To amend the Law on Tax Administration, the 
Law on Personal Income Tax and the Law on 
Profits Tax as per the recommendations of the IRS 
experts (1997-9). 

Customs and Duties 

• Ideally, the customs service should be put under 
foreign contract managers. If this is politically too 
sensitive, the customs personnel should be entitled 
to receive a percentage of customs and duties 
revenues, on a departmental incentive basis. In any 
case, the customs should be subjected to outside 
inspection by expert inspectors who should be 
rewarded with a percentage of the corruption and 
lost revenues that they expose. 

• In the case of imports or payments abroad, 
invoices, which include a price of more than 5% 
above the list price of a product, should be rejected 
and assessment for the purposes of paying customs 
duties and other taxes should be issued at the list 
price. 

• In the case of exports or payments from abroad, 
invoices which include a discount of more than 
25% on the list price of a product should be 
rejected and assessment for the purposes of paying 
customs duties and other taxes should be issued at 
the list price. 

• The numbers of tax inspectors should be 
substantially increased and their pay considerably 
enhanced. A departmental incentive system should 



be instituted involving a percentage of the intake 
(monetary fines levied, goods confiscated, etc.). 

The computerized database system (see 
"Databases and Information Gathering") should be 
used to compare imports of raw materials for the 
purposes of re-export and actual exports (using 
invoices and customs declarations). Where there 
are disparities and discrepancies, severe and 
immediate penal actions should be taken. Anti- 
dumping levies and measures, fines and criminal 
charges should be adopted against exporters 
colluding with importers in hiding imported goods 
or reducing their value. 

Often final products are imported and declared to 
the customs as raw materials (to minimize customs 
duties paid). Later these raw materials are either 
sold outright in the domestic or international 
markets or bartered for finished products (for 
example: paints and lacquers against furniture or 
sugar against chocolate). This should be a major 
focus of the fight against the informal economy. I 
follow with an analysis of two products, which are 
often abused in this manner. 

I study two examples (white sugar and cooking 
oil) though virtually all raw materials and foods 
are subject to the aforementioned abuse. 

White Sugar is often imported as brown sugar. 
One way to prevent this is to place sugar on the list 
of LB (import licence required) list, to limit the 
effective period of each licence issued, to connect 
each transaction of imported brown sugar to a 



transaction of export, to apply the world price of 
sugar to customs duties, to demand payment of 
customs duties in the first customs terminal, to 
demand a forwarder's as well as an importer's 
guarantee and to require a certificate of origin. The 
same goes for Cooking Oil (which - when it is 
imported packaged - is often declared as some 
other goods). 

All payments to the customs should be made only 
through the ZPP. Customs and tax inspectors 
should inspect these receipts periodically. 

All goods should be kept in the customs terminal 
until full payment of the customs duties, as 
evidenced by a ZPP receipt, is effected. 



Public Campaign 



The government should embark on a massive 
Public Relations and Information campaign. The 
citizens should be made to understand what is a 
budget, how the taxes are collected, how they are 
used. They should begin to view tax evaders as 
criminals. "He who does not pay his taxes - is 
stealing from you and from your children", "Why 
should YOU pay for HIM?" "If we all did not pay 
taxes- there would be no roads, bridges, schools, 
or hospitals" (using video to show disappearing 
roads, bridges, suffering patients and students 
without classes), "Our country is a partnership - 
and the tax-evader is stealing from the till (kasa)" 
and so on. 



The phrase "Gray Economy" should be replaced 
by the more accurate phrases "Black Economy" or 
"Criminal Economy". 

Return 



Public Procurement and Very Private 
Benefits 



In every national budget, there is a part called "Public 
Procurement". This is the portion of the budget allocated 
to purchasing services and goods for the various 
ministries, authorities and other arms of the executive 
branch. It was the famous management consultant, 
Parkinson, who once wrote that government officials are 
likely to approve a multi-billion dollar nuclear power 
plant much more speedily that they are likely to authorize 
a hundred dollar expenditure on a bicycle parking device. 
This is because everyone came across 100 dollar 
situations in real life - but precious few had the fortune to 
expend with billions of USD. 

This, precisely, is the problem with public procurement: 
people are too acquainted with the purchased items. They 
tend to confuse their daily, household-type, decisions with 
the processes and considerations which should permeate 
governmental decision making. They label perfectly 
legitimate decisions as "corrupt" - and totally corrupt 
procedures as "legal" or merely "legitimate", because this 
is what was decreed by the statal mechanisms, or because 
"this is the law". 

Procurement is divided to defence and non-defence 
spending. In both these categories - but, especially in the 
former - there are grave, well founded, concerns that 
things might not be all what they seem to be. 



Government - from India's to Sweden's to Belgium's - fell 
because of procurement scandals which involved bribes 
paid by manufacturers or service providers either to 
individual in the service of the state or to political parties. 
Other, lesser cases, litter the press daily. In the last few 
years only, the burgeoning defence sector in Israel saw 
two such big scandals: the developer of Israel's missiles 
was involved in one (and currently is serving a jail 
sentence) and Israel's military attache to Washington was 
implicated - though, never convicted - in yet another. 

But the picture is not that grim. Most governments in the 
West succeeded in reigning in and fully controlling this 
particular budget item. In the USA, this part of the budget 
remained constant in the last 35(!) years at 20% of the 
GDP. 

There are many problems with public procurement. It is 
an obscure area of state activity, agreed upon in 
"customized" tenders and in dark rooms through a series 
of undisclosed agreements. At least, this is the public 
image of these expenditures. 

The truth is completely different. 

True, some ministers use public money to build their 
private "empires". It could be a private business empire, 
catering to the financial future of the minister, his cronies 
and his relatives. These two plagues - cronyism and 
nepotism - haunt public procurement. The spectre of 
government official using public money to benefit their 
political allies or their family members - haunts public 
imagination and provokes public indignation. 



Then, there are problems of plain corruption: bribes or 
commissions paid to decision makers in return for 
winning tenders or awarding of economic benefits 
financed by the public money. Again, sometimes these 
moneys end in secret bank accounts in Switzerland or in 
Luxembourg. At other times, they finance political 
activities of political parties. This was rampantly abundant 
in Italy and has its place in France. The USA, which was 
considered to be immune from such behaviours - has 
proven to be less so, lately, with the Bill Clinton alleged 
election financing transgressions. 

But, these, with all due respect to "clean hands" 
operations and principles, are not the main problems of 
public procurement. 

The first order problem is the allocation of scarce 
resources. In other words, prioritizing. The needs are 
enormous and ever growing. The US government 
purchases hundreds of thousands of separate items from 
outside suppliers. Just the list of these goods - not to 
mention their technical specifications and the 
documentation which accompanies the transactions - 
occupies tens of thick volumes. Supercomputers are used 
to manage all these - and, even so, it is getting way out of 
hand. How to allocate ever scarcer resources amongst 
these items is a daunting - close to impossible - task. It 
also, of course, has a political dimension. A procurement 
decision reflects a political preference and priority. But 
the decision itself is not always motivated by rational - let 
alone noble - arguments. More often, it is the by product 
and end result of lobbying, political hand bending and 
extortionist muscle. This raises a lot of hackles among 
those who feel that were kept out of the pork barrel. They 
feel underprivileged and discriminated against. They fight 



back and the whole system finds itself in a quagmire, a 
nightmare of conflicting interests. Last year, the whole 
budget in the USA was stuck - not approved by Congress 
- because of these reactions and counter-reactions. 

The second problem is the supervision, auditing and 
control of actual spending. This has two dimensions: 

1 . How to make sure that the expenditures match and 
do not exceed the budgetary items. In some 
countries, this is a mere ritual formality and 
government departments are positively expected to 
overstep their procurement budgets. In others, this 
constitutes a criminal offence. 

2. How to prevent the criminally corrupt activities 
that we have described above - or even the non 
criminal incompetent acts which government 
officials are prone to do. 

The most widespread method is the public, competitive, 
tender for the purchases of goods and services. 

But, this is not as simple as it sounds. 

Some countries publish international tenders, striving to 
secure the best quality in the cheapest price - no matter 
what is its geographical or political source. Other 
countries are much more protectionist (notably: Japan and 
France) and they publish only domestic tenders, in most 
cases. A domestic tender is open only to domestic bidders. 
Yet other countries limit participation in the tenders on 
various backgrounds: 



the size of the competing company, its track record, its 
ownership structure, its human rights or environmental 
record and so on. Some countries publish the minutes of 
the tender committee (which has to explain WHY it 
selected this or that supplier). Others keep it a closely 
guarded secret ("to protect commercial interests and 
secrets"). 

But all countries state in advance that they have no 
obligation to accept any kind of offer - even if it is the 
cheapest. This is a needed provision: the cheapest is not 
necessarily the best. The cheapest offer could be coming 
from a very unreliable supplier with a bad past 
performance or a criminal record or from a supplier who 
offers goods of shoddy quality. 

The tendering policies of most of the countries in the 
world also incorporates a second principle: that of 
"minimum size". The cost of running a tender is 
prohibitive in the cases of purchases in small amounts. 

Even if there is corruption in such purchases it is bound to 
cause less damage to the public purse than the costs of the 
tender which is supposed to prevent it! 

So, in most countries, small purchases can be authorized 
by government officials - larger amounts go through a 
tedious, multi-phase tendering process. Public competitive 
bidding is not corruption-proof: many times officials and 
bidders collude and conspire to award the contract against 
bribes and other, noncash, benefits. But we still know of 
no better way to minimize the effects of human greed. 

Procurement policies, procedures and tenders are 
supervised by state auditing authorities. The most famous 



is, probably, the General Accounting Office, known by its 
acronym: the GAO. 

It is an unrelenting, very thorough and dangerous 
watchdog of the administration. It is considered to be 
highly effective in reducing procurement - related 
irregularities and crimes. Another such institutions the 
Israeli State Reviser. What is common to both these 
organs of the state is that they have very broad authority. 
They possess (by law) judicial and criminal prosecution 
powers and they exercise it without any hesitation. They 
have the legal obligation to review the operations and 
financial transactions of all the other organs of the 
executive branch. Their teams select, each year, the 
organs to be reviewed and audited. They collect all 
pertinent documents and correspondence. They cross the 
information that they receive from elsewhere. They ask 
very embarrassing questions and they do it under the 
threat of perjury prosecutions. They summon witnesses 
and they publish damning reports which, in many cases, 
lead to criminal prosecutions. 

Another form of review of public procurement is through 
powers granted to the legislative arm of the state 
(Congress, Parliament, Bundestag, or Knesset). In almost 
every country in the world, the elected body has its own 
procurement oversight committee. It supervises the 
expenditures of the executive branch and makes sure that 
they conform to the budget. The difference between such 
supervisory, parliamentary, bodies and their executive 
branch counterparts - is that they feel free to criticize 
public procurement not only in the context of its 
adherence to budget constraints or its cleanliness - but 
also in a political context. In other words, these 
committees do not limit themselves to asking HOW - but 



also engage in asking WHY. Why this specific expense in 
this given time and location - and not that expense, 
somewhere else or some other time. These elected bodies 
feel at liberty - and often do - intervene in the very 
decision making process and in the order of priorities. 
They have the propensity to alter both quite often. 

The most famous such committee is, arguably, the 
Congressional Budget Office (CBO). It is famous because 
it is non-partisan and technocratic in nature. It is really 
made of experts which staff its offices. 

Its apparent - and real - neutrality makes its judgements 
and recommendations a commandment not to be avoided 
and, almost universally, to be obeyed. The CBO operates 
for and on behalf of the American Congress and is, really, 
the research arm of that venerable parliament. Parallelly, 
the executive part of the American system - the 
Administration - has its own guard against waste and 
worse: the Office of Management and Budget (OMB). 

Both bodies produce learned, thickset, analyses, reports, 
criticism, opinions and recommendations. Despite quite a 
prodigious annual output of verbiage - they are so highly 
regarded, that virtually anything that they say (or write) is 
minutely analysed and implemented to the last letter with 
an air of awe. 

Only a few other parliaments have committees that carry 
such weight. The Israeli Knesset have the extremely 
powerful Finance Committee which is in charge of all 
matters financial, from appropriations to procurement. 
Another parliament renowned for its tight scrutiny is the 
French Parliament - though it retains very few real 
powers. 



But not all countries chose the option of legislative 
supervision. Some of them relegated parts or all of these 
functions to the executive arm. 

In Japan, the Ministry of Finance still scrutinizes (and has 
to authorize) the smallest expense, using an army of 
clerks. These clerks became so powerful that they have 
the theoretical potential to secure and extort benefits 
stemming from the very position that they hold. Many of 
them suspiciously join companies and organizations 
which they supervised or to which they awarded contracts 
- immediately after they leave their previous, government, 
positions. The Ministry of Finance is subject to a major 
reform in the reform-bent government of Prime Minister 
Hashimoto. The Japanese establishment finally realized 
that too much supervision, control, auditing and 
prosecution powers might be a Pyrrhic victory: it might 
encourage corruption - rather than discourage it. 

Britain opted to keep the discretion to use public funds 
and the clout that comes with it in the hands of the 
political level. This is a lot like the relationship between 
the butter and the cat left to guard it. Still, this 
idiosyncratic British arrangement works surprisingly well. 
All public procurement and expenditure items are 
approved by the EDX Committee of the British Cabinet 
(=inner, influential, circle of government) which is headed 
by the Ministry of Finance. Even this did not prove 
enough to restrain the appetites of Ministers, especially as 
quid pro quo deals quickly developed. So, now the word 
is that the new Labour Prime Minister will chair it- 
enabling him to exert his personal authority on matters of 
public money. 



Britain, under the previous, Tory, government also 
pioneered an interesting and controversial incentive 
system for its public servants as top government officials 
are euphemistically called there. They receive, added to 
their salaries, a portion of the savings that they effect in 
their departmental budgets. This means that they get a 
small fraction of the end of the fiscal year difference 
between their budget allowances and what they actually 
spent. This is very useful in certain segments of 
government activity - but could prove very problematic in 
others. Imagine health officials saving on medicines, or 
others saving on road maintenance or educational 
consumables. This, naturally, will not do. 

Needless to say that no country officially approves of the 
payment of bribes or commission to officials in charge of 
public spending, however remote the connection is 
between the payment and the actions. 

Yet, law aside many countries accept the intertwining of 
elites - business and political - as a fact of life, albeit a sad 
one. Many judicial systems in the world even make a 
difference between a payment which is not connected to 
an identifiable or discernible benefit and those that are. 
The latter - and only the latter - are labelled "bribery". 

Where there is money - there is wrongdoing. Humans are 
humans - and sometimes not even that. 

But these unfortunate derivatives of social activity can be 
minimized by the adoption of clear procurement policies, 
transparent and public decision making processes and the 
right mix of supervision, auditing and prosecution. Even 
then the result is bound to be dubious, at best. 



Crisis of the Bookkeepers 
The Future of the Accounting Profession 

Interview with David Jones 



On May 31, 2005, the US Supreme Court overturned the 
conviction of accounting firm Arthur Anderson on 
charges related to its handling of the books of the now 
defunct energy concern, Enron. It was only the latest 
scene in a drama which unfolded at the height of the wave 
of corporate malfeasance in the USA. 

David C. Jones is a part-time research fellow at the Center 
for Urban Development Studies of the Graduate School of 
Design, Harvard University. He has been associated with 
the University since 1987 when he retired from the World 
Bank, where he served as financial adviser for water 
supply and urban development. 

He had joined the World Bank, as a senior financial 
analyst, in 1970, after working as a technical assistance 
advisor for the British Government in East Africa. He 
began his career in British local government. He is a 
Chartered Public Finance Accountant and a Chartered 
Certified Accountant (UK). He is the author of 
"Municipal Accounting for Developing Countries" 
originally published by the World Bank and the Chartered 
Institute of Public Finance and Accountancy (UK) in 
1982. 



Q: Accounting scandals seem to form the core of 
corporate malfeasance in the USA. Is there something 
wrong with the GAAP - or with American accountants? 

A: Accounting is based on some fundamental principles. 
As I say at the beginning of my textbook, the accountant 
"records and interprets variations in financial position ... 
during any period of time, at the end of which he can 
balance net results (of past operations) against net 
resources (available for future operations)". 

Accountancy includes the designing of financial records, 
the recording of financial information based on actual 
financial transactions (i.e., bookkeeping), the production 
of financial statements from the recorded information, 
giving advice on financial matters, and interpreting and 
using financial data to assist in making the best 
management decisions. 

Simple as these principles may sound, they are, in 
practice, rather complicated to implement, to interpret and 
to practice. About 80% of the transactions require only 
about 20% of the effort because they are straightforward 
and obvious to a book-keeper, once the rules are learned. 

But - and it is a big but - the other 20% or so of 
transactions require 80% of the intellectual effort. These 
transactions are most likely to have major impacts on the 
profit and loss account and the balance sheet. 

My colleagues and I, all qualified accountants, have 
heated discussion over something as simple as the 
definition of a debit or a credit. Debits can be records of 
either expenses or assets. The former counts against 
income in the statement of profit and loss. The latter is 



treated as a continuing resource in a balance sheet. It is 
sometimes gradually allocated (expensed) against income 
in subsequent years, sometimes not. 

A fundamental problem with the financial reporting of 
WorldCom, for example, was that huge quantities of 
expenses were misallocated in the accounts as assets. 
Thus, by reducing expenditures, profit appeared to be 
increased. The effect of this on stock values and, thereby, 
on executive rewards are secondary and tertiary outcomes 
not caused directly by the accountancy. 

Another example concerns interest on loans that may have 
been raised to finance capital investment, while a large 
asset is under construction, often for several years. 

Some argue that the interest should be accounted for as 
part of the capital cost until the asset is operational. Others 
claim that because the interest is an expense, it should be 
charged against that year's profits. Yet, the current year's 
income includes none of the income generated by the new 
asset, so profit is under-stated. And what if a hydro- 
electric power station starts to operate three of its ten 
turbines while still under construction? How does one 
allocate what costs, as expenses or assets, in such cases? 

Interestingly, the Generally Accepted Accounting 
Principles (GAAP) require that "interest during 
construction" be capitalized, that is included in the cost of 
the asset. The International Accounting Standards (IAS) 
prefer expensing but allow capitalization. From an 
economic viewpoint, both are wrong - or only partially 
right! 



The accountancy profession should get together to 
establish common practices for comparing companies, 
limiting the scope for judgment. Accountants used to 
make the rules in the USA and elsewhere until the 
business community demanded input from other 
professionals, to provide a more "balanced" view. 

This led to the establishment of the Financial Accounting 
Standards Board (FASB), with non-accountants as 
members. The GAAP has been tempered by political and 
business lobbying. Moreover, accounting rules for 
taxation purposes and applied to companies quoted on 
stock exchanges are not always consistent with the 
GAAP. 

Accountants who do not follow the rules are disciplined. 
American accountants are among the best educated and 
best-trained in the world. Those who wish to be 
recognized as auditors of significant enterprises must be 
CPAs. Thus, they must have obtained at least a finance- 
related bachelor's degree and then have passed a five-part 
examination that is commonly set, nation-wide, by the 
American Institute of Certified Public Accountants 
(AICPA). To practice publicly, they must be licensed by 
the state in which they live or practice. To remain a CPA, 
each must abide by the standards of conduct and ethics of 
the AICPA, including a requirement for continuing 
professional education. 

Most other countries have comparable rules. Probably the 
closest comparisons to the USA are found in the UK and 
its former colonies. 

Q: Can you briefly compare the advantages and 
disadvantages of the GAAP and the IAS? 



A: It is asserted that the GAAP tend to be "rule-based" 
and the IAS are "principle-based." GAAP, because they 
are founded on the business environment of the USA are 
closely aligned to its laws and regulations. The IAS seek 
to prescribe how credible accounting practices can operate 
within a country's existing legal structure and prevailing 
business practices. 

Alas, sometimes the IAS and the GAAP are in 
disagreement. The two rule-making bodies - FASB and 
IASB - are trying to cooperate to eliminate such 
differences. 

The Inter-American Development Bank, having reviewed 
the situation in Latin America, concluded that most of the 
countries in that region - as well as Canada and the EU 
aspirants - are IAS-orientated. Still, the USA is by far the 
largest economy in the world, with significant political 
influence. It also has the world's most important financial 
markets. 

Q: Can accounting cope with derivatives, off-shore 
entities, stock options - or is there a problem in the very 
effort to capture dynamics and uncertainties in terms of a 
static, numerical representation? 

A: Most, if not all, of these matters can be handled by 
proper application of accounting principles and practices. 
Much has been made of expensing employee stock 
options, for instance. But an FASB proposal in the early 
nineties was watered down at the insistence of US 
company lobbyists and legislators. 

How to value stock options and when to recognize them is 
not clear. A paper on the topic identified sixteen different 



valuation parameters. But accountants are accustomed to 
dealing with such practical matters. 

Q: Can you describe the state of the art (i.e., recent 
trends) of municipal finance in the USA, Europe, Latin 
America (mainly Argentina and Brazil), and in emerging 
economies (e.g., central and eastern Europe)? 

A: There are no standard practices for governmental 
accounting - whether national, federal, state, or local. The 
International Federation of Accountants (IFAC) urged 
accountants to follow various practices. It subsequently 
settled mainly on accrual accounting standards. 

Some countries - the UK, for local government, New 
Zealand for both central and local government - use full 
accrual at current value, which is beyond many private 
sector practices. This is being reviewed in the UK. The 
central government there is introducing "resource-based" 
accounting, approximating full accrual at current value. 

The US Governmental Accounting Standards Board has 
recently recommended that US local governments 
produce dual financial reports, combining "commercially- 
based" practices with those emanating from the truly 
unique US "fund accounting" system. 

In my book I recognized that fixed assets are being funded 
less and less entirely by debt, private sector accounting 
practices increasingly intrude into the public sector, and 
costs of services must be much more carefully assessed. 

Q: Are we likely to witness municipal Enrons and 
World. corn's? 



A: We already have! Remember the financial downfall 
and restructuring of New York City in the seventies. 
Other state and local governments have had serious 
defaults in USA and elsewhere. Shortcomings of their 
accounting, politicians choosing to ignore predictive 
budgeting, borrowing used to cover operating 
expenditures - similar to WorldCom. In the case of the 
New York City debacle, operating expenditures were 
treated as capital expenditures to balance the operating 
budget. 

More recently, I testified to the US Congress about 
Washington DC, where the City Council ran up a huge 
accumulated operating deficit, of c. $700 million. It then 
sought Congressional approval to cover this deficit by 
borrowing. 

Even more recently, the State of Virginia decided to 
abolish the property tax on domestic vehicles. This left a 
huge gap in the following year's current budget. The 
governor proposed to use a deceptive accounting device 
and to set up a separate - and, thus not subject to a 
referendum - "revenue" bond-issuing entity (shades of 
Enron's "Special Purpose Entities"). The bonds were then 
to be serviced by expected annual receipts from the 
negotiated tobacco settlement, at that time not even 
finalized. This crazy and illegal plan was abandoned. 

The fact that both accounting and financial reporting for 
local governments are very often in slightly modified 
cash-based formats adds to the confusion. But these 
formats could be built on. Indeed, in the very tight 
budgetary situations facing virtually every local 
government, it is essential that cash management on a day- 
to-day basis be given high priority. 



Still, the system can be misleading. It produces extremely 
scant information on costs - the use of resources - compared 
with expenditures (i.e., cash-flows). More seriously, cash 
accounting allows indiscriminate allocation of funds 
between capital and recurrent purposes, thus permitting no 
useful assessment of annual or other periodic financial 
performance. 

A cash-based system cannot engender a credible balance 
sheet. It produces meaningless and incoherent information 
on assets and liabilities and the ownership, or trusteeship, of 
separate (or separable) funds. It is not a sound system of 
budgetary control. When year-end unpaid invoices are held 
over, it creates a false impression of operating within 
approved budgetary limits. Thus, local government units 
can run serious budgetary deficits that are hidden from 
public view merely by not paying their bills on time and 
in full! A cash accounting system will not reveal this. 

Still, moving to an accrual system should be done slowly 
and cautiously. Private sector experience, in former Soviet 
countries, of changing to accrual accounting was 
administratively traumatic. Their public sector systems 
may not easily survive any major tinkering, let alone an - 
eventually inevitable - full overhaul. Skills, tools, and 
access to proper professional knowledge are required 
before this is attempted. 

Q: Can you compare municipal and corporate accounting 
and financing practices as far as governance and control 
are concerned? 

A: In corporate accounting practice, the notional owners 
and managers are the shareholders. In practice, through 
the use of proxies and other devices, the real control is 



normally in the hands of a board of directors. Actual day 
to day control reverts to the company chairmen, president, 
chief executive or chief operating officer. The chief 
financial officer is often - though not necessarily - an 
accountant and he or she oversees qualified accountants. 

The company's accountants must produce the annual and 
other financial statements. It is not the responsibility of 
the auditors whose obligation is to report to the 
shareholders on the credibility and legality of the financial 
statements. The shareholders may appoint an audit 
committee to review the audit reports on their behalf. The 
audit is carried out by Certified Public Accountants with 
recognized accounting credentials. Both the qualified 
accountants in the audit firm and those in the corporation 
are subject to professional discipline of their accounting 
institutions and of the law. 

In local government accounting practice, the public 
trustees and managers are normally a locally elected 
council. Often, the detailed control over financial 
management is in the hands of a finance committee or 
finance commission, usually comprised only of elected 
members. 

Traditionally, only the elected council may take major 
financial decisions, such as approving a budget, levying 
taxes and borrowing. Actual day to day control of a local 
government may be by an executive mayor, or by an 
elected or appointed chief executive. There normally is a 
chief financial officer, often - though not necessarily - an 
accountant in charge of other qualified accountants. 

It is the responsibility of the accountants of the local 
government to produce the annual and other financial 



statements. It is not the responsibility of the auditors 
whose obligation is to report to the local elected council 
on the credibility and legality of the financial statements. 
The council may appoint an audit committee to review the 
audit reports on their behalf, or they may ask the finance 
committee to do this. 

However, it is quite common, in many countries, for local 
government financial statements to be audited by properly 
authorized public officials. Auditors should be qualified, 
independent, experienced, and competent. Audits should 
be regular and comprehensive. It is unclear whether or not 
public official auditors always fulfill these conditions. 

In the United Kingdom, for example, there is a Local 
Government Audit Commission which employs qualified 
accountants either on its own staff or from hired 
accountancy firms. Thus, it clearly follows high standards. 

Q: How did the worldwide trend of devolution affect 
municipal finance? 

A: Outside of the former Soviet Union and Eastern 
Europe, municipal finance was not significantly affected 
by devolution, though there has been a tendency for 
decentralization. Central governments hold the purse- 
strings and almost all local governments operate under 
legislation engendered by the national, or - in federal 
systems - state, governments. Local governments rarely 
have separate constitutional authority, although there are 
varying degrees of local autonomy. 

In the former Soviet Empire, changes of systems and of 
attitudes were much more dramatic. Local government 
units, unlike under the former Soviet system, are not 



branches of the general government. They are separate 
corporate bodies, or legal persons. But in Russia, and in 
other former socialist countries, they have often been 
granted "de jure" (legal) independence but not full "de 
facto" (practical) autonomy. 

There seems to be an unwillingness to accept that the two 
systems are intended to operate quite differently. What is 
good for a central government is not necessarily equally 
good for a local government unit. For example, the main 
purpose of local government is to provide public services, 
with only enough authority to perform them effectively. It 
is almost always the responsibility of a central or state 
government to enact and enforce the criminal and civil 
law. Local by-laws or ordinances are usually concerned 
only with minor matters and are subject to an enabling 
legislation. Moreover, they may prove to be "ultra vires" 
(beyond their powers) and, therefore, unconstitutional, or 
at least unenforceable. 

It may be appropriate, under certain circumstances, for a 
central government to run budgetary deficits, whether 
caused by current or capital transactions. In local 
government units, there is almost always a necessity to 
distinguish between such transactions. Moreover, in most 
countries, local government units are required by law to 
have balanced budgets, without resort to borrowing to 
cover current deficits. 

A corporate body (legal person), whether a private or a 
public sector entity, has a separate legal identity from the 
central government and from the members, shareholders, or 
electorate who own and manage it. It has its own corporate 
name. Typically, its formal decisions are by resolution of its 
managing body (board or council). Written documents are 



authenticated by its common seal. It may contract, sue and 
be sued in its own name. Indeed, unless specifically 
prevented by law, it may even sue the central government! 
It may also have legal relationships with its own individual 
members or with its staff. It is often said to have perpetual 
succession, meaning that it lives on, even though the 
individual members may die, resign or otherwise cease their 
membership. 

While a corporation owes its existence to legislation, a 
local government unit is established, typically, under 
something like a "Local Government Organic Law". 
Corporate status differs fundamentally from that of (say) 
government departments in a system of de-concentration. 
Permanent closure or abolition of a municipal council, or 
indeed any change in its powers and duties, would almost 
always require formal legal action, typically national 
parliamentary legislation. 

A local government unit makes its own policy decisions, 
some of which, especially the financial ones, often require 
approval by a central government authority. Still, the central 
government rarely runs, or manages, a local government 
unit on a daily basis. The relationship is at arms length and 
not hands on. A local government unit usually is 
empowered to own land and real estate. Sometimes, public 
assets - such as with roads or drainage systems - are deemed 
to be "vested in" the local authority because they cannot be 
owned in the same way as buildings are. 

Q: Local authorities issue bonds, partake in joint ventures, 
lend to SME's - in short, encroach on turf previously 
exclusively occupied by banks, the capital markets, and 
business. Is this a good or a bad thing? 



A: Local governments are established to provide services 
and perform activities required or allowed by law! 
Normally, they won't seek or be permitted to engage in 
commercial activities, best left to the private sector. 
However, there have always been natural monopolies 
(such as water supply), coping with negative economic 
externalities (such as sewerage and solid waste 
management), the provision of whole or partial public 
goods (such as street lighting, or roads) and merit goods 
(such as education, health, and welfare), and services that 
the community, for economic or social reasons, seeks to 
subsidize (such as urban transport). Left to the private 
marketplace, these services would be absent, or under- 
supplied, or over-charged for. 

Such services are wholly or partially financed by local 
taxation, either imposed by local governments, or by 
central (or state) taxation, through a grant or revenue- 
sharing system. What has changed in recent years is that 
local governments have been encouraged and empowered 
to outsource these services to the private sector, or to 
"public -private" partnerships. 

Charges for services, and revenues from taxation cover 
current operating expenditures with a small operating 
surplus used to partly fund capital expenditure or to 
service long, or medium term debt, such as bond issues 
secured against future revenues. Commercial banks, 
because of their tendency to lend only for relatively short 
periods of time, usually have a relatively minor role in 
such funding, except perhaps as fiscal agents or bond 
issue managers. 

Other funding is obtained via direct - and dependence- 
forming - capital grants from the central or state 



government. Alternatively, the central government can 
establish a quasi-autonomous local government loans 
authority, which it may wholly or partially fund. The 
authority may also seek to raise additional funds from 
commercial sources and make loans on reasonable terms 
to the local governments. 

Third, the central government may lend directly to local 
governments, or guarantee their borrowing. Finally, local 
governments are left to their own devices to raise loans as 
and when they can, on whatever terms are available. This 
usually leaves them in a precarious position, because the 
market for this kind of long and medium term credit is 
thin and costly. 

Commercial banks make short term loans to local 
governments to cover temporary shortages of working 
capital. If not properly controlled, such short-term loans 
are rolled over and accumulate unsustainably. That is 
what happed in New York City, in the seventies. 

Q: In the age of the Internet and the car, isn't the added 
layer of municipal bureaucracy superfluous or even 
counterproductive? Can't the center - at least in smallish 
countries - administer things at least as well? 

A: I am quite sure that they can. There are many glaring 
examples of mismatches of sizes, shapes and 
responsibilities of local government units. For example, 
New York, Moscow and Bombay are each single local 
government units. Yet, they each have much bigger 
populations than many countries, such as New Zealand, 
the republics of former Yugoslavia, and the Baltic states. 



On the other hand, the Greater Washington Metropolitan 
Area comprises a federal district, four counties and 
several small cities. The local government systems are 
under the jurisdictions of two states and the federal 
government. Each of the two states has a completely 
different traditions and systems of local governance, 
emanating from pre-independence times. Accordingly, the 
local government systems north and east of the Potomac 
River (which flows through the Washington area) are 
substantially different from those to the south and west. 
Finally, the Boston area, a cradle of U.S. democracy, is 
governed by a conglomerate of over 40 local government 
jurisdictions. Even its most famous college, Harvard, is in 
Cambridge and not in Boston itself. Many of the 
jurisdictions are so small (Boston is not very big by U.S. 
standards) that common services are run by agencies of 
the State of Massachusetts. 

The problem of centralizing financial records would, 
indeed, be relatively simple to solve. If credit card 
companies can maintain linkages world-wide, there is no 
practical reason why local government accounts for (say) 
a city in Macedonia could not be kept in China. The issue 
here is quite different. It revolves around democracy, 
tradition, living in community, service delivery at a local 
level, civil society, and the common wealth. It really has 
very little to do with accountancy, which is just one tool 
of management, albeit an important one. 

Return 



Competition Laws 



A. THE PHILOSOPHY OF COMPETITION 

The aims of competition (anti-trust) laws are to ensure 
that consumers pay the lowest possible price (=the most 
efficient price) coupled with the highest quality of the 
goods and services which they consume. This, according 
to current economic theories, can be achieved only 
through effective competition. Competition not only 
reduces particular prices of specific goods and services - it 
also tends to have a deflationary effect by reducing the 
general price level. It pits consumers against producers, 
producers against other producers (in the battle to win the 
heart of consumers) and even consumers against 
consumers (for example in the healthcare sector in the 
USA). This everlasting conflict does the miracle of 
increasing quality with lower prices. Think about the vast 
improvement on both scores in electrical appliances. The 
VCR and PC of yesteryear cost thrice as much and 
provided one third the functions at one tenth the speed. 

Competition has innumerable advantages: 

a. It encourages manufacturers and service providers 

to be more efficient, to better respond to the needs of their 
customers, to innovate, to initiate, to venture. In 
professional words: it optimizes the allocation of 
resources at the firm level and, as a result, throughout the 
national economy. 

More simply: producers do not waste resources (capital), 
consumers and businesses pay less for the same goods and 



services and, as a result, consumption grows to the benefit 
of all involved. 

b. The other beneficial effect seems, at first sight, to 
be an adverse one: competition weeds out the 
failures, the incompetents, the inefficient, the fat 
and slow to respond. Competitors pressure one 
another to be more efficient, leaner and meaner. 
This is the very essence of capitalism. It is wrong 
to say that only the consumer benefits. If a firm 
improves itself, re-engineers its production 
processes, introduces new management 
techniques, modernizes - in order to fight the 
competition, it stands to reason that it will reap the 
rewards. Competition benefits the economy, as a 
whole, the consumers and other producers by a 
process of natural economic selection where only 
the fittest survive. Those who are not fit to survive 
die out and cease to waste the rare resources of 
humanity. 

Thus, paradoxically, the poorer the country, the less 
resources it has - the more it is in need of competition. 
Only competition can secure the proper and most efficient 
use of its scarce resources, a maximization of its output 
and the maximal welfare of its citizens (consumers). 
Moreover, we tend to forget that the biggest consumers 
are businesses (firms). If the local phone company is 
inefficient (because no one competes with it, being a 
monopoly) - firms will suffer the most: higher charges, 
bad connections, lost time, effort, money and business. If 
the banks are dysfunctional (because there is no foreign 
competition), they will not properly service their clients 
and firms will collapse because of lack of liquidity. It is 



the business sector in poor countries which should head 
the crusade to open the country to competition. 

Unfortunately, the first discernible results of the 
introduction of free marketry are unemployment and 
business closures. People and firms lack the vision, the 
knowledge and the wherewithal needed to support 
competition. They fiercely oppose it and governments 
throughout the world bow to protectionist measures. To 
no avail. Closing a country to competition will only 
exacerbate the very conditions which necessitate its 
opening up. At the end of such a wrong path awaits 
economic disaster and the forced entry of competitors. A 
country which closes itself to the world - will be forced to 
sell itself cheaply as its economy will become more and 
more inefficient, less and less competitive. 

The Competition Laws aim to establish fairness of 
commercial conduct among entrepreneurs and competitors 
which are the sources of said competition and innovation. 

Experience - later buttressed by research - helped to 
establish the following four principles: 

1 . There should be no barriers to the entry of new 
market players (barring criminal and moral 
barriers to certain types of activities and to certain 
goods and services offered). 

2. A larger scale of operation does introduce 
economies of scale (and thus lowers prices). 
This, however, is not infinitely true. There is a 
Minimum Efficient Scale - MES - beyond which 
prices will begin to rise due to monopolization of 
the markets. This MES was empirically fixed at 



10% of the market in any one good or service. In 
other words: companies should be encouraged to 
capture up to 10% of their market (=to lower 
prices) and discouraged to cross this barrier, lest 
prices tend to rise again. 

3. Efficient competition does not exist when a market 
is controlled by less than 10 firms with big size 
differences. An oligopoly should be declared 
whenever 4 firms control more than 40% of the 
market and the biggest of them controls more than 
12% of it. 

4. A competitive price will be comprised of a 
minimal cost plus an equilibrium profit which does 
not encourage either an exit of firms (because it is 
too low), nor their entry (because it is too high). 

Left to their own devices, firms tend to liquidate 
competitors (predation), buy them out or collude with 
them to raise prices. The 1890 Sherman Antitrust Act in 
the USA forbade the latter (section 1) and prohibited 
monopolization or dumping as a method to eliminate 
competitors. Later acts (Clayton, 1914 and the Federal 
Trade Commission Act of the same year) added forbidden 
activities: tying arrangements, boycotts, territorial 
divisions, non-competitive mergers, price discrimination, 
exclusive dealing, unfair acts, practices and methods. 
Both consumers and producers who felt offended were 
given access to the Justice Department and to the FTC or 
the right to sue in a federal court and be eligible to receive 
treble damages. 

It is only fair to mention the "intellectual competition", 
which opposes the above premises. Many important 



economists thought (and still do) that competition laws 
represent an unwarranted and harmful intervention of the 
State in the markets. Some believed that the State should 
own important industries (J.K. Galbraith), others - that 
industries should be encouraged to grow because only size 
guarantees survival, lower prices and innovation (Ellis 
Hawley). Yet others supported the cause of laissez faire 
(Marc Eisner). 

These three antithetical approaches are, by no means, 
new. One led to socialism and communism, the other to 
corporatism and monopolies and the third to jungle- 
ization of the market (what the Europeans derisively call: 
the Anglo-Saxon model). 

B. HISTORICAL AND LEGAL CONSIDERATIONS 

Why does the State involve itself in the machinations of 
the free market? Because often markets fail or are unable 
or unwilling to provide goods, services, or competition. 
The purpose of competition laws is to secure a 
competitive marketplace and thus protect the consumer 
from unfair, anti-competitive practices. The latter tend to 
increase prices and reduce the availability and quality of 
goods and services offered to the consumer. 

Such state intervention is usually done by establishing a 
governmental Authority with full powers to regulate the 
markets and ensure their fairness and accessibility to new 
entrants. Lately, international collaboration between such 
authorities yielded a measure of harmonization and 
coordinated action (especially in cases of trusts which are 
the results of mergers and acquisitions). 



Yet, competition law embodies an inherent conflict: while 
protecting local consumers from monopolies, cartels and 
oligopolies - it ignores the very same practices when 
directed at foreign consumers. Cartels related to the 
country's foreign trade are allowed even under 
GATT/WTO rules (in cases of dumping or excessive 
export subsidies). Put simply: governments regard acts 
which are criminal as legal if they are directed at foreign 
consumers or are part of the process of foreign trade. 

A country such as Macedonia - poor and in need of 
establishing its export sector - should include in its 
competition law at least two protective measures against 
these discriminatory practices: 

1. Blocking Statutes - which prohibit its legal entities 
from collaborating with legal procedures in other 
countries to the extent that this collaboration 
adversely affects the local export industry. 

2. Clawback Provisions - which will enable the local 
courts to order the refund of any penalty payment 
decreed or imposed by a foreign court on a local 
legal entity and which exceeds actual damage 
inflicted by unfair trade practices of said local 
legal entity. US courts, for instance, are allowed to 
impose treble damages on infringing foreign 
entities. The clawback provisions are used to battle 
this judicial aggression. 

Competition policy is the antithesis of industrial policy. 
The former wishes to ensure the conditions and the rules 
of the game - the latter to recruit the players, train them 
and win the game. The origin of the former is in the 19 th 
century USA and from there it spread to (really was 



imposed on) Germany and Japan, the defeated countries in 
the 2 nd World War. The European Community (EC) 
incorporated a competition policy in articles 85 and 86 of 
the Rome Convention and in Regulation 17 of the Council 
of Ministers, 1962. 

Still, the two most important economic blocks of our time 
have different goals in mind when implementing 
competition policies. The USA is more interested in 
economic (and econometric) results while the EU 
emphasizes social, regional development and political 
consequences. The EU also protects the rights of small 
businesses more vigorously and, to some extent, sacrifices 
intellectual property rights on the altar of fairness and the 
free movement of goods and services. 

Put differently: the USA protects the producers and the 
EU shields the consumer. The USA is interested in the 
maximization of output at whatever social cost - the EU is 
interested in the creation of a just society, a liveable 
community, even if the economic results will be less than 
optimal. 

There is little doubt that Macedonia should follow the EU 
example. Geographically, it is a part of Europe and, one 
day, will be integrated in the EU. It is socially sensitive, 
export oriented, its economy is negligible and its 
consumers are poor, it is besieged by monopolies and 
oligopolies. 

In my view, its competition laws should already 
incorporate the important elements of the EU 
(Community) legislation and even explicitly state so in the 
preamble to the law. Other, mightier, countries have done 
so. Italy, for instance, modelled its Law number 287 dated 



10/10/90 "Competition and Fair Trading Act" after the EC 
legislation. The law explicitly says so. 

The first serious attempt at international harmonization of 
national antitrust laws was the Havana Charter of 1947. It 
called for the creation of an umbrella operating 
organization (the International Trade Organization or 
"ITO") and incorporated an extensive body of universal 
antitrust rules in nine of its articles. Members were 
required to "prevent business practices affecting 
international trade which restrained competition, limited 
access to markets, or fostered monopolistic control 
whenever such practices had harmful effects on the 
expansion of production or trade", the latter included: 

a. Fixing prices, terms, or conditions to be observed 

in dealing with others in the purchase, sale, or lease of any 
product; 

b. Excluding enterprises from, or allocating or 
dividing, any territorial market or field of business 
activity, or allocating customers, or fixing sales 
quotas or purchase quotas; 

c. Discriminating against particular enterprises; 

d. Limiting production or fixing production quotas; 

e. Preventing by agreement the development or 
application of technology or invention, whether 
patented or non-patented; and 

f. Extending the use of rights under intellectual 
property protections to matters which, according to 
a member's laws and regulations, are not within 



the scope of such grants, or to products or 
conditions of production, use, or sale which are 
not likewise the subject of such grants. 

GATT 1947 was a mere bridging agreement but the 
Havana Charter languished and died due to the objections 
of a protectionist US Senate. 

There are no antitrust/competition rules either in GATT 
1947 or in G ATT/WTO 1994, but their provisions on 
antidumping and countervailing duty actions and 
government subsidies constitute some elements of a more 
general antitrust/competition law. 

GATT, though, has an International Antitrust Code 
Writing Group which produced a "Draft International 
Antitrust Code" (10/7/93). It is reprinted in §11, 64 
Antitrust & Trade Regulation Reporter (BNA), Special 
Supplement at S-3 (19/8/93). 

Four principles guided the (mostly German) authors: 

1 . National laws should be applied to solve 
international competition problems; 

2. Parties, regardless of origin, should be treated as 
locals; 

3. A minimum standard for national antitrust rules 
should be set (stricter measures would be 
welcome); and 

4. The establishment of an international authority to 
settle disputes between parties over antitrust 
issues. 



The 29 (well-off) members of the Organization for 
Economic Cooperation and Development (OECD) formed 
rules governing the harmonization and coordination of 
international antitrust/competition regulation among its 
member nations ("The Revised Recommendation of the 
OECD Council Concerning Cooperation between Member 
Countries on Restrictive Business Practices Affecting 
International Trade," OECD Doc. No. C( 86)44 (Final) 
(June 5, 1986), also in 25 International Legal Materials 
1629 (1986). A revised version was reissued. According 
to it, " . . .Enterprises should refrain from abuses of a 
dominant market position; permit purchasers, distributors, 
and suppliers to freely conduct their businesses; refrain 
from cartels or restrictive agreements; and consult and 
cooperate with competent authorities of interested 
countries". 

An agency in one of the member countries tackling an 
antitrust case, usually notifies another member country 
whenever an antitrust enforcement action may affect 
important interests of that country or its nationals (see: 
OECD Recommendations on Predatory Pricing, 1989). 

The United States has bilateral antitrust agreements with 
Australia, Canada, and Germany, which was followed by 
a bilateral agreement with the EU in 1991. These provide 
for coordinated antitrust investigations and prosecutions. 
The United States thus reduced the legal and political 
obstacles which faced its extraterritorial prosecutions and 
enforcement. The agreements require one party to notify 
the other of imminent antitrust actions, to share relevant 
information, and to consult on potential policy changes. 
The EU-U.S. Agreement contains a "comity" principle 
under which each side promises to take into consideration 
the other's interests when considering antitrust 



prosecutions. A similar principle is at the basis of Chapter 
15 of the North American Free Trade Agreement 
(NAFTA) - cooperation on antitrust matters. 

The United Nations Conference on Restrictive Business 
Practices adopted a code of conduct in 1979/1980 that was 
later integrated as a U.N. General Assembly Resolution 
[U.N. Doc. TD/RBP/10 (1980)]: "The Set of 
Multilaterally Agreed Equitable Principles and Rules". 

According to its provisions, "independent enterprises 
should refrain from certain practices when they would 
limit access to markets or otherwise unduly restrain 
competition". 

The following business practices are prohibited: 

1 . Agreements to fix prices (including export and 
import prices); 

2. Collusive tendering; 

3. Market or customer allocation (division) 
arrangements; 

4. Allocation of sales or production by quota; 

5. Collective action to enforce arrangements, e.g., by 
concerted refusals to deal; 

6. Concerted refusal to sell to potential importers; 
and 

7. Collective denial of access to an arrangement, or 
association, where such access is crucial to 



competition and such denial might hamper it. In 
addition, businesses are forbidden to engage in the 
abuse of a dominant position in the market by 
limiting access to it or by otherwise restraining 
competition by: 

a. Predatory behaviour towards 
competitors; 

b. Discriminatory pricing or terms or 
conditions in the supply or purchase 
of goods or services; 

c. Mergers, takeovers, joint ventures, 
or other acquisitions of control; 

d. Fixing prices for exported goods or 
resold imported goods; 

e. Import restrictions on legitimately- 
marked trademarked goods; 

f. Unjustifiably - whether partially or 
completely - refusing to deal on an 
enterprise's customary commercial 
terms, making the supply of goods 
or services dependent on 
restrictions on the distribution or 
manufacturer of other goods, 
imposing restrictions on the resale 
or exportation of the same or other 
goods, and purchase "tie-ins". 

C. ANTI - COMPETITIVE STRATEGIES 

Any Competition Law in Macedonia should, in my view, 
excplicitly include strict prohibitions of the following 
practices (further details can be found in Porter's book - 
"Competitive Strategy"). 



These practices characterize the Macedonian market. 
They influence the Macedonian economy by discouraging 
foreign investors, encouraging inefficiencies and 
mismanagement, sustaining artificially high prices, 
misallocating very scarce resources, increasing 
unemployment, fostering corrupt and criminal practices 
and, in general, preventing the growth that Macedonia 
could have attained. 

Strategies for Monopolization 

Exclude competitors from distribution channels. - This is 
common practice in many countries. Open threats are 
made by the manufacturers of popular products: "If you 
distribute my competitor's products - you cannot distribute 
mine. So, choose." Naturally, retail outlets, dealers and 
distributors will always prefer the popular product to the 
new. This practice not only blocks competition - but also 
innovation, trade and choice or variety. 

Buy up competitors and potential competitors. - There is 
nothing wrong with that. Under certain circumstances, this 
is even desirable. Think about the Banking System: it is 
always better to have fewer banks with bigger capital than 
many small banks with capital inadequacy (remember the 
TAT affair). So, consolidation is sometimes welcome, 
especially where scale represents viability and a higher 
degree of consumer protection. The line is thin and is 
composed of both quantitative and qualitative criteria. 
One way to measure the desirability of such mergers and 
acquisitions (M&A) is the level of market concentration 
following the M&A. Is a new monopoly created? Will the 
new entity be able to set prices unperturbed? stamp out its 
other competitors? If so, it is not desirable and should be 
prevented. 



Every merger in the USA must be approved by the 
antitrust authorities. When multinationals merge, they 
must get the approval of all the competition authorities in 
all the territories in which they operate. The purchase of 
"Intuit" by "Microsoft" was prevented by the antitrust 
department (the "Trust-busters"). A host of airlines was 
conducting a drawn out battle with competition authorities 
in the EU, UK and the USA lately. 

Use predatory [below -cost] pricing (also known as 
dumping) to eliminate competitors. - This tactic is mostly 
used by manufacturers in developing or emerging 
economies and in Japan. It consists of "pricing the 
competition out of the markets". The predator sells his 
products at a price which is lower even than the costs of 
production. The result is that he swamps the market, 
driving out all other competitors. Once he is left alone - he 
raises his prices back to normal and, often, above normal. 
The dumper loses money in the dumping operation and 
compensates for these losses by charging inflated prices 
after having the competition eliminated. 

Raise scale-economy barriers. - Take unfair advantage of 
size and the resulting scale economies to force conditions 
upon the competition or upon the distribution channels. In 
many countries Big Industry lobbies for a legislation 
which will fit its purposes and exclude its (smaller) 
competitors. 

Increase "market power (share) and hence profit 
potential". 

Study the industry's "potential" structure and ways it 
can be made less competitive. - Even thinking about sin 
or planning it should be prohibited. Many industries have 



"think tanks" and experts whose sole function is to show 
the firm the way to minimize competition and to increase 
its market shares. Admittedly, the line is very thin: when 
does a Marketing Plan become criminal? 

Arrange for a "rise in entry barriers to block later 
entrants" and "inflict losses on the entrant". - This 
could be done by imposing bureaucratic obstacles (of 
licencing, permits and taxation), scale hindrances (no 
possibility to distribute small quantities), "old boy 
networks" which share political clout and research and 
development, using intellectual property right to block 
new entrants and other methods too numerous to recount. 
An effective law should block any action which prevents 
new entry to a market. 

Buy up firms in other industries "as a base from which 
to change industry structures" there. - This is a way of 
securing exclusive sources of supply of raw materials, 
services and complementing products. If a company owns 
its suppliers and they are single or almost single sources 
of supply - in effect it has monopolized the market. If a 
software company owns another software company with a 
product which can be incorporated in its own products - 
and the two have substantial market shares in their 
markets - then their dominant positions will reinforce each 
other's. 

"Find ways to encourage particular competitors out of 
the industry ". - If you can't intimidate your competitors 
you might wish to "make them an offer that they cannot 
refuse". One way is to buy them, to bribe the key 
personnel, to offer tempting opportunities in other 
markets, to swap markets (I will give you my market 
share in a market which I do not really care about and you 



will give me your market share in a market in which we 
are competitors). Other ways are to give the competitors 
assets, distribution channels and so on providing that they 
collude in a cartel. 

"Send signals to encourage competition to exit" the 
industry. - Such signals could be threats, promises, policy 
measures, attacks on the integrity and quality of the 
competitor, announcement that the company has set a 
certain market share as its goal (and will, therefore, not 
tolerate anyone trying to prevent it from attaining this 
market share) and any action which directly or indirectly 
intimidates or convinces competitors to leave the industry. 
Such an action need not be positive - it can be negative, 
need not be done by the company - can be done by its 
political proxies, need not be planned - could be 
accidental. The results are what matters. 

Macedonia's Competition Law should outlaw the 
following, as well: 

'Intimidate' Competitors 

Raise "mobility " barriers to keep competitors in the 
least-profitable segments of the industry. - This is a tactic 
which preserves the appearance of competition while 
subverting it. Certain segments, usually less profitable or 
too small to be of interest, or with dim growth prospects, 
or which are likely to be opened to fierce domestic and 
foreign competition are left to the competition. The more 
lucrative parts of the markets are zealously guarded by the 
company. Through legislation, policy measures, 
withholding of technology and know-how - the firm 
prevents its competitors from crossing the river into its 
protected turf. 



Let little firms "develop" an industry and then come in 
and take it over. - This is precisely what Netscape is 
saying that Microsoft is doing to it. Netscape developed 
the now lucrative Browser Application market. Microsoft 
was wrong in discarding the Internet as a fad. When it was 
found to be wrong - Microsoft reversed its position and 
came up with its own (then, technologically inferior) 
browser (the Internet Explorer). It offered it free (sound 
suspiciously like dumping) to buyers of its operating 
system, "Windows". Inevitably it captured more than 30% 
of the market, crowding out Netscape. It is the view of the 
antitrust authorities in the USA that Microsoft utilized its 
dominant position in one market (that of the Operating 
Systems) to annihilate a competitor in another (that of the 
browsers). 

Engage in "promotional warfare" by "attacking shares 
of others". - This is when the gist of a marketing, 
lobbying, or advertising campaign is to capture the market 
share of the competition. Direct attack is then made on the 
competition just in order to abolish it. To sell more in 
order to maximize profits, is allowed and meritorious - to 
sell more in order to eliminate the competition is wrong 
and should be disallowed. 

Use price retaliation to "discipline" competitors. - 

Through dumping or even unreasonable and excessive 
discounting. This could be achieved not only through the 
price itself. An exceedingly long credit term offered to a 
distributor or to a buyer is a way of reducing the price. 
The same applies to sales, promotions, vouchers, gifts. 
They are all ways to reduce the effective price. The 
customer calculates the money value of these benefits and 
deducts them from the price. 



Establish a "pattern " of severe retaliation against 
challengers to "communicate commitment" to resist 
efforts to win market share. - Again, this retaliation can 
take a myriad of forms: malicious advertising, a media 
campaign, adverse legislation, blocking distribution 
channels, staging a hostile bid in the stock exchange just 
in order to disrupt the proper and orderly management of 
the competitor. Anything which derails the competitor 
whenever he makes a headway, gains a larger market 
share, launches a new product - can be construed as a 
"pattern of retaliation". 

Maintain excess capacity to be used for "fighting" 
purposes to discipline ambitious rivals. - Such excess 
capacity could belong to the offending firm or - through 
cartel or other arrangements - to a group of offending 
firms. 

Publicize one's "commitment to resist entry" into the 
market. 

Publicize the fact that one has a "monitoring system " to 
detect any aggressive acts of competitors. 

Announce in advance "market share targets" to 
intimidate competitors into yielding their market share. 

Proliferate Brand Names 

Contract with customers to "meet or match all price cuts 
(offered by the competition)" thus denying rivals any 
hope of growth through price competition. 

Secure a big enough market share to "corner" the 
"learning curve, " thus denying rivals an opportunity to 



become efficient. - Efficiency is gained by an increase in 
market share. Such an increase leads to new demands 
imposed by the market, to modernization, innovation, the 
introduction of new management techniques (example: 
Just In Time inventory management), joint ventures, 
training of personnel, technology transfers, development 
of proprietary intellectual property and so on. Deprived of 
a growing market share - the competitor will not feel 
pressurized to learn and to better itself. In due time, it will 
dwindle and die. 

Acquire a wall of "defensive" patents to deny 
competitors access to the latest technology. 

"Harvest" market position in a no-growth industry by 
raising prices, lowering quality, and stopping all 
investment and advertising in it. 

Create or encourage capital scarcity. - By colluding with 
sources of financing (e.g., regional, national, or 
investment banks), by absorbing any capital offered by the 
State, by the capital markets, through the banks, by 
spreading malicious news which serve to lower the credit- 
worthiness of the competition, by legislating special tax 
and financing loopholes and so on. 

Introduce high advertising-intensity. - This is very 
difficult to measure. There could be no objective criteria 
which will not go against the grain of the fundamental 
right to freedom of expression. However, truth in 
advertising should be strictly imposed. Practices such as 
dragging a competitor through the mud or derogatorily 
referring to its products or services in advertising 
campaigns should be banned and the ban should be 
enforced. 



Proliferate "brand names " to make it too expensive for 
small firms to grow. - By creating and maintaining a host 
of absolutely unnecessary brandnames, the competition's 
brandnames are crowded out. Again, this cannot be 
legislated against. A firm has the right to create and 
maintain as many brandnames as it wishes. The market 
will exact a price and thus punish such a company 
because, ultimately, its own brandname will suffer from 
the proliferation. 

Get a "corner" (control, manipulate and regulate) on 
raw materials, government licenses, contracts, subsidies, 
and patents (and, of course, prevent the competition 
from having access to them). 

Build up "political capital" with government bodies; 
overseas, get "protection" from "the host government". 

'Vertical' Barriers 

Practice a "preemptive strategy " by capturing all 
capacity expansion in the industry (simply buying it, 
leasing it or taking over the companies that own or 
develop it). 

This serves to "deny competitors enough residual 
demand". Residual demand, as we previously explained, 
causes firms to be efficient. Once efficient, they develop 
enough power to "credibly retaliate" and thereby "enforce 
an orderly expansion process" to prevent overcapacity 

Create "switching" costs. - Through legislation, 
bureaucracy, control of the media, cornering advertising 
space in the media, controlling infrastructure, owning 



intellectual property, owning, controlling or intimidating 
distribution channels and suppliers and so on. 

Impose vertical "price squeezes". - By owning, 
controlling, colluding with, or intimidating suppliers and 
distributors, marketing channels and wholesale and retail 
outlets into not collaborating with the competition. 

Practice vertical integration (buying suppliers and 
distribution and marketing channels). 

This has the following effects: 

The firm gains a "tap (access) into technology" and 
marketing information in an adjacent industry. It defends 
itself against a supplier's too-high or even realistic prices. 

It defends itself against foreclosure, bankruptcy and 
restructuring or reorganization. Owning suppliers means 
that the supplies do not cease even when payment is not 
affected, for instance. 

It "protects proprietary information from suppliers" - 
otherwise the firm might have to give outsiders access to 
its technology, processes, formulas and other intellectual 
property. 

It raises entry and mobility barriers against competitors. 
This is why the State should legislate and act against any 
purchase, or other types of control of suppliers and 
marketing channels which service competitors and thus 
enhance competition. 

It serves to "prove that a threat of full integration is 
credible" and thus intimidate competitors. 



Finally, it gets "detailed cost information" in an adjacent 
industry (but doesn't integrate it into a "highly competitive 
industry"). 

"Capture distribution outlets" by vertical integration to 
"increase barriers". 

'Consolidate' the Industry 

Send "signals" to threaten, bluff, preempt, or collude 
with competitors. 

Use a "fighting brand" (a low-price brand used only for 
price-cutting). 

Use "cross parry" (retaliate in another part of a 
competitor's market). 

Harass competitors with antitrust suits and other 
litigious techniques. 

Use "brute force" ("massed resources" applied "with 
finesse") to attack competitors 
or use "focal points" of pressure to collude with 
competitors on price. 

"Load up customers" at cut-rate prices to "deny new 
entrants a base" and force them to "withdraw "from 
market. 

Practice "buyer selection, "focusing on those that are 
the most "vulnerable" (easiest to overcharge) and 
discriminating against and for certain types of 
consumers. 



"Consolidate" the industry so as to "overcome industry 
fragmentation ". 

This arguments is highly successful with US federal 
courts in the last decade. There is an intuitive feeling that 
few is better and that a consolidated industry is bound to 
be more efficient, better able to compete and to survive 
and, ultimately, better positioned to lower prices, to 
conduct costly research and development and to increase 
quality. In the words of Porter: "(The) pay-off to 
consolidating a fragmented industry can be high because... 
small and weak competitors offer little threat of 
retaliation." 

Time one's own capacity additions; never sell old 
capacity "to anyone who will use it in the same 
industry " and buy out "and retire competitors ' 
capacity ". 

A Note on the Spiteful Application of Competition Laws 

In many developing countries and countries in transition 
from Communism to capitalism, competition laws are 
used to reward cronies or to damage opponents. The 
discriminatory and partial application of such laws and 
regulations sustains networks of patronage and cements 
political-economic alliances. 

This abuse of the rule of Law and the regulatory regime is 
further compounded by the seething pathological envy 
that is typical of erstwhile egalitarian societies now 
exposed to growing income inequalities. The mob, 
business rivals, political parties, and the populace at large 
leverage competition laws to tear down businesses and 



humiliate entrepreneurs whose success grates on their 
nerves and provokes their unbridled jealousy. 

Return 



The Benefits of Oligopolies 



The Wall Street Journal has recently published an elegiac 
list: 

"Twenty years ago, cable television was dominated by a 
patchwork of thousands of tiny, family-operated 
companies. Today, a pending deal would leave three 
companies in control of nearly two-thirds of the market. 
In 1990, three big publishers of college textbooks 
accounted for 35% of industry sales. Today they have 
62% ... Five titans dominate the (defense) industry, and 
one of them, Northrop Grumman ... made a surprise 
(successful) $5.9 billion bid for (another) TRW ... In 
1996, when Congress deregulated telecommunications, 
there were eight Baby Bells. Today there are four, and 
dozens of small rivals are dead. In 1999, more than 10 
significant firms offered help-wanted Web sites. Today, 
three firms dominate." 

Mergers, business failures, deregulation, globalization, 
technology, dwindling and more cautious venture capital, 
avaricious managers and investors out to increase share 
prices through a spree of often ill-thought acquisitions - 
all lead inexorably to the congealing of industries into a 
few suppliers. Such market formations are known as 
oligopolies. Oligopolies encourage customers to 
collaborate in oligopsonies and these, in turn, foster 
further consolidation among suppliers, service providers, 
and manufacturers. 

Market purists consider oligopolies - not to mention 
cartels - to be as villainous as monopolies. Oligopolies, 



they intone, restrict competition unfairly, retard 
innovation, charge rent and price their products higher 
than they could have in a perfect competition free market 
with multiple participants. Worse still, oligopolies are 
going global. 

But how does one determine market concentration to start 
with? 

The Herfindahl-Hirschmann index squares the market 
shares of firms in the industry and adds up the total. But 
the number of firms in a market does not necessarily 
impart how low - or high - are barriers to entry. These are 
determined by the structure of the market, legal and 
bureaucratic hurdles, the existence, or lack thereof of 
functioning institutions, and by the possibility to turn an 
excess profit. 

The index suffers from other shortcomings. Often the 
market is difficult to define. Mergers do not always drive 
prices higher. University of Chicago economists studying 
Industrial Organization - the branch of economics that 
deals with competition - have long advocated a shift of 
emphasis from market share to - usually temporary - 
market power. Influential antitrust thinkers, such as 
Robert Bork, recommended to revise the law to focus 
solely on consumer welfare. 

These - and other insights - were incorporated in a theory 
of market contestability. Contrary to classical economic 
thinking, monopolies and oligopolies rarely raise prices 
for fear of attracting new competitors, went the new 
school. This is especially true in a "contestable" market - 
where entry is easy and cheap. 



An Oligopolistic firm also fears the price-cutting reaction 
of its rivals if it reduces prices, goes the Hall, Hitch, and 
Sweezy theory of the Kinked Demand Curve. If it were to 
raise prices, its rivals may not follow suit, thus 
undermining its market share. Stackleberg's amendments 
to Cournot's Competition model, on the other hand, 
demonstrate the advantages to a price setter of being a 
first mover. 

In "Economic assessment of oligopolies under the 
Community Merger Control Regulation, in European 
Competition law Review (Vol 4, Issue 3), Juan Briones 
Alonso writes: 

"At first sight, it seems that ... oligopolists will sooner or 
later find a way of avoiding competition among 
themselves, since they are aware that their overall profits 
are maximized with this strategy. However, the question 
is much more complex. First of all, collusion without 
explicit agreements is not easy to achieve. Each supplier 
might have different views on the level of prices which 
the demand would sustain, or might have different price 
preferences according to its cost conditions and market 
share. A company might think it has certain advantages 
which its competitors do not have, and would perhaps 
perceive a conflict between maximising its own profits 
and maximizing industry profits. 

Moreover, if collusive strategies are implemented, and 
oligopolists manage to raise prices significantly above 
their competitive level, each oligopolist will be confronted 
with a conflict between sticking to the tacitly agreed 
behaviour and increasing its individual profits by 
'cheating' on its competitors. Therefore, the question of 



mutual monitoring and control is a key issue in collusive 
oligopolies." 

Monopolies and oligopolies, went the contestability 
theory, also refrain from restricting output, lest their 
market share be snatched by new entrants. In other words, 
even monopolists behave as though their market was fully 
competitive, their production and pricing decisions and 
actions constrained by the "ghosts" of potential and 
threatening newcomers. 

In a CRIEFF Discussion Paper titled "From Walrasian 
Oligopolies to Natural Monopoly - An Evolutionary 
Model of Market Structure", the authors argue that: 
"Under decreasing returns and some fixed cost, the market 
grows to 'full capacity' at Walrasian equilibrium 
(oligopolies); on the other hand, if returns are increasing, 
the unique long run outcome involves a profit-maximising 
monopolist." 

While intellectually tempting, contestability theory has 
little to do with the rough and tumble world of business. 
Contestable markets simply do not exist. Entering a 
market is never cheap, nor easy. Huge sunk costs are 
required to counter the network effects of more veteran 
products as well as the competitors' brand recognition and 
ability and inclination to collude to set prices. 

Victory is not guaranteed, losses loom constantly, 
investors are forever edgy, customers are fickle, bankers 
itchy, capital markets gloomy, suppliers beholden to the 
competition. Barriers to entry are almost always 
formidable and often insurmountable. 



In the real world, tacit and implicit understandings 
regarding prices and competitive behavior prevail among 
competitors within oligopolies. Establishing a reputation 
for collusive predatory pricing deters potential entrants. 
And a dominant position in one market can be leveraged 
into another, connected or derivative, market. 

But not everyone agrees. Ellis Hawley believed that 
industries should be encouraged to grow because only size 
guarantees survival, lower prices, and innovation. Louis 
Galambos, a business historian at Johns Hopkins 
University, published a 1994 paper titled "The Triumph of 
Oligopoly". In it, he strove to explain why firms and 
managers - and even consumers - prefer oligopolies to 
both monopolies and completely free markets with 
numerous entrants. 

Oligopolies, as opposed to monopolies, attract less 
attention from trustbusters. Quoted in the Wall Street 
Journal on March 8, 1999, Galambos wrote: 
"Oligopolistic competition proved to be beneficial ... 
because it prevented ossification, ensuring that 
managements would keep their organizations innovative 
and efficient over the long run." 

In his recently published tome "The Free-Market 
Innovation Machine - Analysing the Growth Miracle of 
Capitalism", William Baumol of Princeton University, 
concurs. He daringly argues that productive innovation is 
at its most prolific and qualitative in oligopolistic markets. 
Because firms in an oligopoly characteristically charge 
above-equilibrium (i.e., high) prices - the only way to 
compete is through product differentiation. This is 
achieved by constant innovation - and by incessant 
advertising. 



Baumol maintains that oligopolies are the real engines of 
growth and higher living standards and urges antitrust 
authorities to leave them be. Lower regulatory costs, 
economies of scale and of scope, excess profits due to the 
ability to set prices in a less competitive market - allow 
firms in an oligopoly to invest heavily in research and 
development. A new drug costs c. $800 million to develop 
and get approved, according to Joseph DiMasi of Tufts 
University's Center for the Study of Drug Development, 
quoted in The wall Street Journal. 

In a paper titled "If Cartels Were Legal, Would Firms Fix 
Prices", implausibly published by the Antitrust Division 
of the US Department of Justice in 1997, Andrew Dick 
demonstrated, counterintuitively, that cartels are more 
likely to form in industries and sectors with many 
producers. The more concentrated the industry - i.e., the 
more oligopolistic it is - the less likely were cartels to 
emerge. 

Cartels are conceived in order to cut members' costs of 
sales. Small firms are motivated to pool their purchasing 
and thus secure discounts. Dick draws attention to a 
paradox: mergers provoke the competitors of the merging 
firms to complain. Why do they act this way? 

Mergers and acquisitions enhance market concentration. 
According to conventional wisdom, the more concentrated 
the industry, the higher the prices every producer or 
supplier can charge. Why would anyone complain about 
being able to raise prices in a post-merger market? 

Apparently, conventional wisdom is wrong. Market 
concentration leads to price wars, to the great benefit of 
the consumer. This is why firms find the mergers and 



acquisitions of their competitors worrisome. America's 
soft drink market is ruled by two firms - Pepsi and Coca- 
Cola. Yet, it has been the scene of ferocious price 
competition for decades. 

"The Economist", in its review of the paper, summed it up 
neatly: 

"The story of America's export cartels suggests that when 
firms decide to co-operate, rather than compete, they do 
not always have price increases in mind. Sometimes, they 
get together simply in order to cut costs, which can be of 
benefit to consumers." 

The very atom of antitrust thinking - the firm - has 
changed in the last two decades. No longer hierarchical 
and rigid, business resembles self-assembling, nimble, ad- 
hoc networks of entrepreneurship superimposed on ever- 
shifting product groups and profit and loss centers. 

Competition used to be extraneous to the firm - now it is 
commonly an internal affair among autonomous units 
within a loose overall structure. This is how Jack 
"neutron" Welsh deliberately structured General Electric. 
AOL- Time Warner hosts many competing units, yet no 
one ever instructs them either to curb this internecine 
competition, to stop cannibalizing each other, or to start 
collaborating synergistically. The few mammoth agencies 
that rule the world of advertising now host a clutch of 
creative boutiques comfortably ensconced behind Chinese 
walls. Such outfits often manage the accounts of 
competitors under the same corporate umbrella. 

Most firms act as intermediaries. They consume inputs, 
process them, and sell them as inputs to other firms. Thus, 



many firms are concomitantly consumers, producers, and 
suppliers. In a paper published last year and titled 
"Productive Differentiation in Successive Vertical 
Oligopolies", that authors studied: 

"An oligopoly model with two brands. Each downstream 
firm chooses one brand to sell on a final market. The 
upstream firms specialize in the production of one input 
specifically designed for the production of one brand, but 
they also produce he input for the other brand at an extra 
cost. (They concluded that) when more downstream 
brands choose one brand, more upstream firms will 
specialize in the input specific to that brand, and vice 
versa. Hence, multiple equilibria are possible and the 
softening effect of brand differentiation on competition 
might not be strong enough to induce maximal 
differentiation" (and, thus, minimal competition). 

Both scholars and laymen often mix their terms. 
Competition does not necessarily translate either to 
variety or to lower prices. Many consumers are turned off 
by too much choice. Lower prices sometimes deter 
competition and new entrants. A multiplicity of vendors, 
retail outlets, producers, or suppliers does not always 
foster competition. And many products have umpteen 
substitutes. Consider films - cable TV, satellite, the 
Internet, cinemas, video rental shops, all offer the same 
service: visual content delivery. 

And then there is the issue of technological standards. It is 
incalculably easier to adopt a single worldwide or 
industry-wide standard in an oligopolistic environment. 
Standards are known to decrease prices by cutting down 
R&D expenditures and systematizing components. 



Or, take innovation. It is used not only to differentiate 
one's products from the competitors' - but to introduce 
new generations and classes of products. Only firms with 
a dominant market share have both the incentive and the 
wherewithal to invest in R&D and in subsequent branding 
and marketing. 

But oligopolies in deregulated markets have sometimes 
substituted price fixing, extended intellectual property 
rights, and competitive restraint for market regulation. 
Still, Schumpeter believed in the faculty of "disruptive 
technologies" and "destructive creation" to check the 
power of oligopolies to set extortionate prices, lower 
customer care standards, or inhibit competition. 

Linux threatens Windows. Opera nibbles at Microsoft's 
Internet Explorer. Amazon drubbed traditional 
booksellers. eBay thrashes Amazon. Bell was forced by 
Covad Communications to implement its own technology, 
the DSL broadband phone line. 

Barring criminal behavior, there is little that oligopolies 
can do to defend themselves against these forces. They 
can acquire innovative firms, intellectual property, and 
talent. They can form strategic partnerships. But the 
supply of innovators and new technologies is infinite - and 
the resources of oligopolies, however mighty, are finite. 
The market is stronger than any of its participants, 
regardless of the hubris of some, or the paranoia of others. 



The Misconception of Scarcity 

My love as deep; the more I give to thee, 
The more I have, for both are infinite. 

(William Shakespeare, Romeo and Juliet, Act 2, Scene 2) 

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 is 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. 

A Comment on "Manufactured Scarcity" 

Conspiracy theorists have long alleged that manufacturers 
foster scarcity by building into their products mechanisms 
of programmed obsolescence and apoptosis (self- 
destruction). But scarcity is artificially manufactured in 
less obvious (and far less criminal) ways. 

Technological advances, product revisions, new features, 
and novel editions render successive generations of 
products obsolete. Consumerism encourages owners to rid 
themselves of their possessions and replace them with 
newer, more gleaming, status-enhancing substitutes 



offered by design departments and engineering workshops 
worldwide. Cherished values of narcissistic 
competitiveness and malignant individualism play an 
important socio-cultural role in this semipternal game of 
musical chairs. 

Many products have a limited shelf life or an expiry date 
(rarely supported by solid and rigorous research). They 
are to be promptly disposed of and, presumably, 
instantaneously replaced with new ones. 

Finally, manufacturers often knowingly produce scarcity 
by limiting their output or by restricting access to their 
goods. "Limited editions" of works of art and books are 
prime examples of this stratagem. 

A Comment on Energy Security 

The pursuit of "energy security" has brought us to the 
brink. It is directly responsible for numerous wars, big and 
small; for unprecedented environmental degradation; for 
global financial imbalances and meltdowns; for growing 
income disparities; and for ubiquitous unsustainable 
development. 

It is energy insecurity that we should seek. 

The uncertainty incumbent in phenomena such "peak oil", 
or in the preponderance of hydrocarbon fuels in failed 
states fosters innovation. The more insecure we get, the 
more we invest in the recycling of energy-rich 



products; the more substitutes we find for energy- 
intensive foods; the more we conserve energy; the more 
we switch to alternatives energy; the more we encourage 
international collaboration; and the more we optimize 
energy outputs per unit of fuel input. 

A world in which energy (of whatever source) will be 
abundant and predictably available would suffer from 
entropy, both physical and mental. The vast majority of 
human efforts revolve around the need to deploy our 
meager resources wisely. Energy also serves as a 
geopolitical "organizing principle" and disciplinary rod. 
Countries which waste energy (and the money it takes to 
buy it), pollute, and conflict with energy suppliers end up 
facing diverse crises, both domestic and foreign. 
Profligacy is punished precisely because energy in 
insecure. Energy scarcity and precariousness thus serves a 
global regulatory mechanism. 

But the obsession with "energy security" is only one 
example of the almost religious belief in "scarcity". 

A Comment on Alternative Energies 

The quest for alternative, non-fossil fuel, energy sources 
is driven by two misconceptions: (1) The mistaken belief 
in "peak oil" (that we are nearing the complete depletion 
and exhaustion of economically extractable oil reserves) 
and (2) That market mechanisms cannot be trusted to 



provide adequate and timely responses to energy needs (in 
other words that markets are prone to failure) . 

At the end of the 19th century, books and pamphlets were 
written about "peak coal". People and governments 
panicked: what would satisfy the swelling demand for 
energy? Apocalyptic thinking was rampant. Then, of 
course, came oil. At first, no one knew what to do with the 
sticky, noxious, and occasionally flammable substance. 
Gradually, petroleum became our energetic mainstay and 
gave rise to entire industries (petrochemicals and 
automotive, to mention but two). 

History will repeat itself: the next major source of energy 
is very unlikely to be hatched up in a laboratory. It will be 
found fortuitously and serendipitously. It will shock and 
surprise pundits and laymen alike. And it will amply cater 
to all our foreseeable needs. It is also likely to be greener 
than carbon-based fuels. 

More generally, the market can take care of itself: energy 
does not have the characteristics of a public good and 
therefore is rarely subject to market breakdowns and 
unalleviated scarcity. Energy prices have proven 
themselves to be a sagacious regulator and a perspicacious 
invisible hand. 

Until this holy grail ("the next major source of energy") 
reveals itself, we are likely to increase the shares of 
nuclear and wind sources in our energy consumption pie. 
Our industries and cars will grow even more energy- 
efficient. But there is no escaping the fact that the main 
drivers of global warming and climate change are 
population growth and the emergence of an energy- 
guzzling middle class in developing and formerly poor 



countries. These are irreversible economic processes and 
only at their inception. 

Global warming will, therefore, continue apace no matter 
which sources of energy we deploy. It is inevitable. 
Rather than trying to limit it in vain, we would do better to 
adapt ourselves: avoid the risks and cope with them while 
also reaping the rewards (and, yes, climate change has 
many positive and beneficial aspects to it). 

Climate change is not about the demise of the human 
species as numerous self-interested (and well-paid) 
alarmists would have it. Climate change is about the 
global redistribution and reallocation of economic 
resources. No wonder the losers are sore and hysterical. It 
is time to consider the winners, too and hear their hitherto 
muted voices. Alternative energy is nice and all but it is 
rather besides the point and it misses both the big picture 
and the trends that will make a difference in this century 
and the next. 

The Ecology of Environmentalism 

"It wasn 't just predictable curmudgeons like Dr. 

Johnson who thought the Scottish hills ugly; if anybody 

had something to say 

about mountains at all, it was sure to be an insult. (The 

Alps: "monstrous excrescences of nature, " in the words 

of one wholly 

typical 18th-century observer.) " 

Stephen Budiansky, "Nature? A bit overdone", U.S. 
News & World Report, December 2, 1996 



The concept of "nature" is a romantic invention. It was 
spun by the likes of Jean- Jacques Rousseau in the 18th 
century as a confabulated Utopian contrast to the dystopia 
of urbanization and materialism. The traces of this dewy- 
eyed conception of the "savage" and his unmolested, 
unadulterated surroundings can be found in the more 
malignant forms of fundamentalist environmentalism. 

At the other extreme are religious literalists who regard 
Man as the crown of creation with complete dominion 
over nature and the right to exploit its resources 
unreservedly. Similar, veiled, sentiments can be found 
among scientists. The Anthropic Principle, for instance, 
promoted by many outstanding physicists, claims that the 
nature of the Universe is preordained to accommodate 
sentient beings - namely, us humans. 

Industrialists, politicians and economists have only 
recently begun paying lip service to sustainable 
development and to the environmental costs of their 
policies. Thus, in a way, they bridge the abyss - at least 
verbally - between these two diametrically opposed forms 
of fundamentalism. Similarly, the denizens of the West 
continue to indulge in rampant consumption, but now it is 
suffused with environmental guilt rather than driven by 
unadulterated hedonism. 

Still, essential dissimilarities between the schools 
notwithstanding, the dualism of Man vs. Nature is 
universally acknowledged. 

Modern physics - notably the Copenhagen interpretation 
of quantum mechanics - has abandoned the classic split 
between (typically human) observer and (usually 
inanimate) observed. Environmentalists, in contrast, have 



embraced this discarded worldview wholeheartedly. To 
them, Man is the active agent operating upon a distinct 
reactive or passive substrate - i.e., Nature. But, though 
intuitively compelling, it is a false dichotomy. 

Man is, by definition, a part of Nature. His tools are 
natural. He interacts with the other elements of Nature and 
modifies it - but so do all other species. Arguably, bacteria 
and insects exert on Nature far more influence with farther 
reaching consequences than Man has ever done. 

Still, the "Law of the Minimum" - that there is a limit to 
human population growth and that this barrier is related to 
the biotic and abiotic variables of the environment - is 
undisputed. Whatever debate there is veers between two 
strands of this Malthusian Weltanschauung: the utilitarian 
(a.k.a. anthropocentric, shallow, or technocentric) and the 
ethical (alternatively termed biocentric, deep, or 
ecocentric). 

First, the Utilitarians. 

Economists, for instance, tend to discuss the costs and 
benefits of environmental policies. Activists, on the other 
hand, demand that Mankind consider the "rights" of other 
beings and of nature as a whole in determining a least 
harmful course of action. 

Utilitarians regard nature as a set of exhaustible and 
scarce resources and deal with their optimal allocation 
from a human point of view. Yet, they usually fail to 
incorporate intangibles such as the beauty of a sunset or 
the liberating sensation of open spaces. 



"Green" accounting - adjusting the national accounts to 
reflect environmental data - is still in its unpromising 
infancy. It is complicated by the fact that ecosystems do 
not respect man-made borders and by the stubborn refusal 
of many ecological variables to succumb to numbers. To 
complicate things further, different nations weigh 
environmental problems disparately. 

Despite recent attempts, such as the Environmental 
Sustainability Index (ESI) produced by the World 
Economic Forum (WEF), no one knows how to define 
and quantify elusive concepts such as "sustainable 
development". Even the costs of replacing or repairing 
depleted resources and natural assets are difficult to 
determine. 

Efforts to capture "quality of life" considerations in the 
straitjacket of the formalism of distributive justice - 
known as human- welfare ecology or emancipatory 
environmentalism - backfired. These led to derisory 
attempts to reverse the inexorable processes of 
urbanization and industrialization by introducing 
localized, small-scale production. 

Social ecologists proffer the same prescriptions but with 
an anarchistic twist. The hierarchical view of nature - with 
Man at the pinnacle - is a reflection of social relations, 
they suggest. Dismantle the latter - and you get rid of the 
former. 

The Ethicists appear to be as confounded and ludicrous as 
their "feet on the ground" opponents. 

Biocentrists view nature as possessed of an intrinsic value, 
regardless of its actual or potential utility. They fail to 



specify, however, how this, even if true, gives rise to 
rights and commensurate obligations. Nor was their case 
aided by their association with the apocalyptic or 
survivalist school of environmentalism which has 
developed proto-fascist tendencies and is gradually being 
scientifically debunked. 

The proponents of deep ecology radicalize the ideas of 
social ecology ad absurdum and postulate a 
transcendentalist spiritual connection with the inanimate 
(whatever that may be). In consequence, they refuse to 
intervene to counter or contain natural processes, 
including diseases and famine. 

The politicization of environmental concerns runs the 
gamut from political activism to eco-terrorism. The 
environmental movement - whether in academe, in the 
media, in non-governmental organizations, or in 
legislature - is now comprised of a web of bureaucratic 
interest groups. 

Like all bureaucracies, environmental organizations are 
out to perpetuate themselves, fight heresy and accumulate 
political clout and the money and perks that come with it. 
They are no longer a disinterested and objective party. 
They have a stake in apocalypse. That makes them 
automatically suspect. 

Bjorn Lomborg, author of "The Skeptical 
Environmentalist", was at the receiving end of such self- 
serving sanctimony. A statistician, he demonstrated that 
the doom and gloom tendered by environmental 
campaigners, scholars and militants are, at best, dubious 
and, at worst, the outcomes of deliberate manipulation. 



The situation is actually improving on many fronts, 
showed Lomborg: known reserves of fossil fuels and most 
metals are rising, agricultural production per head is 
surging, the number of the famished is declining, 
biodiversity loss is slowing as do pollution and tropical 
deforestation. In the long run, even in pockets of 
environmental degradation, in the poor and developing 
countries, rising incomes and the attendant drop in birth 
rates will likely ameliorate the situation in the long run. 

Yet, both camps, the optimists and the pessimists, rely on 
partial, irrelevant, or, worse, manipulated data. The 
multiple authors of "People and Ecosystems", published 
by the World Resources Institute, the World Bank and the 
United Nations conclude: "Our knowledge of ecosystems 
has increased dramatically, but it simply has not kept pace 
with our ability to alter them." 

Quoted by The Economist, Daniel Esty of Yale, the leader 
of an environmental project sponsored by World 
Economic Forum, exclaimed: 

"Why hasn 't anyone done careful environmental 
measurement before? Businessmen always say, 'what 
matters gets measured'. Social scientists started 
quantitative measurement 30 years ago, and even 
political science turned to hard numbers 15 years ago. 
Yet look at environmental policy, and the data are 
lousy. " 

Nor is this dearth of reliable and unequivocal information 
likely to end soon. Even the Millennium Ecosystem 
Assessment, supported by numerous development 
agencies and environmental groups, is seriously under- 
financed. The conspiracy-minded attribute this curious 



void to the self-serving designs of the apocalyptic school 
of environmentalism. Ignorance and fear, they point out, 
are among the fanatic's most useful allies. They also make 
for good copy. 

A Comment on Energy Security 

The pursuit of "energy security" has brought us to the 
brink. It is directly responsible for numerous wars, big and 
small; for unprecedented environmental degradation; for 
global financial imbalances and meltdowns; for growing 
income disparities; and for ubiquitous unsustainable 
development. 

It is energy insecurity that we should seek. 

The uncertainty incumbent in phenomena such "peak oil", 
or in the preponderance of hydrocarbon fuels in failed 
states fosters innovation. The more insecure we get, the 
more we invest in the recycling of energy-rich 
products; the more substitutes we find for energy- 
intensive foods; the more we conserve energy; the more 
we switch to alternatives energy; the more we encourage 
international collaboration; and the more we optimize 
energy outputs per unit of fuel input. 

A world in which energy (of whatever source) will be 
abundant and predictably available would suffer from 
entropy, both physical and mental. The vast majority of 



human efforts revolve around the need to deploy our 
meager resources wisely. Energy also serves as a 
geopolitical "organizing principle" and disciplinary rod. 
Countries which waste energy (and the money it takes to 
buy it), pollute, and conflict with energy suppliers end up 
facing diverse crises, both domestic and foreign. 
Profligacy is punished precisely because energy in 
insecure. Energy scarcity and precariousness thus serves a 
global regulatory mechanism. 

But the obsession with "energy security" is only one 
example of the almost religious belief in "scarcity". 

A Comment on Alternative Energies 

The quest for alternative, non-fossil fuel, energy sources 
is driven by two misconceptions: (1) The mistaken belief 
in "peak oil" (that we are nearing the complete depletion 
and exhaustion of economically extractable oil reserves) 
and (2) That market mechanisms cannot be trusted to 
provide adequate and timely responses to energy needs (in 
other words that markets are prone to failure) . 

At the end of the 19th century, books and pamphlets were 
written about "peak coal". People and governments 
panicked: what would satisfy the swelling demand for 
energy? Apocalyptic thinking was rampant. Then, of 
course, came oil. At first, no one knew what to do with the 
sticky, noxious, and occasionally flammable substance. 
Gradually, petroleum became our energetic mainstay and 



gave rise to entire industries (petrochemicals and 
automotive, to mention but two). 

History will repeat itself: the next major source of energy 
is very unlikely to be hatched up in a laboratory. It will be 
found fortuitously and serendipitously. It will shock and 
surprise pundits and laymen alike. And it will amply cater 
to all our foreseeable needs. It is also likely to be greener 
than carbon-based fuels. 

More generally, the market can take care of itself: energy 
does not have the characteristics of a public good and 
therefore is rarely subject to market breakdowns and 
unalleviated scarcity. Energy prices have proven 
themselves to be a sagacious regulator and a perspicacious 
invisible hand. 

Until this holy grail ("the next major source of energy") 
reveals itself, we are likely to increase the shares of 
nuclear and wind sources in our energy consumption pie. 
Our industries and cars will grow even more energy- 
efficient. But there is no escaping the fact that the main 
drivers of global warming and climate change are 
population growth and the emergence of an energy- 
guzzling middle class in developing and formerly poor 
countries. These are irreversible economic processes and 
only at their inception. 

Global warming will, therefore, continue apace no matter 
which sources of energy we deploy. It is inevitable. 
Rather than trying to limit it in vain, we would do better to 
adapt ourselves: avoid the risks and cope with them while 
also reaping the rewards (and, yes, climate change has 
many positive and beneficial aspects to it). 



Climate change is not about the demise of the human 
species as numerous self-interested (and well-paid) 
alarmists would have it. Climate change is about the 
global redistribution and reallocation of economic 
resources. No wonder the losers are sore and hysterical. It 
is time to consider the winners, too and hear their hitherto 
muted voices. Alternative energy is nice and all but it is 
rather besides the point and it misses both the big picture 
and the trends that will make a difference in this century 
and the next. 

Note on Adapting to Climate Change 

How must society adapt to rapid climate change to 
minimize severe upheaval? 

The question makes two explicit assumptions, both of 
which are controversial and disputed: that climate change 
is rapid and that it will result in severe upheaval. 
Similarly, it is not clear whether the best reaction to global 
warming should be societal, or individual (or, perhaps, 
global). 

That global warming is happening has now been 
established. Yet, such a forcing is likely to take centuries 
to induce any discernible climate change on the planetary 
level. Moreover: self-interested and well-paying hype 
aside, we know close to nothing about the hypercomplex 
set of interactions between various greenhouse gases, the 
atmosphere, the oceans, the Earth's orbit, volcanic 
eruptions, human activities, the unforeseen outcomes and 
by-products of well-meaning regulation and technologies 
(such as biofuels), solar dynamics, plate tectonics, and 
thousands of other factors, the vast majority of which are 
yet to be discovered. 



Environmentalism is, therefore, poor science or pseudo- 
science: it is a pernicious and venal form of faddish 
hubris. In our current state of ignorance, the more 
ambitious variants of "solutions" such as geoengineering 
are far more dangerous than the threats of global 
warming. 

Two things are clear, though: (a) Climate change had 
happened frequently and repeatedly, long before and ever 
since humans strode the scene; and (b) Some regions of 
Earth will greatly benefit economically from global 
warming. Others, inevitably, will suffer and will have to 
adapt. None of this sounds like a "severe upheaval", let 
alone life-threatening as the more rabid and sensationalist 
environmentalists will have us believe. 

We should take an inventory of what we know and act 
upon it resolutely (mitigation): emissions from fossil fuel 
combustion should be tamed, captured, stored, sunk, and 
sequestered (aerosols to be further studied in conjunction 
with global dimming and ozone depletion); measures for 
population control and family planning enhanced; 
alternative and renewable fuels should be studied and 
incentives provided to energy-efficient, clean and green 
technologies; cement manufacture should be tweaked; cap 
and trade (or tax) schemes implemented on the national, 
corporate, and individual levels; weather-resistant, 
energy-conserving, and green construction technologies 
pioneered; the diets of livestock should be adapted to 
restrict biological emissions; deforestation and 
reforestation should be rationalized as should be land use; 
drought-related indigenous agricultural and water 
management knowledge and crop varieties should be 
preserved; flood defenses erected or strengthened; and 
weather-monitoring capacity should be extended and 



modernized. These measures make good sense, whatever 
the urgency of the problem facing us. 

But, we should invest the bulk of our scarce resources in 
research and innovation. We should accept that climate 
change is inevitable and work out ways of harnessing it to 
our benefit. We should come up with new agricultural 
methods and strains; new types of tourism; new irrigation 
techniques; water desalination, diversion, transport, and 
allocation schemes; ways of sustaining biological 
diversity and of helping the human body adapt and cope; 
and global plans to cope with energy production 
problems, poverty, and disease triggered by global 
warming. 

For the next few centuries, global warming is inexorable 
and largely irreversible (as the IPCC essentially admits). 
To think otherwise is completely delusional. Better to re- 
imagine our existence on this planet (adaptation). As 
temperatures rise in certain locales (and drop in others!), 
new economic activities and routes of commerce would 
be made possible or rendered feasible; new types of 
produce and forests will flourish; new technologies will 
be developed to cater to a novel and growing set of needs. 

We would do well to not consider global warming as a 
crisis, but as a massive change. And even if we insist on 
regarding it as a cataclysm, as the Chinese saying goes, 
there are opportunities in every predicament. The initial 
costs of every transformation and transition in human 
history have been steep (recall the Industrial Revolution 
and, more recently, the transition from Communism to 
Capitalism). Climate change is not likely to be the only 
exception. Such a massive realignment implies severe 
disruption and great distress. But, invariably, tectonic 



shifts are followed by an extended period of creativity and 
growth. This time will be no different. 



Return 



Anarchy as an Organizing Principle 



The recent spate of accounting fraud scandals signals the 
end of an era. Disillusionment and disenchantment with 
American capitalism may yet lead to a tectonic 
ideological shift from laissez faire and self regulation to 
state intervention and regulation. This would be the 
reversal of a trend dating back to Thatcher in Britain and 
Reagan in the USA. It would also cast some fundamental - 
and way more ancient - tenets of free-marketry in grave 
doubt. 

Markets are perceived as self-organizing, self-assembling, 
exchanges of information, goods, and services. Adam 
Smith's "invisible hand" is the sum of all the mechanisms 
whose interaction gives rise to the optimal allocation of 
economic resources. The market's great advantages over 
central planning are precisely its randomness and its lack 
of self-awareness. 

Market participants go about their egoistic business, 
trying to maximize their utility, oblivious of the interests 
and action of all, bar those they interact with directly. 
Somehow, out of the chaos and clamor, a structure 
emerges of order and efficiency unmatched. Man is 
incapable of intentionally producing better outcomes. 
Thus, any intervention and interference are deemed to be 
detrimental to the proper functioning of the economy. 

It is a minor step from this idealized worldview back to 
the Physiocrats, who preceded Adam Smith, and who 
propounded the doctrine of "laissez faire, laissez passer" - 
the hands-off battle cry. Theirs was a natural religion. The 



market, as an agglomeration of individuals, they 
thundered, was surely entitled to enjoy the rights and 
freedoms accorded to each and every person. John Stuart 
Mill weighed against the state's involvement in the 
economy in his influential and exquisitely-timed 
"Principles of Political Economy", published in 1848. 

Undaunted by mounting evidence of market failures - for 
instance to provide affordable and plentiful public goods - 
this flawed theory returned with a vengeance in the last 
two decades of the past century. Privatization, 
deregulation, and self-regulation became faddish 
buzzwords and part of a global consensus propagated by 
both commercial banks and multilateral lenders. 

As applied to the professions - to accountants, stock 
brokers, lawyers, bankers, insurers, and so on - self- 
regulation was premised on the belief in long-term self- 
preservation. Rational economic players and moral agents 
are supposed to maximize their utility in the long-run by 
observing the rules and regulations of a level playing 
field. 

This noble propensity seemed, alas, to have been 
tampered by avarice and narcissism and by the immature 
inability to postpone gratification. Self-regulation failed 
so spectacularly to conquer human nature that its demise 
gave rise to the most intrusive statal stratagems ever 
devised. In both the UK and the USA, the government is 
much more heavily and pervasively involved in the 
minutia of accountancy, stock dealing, and banking than it 
was only two years ago. 

But the ethos and myth of "order out of chaos" - with its 
proponents in the exact sciences as well - ran deeper than 



that. The very culture of commerce was thoroughly 
permeated and transformed. It is not surprising that the 
Internet - a chaotic network with an anarchic modus 
operandi - flourished at these times. 

The dotcom revolution was less about technology than 
about new ways of doing business - mixing umpteen 
irreconcilable ingredients, stirring well, and hoping for the 
best. No one, for instance, offered a linear revenue model 
of how to translate "eyeballs" - i.e., the number of visitors 
to a Web site - to money ("monetizing"). It was 
dogmatically held to be true that, miraculously, traffic - a 
chaotic phenomenon - will translate to profit - hitherto the 
outcome of painstaking labour. 

Privatization itself was such a leap of faith. State owned 
assets - including utilities and suppliers of public goods 
such as health and education - were transferred wholesale 
to the hands of profit maximizers. The implicit belief was 
that the price mechanism will provide the missing 
planning and regulation. In other words, higher prices 
were supposed to guarantee an uninterrupted service. 
Predictably, failure ensued - from electricity utilities in 
California to railway operators in Britain. 

The simultaneous crumbling of these urban legends - the 
liberating power of the Net, the self -regulating markets, 
the unbridled merits of privatization - inevitably gave rise 
to a backlash. 

The state has acquired monstrous proportions in the 
decades since the Second world War. It is about to grow 
further and to digest the few sectors hitherto left 
untouched. To say the least, these are not good news. But 
we libertarians - proponents of both individual freedom 



and individual responsibility - have brought it on 
ourselves by thwarting the work of that invisible regulator 
- the market. 

Return 



Narcissism in the Boardroom 



The perpetrators of the recent spate of financial frauds in 
the USA acted with callous disregard for both their 
employees and shareholders - not to mention other 
stakeholders. Psychologists have often remote-diagnosed 
them as "malignant, pathological narcissists". 

Narcissists are driven by the need to uphold and maintain 
a false self - a concocted, grandiose, and demanding 
psychological construct typical of the narcissistic 
personality disorder. The false self is projected to the 
world in order to garner "narcissistic supply" - adulation, 
admiration, or even notoriety and infamy. Any kind of 
attention is usually deemed by narcissists to be preferable 
to obscurity. 

The false self is suffused with fantasies of perfection, 
grandeur, brilliance, infallibility, immunity, significance, 
omnipotence, omnipresence, and omniscience. To be a 
narcissist is to be convinced of a great, inevitable personal 
destiny. The narcissist is preoccupied with ideal love, the 
construction of brilliant, revolutionary scientific theories, 
the composition or authoring or painting of the greatest 
work of art, the founding of a new school of thought, the 
attainment of fabulous wealth, the reshaping of a nation or 
a conglomerate, and so on. The narcissist never sets 
realistic goals to himself. He is forever preoccupied with 
fantasies of uniqueness, record breaking, or breathtaking 
achievements. His verbosity reflects this propensity. 



Reality is, naturally, quite different and this gives rise to a 
"grandiosity gap". The demands of the false self are never 
satisfied by the narcissist's accomplishments, standing, 
wealth, clout, sexual prowess, or knowledge. The 
narcissist's grandiosity and sense of entitlement are 
equally incommensurate with his achievements. 

To bridge the grandiosity gap, the malignant 
(pathological) narcissist resorts to shortcuts. These very 
often lead to fraud. 

The narcissist cares only about appearances. What matters 
to him are the facade of wealth and its attendant social 
status and narcissistic supply. Witness the travestied 
extravagance of Tyco's Denis Kozlowski. Media attention 
only exacerbates the narcissist's addiction and makes it 
incumbent on him to go to ever- wilder extremes to secure 
uninterrupted supply from this source. 

The narcissist lacks empathy - the ability to put himself in 
other people's shoes. He does not recognize boundaries - 
personal, corporate, or legal. Everything and everyone are 
to him mere instruments, extensions, objects 
unconditionally and uncomplainingly available in his 
pursuit of narcissistic gratification. 

This makes the narcissist perniciously exploitative. He 
uses, abuses, devalues, and discards even his nearest and 
dearest in the most chilling manner. The narcissist is 
utility- driven, obsessed with his overwhelming need to 
reduce his anxiety and regulate his labile sense of self- 
worth by securing a constant supply of his drug - 
attention. American executives acted without 
compunction when they raided their employees' pension 



funds - as did Robert Maxwell a generation earlier in 
Britain. 

The narcissist is convinced of his superiority - cerebral or 
physical. To his mind, he is a Gulliver hamstrung by a 
horde of narrow-minded and envious Lilliputians. The 
dotcom "new economy" was infested with "visionaries" 
with a contemptuous attitude towards the mundane: 
profits, business cycles, conservative economists, doubtful 
journalists, and cautious analysts. 

Yet, deep inside, the narcissist is painfully aware of his 
addiction to others - their attention, admiration, applause, 
and affirmation. He despises himself for being thus 
dependent. He hates people the same way a drug addict 
hates his pusher. He wishes to "put them in their place", 
humiliate them, demonstrate to them how inadequate and 
imperfect they are in comparison to his regal self and how 
little he craves or needs them. 

The narcissist regards himself as one would an expensive 
present, a gift to his company, to his family, to his 
neighbours, to his colleagues, to his country. This firm 
conviction of his inflated importance makes him feel 
entitled to special treatment, special favors, special 
outcomes, concessions, subservience, immediate 
gratification, obsequiousness, and lenience. It also makes 
him feel immune to mortal laws and somehow divinely 
protected and insulated from the inevitable consequences 
of his deeds and misdeeds. 

The self-destructive narcissist plays the role of the "bad 
guy" (or "bad girl"). But even this is within the traditional 
social roles cartoonishly exaggerated by the narcissist to 
attract attention. Men are likely to emphasise intellect, 



power, aggression, money, or social status. Narcissistic 
women are likely to emphasise body, looks, charm, 
sexuality, feminine "traits", homemaking, children and 
childrearing. 

Punishing the wayward narcissist is a veritable catch-22. 

A jail term is useless as a deterrent if it only serves to 
focus attention on the narcissist. Being infamous is second 
best to being famous - and far preferable to being ignored. 
The only way to effectively punish a narcissist is to 
withhold narcissistic supply from him and thus to prevent 
him from becoming a notorious celebrity. 

Given a sufficient amount of media exposure, book 
contracts, talk shows, lectures, and public attention - the 
narcissist may even consider the whole grisly affair to be 
emotionally rewarding. To the narcissist, freedom, wealth, 
social status, family, vocation - are all means to an end. 
And the end is attention. If he can secure attention by 
being the big bad wolf - the narcissist unhesitatingly 
transforms himself into one. Lord Archer, for instance, 
seems to be positively basking in the media circus 
provoked by his prison diaries. 

The narcissist does not victimise, plunder, terrorise and 
abuse others in a cold, calculating manner. He does so 
offhandedly, as a manifestation of his genuine character. 
To be truly "guilty" one needs to intend, to deliberate, to 
contemplate one's choices and then to choose one's acts. 
The narcissist does none of these. 

Thus, punishment breeds in him surprise, hurt and 
seething anger. The narcissist is stunned by society's 
insistence that he should be held accountable for his deeds 



and penalized accordingly. He feels wronged, baffled, 
injured, the victim of bias, discrimination and injustice. 
He rebels and rages. 

Depending upon the pervasiveness of his magical 
thinking, the narcissist may feel besieged by 
overwhelming powers, forces cosmic and intrinsically 
ominous. He may develop compulsive rites to fend off 
this "bad", unwarranted, persecutory influences. 

The narcissist, very much the infantile outcome of stunted 
personal development, engages in magical thinking. He 
feels omnipotent, that there is nothing he couldn't do or 
achieve if only he sets his mind to it. He feels omniscient - 
he rarely admits to ignorance and regards his intuitions 
and intellect as founts of objective data. 

Thus, narcissists are haughtily convinced that 
introspection is a more important and more efficient (not 
to mention easier to accomplish) method of obtaining 
knowledge than the systematic study of outside sources of 
information in accordance with strict and tedious 
curricula. Narcissists are "inspired" and they despise 
hamstrung technocrats. 

To some extent, they feel omnipresent because they are 
either famous or about to become famous or because their 
product is selling or is being manufactured globally. 
Deeply immersed in their delusions of grandeur, they 
firmly believe that their acts have - or will have - a great 
influence not only on their firm, but on their country, or 
even on Mankind. Having mastered the manipulation of 
their human environment - they are convinced that they 
will always "get away with it". They develop hubris and a 
false sense of immunity. 



Narcissistic immunity is the (erroneous) feeling, 
harboured by the narcissist, that he is impervious to the 
consequences of his actions, that he will never be effected 
by the results of his own decisions, opinions, beliefs, 
deeds and misdeeds, acts, inaction, or membership of 
certain groups, that he is above reproach and punishment, 
that, magically, he is protected and will miraculously be 
saved at the last moment. Hence the audacity, simplicity, 
and transparency of some of the fraud and corporate 
looting in the 1990's. Narcissists rarely bother to cover 
their traces, so great is their disdain and conviction that 
they are above mortal laws and wherewithal. 

What are the sources of this unrealistic appraisal of 
situations and events? 

The false self is a childish response to abuse and trauma. 
Abuse is not limited to sexual molestation or beatings. 
Smothering, doting, pampering, over-indulgence, treating 
the child as an extension of the parent, not respecting the 
child's boundaries, and burdening the child with excessive 
expectations are also forms of abuse. 

The child reacts by constructing false self that is 
possessed of everything it needs in order to prevail: 
unlimited and instantaneously available Harry Potter-like 
powers and wisdom. The false self, this Superman, is 
indifferent to abuse and punishment. This way, the child's 
true self is shielded from the toddler's harsh reality. 

This artificial, maladaptive separation between a 
vulnerable (but not punishable) true self and a punishable 
(but invulnerable) false self is an effective mechanism. It 
isolates the child from the unjust, capricious, emotionally 
dangerous world that he occupies. But, at the same time, it 



fosters in him a false sense of "nothing can happen to me, 
because I am not here, I am not available to be punished, 
hence I am immune to punishment". 

The comfort of false immunity is also yielded by the 
narcissist's sense of entitlement. In his grandiose 
delusions, the narcissist is sui generis, a gift to humanity, 
a precious, fragile, object. Moreover, the narcissist is 
convinced both that this uniqueness is immediately 
discernible - and that it gives him special rights. The 
narcissist feels that he is protected by some cosmological 
law pertaining to "endangered species". 

He is convinced that his future contribution to others - his 
firm, his country, humanity - should and does exempt him 
from the mundane: daily chores, boring jobs, recurrent 
tasks, personal exertion, orderly investment of resources 
and efforts, laws and regulations, social conventions, and 
so on. 

The narcissist is entitled to a "special treatment": high 
living standards, constant and immediate catering to his 
needs, the eradication of any friction with the humdrum 
and the routine, an all-engulfing absolution of his sins, 
fast track privileges (to higher education, or in his 
encounters with bureaucracies, for instance). Punishment, 
trusts the narcissist, is for ordinary people, where no great 
loss to humanity is involved. 

Narcissists are possessed of inordinate abilities to charm, 
to convince, to seduce, and to persuade. Many of them are 
gifted orators and intellectually endowed. Many of them 
work in in politics, the media, fashion, show business, the 
arts, medicine, or business, and serve as religious leaders. 



By virtue of their standing in the community, their 
charisma, or their ability to find the willing scapegoats, 
they do get exempted many times. Having recurrently 
"got away with it" - they develop a theory of personal 
immunity, founded upon some kind of societal and even 
cosmic "order" in which certain people are above 
punishment. 

But there is a fourth, simpler, explanation. The narcissist 
lacks self-awareness. Divorced from his true self, unable 
to empathise (to understand what it is like to be someone 
else), unwilling to constrain his actions to cater to the 
feelings and needs of others - the narcissist is in a constant 
dreamlike state. 

To the narcissist, his life is unreal, like watching an 
autonomously unfolding movie. The narcissist is a mere 
spectator, mildly interested, greatly entertained at times. 
He does not "own" his actions. He, therefore, cannot 
understand why he should be punished and when he is, he 
feels grossly wronged. 

So convinced is the narcissist that he is destined to great 
things - that he refuses to accept setbacks, failures and 
punishments. He regards them as temporary, as the 
outcomes of someone else's errors, as part of the future 
mythology of his rise to power/brilliance/wealth/ideal 
love, etc. Being punished is a diversion of his precious 
energy and resources from the all-important task of 
fulfilling his mission in life. 

The narcissist is pathologically envious of people and 
believes that they are equally envious of him. He is 
paranoid, on guard, ready to fend off an imminent attack. 
A punishment to the narcissist is a major surprise and a 



nuisance but it also validates his suspicion that he is being 
persecuted. It proves to him that strong forces are arrayed 
against him. 

He tells himself that people, envious of his achievements 
and humiliated by them, are out to get him. He constitutes 
a threat to the accepted order. When required to pay for 
his misdeeds, the narcissist is always disdainful and bitter 
and feels misunderstood by his inferiors. 

Cooked books, corporate fraud, bending the (GAAP or 
other) rules, sweeping problems under the carpet, over- 
promising, making grandiose claims (the "vision thing") - 
are hallmarks of a narcissist in action. When social cues 
and norms encourage such behaviour rather than inhibit it 
- in other words, when such behaviour elicits abundant 
narcissistic supply - the pattern is reinforced and become 
entrenched and rigid. Even when circumstances change, 
the narcissist finds it difficult to adapt, shed his routines, 
and replace them with new ones. He is trapped in his past 
success. He becomes a swindler. 

But pathological narcissism is not an isolated 
phenomenon. It is embedded in our contemporary culture. 
The West's is a narcissistic civilization. It upholds 
narcissistic values and penalizes alternative value- 
systems. From an early age, children are taught to avoid 
self-criticism, to deceive themselves regarding their 
capacities and attainments, to feel entitled, and to exploit 
others. 

As Lilian Katz observed in her important paper, 
"Distinctions between Self-Esteem and Narcissism: 
Implications for Practice", published by the Educational 
Resources Information Center, the line between enhancing 



self-esteem and fostering narcissism is often blurred by 
educators and parents. 

Both Christopher Lasch in "The Culture of Narcissism" 
and Theodore Millon in his books about personality 
disorders, singled out American society as narcissistic. 
Litigiousness may be the flip side of an inane sense of 
entitlement. Consumerism is built on this common and 
communal lie of "I can do anything I want and possess 
everything I desire if I only apply myself to it" and on the 
pathological envy it fosters. 

Not surprisingly, narcissistic disorders are more common 
among men than among women. This may be because 
narcissism conforms to masculine social mores and to the 
prevailing ethos of capitalism. Ambition, achievements, 
hierarchy, ruthlessness, drive - are both social values and 
narcissistic male traits. Social thinkers like the 
aforementioned Lasch speculated that modern American 
culture - a self-centred one - increases the rate of 
incidence of the narcissistic personality disorder. 

Otto Kernberg, a notable scholar of personality disorders, 
confirmed Lasch's intuition: "Society can make serious 
psychological abnormalities, which already exist in some 
percentage of the population, seem to be at least 
superficially appropriate." 

In their book "Personality Disorders in Modern Life", 

Theodore Millon and Roger Davis state, as a matter of 
fact, that pathological narcissism was once the preserve of 
"the royal and the wealthy" and that it "seems to have 
gained prominence only in the late twentieth century". 
Narcissism, according to them, may be associated with 
"higher levels of Maslow's hierarchy of needs ... 



Individuals in less advantaged nations .. are too busy 
trying (to survive) ... to be arrogant and grandiose". 

They - like Lasch before them - attribute pathological 
narcissism to "a society that stresses individualism and 
self-gratification at the expense of community, namely the 
United States." They assert that the disorder is more 
prevalent among certain professions with "star power" or 
respect. "In an individualistic culture, the narcissist is 
'God's gift to the world'. In a collectivist society, the 
narcissist is 'God's gift to the collective." 

Millon quotes Warren and Caponi's "The Role of Culture 
in the Development of Narcissistic Personality Disorders 
in America, Japan and Denmark": 

"Individualistic narcissistic structures of self-regard (in 
individualistic societies) ... are rather self-contained and 
independent ... (In collectivist cultures) narcissistic 
configurations of the we-self ... denote self-esteem 
derived from strong identification with the reputation and 
honor of the family, groups, and others in hierarchical 
relationships." 

Still, there are malignant narcissists among subsistence 
farmers in Africa, nomads in the Sinai desert, day laborers 
in east Europe, and intellectuals and socialites in 
Manhattan. Malignant narcissism is all-pervasive and 
independent of culture and society. It is true, though, that 
the way pathological narcissism manifests and is 
experienced is dependent on the particulars of societies 
and cultures. 

In some cultures, it is encouraged, in others suppressed. In 
some societies it is channeled against minorities - in 



others it is tainted with paranoia. In collectivist societies, 
it may be projected onto the collective, in individualistic 
societies, it is an individual's trait. 

Yet, can families, organizations, ethnic groups, churches, 
and even whole nations be safely described as 
"narcissistic" or "pathologically self-absorbed"? Can we 
talk about a "corporate culture of narcissism"? 

Human collectives - states, firms, households, institutions, 
political parties, cliques, bands - acquire a life and a 
character all their own. The longer the association or 
affiliation of the members, the more cohesive and 
conformist the inner dynamics of the group, the more 
persecutory or numerous its enemies, competitors, or 
adversaries, the more intensive the physical and emotional 
experiences of the individuals it is comprised of, the 
stronger the bonds of locale, language, and history - the 
more rigorous might an assertion of a common pathology 
be. 

Such an all-pervasive and extensive pathology manifests 
itself in the behavior of each and every member. It is a 
defining - though often implicit or underlying - mental 
structure. It has explanatory and predictive powers. It is 
recurrent and invariable - a pattern of conduct melding 
distorted cognition and stunted emotions. And it is often 
vehemently denied. 

Return 



The Revolt of the Poor 
The Demise of Intellectual Property? 



In 1997, 1 published a book of short stories in Israel. The 
publishing house belongs to Israel's leading (and 
exceedingly wealthy) newspaper. I signed a contract 
which stated that I am entitled to receive 8% of the 
income from the sales of the book after commissions 
payable to distributors, shops, etc. A few months later 
(1997), I won the coveted Prize of the Ministry of 
Education (for short prose). The prize money (a few 
thousand DMs) was snatched by the publishing house on 
the legal grounds that all the money generated by the book 
belongs to them because they own the copyright. 

In the mythology generated by capitalism to pacify the 
masses, the myth of intellectual property stands out. It 
goes like this: if the rights to intellectual property were 
not defined and enforced, commercial entrepreneurs 
would not have taken on the risks associated with 
publishing books, recording records, and preparing 
multimedia products. As a result, creative people will 
have suffered because they will have found no way to 
make their works accessible to the public. Ultimately, it is 
the public which pays the price of piracy, goes the refrain. 

But this is factually untrue. In the USA there is a very 
limited group of authors who actually live by their pen. 
Only select musicians eke out a living from their noisy 
vocation (most of them rock stars who own their labels - 
George Michael had to fight Sony to do just that) and very 
few actors come close to deriving subsistence level 
income from their profession. All these can no longer be 



thought of as mostly creative people. Forced to defend 
their intellectual property rights and the interests of Big 
Money, Madonna, Michael Jackson, Schwarzenegger and 
Grisham are businessmen at least as much as they are 
artists. 

Economically and rationally, we should expect that the 
costlier a work of art is to produce and the narrower its 
market - the more emphasized its intellectual property 
rights. 

Consider a publishing house. 

A book which costs 50,000 DM to produce with a 
potential audience of 1000 purchasers (certain academic 
texts are like this) - would have to be priced at a a 
minimum of 100 DM to recoup only the direct costs. If 
illegally copied (thereby shrinking the potential market as 
some people will prefer to buy the cheaper illegal copies) 
- its price would have to go up prohibitively to recoup 
costs, thus driving out potential buyers. The story is 
different if a book costs 10,000 DM to produce and is 
priced at 20 DM a copy with a potential readership of 
1,000,000 readers. Piracy (illegal copying) should in this 
case be more readily tolerated as a marginal phenomenon. 

This is the theory. But the facts are tellingly different. The 
less the cost of production (brought down by digital 
technologies) - the fiercer the battle against piracy. The 
bigger the market - the more pressure is applied to clamp 
down on samizdat entrepreneurs. 

Governments, from China to Macedonia, are introducing 
intellectual property laws (under pressure from rich world 
countries) and enforcing them belatedly. But where one 



factory is closed on shore (as has been the case in 
mainland China) - two sprout off shore (as is the case in 
Hong Kong and in Bulgaria). 

But this defies logic: the market today is global, the costs 
of production are lower (with the exception of the music 
and film industries), the marketing channels more 
numerous (half of the income of movie studios emanates 
from video cassette sales), the speedy recouping of the 
investment virtually guaranteed. Moreover, piracy thrives 
in very poor markets in which the population would 
anyhow not have paid the legal price. The illegal product 
is inferior to the legal copy (it comes with no literature, 
warranties or support). So why should the big 
manufacturers, publishing houses, record companies, 
software companies and fashion houses worry? 

The answer lurks in history. Intellectual property is a 
relatively new notion. In the near past, no one considered 
knowledge or the fruits of creativity (art, design) as 
"patentable", or as someone's "property". The artist was 
but a mere channel through which divine grace flowed. 
Texts, discoveries, inventions, works of art and music, 
designs - all belonged to the community and could be 
replicated freely. True, the chosen ones, the conduits, 
were honoured but were rarely financially rewarded. They 
were commissioned to produce their works of art and 
were salaried, in most cases. Only with the advent of the 
Industrial Revolution were the embryonic precursors of 
intellectual property introduced but they were still limited 
to industrial designs and processes, mainly as embedded 
in machinery. The patent was born. The more massive the 
market, the more sophisticated the sales and marketing 
techniques, the bigger the financial stakes - the larger 
loomed the issue of intellectual property. It spread from 



machinery to designs, processes, books, newspapers, any 
printed matter, works of art and music, films (which, at 
their beginning were not considered art), software, 
software embedded in hardware, processes, business 
methods, and even unto genetic material. 

Intellectual property rights - despite their noble title - are 
less about the intellect and more about property. This is 
Big Money: the markets in intellectual property outweigh 
the total industrial production in the world. The aim is to 
secure a monopoly on a specific work. This is an 
especially grave matter in academic publishing where 
small- circulation magazines do not allow their content to 
be quoted or published even for non-commercial 
purposes. The monopolists of knowledge and intellectual 
products cannot allow competition anywhere in the world 
- because theirs is a world market. A pirate in Skopje is in 
direct competition with Bill Gates. When he sells a pirated 
Microsoft product - he is depriving Microsoft not only of 
its income, but of a client (=future income), of its 
monopolistic status (cheap copies can be smuggled into 
other markets), and of its competition-deterring image (a 
major monopoly preserving asset). This is a threat which 
Microsoft cannot tolerate. Hence its efforts to eradicate 
piracy - successful in China and an utter failure in legally- 
relaxed Russia. 

But what Microsoft fails to understand is that the problem 
lies with its pricing policy - not with the pirates. When 
faced with a global marketplace, a company can adopt one 
of two policies: either to adjust the price of its products to 
a world average of purchasing power - or to use 
discretionary differential pricing (as pharmaceutical 
companies were forced to do in Brazil and South Africa). 
A Macedonian with an average monthly income of 160 



USD clearly cannot afford to buy the Encyclopaedia 
Encarta Deluxe. In America, 50 USD is the income 
generated in 4 hours of an average job. In Macedonian 
terms, therefore, the Encarta is 20 times more expensive. 
Either the price should be lowered in the Macedonian 
market - or an average world price should be fixed which 
will reflect an average global purchasing power. 

Something must be done about it not only from the 
economic point of view. Intellectual products are very 
price sensitive and highly elastic. Lower prices will be 
more than compensated for by a much higher sales 
volume. There is no other way to explain the pirate 
industries: evidently, at the right price a lot of people are 
willing to buy these products. High prices are an implicit 
trade-off favouring small, elite, select, rich world 
clientele. This raises a moral issue: are the children of 
Macedonia less worthy of education and access to the 
latest in human knowledge and creation? 

Two developments threaten the future of intellectual 
property rights. One is the Internet. Academics, fed up 
with the monopolistic practices of professional 
publications - already publish on the web in big numbers. 
I published a few book on the Internet and they can be 
freely downloaded by anyone who has a computer or a 
modem. The full text of electronic magazines, trade 
journals, billboards, professional publications, and 
thousands of books is available online. Hackers even 
made sites available from which it is possible to download 
whole software and multimedia products. It is very easy 
and cheap to publish on the Internet, the barriers to entry 
are virtually nil. Web pages are hosted free of charge, and 
authoring and publishing software tools are incorporated 
in most word processors and browser applications. As the 



Internet acquires more impressive sound and video 
capabilities it will proceed to threaten the monopoly of the 
record companies, the movie studios and so on. 

The second development is also technological. The oft- 
vindicated Moore's law predicts the doubling of computer 
memory capacity every 18 months. But memory is only 
one aspect of computing power. Another is the rapid 
simultaneous advance on all technological fronts. 
Miniaturization and concurrent empowerment by software 
tools have made it possible for individuals to emulate 
much larger scale organizations successfully. A single 
person, sitting at home with 5000 USD worth of 
equipment can fully compete with the best products of the 
best printing houses anywhere. CD-ROMs can be written 
on, stamped and copied in house. A complete music 
studio with the latest in digital technology has been 
condensed to the dimensions of a single chip. This will 
lead to personal publishing, personal music recording, and 
the to the digitization of plastic art. But this is only one 
side of the story. 

The relative advantage of the intellectual property 
corporation does not consist exclusively in its 
technological prowess. Rather it lies in its vast pool of 
capital, its marketing clout, market positioning, sales 
organization, and distribution network. 

Nowadays, anyone can print a visually impressive book, 
using the above-mentioned cheap equipment. But in an 
age of information glut, it is the marketing, the media 
campaign, the distribution, and the sales that determine 
the economic outcome. 

This advantage, however, is also being eroded. 



First, there is a psychological shift, a reaction to the 
commercialization of intellect and spirit. Creative people 
are repelled by what they regard as an oligarchic 
establishment of institutionalized, lowest common 
denominator art and they are fighting back. 

Secondly, the Internet is a huge (200 million people), truly 
cosmopolitan market, with its own marketing channels 
freely available to all. Even by default, with a minimum 
investment, the likelihood of being seen by surprisingly 
large numbers of consumers is high. 

I published one book the traditional way - and another on 
the Internet . In 50 months, I have received 6500 written 
responses regarding my electronic book . Well over 
500,000 people read it (my Link Exchange meter 
registered c. 2,000,000 impressions since November 
1998). It is a textbook (in psychopathology) - and 500,000 
readers is a lot for this kind of publication. I am so 
satisfied that I am not sure that I will ever consider a 
traditional publisher again. Indeed, my last book was 
published in the very same way. 

The demise of intellectual property has lately become 
abundantly clear. The old intellectual property industries 
are fighting tooth and nail to preserve their monopolies 
(patents, trademarks, copyright) and their cost advantages 
in manufacturing and marketing. 

But they are faced with three inexorable processes which 
are likely to render their efforts vain: 



The Newspaper Packaging 

Print newspapers offer package deals of cheap content 
subsidized by advertising. In other words, the advertisers 
pay for content formation and generation and the reader 
has no choice but be exposed to commercial messages as 
he or she studies the content. 

This model - adopted earlier by radio and television - 
rules the internet now and will rule the wireless internet in 
the future. Content will be made available free of all 
pecuniary charges. The consumer will pay by providing 
his personal data (demographic data, consumption 
patterns and preferences and so on) and by being exposed 
to advertising. Subscription based models are bound to 
fail. 

Thus, content creators will benefit only by sharing in the 
advertising cake. They will find it increasingly difficult to 
implement the old models of royalties paid for access or 
of ownership of intellectual property. 

Disintermediation 

A lot of ink has been spilt regarding this important trend. 
The removal of layers of brokering and intermediation - 
mainly on the manufacturing and marketing levels - is a 
historic development (though the continuation of a long 
term trend). 

Consider music for instance. Streaming audio on the 
internet or downloadable MP3 files will render the CD 
obsolete. The internet also provides a venue for the 
marketing of niche products and reduces the barriers to 
entry previously imposed by the need to engage in costly 



marketing ("branding") campaigns and manufacturing 
activities. 

This trend is also likely to restore the balance between 
artist and the commercial exploiters of his product. The 
very definition of "artist" will expand to include all 
creative people. One will seek to distinguish oneself, to 
"brand" oneself and to auction off one's services, ideas, 
products, designs, experience, etc. This is a return to pre- 
industrial times when artisans ruled the economic scene. 
Work stability will vanish and work mobility will increase 
in a landscape of shifting allegiances, head hunting, 
remote collaboration and similar labour market trends. 

Market Fragmentation 

In a fragmented market with a myriad of mutually 
exclusive market niches, consumer preferences and 
marketing and sales channels - economies of scale in 
manufacturing and distribution are meaningless. 
Narrowcasting replaces broadcasting, mass customization 
replaces mass production, a network of shifting 
affiliations replaces the rigid owned-branch system. The 
decentralized, intrapreneurship-based corporation is a late 
response to these trends. The mega-corporation of the 
future is more likely to act as a collective of start-ups than 
as a homogeneous, uniform (and, to conspiracy theorists, 
sinister) juggernaut it once was. 

Return 



The Kidnapping of Content 

http://www.plagiarism.org and 

http ://www.Turnitin.com 

Latin kidnapped the word "plagion" from ancient Greek 
and it ended up in English as "plagiarism". It literally 
means "to kidnap" - most commonly, to misappropriate 
content and wrongly attribute it to oneself. It is a close kin 
of piracy. But while the software or content pirate does 
not bother to hide or alter the identity of the content's 
creator or the software's author - the plagiarist does. 
Plagiarism is, therefore, more pernicious than piracy. 

Enter Turnit.com. An off-shoot of www.iparadigms.com, 
it was established by a group of concerned (and 
commercially minded) scientists from UC Berkeley. 

Whereas digital rights and asset management systems are 
geared to prevent piracy - plagiarism.org and its 
commercial arm, Turnit.com, are the cyber equivalent of a 
law enforcement agency, acting after the fact to discover 
the culprits and uncover their misdeeds. This, they claim, 
is a first stage on the way to a plagiarism-free Internet- 
based academic community of both teachers and students, 
in which the educational potential of the Internet can be 
fully realized. 

The problem is especially severe in academia. Various 
surveys have discovered that a staggering 80%(!) of US 
students cheat and that at least 30% plagiarize written 
material. The Internet only exacerbated this problem. 



More than 200 cheat-sites have sprung up, with thousands 
of papers available on-line and tens of thousands of 
satisfied plagiarists the world over. Some of these hubs - 
like cheater.com, cheatweb or cheathouse.com - make no 
bones about their offerings. Many of them are located 
outside the USA (in Germany, or Asia) and at least one 
offers papers in a few languages, Hebrew included. 

The problem, though, is not limited to the ivory towers. E- 
zines plagiarize. The print media plagiarize. Individual 
journalists plagiarize, many with abandon. Even 
advertising agencies and financial institutions plagiarize. 
The amount of material out there is so overwhelming that 
the plagiarist develops a (fairly justified) sense of 
immunity. The temptation is irresistible, the rewards big 
and the pressures of modern life great. 

Some of the plagiarists are straightforward copiers. Others 
substitute words, add sentences, or combine two or more 
sources. This raises the question: "when should content be 
considered original and when - plagiarized?". Should the 
test for plagiarism be more stringent than the one applied 
by the Copyright Office? And what rights are implicitly 
granted by the material's genuine authors or publishers 
once they place the content on the Internet? Is the Web a 
public domain and, if yes, to what extent? These questions 
are not easily answered. Consider reports generated by 
users from a database. Are these reports copyrighted - and 
if so, by whom - by the database compiler or by the user 
who defined the parameters, without which the reports in 
question would have never been generated? What about 
"fair use" of text and works of art? In the USA, the 
backlash against digital content piracy and plagiarism has 
reached preposterous legal, litigious and technological 
nadirs. 



Plagiarism.org has developed a statistics-based 
technology (the "Document Source Analysis") which 
creates a "digital fingerprint" of every document in its 
database. Web crawlers are then unleashed to scour the 
Internet and find documents with the same fingerprint and 
a colour-coded report is generated. An instructor, teacher, 
or professor can then use the report to prove plagiarism 
and cheating. 

Piracy is often considered to be a form of viral marketing 
(even by software developers and publishers). The 
author's, publisher's, or software house's data are 
preserved intact in the cracked copy. Pirated copies of e- 
books often contribute to increased sales of the print 
versions. Crippled versions of software or pirated copies 
of software without its manuals, updates and support - 
often lead to the purchase of a licence. Not so with 
plagiarism. The identities of the author, editor, publisher 
and illustrator are deleted and replaced by the details of 
the plagiarist. And while piracy is discussed freely and 
fought vigorously - the discussion of plagiarism is still 
taboo and actively suppressed by image-conscious and 
endowment-weary academic institutions and media. It is 
an uphill struggle but plagiarism.org has taken the first 
resolute step. 

Return 



The Economics of Spam 

Tennessee resident K. C. "Khan" Smith owes the internet 
service provider Earthlink $24 million. According to the 
CNN, in August 2001 he was slapped with a lawsuit 
accusing him of violating federal and state Racketeering 
Influenced and Corrupt Organizations (RICO) statutes, the 
federal Computer Fraud and Abuse Act of 1984, the 
federal Electronic Communications Privacy Act of 1986 
and numerous other state laws. On July 19, 2002 - having 
failed to appear in court - the judge ruled against him. Mr. 
Smith is a spammer. 

Brightmail, a vendor of e-mail filters and anti-spam 
applications warned that close to 5 million spam "attacks" 
or "bursts" occurred in June 2002 and that spam has 
mushroomed 450 percent since June 2001. This pace 
continued unabated well into the beginning of 2004 when 
the introduction of spam filters began to take effect. PC 
World concurs. 

Between one half and three quarters of all e-mail 
messages are spam or UCE (Unsolicited Commercial 
Email) - unsolicited and intrusive commercial ads, mostly 
concerned with sex, scams, get rich quick schemes, 
financial services and products, and health articles of 
dubious provenance. The messages are sent from spoofed 
or fake e-mail addresses. Some spammers hack into 
unsecured servers - mainly in China and Korea - to relay 
their missives anonymously. 

Starting in 2003, malicious hackers began using spam to 
install malware - such as viruses, adware, spyware, and 



Trojans - on the unprotected personal computers of less 
savvy users. They thus transform these computers into 
"zombies", organize them into spam-spewing "bots" 
(networks), and sell access to them to criminals on 
penumbral boards and forums all over the Net. 

Spam is an industry. Mass e-mailers maintain lists of e- 
mail addresses, often "harvested" by spamware bots - 
specialized computer applications - from Web sites. These 
lists are rented out or sold to marketers who use bulk mail 
services. They come cheap - c. $100 for 10 million 
addresses. Bulk mailers provide servers and bandwidth, 
charging c. $300 per million messages sent. 

As spam recipients become more inured, ISPs less 
tolerant, and both more litigious - spammers multiply their 
efforts in order to maintain the same response rate. Spam 
works. It is not universally unwanted - which makes it 
tricky to outlaw. It elicits between 0.1 and 1 percent in 
positive follow ups, depending on the message. Many 
messages now include HTML, JavaScript, and ActiveX 
coding and thus resemble (or actually contain) viruses and 
Trojans. 

Jupiter Media Matrix predicted in 2001 that the number of 
spam messages annually received by a typical Internet 
user will double to 1400 and spending on legitimate e- 
mail marketing will reach $9.4 billion by 2006 - compared 
to $1 billion in 2001. Forrester Research pegs the number 
at $4.8 billion in 2003. 

More than 2.3-5 billion spam messages are sent daily. 
eMarketer puts the figures a lot lower at 76 billion 
messages in 2002. By 2006, daily spam output will soar to 
c. 15 billion missives, says Radicati Group. Jupiter 



projects a more modest 268 billion annual messages this 
year (2005). An average communication costs the 
spammer 0.00032 cents. 

PC World quotes the European Union as pegging the 
bandwidth costs of spam worldwide in 2002 at $8-10 
billion annually. Other damages include server crashes, 
time spent purging unwanted messages, lower 
productivity, aggravation, and increased cost of Internet 
access. 

Inevitably, the spam industry gave rise to an anti-spam 
industry. According to a Radicati Group report titled 
'Anti-virus, anti-spam, and content filtering market trends 
2002-2006", anti-spam revenues were projected to exceed 
$88 million in 2002 - and more than double by 2006. List 
blockers, report and complaint generators, advocacy 
groups, registers of known spammers, and spam filters all 
proliferate. The Wall Street Journal reported in its June 
25, 2002 issue about a resurgence of anti-spam startups 
financed by eager venture capital. 

ISPs are bent on preventing abuse - reported by victims - 
by expunging the accounts of spammers. But the latter 
simply switch ISPs or sign on with free services like 
Hotmail and Yahoo! Barriers to entry are getting lower by 
the day as the costs of hardware, software, and 
communications plummet. 

The use of e-mail and broadband connections by the 
general population is spreading. Hundreds of thousands of 
technologically-savvy operators have joined the market in 
the last five years, as the dotcom bubble burst. Still, Steve 
Linford of the UK-based Spamhaus.org insists that most 
spam emanates from c. 80 large operators. 



Now, according to Jupiter Media, ISPs and portals are 
poised to begin to charge advertisers in a tier-based 
system, replete with premium services. Writing back in 
1998, Bill Gates described a solution also espoused by 
Esther Dyson, chair of the Electronic Frontier Foundation: 

"As I first described in my book 'The Road Ahead' in 
1995, 1 expect that eventually you '11 be paid to read 
unsolicited e-mail. You '11 tell your e-mail program to 
discard all unsolicited messages that don 't offer an 
amount of money that you'll choose. If you open a paid 
message and discover it's from a long-lost friend or 
somebody else who has a legitimate reason to contact 
you, you '11 be able to cancel the payment. Otherwise, 
you '11 be paid for your time. " 

Subscribers may not be appreciative of the joint ventures 
between gatekeepers and inbox clutterers. Moreover, 
dominant ISPs, such as AT&T and PSINet have 
recurrently been accused of knowingly collaborating with 
spammers. ISPs rely on the data traffic that spam 
generates for their revenues in an ever-harsher business 
environment. 

The Financial Times and others described how WorldCom 
refuses to ban the sale of spamware over its network, 
claiming that it does not regulate content. When "pink" 
(the color of canned spam) contracts came to light, the 
implicated ISPs blame the whole affair on rogue 
employees. 

PC World begs to differ: 

"Ronnie Scelson, a self-described spammer who signed 
such a contract with PSInet, (says) that backbone 



providers are more than happy to do business with bulk 
e-mailers. 'I've signed up with the biggest 50 carriers 
two or three times', says Scelson ... The Louisiana-based 
spammer claims to send 84 million commercial e-mail 
messages a day over his three 45-megabit-per-second 
DS3 circuits. 'If you were getting $40,000 a month for 
each circuit', Scelson asks, 'would you want to shut me 
down?'" 

The line between permission-based or "opt-in" e-mail 
marketing and spam is getting thinner by the day. Some 
list resellers guarantee the consensual nature of their 
wares. According to the Direct Marketing Association's 
guidelines, quoted by PC World, not responding to an 
unsolicited e-mail amounts to "opting-in" - a marketing 
strategy known as "opting out". Most experts, though, 
strongly urge spam victims not to respond to spammers, 
lest their e-mail address is confirmed. 

But spam is crossing technological boundaries. Japan has 
just legislated against wireless SMS spam targeted at 
hapless mobile phone users. Many states in the USA as 
well as the European parliament have followed suit. Ideas 
regarding a "do not spam" list akin to the "do not call" list 
in telemarketing have been floated. Mobile phone users 
will place their phone numbers on the list to avoid 
receiving UCE (spam). Email subscribers enjoy the 
benefits of a similar list under the CAN- Spam Act of 
2003. 

Expensive and slow connections make mobile phone 
spam and spim (instant messaging spam) particularly 
resented. Still, according to Britain's Mobile Channel, a 
mobile advertising company quoted by "The Economist", 



SMS advertising - a novelty - attracts a 10-20 percent 
response rate - compared to direct mail's 1-3 percent. 

Net identification systems - like Microsoft's Passport and 
the one proposed by Liberty Alliance - will make it even 
easier for marketers to target prospects. 

The reaction to spam can be described only as mass 
hysteria. Reporting someone as a spammer - even when 
he is not - has become a favorite pastime of vengeful, self- 
appointed, vigilante "cyber-cops". Perfectly legitimate, 
opt-in, email marketing businesses and discussion forums 
often find themselves in one or more black lists - their 
reputation and business ruined. 

In January 2002, CMGI-owned Yesmail was awarded a 
temporary restraining order against MAPS - Mail Abuse 
Prevention System - forbidding it to place the reputable e- 
mail marketer on its Real-time Blackhole list. The case 
was settled out of court. 

Harris Interactive, a large online opinion polling 
company, sued not only MAPS, but ISPs who blocked its 
email messages when it found itself included in MAPS' 
Blackhole. Their CEO accused one of their competitors 
for the allegations that led to Harris' inclusion in the list. 

Coupled with other pernicious phenomena - such as 
viruses, Trojans, and spyware - the very foundation of the 
Internet as a fun, relatively safe, mode of communication 
and data acquisition is at stake. 

Spammers, it emerges, have their own organizations. 
NOIC - the National Organization of Internet Commerce 
threatened to post to its Web site the e-mail addresses of 



millions of AOL members. AOL has aggressive anti- 
spamming policies. 'AOL is blocking bulk email because 
it wants the advertising revenues for itself (by selling pop- 
up ads)" the president of NOIC, Damien Melle, 
complained to CNET. 

Spam is a classic "free rider" problem. For any given 
individual, the cost of blocking a spammer far outweighs 
the benefits. It is cheaper and easier to hit the "delete" 
key. Individuals, therefore, prefer to let others do the job 
and enjoy the outcome - the public good of a spam-free 
Internet. They cannot be left out of the benefits of such an 
aftermath - public goods are, by definition, "non- 
excludable". Nor is a public good diminished by a 
growing number of "non-rival" users. 

Such a situation resembles a market failure and requires 
government intervention through legislation and 
enforcement. The FTC - the US Federal Trade 
Commission - has taken legal action against more than 
100 spammers for promoting scams and fraudulent goods 
and services. 

"Project Mailbox" is an anti-spam collaboration between 
American law enforcement agencies and the private 
sector. Non government organizations have entered the 
fray, as have lobbying groups, such as CAUCE - the 
Coalition Against Unsolicited Commercial E-mail. 

But, a few recent anti-spam and anti-spyware Acts 
notwithstanding, Congress is curiously reluctant to enact 
stringent laws against spam. Reasons cited are free 
speech, limits on state powers to regulate commerce, 
avoiding unfair restrictions on trade, and the interests of 
small business. The courts equivocate as well. In some 



cases - e.g., Missouri vs. American Blast Fax - US courts 
found "that the provision prohibiting the sending of 
unsolicited advertisements is unconstitutional". 

According to Spamlaws.com, the 107th Congress, for 
instance, discussed these laws but never enacted them: 

Unsolicited Commercial Electronic Mail Act of 2001 
(H.R. 95), Wireless Telephone Spam Protection Act (H.R. 
113), Anti-Spamming Act of 2001 (H.R. 718), Anti- 
Spamming Act of 2001 (H.R. 1017), Who Is E-Mailing 
Our Kids Act (H.R. 1846), Protect Children From E-Mail 
Smut Act of 2001 (H.R. 2472), Netizens Protection Act 
of 2001 (H.R. 3146), "CAN SPAM" Act of 2001 (S. 630). 

Anti-spam laws fared no better in the 106th Congress. 
Some of the states have picked up the slack. Arkansas, 
California, Colorado, Connecticut, Delaware, Idaho, 
Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, 
Missouri, Nevada, North Carolina, Oklahoma, 
Pennsylvania, Rhode Island, South Dakota, Tennessee, 
Utah, Virginia, Washington, West Virginia, and 
Wisconsin. 

The situation is no better across the pond. The European 
parliament decided in 2001 to allow each member country 
to enact its own spam laws, thus avoiding a continent- 
wide directive and directly confronting the 
communications ministers of the union. Paradoxically, it 
also decided, in March 2002, to restrict SMS spam. 
Confusion clearly reigns. Finally, in May 2002, it adopted 
strong anti-spam provisions as part of a Directive on Data 
Protection. 



Responding to this unfavorable legal environment, spam 
is relocating to developing countries, such as Malaysia, 
Nepal, and Nigeria. In a May 2005 report, the OECD 
(Organization for Economic Cooperation and 
Development) warned that these countries lack the 
technical know-how and financial resources (let alone the 
will) to combat spam. Their users, anyhow deprived of 
bandwidth, endure, as a result, a less reliable service and 
an intermittent access to the Internet; 

"Spam is a much more serious issue in developing 
countries. ..as it is a heavy drain on resources that are 
scarcer and costlier in developing countries than 
elsewhere" - writes the report's author, Suresh 
Ramasubramanian, an OECD advisor and postmaster for 
Outblaze.com. 

ISPs, spam monitoring services, and governments in the 
rich industrialized world react by placing entire countries 
- such as Macedonia and Costa Rica - on black lists and, 
thus denying access to their users en bloc. 

International collaboration against the looming destruction 
of the Internet by crime organizations is budding. The 
FTC had just announced that it will work with its 
counterparts abroad to cut zombie computers off the 
network. A welcome step - but about three years late. 
Spammers the world over are still six steps ahead and are 
having the upper hand. 

Return 



The Content Downloaded s Profile 

Interview granted to Tim Emmerling, a student at Eastern 
Illinois University. 

Q. What do you know about people illegally 
downloading files over the internet? 

A. I know what everyone knows from being exposed to 
the news media and to lawsuits filed by publishers: the 
phenomenon is widespread and most of the millions of 
exchanged files are music tracks and films (though book 
rip-off s are not unknown as well). 

Q. Why do you think people are taking part in these 
electronic transactions? Does the cost of purchasing the 
media come into play? 

A. It's a complex canvass of motivations, I guess. Many 
media products (especially in developing and poor 
countries) are overpriced in terms of the local purchasing 
power. Illegally downloading them is often an act of 
protest or defiance against what disgruntled consumers 
perceive as excessive profiteering. It may also be the only 
realistic way to gain ownership of coveted content. 

The fact that everything - from text to images - is digital 
makes replication facile and enticing. Illegal downloading 
also probably confers an aura of daring and mystique on 
the "pirates" involved (whose life may otherwise be a lot 
drearier and mundane). 



Additionally, these products resemble public goods in that 
they are nonrivalrous (the cost of extending the service or 
providing the good to another person is (close to) zero) 
and largely nonexcludable. 

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 entrepreneur ship. It is 
impossible to recapture the full returns they engender. As 
Samuelson observed, they are extreme forms of positive 
externalities (spillover effects). 

Moreover, 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. 

Needless to emphasize that media products are not public 
goods at all! They only superficially resemble public 
goods. Still, the fact that many books, music, and some 
films are, indeed, in the public domain further exacerbates 
the consumer's confusion. "Why can I (legally) download 
certain books and music tracks free of charge - but not 
others?" - wonders the baffled surfer, who is rarely versed 
in the intricacies of copyright laws. 

Q. Do you think this leads to a feeling of disrespect 
toward the various pieces of media by the person that 
steals it so frequently? (If I download music all the time, 
will I lose interest in it?) 

A. I am not sure that the word "respect" is relevant here. 



People don't respect or disrespect music - they enjoy it, 
like it, or dislike it. But frequent illegal downloading of 
media products is, probably, the outcome of disrespect 
towards content intermediaries such as publishers, 
producers, and retail outlets. I don't know for sure because 
there is no research to guide us in this matter, but I would 
imagine that these people (wrongly) perceive content 
intermediaries as parasitic and avaricious. 

Q. Downloading is still a widespread act today. The 
threats of lawsuits and legal action against downloaders 
hasn't stopped the problem. What, in your opinion, 
needs to be done to stop this behavior? 

A. Law enforcement activities and lawsuits are already 
having an effect. But you cannot prosecute thousands of 
people on a regular basis without suffering a 
commensurate drop in popularity and a tarnished image. 
People do not perceive these acts as self-defense but as 
David vs. Goliath bullying. Sooner or later, the efficacy of 
such measures is bound to decline. 

Media companies would do better to adopt new 
technologies rather than fight them. They must come forth 
with new business models and new venues of 
dissemination of content. They have to show more 
generosity in the management of digital rights. They have 
to adopt differential pricing of their products across the 
board, to reflect disparities in earnings and purchasing 
power in the global marketplace. They have to transform 
themselves rather than try to coerce the world into their 
antiquated and Procrustean ways of doing things. 



Q. Psychologically speaking, is there a certain kind of 
person who is more likely to take part in this behavior? 
Do you feel that this is a generational issue? 

A. I cannot but speculate. There is a dearth of data at this 
early stage. I would imagine that illegal downloaders are 
hoarders. They are into owning things rather than into 
using or consuming them. They are into building libraries 
and collections. They are young and intelligent, but not 
affluent. They are irreverent, rebellious, and non- 
conformist. They may be loners who network socially 
only online. Some of them love culture and its artifacts 
but they need not be particularly computer- savvy. 



Return 



The Fabric of Economic Trust 



Economics acquired its dismal reputation by pretending to 
be an exact science rather than a branch of mass 
psychology. In truth it is a narrative struggling to describe 
the aggregate behavior of humans. It seeks to cloak its 
uncertainties and shifting fashions with mathematical 
formulae and elaborate econometric computerized 
models. 

So much is certain, though - that people operate within 
markets, free or regulated, patchy or organized. They 
attach numerical (and emotional) values to their inputs 
(work, capital) and to their possessions (assets, natural 
endowments). They communicate these values to each 
other by sending out signals known as prices. 

Yet, this entire edifice - the market and its price 
mechanism - critically depends on trust. If people do not 
trust each other, or the economic "envelope" within which 
they interact - economic activity gradually grinds to a halt. 
There is a strong correlation between the general level of 
trust and the extent and intensity of economic activity. 
Francis Fukuyama, the political scientist, distinguishes 
between high-trust and prosperous societies and low-trust 
and, therefore, impoverished collectives. Trust underlies 
economic success, he argued in a 1995 tome. 

Trust is not a monolithic quantity. There are a few 
categories of economic trust. Some forms of trust are akin 
to a public good and are closely related to governmental 
action or inaction, the reputation of the state and its 
institutions, and its pronounced agenda. Other types of 



trust are the outcomes of kinship, ethnic origin, personal 
standing and goodwill, corporate brands and other data 
generated by individuals, households, and firms. 

/. Trust in the playing field 

To transact, people have to maintain faith in a relevant 
economic horizon and in the immutability of the 
economic playing field or "envelope". Put less obscurely, 
a few hidden assumptions underlie the continued 
economic activity of market players. 

They assume, for instance, that the market will continue to 
exist for the foreseeable future in its current form. That it 
will remain inert - unhindered by externalities like 
government intervention, geopolitical upheavals, crises, 
abrupt changes in accounting policies and tax laws, 
hyperinflation, institutional and structural reform and 
other market-deflecting events and processes. 

They further assume that their price signals will not be 
distorted or thwarted on a consistent basis thus skewing 
the efficient and rational allocation of risks and rewards. 
Insider trading, stock manipulation, monopolies, hoarding 
- all tend to consistently but unpredictably distort price 
signals and, thus, deter market participation. 

Market players take for granted the existence and 
continuous operation of institutions - financial 
intermediaries, law enforcement agencies, courts. It is 
important to note that market players prefer continuity and 
certainty to evolution, however gradual and ultimately 
beneficial. A venal bureaucrat is a known quantity and 
can be tackled effectively. A period of transition to good 
and equitable governance can be more stifling than any 



level of corruption and malfeasance. This is why 
economic activity drops sharply whenever institutions are 
reformed. 

//. Trust in other players 

Market players assume that other players are (generally) 
rational, that they have intentions, that they intend to 
maximize their benefits and that they are likely to act on 
their intentions in a legal (or rule-based), rational manner. 

///. Trust in market liquidity 

Market players assume that other players possess or have 
access to the liquid means they need in order to act on 
their intentions and obligations. They know, from 
personal experience, that idle capital tends to dwindle and 
that the only way to, perhaps, maintain or increase it is to 
transact with others, directly or through intermediaries, 
such as banks. 

IV. Trust in others' knowledge and ability 

Market players assume that other players possess or have 
access to the intellectual property, technology, and 
knowledge they need in order to realize their intentions 
and obligations. This implicitly presupposes that all other 
market players are physically, mentally, legally and 
financially able and willing to act their parts as stipulated, 
for instance, in contracts they sign. 

The emotional dimensions of contracting are often 
neglected in economics. Players assume that their 
counterparts maintain a realistic and stable sense of self- 
worth based on intimate knowledge of their own strengths 



and weaknesses. Market participants are presumed to 
harbor realistic expectations, commensurate with their 
skills and accomplishments. Allowance is made for 
exaggeration, disinformation, even outright deception - 
but these are supposed to be marginal phenomena. 

When trust breaks down - often the result of an external or 
internal systemic shock - people react expectedly. The 
number of voluntary interactions and transactions 
decreases sharply. With a collapsed investment horizon, 
individuals and firms become corrupt in an effort to 
shortcut their way into economic benefits, not knowing 
how long will the system survive. Criminal activity 
increases. 

People compensate with fantasies and grandiose delusions 
for their growing sense of uncertainty, helplessness, and 
fears. This is a self-reinforcing mechanism, a vicious 
cycle which results in under-confidence and a fluctuating 
self esteem. They develop psychological defence 
mechanisms. 

Cognitive dissonance ("I really choose to be poor rather 
than heartless"), pathological envy (seeks to deprive 
others and thus gain emotional reward), rigidity ("I am 
like that, my family or ethnic group has been like that for 
generations, there is nothing I can do"), passive- 
aggressive behavior (obstructing the work flow, 
absenteeism, stealing from the employer, adhering strictly 
to arcane regulations) - are all reactions to a breakdown in 
one or more of the four aforementioned types of trust. 
Furthermore, people in a trust crisis are unable to 
postpone gratification. They often become frustrated, 
aggressive, and deceitful if denied. They resort to reckless 
behavior and stopgap economic activities. 



In economic environments with compromised and 
impaired trust, loyalty decreases and mobility increases. 
People switch jobs, renege on obligations, fail to repay 
debts, relocate often. Concepts like exclusivity, the 
sanctity of contracts, workplace loyalty, or a career path - 
all get eroded. As a result, little is invested in the future, in 
the acquisition of skills, in long term savings. Short- 
termism and bottom line mentality rule. 

The outcomes of a crisis of trust are, usually, catastrophic: 

Economic activity is much reduced, human capital is 
corroded and wasted, brain drain increases, illegal and 
extra-legal activities rise, society is polarized between 
haves and haves-not, interethnic and inter-racial tensions 
increase. To rebuild trust in such circumstances is a 
daunting task. The loss of trust is contagious and, finally, 
it infects every institution and profession in the land. It is 
the stuff revolutions are made of. 

Return 



The Distributive Justice of the Market 



The public outcry against executive pay and compensation 
followed disclosures of insider trading, double dealing, 
and outright fraud. But even honest and productive 
entrepreneurs often earn more money in one year than 
Albert Einstein did in his entire life. This strikes many - 
especially academics - as unfair. Surely Einstein's 
contributions to human knowledge and welfare far exceed 
anything ever accomplished by sundry businessmen? 
Fortunately, this discrepancy is cause for constructive 
jealousy, emulation, and imitation. It can, however, lead 
to an orgy of destructive and self-ruinous envy . 

Such envy is reinforced by declining social mobility in the 
United States. Recent (2006-7) studies by the OECD 
(Organization for Economic Cooperation and 
Development) clearly demonstrate that the American 
Dream is a myth. In an editorial dated July 13, 2007, the 
New- York Times described the rapidly deteriorating 
situation thus: 

"... (M)obility between generations — people doing 
better or worse than their parents — is weaker in 
America than in Denmark, Austria, Norway, Finland, 
Canada, Sweden, Germany, Spain and France. In 
America, there is more than a 40 percent chance that if 
a father is in the bottom fifth of the earnings ' 
distribution, his son will end up there, too. In Denmark, 
the equivalent odds are under 25 percent, and they are 
less than 30 percent in Britain. 



America 's sluggish mobility is ultimately unsurprising. 
Wealthy parents not only pass on that wealth in 
inheritances, they can pay for better education, nutrition 
and health care for their children. The poor cannot 
afford this investment in their children's development — 
and the government doesn 't provide nearly enough help. 
In a speech earlier this year, the Federal Reserve 
chairman, Ben Bernanke, argued that while the 
inequality of rewards fuels the economy by making 
people exert themselves, opportunity should be "as 
widely distributed and as equal as possible. " The 
problem is that the have-nots don 't have many 
opportunities either. " 

Still, entrepreneurs recombine natural and human 
resources in novel ways. They do so to respond to 
forecasts of future needs, or to observations of failures 
and shortcomings of current products or services. 
Entrepreneurs are professional - though usually intuitive - 
futurologists. This is a valuable service and it is financed 
by systematic risk takers, such as venture capitalists. 
Surely they all deserve compensation for their efforts and 
the hazards they assume? 

Exclusive ownership is the most ancient type of such 
remuneration. First movers, entrepreneurs, risk takers, 
owners of the wealth they generated, exploiters of 
resources - are allowed to exclude others from owning or 
exploiting the same things. Mineral concessions, patents, 
copyright, trademarks - are all forms of monopoly 
ownership. What moral right to exclude others is gained 
from being the first? 

Nozick advanced Locke's Proviso. An exclusive 
ownership of property is just only if "enough and as good 



is left in common for others". If it does not worsen other 
people's lot, exclusivity is morally permissible. It can be 
argued, though, that all modes of exclusive ownership 
aggravate other people's situation. As far as everyone, bar 
the entrepreneur, are concerned, exclusivity also prevents 
a more advantageous distribution of income and wealth. 

Exclusive ownership reflects real-life irreversibility. A 
first mover has the advantage of excess information and of 
irreversibly invested work, time, and effort. Economic 
enterprise is subject to information asymmetry: we know 
nothing about the future and everything about the past. 
This asymmetry is known as "investment risk". Society 
compensates the entrepreneur with one type of asymmetry 
- exclusive ownership - for assuming another, the 
investment risk. 

One way of looking at it is that all others are worse off by 
the amount of profits and rents accruing to owner- 
entrepreneurs. Profits and rents reflect an intrinsic 
inefficiency. Another is to recall that ownership is the 
result of adding value to the world. It is only reasonable to 
expect it to yield to the entrepreneur at least this value 
added now and in the future. 

In a "Theory of Justice" (published 1971, p. 302), John 
Rawls described an ideal society thus: 

"(1) Each person is to have an equal right to the most 
extensive total system of equal basic liberties compatible 
with a similar system of liberty for all. (2) Social and 
economic inequalities are to be arranged so that they are 
both: (a) to the greatest benefit of the least advantaged, 
consistent with the just savings principle, and (b) attached 



to offices and positions open to all under conditions of fair 
equality of opportunity." 

It all harks back to scarcity of resources - land, money, 
raw materials, manpower, creative brains. Those who can 
afford to do so, hoard resources to offset anxiety 
regarding future uncertainty. Others wallow in paucity. 
The distribution of means is thus skewed. "Distributive 
justice" deals with the just allocation of scarce resources. 

Yet, even the basic terminology is somewhat fuzzy. What 
constitutes a resource? what is meant by allocation? Who 
should allocate resources - Adam Smith's "invisible 
hand", the government, the consumer, or business? Should 
it reflect differences in power, in intelligence, in 
knowledge, or in heredity? Should resource allocation be 
subject to a principle of entitlement? Is it reasonable to 
demand that it be just - or merely efficient? Are justice 
and efficiency antonyms? 

Justice is concerned with equal access to opportunities. 
Equal access does not guarantee equal outcomes, 
invariably determined by idiosyncrasies and differences 
between people. Access leveraged by the application of 
natural or acquired capacities - translates into accrued 
wealth. Disparities in these capacities lead to 
discrepancies in accrued wealth. 

The doctrine of equal access is founded on the 
equivalence of Men. That all men are created equal and 
deserve the same respect and, therefore, equal treatment is 
not self evident. European aristocracy well into this 
century would have probably found this notion abhorrent. 
Jose Ortega Y Gasset, writing in the 1930's, preached that 
access to educational and economic opportunities should 



be premised on one's lineage, up bringing, wealth, and 
social responsibilities. 

A succession of societies and cultures discriminated 
against the ignorant, criminals, atheists, females, 
homosexuals, members of ethnic, religious, or racial 
groups, the old, the immigrant, and the poor. Communism 

- ostensibly a strict egalitarian idea - foundered because it 
failed to reconcile strict equality with economic and 
psychological realities within an impatient timetable. 

Philosophers tried to specify a "bundle" or "package" of 
goods, services, and intangibles (like information, or 
skills, or knowledge). Justice - though not necessarily 
happiness - is when everyone possesses an identical 
bundle. Happiness - though not necessarily justice - is 
when each one of us possesses a "bundle" which reflects 
his or her preferences, priorities, and predilections. None 
of us will be too happy with a standardized bundle, 
selected by a committee of philosophers - or bureaucrats, 
as was the case under communism. 

The market allows for the exchange of goods and services 
between holders of identical bundles. If I seek books, but 
detest oranges - 1 can swap them with someone in return 
for his books. That way both of us are rendered better off 
than under the strict egalitarian version. 

Still, there is no guarantee that I will find my exact match 

- a person who is interested in swapping his books for my 
oranges. Illiquid, small, or imperfect markets thus inhibit 
the scope of these exchanges. Additionally, exchange 
participants have to agree on an index: how many books 
for how many oranges? This is the price of oranges in 
terms of books. 



Money - the obvious "index" - does not solve this 
problem, merely simplifies it and facilitates exchanges. It 
does not eliminate the necessity to negotiate an "exchange 
rate". It does not prevent market failures. In other words: 
money is not an index. It is merely a medium of exchange 
and a store of value. The index - as expressed in terms of 
money - is the underlying agreement regarding the values 
of resources in terms of other resources (i.e., their relative 
values). 

The market - and the price mechanism - increase 
happiness and welfare by allowing people to alter the 
composition of their bundles. The invisible hand is just 
and benevolent. But money is imperfect. The 
aforementioned Rawles demonstrated (1971), that we 
need to combine money with other measures in order to 
place a value on intangibles. 

The prevailing market theories postulate that everyone has 
the same resources at some initial point (the "starting 
gate"). It is up to them to deploy these endowments and, 
thus, to ravage or increase their wealth. While the initial 
distribution is equal - the end distribution depends on how 
wisely - or imprudently - the initial distribution was used. 

Egalitarian thinkers proposed to equate everyone's income 
in each time frame (e.g., annually). But identical incomes 
do not automatically yield the same accrued wealth. The 
latter depends on how the income is used - saved, 
invested, or squandered. Relative disparities of wealth are 
bound to emerge, regardless of the nature of income 
distribution. 

Some say that excess wealth should be confiscated and 
redistributed. Progressive taxation and the welfare state 



aim to secure this outcome. Redistributive mechanisms 
reset the "wealth clock" periodically (at the end of every 
month, or fiscal year). In many countries, the law dictates 
which portion of one's income must be saved and, by 
implication, how much can be consumed. This conflicts 
with basic rights like the freedom to make economic 
choices. 

The legalized expropriation of income (i.e., taxes) is 
morally dubious. Anti-tax movements have sprung all 
over the world and their philosophy permeates the 
ideology of political parties in many countries, not least 
the USA. Taxes are punitive: they penalize enterprise, 
success, entrepreneur ship, foresight, and risk assumption. 
Welfare, on the other hand, rewards dependence and 
parasitism. 

According to Rawles' Difference Principle, all tenets of 
justice are either redistributive or retributive. This ignores 
non-economic activities and human inherent variance. 
Moreover, conflict and inequality are the engines of 
growth and innovation - which mostly benefit the least 
advantaged in the long run. Experience shows that 
unmitigated equality results in atrophy, corruption and 
stagnation. Thermodynamics teaches us that life and 
motion are engendered by an irregular distribution of 
energy. Entropy - an even distribution of energy - equals 
death and stasis. 

What about the disadvantaged and challenged - the 
mentally retarded, the mentally insane, the paralyzed, the 
chronically ill? For that matter, what about the less 
talented, less skilled, less daring? Dworkin (1981) 
proposed a compensation scheme. He suggested a model 
of fair distribution in which every person is given the 



same purchasing power and uses it to bid, in a fair 
auction, for resources that best fit that person's life plan, 
goals and preferences. 

Having thus acquired these resources, we are then 
permitted to use them as we see fit. Obviously, we end up 
with disparate economic results. But we cannot complain - 
we were given the same purchasing power and the 
freedom to bid for a bundle of our choice. 

Dworkin assumes that prior to the hypothetical auction, 
people are unaware of their own natural endowments but 
are willing and able to insure against being naturally 
disadvantaged. Their payments create an insurance pool to 
compensate the less fortunate for their misfortune. 

This, of course, is highly unrealistic. We are usually very 
much aware of natural endowments and liabilities - both 
ours and others'. Therefore, the demand for such insurance 
is not universal, nor uniform. Some of us badly need and 
want it - others not at all. It is morally acceptable to let 
willing buyers and sellers to trade in such coverage (e.g., 
by offering charity or alms) - but may be immoral to make 
it compulsory. 

Most of the modern welfare programs are involuntary 
Dworkin schemes. Worse yet, they often measure 
differences in natural endowments arbitrarily, compensate 
for lack of acquired skills, and discriminate between types 
of endowments in accordance with cultural biases and 
fads. 

Libertarians limit themselves to ensuring a level playing 
field of just exchanges, where just actions always result in 
just outcomes. Justice is not dependent on a particular 



distribution pattern, whether as a starting point, or as an 
outcome. Robert Nozick "Entitlement Theory" proposed 
in 1974 is based on this approach. 

That the market is wiser than any of its participants is a 
pillar of the philosophy of capitalism. In its pure form, the 
theory claims that markets yield patterns of merited 
distribution - i.e., reward and punish justly. Capitalism 
generate just deserts. Market failures - for instance, in the 
provision of public goods - should be tackled by 
governments. But a just distribution of income and wealth 
does not constitute a market failure and, therefore, should 
not be tampered with. 

Return 



The Agent-Principal Conundrum 



In the catechism of capitalism, shares represent the part- 
ownership of an economic enterprise, usually a firm. The 
value of shares is determined by the replacement value of 
the assets of the firm, including intangibles such as 
goodwill. The price of the share is determined by 
transactions among arm's length buyers and sellers in an 
efficient and liquid market. The price reflects expectations 
regarding the future value of the firm and the stock's 
future stream of income - i.e., dividends. 

Alas, none of these oft-recited dogmas bears any 
resemblance to reality. Shares rarely represent ownership. 
The float - the number of shares available to the public - is 
frequently marginal. Shareholders meet once a year to 
vent and disperse. Boards of directors are appointed by 
management - as are auditors. Shareholders are not 
represented in any decision making process - small or big. 

The dismal truth is that shares reify the expectation to find 
future buyers at a higher price and thus incur capital gains. 
In the Ponzi scheme known as the stock exchange, this 
expectation is proportional to liquidity - new suckers - and 
volatility. Thus, the price of any given stock reflects 
merely the consensus as to how easy it would be to 
offload one's holdings and at what price. 

Another myth has to do with the role of managers. They 
are supposed to generate higher returns to shareholders by 
increasing the value of the firm's assets and, therefore, of 
the firm. If they fail to do so, goes the moral tale, they are 
booted out mercilessly. This is one manifestation of the 



"Principal- Agent Problem". It is defined thus by the 
Oxford Dictionary of Economics: 

"The problem of how a person A can motivate person B to 
act for A's benefit rather than following (his) self- 
interest." 

The obvious answer is that A can never motivate B not to 
follow B's self-interest - never mind what the incentives 
are. That economists pretend otherwise - in "optimal 
contracting theory" -just serves to demonstrate how 
divorced economics is from human psychology and, thus, 
from reality. 

Managers will always rob blind the companies they run. 
They will always manipulate boards to collude in their 
shenanigans. They will always bribe auditors to bend the 
rules. In other words, they will always act in their self- 
interest. In their defense, they can say that the damage 
from such actions to each shareholder is minuscule while 
the benefits to the manager are enormous. In other words, 
this is the rational, self-interested, thing to do. 

But why do shareholders cooperate with such corporate 
brigandage? In an important Chicago Law Review article 
whose preprint was posted to the Web a few weeks ago - 
titled "Managerial Power and Rent Extraction in the 
Design of Executive Compensation" - the authors 
demonstrate how the typical stock option granted to 
managers as part of their remuneration rewards mediocrity 
rather than encourages excellence. 

But everything falls into place if we realize that 
shareholders and managers are allied against the firm - not 
pitted against each other. The paramount interest of both 



shareholders and managers is to increase the value of the 
stock - regardless of the true value of the firm. Both are 
concerned with the performance of the share - rather than 
the performance of the firm. Both are preoccupied with 
boosting the share's price - rather than the company's 
business. 

Hence the inflationary executive pay packets. 
Shareholders hire stock manipulators - euphemistically 
known as "managers" - to generate expectations regarding 
the future prices of their shares. These snake oil salesmen 
and snake charmers - the corporate executives - are 
allowed by shareholders to loot the company providing 
they generate consistent capital gains to their masters by 
provoking persistent interest and excitement around the 
business. Shareholders, in other words, do not behave as 
owners of the firm - they behave as free-riders. 

The Principal- Agent Problem arises in other social 
interactions and is equally misunderstood there. Consider 
taxpayers and their government. Contrary to conservative 
lore, the former want the government to tax them 
providing they share in the spoils. They tolerate 
corruption in high places, cronyism, nepotism, inaptitude 
and worse - on condition that the government and the 
legislature redistribute the wealth they confiscate. Such 
redistribution often comes in the form of pork barrel 
projects and benefits to the middle-class. 

This is why the tax burden and the government's share of 
GDP have been soaring inexorably with the consent of the 
citizenry. People adore government spending precisely 
because it is inefficient and distorts the proper allocation 
of economic resources. The vast majority of people are 
rent- seekers. Witness the mass demonstrations that erupt 



whenever governments try to slash expenditures, 
privatize, and eliminate their gaping deficits. This is one 
reason the IMF with its austerity measures is universally 
unpopular. 

Employers and employees, producers and consumers - 
these are all instances of the Principal- Agent Problem. 
Economists would do well to discard their models and go 
back to basics. They could start by asking: 

Why do shareholders acquiesce with executive 
malfeasance as long as share prices are rising? 

Why do citizens protest against a smaller government - 
even though it means lower taxes? 

Could it mean that the interests of shareholders and 
managers are identical? Does it imply that people prefer 
tax-and-spend governments and pork barrel politics to the 
Thatcherite alternative? 

Nothing happens by accident or by coercion. Shareholders 
aided and abetted the current crop of corporate executives 
enthusiastically. They knew well what was happening. 
They may not have been aware of the exact nature and 
extent of the rot - but they witnessed approvingly the 
public relations antics, insider trading, stock option 
resetting , unwinding, and unloading, share price 
manipulation, opaque transactions, and outlandish pay 
packages. Investors remained mum throughout the 
corruption of corporate America. It is time for the 
hangover. 

Return 



The Green-Eyed Capitalist 



Conservative sociologists self-servingly marvel at the 
peaceful proximity of abject poverty and ostentatious 
affluence in American - or, for that matter, Western - 
cities. Devastating riots do erupt, but these are reactions 
either to perceived social injustice (Los Angeles 1965) or 
to political oppression (Paris 1968). The French 
Revolution may have been the last time the urban sans- 
culotte raised a fuss against the economically 
enfranchised. 

This pacific co-existence conceals a maelstrom of envy. 
Behold the rampant Schadenfreude which accompanied 
the antitrust case against the predatory but loaded 
Microsoft. Observe the glee which engulfed many 
destitute countries in the wake of the September 1 1 
atrocities against America, the epitome of triumphant 
prosperity. Witness the post-World.com orgiastic 
castigation of avaricious CEO's. 

Envy - a pathological manifestation of destructive 
aggressiveness - is distinct from jealousy. 

The New Oxford Dictionary of English defines envy as: 

"A feeling of discontented or resentful longing aroused by 
someone else's possessions, qualities, or luck ... 
Mortification and ill-will occasioned by the contemplation 
of another's superior advantages." 

Pathological envy - the fourth deadly sin - is engendered 
by the realization of some lack, deficiency, or inadequacy 



in oneself. The envious begrudge others their success, 
brilliance, happiness, beauty, good fortune, or wealth. 
Envy provokes misery, humiliation, and impotent rage. 

The envious copes with his pernicious emotions in five 
ways: 

1 . They attack the perceived source of frustration in 
an attempt to destroy it, or "reduce it" to their 
"size". Such destructive impulses often assume the 
disguise of championing social causes, fighting 
injustice, touting reform, or promoting an 
ideology. 

2. They seek to subsume the object of envy by 
imitating it. In extreme cases, they strive to get 
rich quick through criminal scams, or corruption. 
They endeavor to out- smart the system and 
shortcut their way to fortune and celebrity. 

3. They resort to self -deprecation. They idealize the 
successful, the rich, the mighty, and the lucky and 
attribute to them super-human, almost divine, 
qualities. At the same time, they humble 
themselves. Indeed, most of this strain of the 
envious end up disenchanted and bitter, driving the 
objects of their own erstwhile devotion and 
adulation to destruction and decrepitude. 

4. They experience cognitive dissonance. These 
people devalue the source of their frustration and 
envy by finding faults in everything they most 
desire and in everyone they envy. 



5. They avoid the envied person and thus the 
agonizing pangs of envy. 

Envy is not a new phenomenon. Belisarius, the general 
who conquered the world for Emperor Justinian, was 
blinded and stripped of his assets by his envious peers. I - 
and many others - have written extensively about envy in 
command economies. Nor is envy likely to diminish. 

In his book, "Facial Justice", Hartley describes a post- 
apocalyptic dystopia, New State, in which envy is 
forbidden and equality extolled and everything enviable is 
obliterated. Women are modified to look like men and 
given identical "beta faces". Tall buildings are razed. 

Joseph Schumpeter, the prophetic Austrian-American 
economist, believed that socialism will disinherit 
capitalism. In "Capitalism, Socialism, and Democracy" he 
foresaw a conflict between a class of refined but dirt-poor 
intellectuals and the vulgar but filthy rich businessmen 
and managers they virulently envy and resent. Samuel 
Johnson wrote: "He was dull in a new way, and that made 
many people think him great." The literati seek to tear 
down the market economy which they feel has so 
disenfranchised and undervalued them. 

Hitler, who fancied himself an artist, labeled the British a 
"nation of shopkeepers" in one of his bouts of raging 
envy. Ralph Reiland, the Kenneth Simon professor of free 
enterprise at Robert Morris University, quotes David 
Brooks of the "weekly Standard", who christened this 
phenomenon "bourgeoisophobia": 

"The hatred of the bourgeoisie is the beginning of all 
virtue' - wrote Gustav Flaubert. He signed his letters 



'Bourgeoisophobus' to show how much he despised 'stupid 
grocers and their ilk ... Through some screw-up in the 
great scheme of the universe, their narrow-minded greed 
had brought them vast wealth, unstoppable power and 
growing social prestige." 

Reiland also quotes from Ludwig van Mises's "The Anti- 
Capitalist Mentality": 

"Many people, and especially intellectuals, passionately 
loathe capitalism. In a society based on caste and status, 
the individual can ascribe adverse fate to conditions 
beyond his control. In ... capitalism ... everybody's station 
in life depends on his doing ... (what makes a man rich is) 
not the evaluation of his contribution from any 'absolute' 
principle of justice but the evaluation on the part of his 
fellow men who exclusively apply the yardstick of their 
personal wants, desires and ends ... Everybody knows 
very well that there are people like himself who succeeded 
where he himself failed. Everybody knows that many of 
those he envies are self-made men who started from the 
same point from which he himself started. Everybody is 
aware of his own defeat. In order to console himself and 
to restore his self- assertion, such a man is in search of a 
scapegoat. He tries to persuade himself that he failed 
through no fault of his own. He was too decent to resort to 
the base tricks to which his successful rivals owe their 
ascendancy. The nefarious social order does not accord 
the prizes to the most meritorious men; it crowns the 
dishonest, unscrupulous scoundrel, the swindler, the 
exploiter, the 'rugged individualist'." 

In "The Virtue of Prosperity", Dinesh D'Souza accuses 
prosperity and capitalism of inspiring vice and temptation. 



Inevitably, it provokes envy in the poor and depravity in 
the rich. 

With only a modicum of overstatement, capitalism can be 
depicted as the sublimation of jealousy. As opposed to 
destructive envy -jealousy induces emulation. Consumers 
- responsible for two thirds of America's GDP - ape role 
models and vie with neighbors, colleagues, and family 
members for possessions and the social status they endow. 
Productive and constructive competition - among 
scientists, innovators, managers, actors, lawyers, 
politicians, and the members of just about every other 
profession - is driven by jealousy. 

The eminent Nobel prize winning British economist and 
philosopher of Austrian descent, Friedrich Hayek, 
suggested in "The Constitution of Liberty" that innovation 
and progress in living standards are the outcomes of class 
envy. The wealthy are early adopters of expensive and 
unproven technologies. The rich finance with their 
conspicuous consumption the research and development 
phase of new products. The poor, driven by jealousy, 
imitate them and thus create a mass market which allows 
manufacturers to lower prices. 

But jealousy is premised on the twin beliefs of equality 
and a level playing field. "I am as good, as skilled, and as 
talented as the object of my jealousy." - goes the subtext - 
"Given equal opportunities, equitable treatment, and a bit 
of luck, I can accomplish the same or more." 

Jealousy is easily transformed to outrage when its 
presumptions - equality, honesty, and fairness - prove 
wrong. In a paper recently published by Harvard 
University's John M. Olin Center for Law and titled 



"Executive Compensation in America: Optimal 
Contracting or Extraction of Rents?", the authors argue 
that executive malfeasance is most effectively regulated 
by this "outrage constraint": 

"Directors (and non-executive directors) would be 
reluctant to approve, and executives would be hesitant to 
seek, compensation arrangements that might be viewed by 
observers as outrageous." 

Return 



Notes on the Economics of 
Game Theory 



Consider this: 

Could Western management techniques be successfully 
implemented in the countries of Central and Eastern 
Europe (CEE)? Granted, they have to be adapted, 
modified and cannot be imported in their entirety. But 
their crux, their inalienable nucleus - can this be 
transported and transplanted in CEE? Theory provides us 
with a positive answer. Human agents are the same 
everywhere and are mostly rational. Practice begs to 
differ. Basic concepts such as the money value of time or 
the moral and legal meaning of property are non existent. 
The legal, political and economic environments are all 
unpredictable. As a result, economic players will prefer to 
maximize their utility immediately (steal from the 
workplace, for instance) - than to wait for longer term 
(potentially, larger) benefits. Warrants (stock options) 
convertible to the company's shares constitute a strong 
workplace incentive in the West (because there is an 
horizon and they increase the employee's welfare in the 
long term). Where the future is speculation - speculation 
withers. Stock options or a small stake in his firm, will 
only encourage the employee to blackmail the other 
shareholders by paralysing the firm, to abuse his new 
position and will be interpreted as immunity, conferred 
from above, from the consequences of illegal activities. 
The very allocation of options or shares will be interpreted 
as a sign of weakness, dependence and need, to be 
exploited. Hierarchy is equated with slavery and 



employees will rather harm their long term interests than 
follow instructions or be subjected to criticism - never 
mind how constructive. The employees in CEE regard the 
corporate environment as a conflict zone, a zero sum 
game (in which the gains by some equal the losses to 
others). In the West, the employees participate in the 
increase in the firm's value. The difference between these 
attitudes is irreconcilable. 

Now, let us consider this: 

An entrepreneur is a person who is gifted at identifying 
the unsatisfied needs of a market, at mobilizing and 
organizing the resources required to satisfy those needs 
and at defining a long-term strategy of development and 
marketing. As the enterprise grows, two processes 
combine to denude the entrepreneur of some of his initial 
functions. The firm has ever growing needs for capital: 
financial, human, assets and so on. Additionally, the 
company begins (or should begin) to interface and interact 
with older, better established firms. Thus, the company is 
forced to create its first management team: a general 
manager with the right doses of respectability, 
connections and skills, a chief financial officer, a host of 
consultants and so on. In theory - if all our properly 
motivated financially - all these players (entrepreneurs 
and managers) will seek to maximize the value of the 
firm. What happens, in reality, is that both work to 
minimize it, each for its own reasons. The managers seek 
to maximize their short-term utility by securing enormous 
pay packages and other forms of company-dilapidating 
compensation. The entrepreneurs feel that they are 
"strangled", "shackled", "held back" by bureaucracy and 
they "rebel". They oust the management, or undermine it, 
turning it into an ineffective representative relic. They 



assume real, though informal, control of the firm. They do 
so by defining a new set of strategic goals for the firm, 
which call for the institution of an entrepreneurial rather 
than a bureaucratic type of management. These cycles of 
initiative-consolidation-new initiative-revolution- 
consolidation are the dynamos of company growth. 
Growth leads to maximization of value. However, the 
players don't know or do not fully believe that they are in 
the process of maximizing the company's worth. On the 
contrary, consciously, the managers say: "Let's maximize 
the benefits that we derive from this company, as long as 
we are still here." The entrepreneurs-owners say: "We 
cannot tolerate this stifling bureaucracy any longer. We 
prefer to have a smaller company - but all ours." The 
growth cycles forces the entrepreneurs to dilute their 
holdings (in order to raise the capital necessary to finance 
their initiatives). This dilution (the fracturing of the 
ownership structure) is what brings the last cycle to its 
end. The holdings of the entrepreneurs are too small to 
materialize a coup against the management. The 
management then prevails and the entrepreneurs are 
neutralized and move on to establish another start-up. The 
only thing that they leave behind them is their names and 
their heirs. 

We can use Game Theory methods to analyse both these 
situations. Wherever we have economic players 
bargaining for the allocation of scarce resources in order 
to attain their utility functions, to secure the outcomes and 
consequences (the value, the preference, that the player 
attaches to his outcomes) which are right for them - we 
can use Game Theory (GT). 

A short recap of the basic tenets of the theory might be in 
order. 



GT deals with interactions between agents, whether 
conscious and intelligent - or Dennettic. A Dennettic 
Agent (DA) is an agent that acts so as to influence the 
future allocation of resources, but does not need to be 
either conscious or deliberative to do so. A Game is the 
set of acts committed by 1 to n rational DA and one a- 
rational (not irrational but devoid of rationality) DA 
(nature, a random mechanism). At least 1 DA in a Game 
must control the result of the set of acts and the DAs must 
be (at least potentially) at conflict, whole or partial. This 
is not to say that all the DAs aspire to the same things. 
They have different priorities and preferences. They rank 
the likely outcomes of their acts differently. They engage 
Strategies to obtain their highest ranked outcome. A 
Strategy is a vector, which details the acts, with which the 
DA will react in response to all the (possible) acts by the 
other DAs. An agent is said to be rational if his Strategy 
does guarantee the attainment of his most preferred goal. 
Nature is involved by assigning probabilities to the 
outcomes. An outcome, therefore, is an allocation of 
resources resulting from the acts of the agents. An agent is 
said to control the situation if its acts matter to others to 
the extent that at least one of them is forced to alter at 
least one vector (Strategy). The Consequence to the agent 
is the value of a function that assigns real numbers to each 
of the outcomes. The consequence represents a list of 
outcomes, prioritized, ranked. It is also known as an 
ordinal utility function. If the function includes relative 
numerical importance measures (not only real numbers) - 
we call it a Cardinal Utility Function. 

Games, naturally, can consist of one player, two players 
and more than two players (n-players). They can be zero 
(or fixed) - sum (the sum of benefits is fixed and whatever 
gains made by one of the players are lost by the others). 



They can be nonzero- sum (the amount of benefits to all 
players can increase or decrease). Games can be 
cooperative (where some of the players or all of them 
form coalitions) - or non-cooperative (competitive). For 
some of the games, the solutions are called Nash 
equilibria. They are sets of strategies constructed so that 
an agent which adopts them (and, as a result, secures a 
certain outcome) will have no incentive to switch over to 
other strategies (given the strategies of all other players). 
Nash equilibria (solutions) are the most stable (it is where 
the system "settles down", to borrow from Chaos Theory) 
- but they are not guaranteed to be the most desirable. 
Consider the famous "Prisoners' Dilemma" in which both 
players play rationally and reach the Nash equilibrium 
only to discover that they could have done much better by 
collaborating (that is, by playing irrationally). Instead, 
they adopt the "Paretto-dominated", or the "Paretto- 
optimal", sub-optimal solution. Any outside interference 
with the game (for instance, legislation) will be construed 
as creating a NEW game, not as pushing the players to 
adopt a "Paretto-superior" solution. 

The behaviour of the players reveals to us their order of 
preferences. This is called "Preference Ordering" or 
"Revealed Preference Theory". Agents are faced with sets 
of possible states of the world (=allocations of resources, 
to be more economically inclined). These are called 
"Bundles". In certain cases they can trade their bundles, 
swap them with others. The evidence of these swaps will 
inevitably reveal to us the order of priorities of the agent. 
All the bundles that enjoy the same ranking by a given 
agent - are this agent's "Indifference Sets". The 
construction of an Ordinal Utility Function is, thus, made 
simple. The indifference sets are numbered from 1 to n. 
These ordinals do not reveal the INTENSITY or the 



RELATIVE INTENSITY of a preference - merely its 
location in a list. However, techniques are available to 
transform the ordinal utility function - into a cardinal one. 

A Stable Strategy is similar to a Nash solution - though 
not identical mathematically. There is currently no 
comprehensive theory of Information Dynamics. Game 
Theory is limited to the aspects of competition and 
exchange of information (cooperation). Strategies that 
lead to better results (independently of other agents) are 
dominant and where all the agents have dominant 
strategies - a solution is established. Thus, the Nash 
equilibrium is applicable to games that are repeated and 
wherein each agent reacts to the acts of other agents. The 
agent is influenced by others - but does not influence 
them (he is negligible). The agent continues to adapt in 
this way - until no longer able to improve his position. 
The Nash solution is less available in cases of cooperation 
and is not unique as a solution. In most cases, the players 
will adopt a minimax strategy (in zero- sum games) or 
maximin strategies (in nonzero-sum games). These 
strategies guarantee that the loser will not lose more than 
the value of the game and that the winner will gain at least 
this value. The solution is the "Saddle Point". 

The distinction between zero-sum games (ZSG) and 
nonzero-sum games (NZSG) is not trivial. A player 
playing a ZSG cannot gain if prohibited to use certain 
strategies. This is not the case in NZSGs. In ZSG, the 
player does not benefit from exposing his strategy to his 
rival and is never harmed by having foreknowledge of his 
rival's strategy. Not so in NZSGs: at times, a player stands 
to gain by revealing his plans to the "enemy". A player 
can actually be harmed by NOT declaring his strategy or 
by gaining acquaintance with the enemy's stratagems. The 



very ability to communicate, the level of communication 
and the order of communication - are important in 
cooperative cases. A Nash solution: 

1 . Is not dependent upon any utility function; 

2. It is impossible for two players to improve the 
Nash solution (=their position) simultaneously 
(=the Paretto optimality); 

3. Is not influenced by the introduction of irrelevant 
(not very gainful) alternatives; and 

4. Is symmetric (reversing the roles of the players 
does not affect the solution). 

The limitations of this approach are immediately evident. 
It is definitely not geared to cope well with more complex, 
multi -player, semi-cooperative (semi-competitive), 
imperfect information situations. 

Von Neumann proved that there is a solution for every 
ZSG with 2 players, though it might require the 
implementation of mixed strategies (strategies with 
probabilities attached to every move and outcome). 
Together with the economist Morgenstern, he developed 
an approach to coalitions (cooperative efforts of one or 
more players - a coalition of one player is possible). 
Every coalition has a value - a minimal amount that the 
coalition can secure using solely its own efforts and 
resources. The function describing this value is super- 
additive (the value of a coalition which is comprised of 
two sub-coalitions equals, at least, the sum of the values 
of the two sub-coalitions). Coalitions can be 
epiphenomenal: their value can be higher than the 
combined values of their constituents. The amounts paid 
to the players equal the value of the coalition and each 
player stands to get an amount no smaller than any 



amount that he would have made on his own. A set of 
payments to the players, describing the division of the 
coalition's value amongst them, is the "imputation", a 
single outcome of a strategy. A strategy is, therefore, 
dominant, if: (1) each player is getting more under the 
strategy than under any other strategy and (2) the players 
in the coalition receive a total payment that does not 
exceed the value of the coalition. Rational players are 
likely to prefer the dominant strategy and to enforce it. 
Thus, the solution to an n-players game is a set of 
imputations. No single imputation in the solution must be 
dominant (=better). They should all lead to equally 
desirable results. On the other hand, all the imputations 
outside the solution should be dominated. Some games are 
without solution (Lucas, 1967). 

Auman and Maschler tried to establish what is the right 
payoff to the members of a coalition. They went about it 
by enlarging upon the concept of bargaining (threats, 
bluffs, offers and counter-offers). Every imputation was 
examined, separately, whether it belongs in the solution 
(=yields the highest ranked outcome) or not, regardless of 
the other imputations in the solution. But in their theory, 
every member had the right to "object" to the inclusion of 
other members in the coalition by suggesting a different, 
exclusionary, coalition in which the members stand to 
gain a larger payoff. The player about to be excluded can 
"counter-argue" by demonstrating the existence of yet 
another coalition in which the members will get at least as 
much as in the first coalition and in the coalition proposed 
by his adversary, the "objector". Each coalition has, at 
least, one solution. 

The Game in GT is an idealized concept. Some of the 
assumptions can - and should be argued against. The 



number of agents in any game is assumed to be finite and 
a finite number of steps is mostly incorporated into the 
assumptions. Omissions are not treated as acts (though 
negative ones). All agents are negligible in their 
relationship to others (have no discernible influence on 
them) - yet are influenced by them (their strategies are not 
- but the specific moves that they select - are). The 
comparison of utilities is not the result of any ranking - 
because no universal ranking is possible. Actually, no 
ranking common to two or n players is possible (rankings 
are bound to differ among players). Many of the problems 
are linked to the variant of rationality used in GT. It is 
comprised of a clarity of preferences on behalf of the 
rational agent and relies on the people's tendency to 
converge and cluster around the right answer / move. 
This, however, is only a tendency. Some of the time, 
players select the wrong moves. It would have been much 
wiser to assume that there are no pure strategies, that all 
of them are mixed. Game Theory would have done well to 
borrow mathematical techniques from quantum 
mechanics. For instance: strategies could have been 
described as wave functions with probability distributions. 
The same treatment could be accorded to the cardinal 
utility function. Obviously, the highest ranking (smallest 
ordinal) preference should have had the biggest 
probability attached to it - or could be treated as the 
collapse event. But these are more or less known, even 
trivial, objections. Some of them cannot be overcome. We 
must idealize the world in order to be able to relate to it 
scientifically at all. The idealization process entails the 
incorporation of gross inaccuracies into the model and the 
ignorance of other elements. The surprise is that the 
approximation yields results, which tally closely with 
reality - in view of its mutilation, affected by the model. 



There are more serious problems, philosophical in nature. 

It is generally agreed that "changing" the game can - and 
very often does - move the players from a non- 
cooperative mode (leading to Paretto -dominated results, 
which are never desirable) - to a cooperative one. A 
government can force its citizens to cooperate and to obey 
the law. It can enforce this cooperation. This is often 
called a Hobbesian dilemma. It arises even in a population 
made up entirely of altruists. Different utility functions 
and the process of bargaining are likely to drive these 
good souls to threaten to become egoists unless other 
altruists adopt their utility function (their preferences, 
their bundles). Nash proved that there is an allocation of 
possible utility functions to these agents so that the 
equilibrium strategy for each one of them will be this kind 
of threat. This is a clear social Hobbesian dilemma: the 
equilibrium is absolute egoism despite the fact that all the 
players are altruists. This implies that we can learn very 
little about the outcomes of competitive situations from 
acquainting ourselves with the psychological facts 
pertaining to the players. The agents, in this example, are 
not selfish or irrational - and, still, they deteriorate in their 
behaviour, to utter egotism. A complete set of utility 
functions - including details regarding how much they 
know about one another's utility functions - defines the 
available equilibrium strategies. The altruists in our 
example are prisoners of the logic of the game. Only an 
"outside" power can release them from their predicament 
and permit them to materialize their true nature. Gauthier 
said that morally-constrained agents are more likely to 
evade Paretto-dominated outcomes in competitive games 
- than agents who are constrained only rationally. But this 
is unconvincing without the existence of an Hobesian 
enforcement mechanism (a state is the most common 



one). Players would do better to avoid Paretto dominated 
outcomes by imposing the constraints of such a 
mechanism upon their available strategies. Paretto 
optimality is defined as efficiency, when there is no state 
of things (a different distribution of resources) in which at 
least one player is better off - with all the other no worse 
off. "Better off" read: "with his preference satisfied". This 
definitely could lead to cooperation (to avoid a bad 
outcome) - but it cannot be shown to lead to the formation 
of morality, however basic. Criminals can achieve their 
goals in splendid cooperation and be content, but that does 
not make it more moral. Game theory is agent neutral, it is 
utilitarianism at its apex. It does not prescribe to the agent 
what is "good" - only what is "right". It is the ultimate 
proof that effort at reconciling utilitarianism with more 
deontological, agent relative, approaches are dubious, in 
the best of cases. Teleology, in other words, in no 
guarantee of morality. 

Acts are either means to an end or ends in themselves. 
This is no infinite regression. There is bound to be an holy 
grail (happiness?) in the role of the ultimate end. A more 
commonsense view would be to regard acts as means and 
states of affairs as ends. This, in turn, leads to a 
teleological outlook: acts are right or wrong in accordance 
with their effectiveness at securing the achievement of the 
right goals. Deontology (and its stronger version, 
absolutism) constrain the means. It states that there is a 
permitted subset of means, all the other being immoral 
and, in effect, forbidden. Game Theory is out to shatter 
both the notion of a finite chain of means and ends 
culminating in an ultimate end - and of the deontological 
view. It is consequentialist but devoid of any value 
judgement. 



Game Theory pretends that human actions are breakable 
into much smaller "molecules" called games. Human acts 
within these games are means to achieving ends but the 
ends are improbable in their finality. The means are 
segments of "strategies": prescient and omniscient 
renditions of the possible moves of all the players. Aside 
from the fact that it involves mnemic causation (direct and 
deterministic influence by past events) and a similar 
influence by the utility function (which really pertains to 
the future) - it is highly implausible. Additionally, Game 
Theory is mired in an internal contradiction: on the one 
hand it solemnly teaches us that the psychology of the 
players is absolutely of no consequence. On the other, it 
hastens to explicitly and axiomatically postulate their 
rationality and implicitly (and no less axiomatically) their 
benefit- seeking behaviour (though this aspect is much 
more muted). This leads to absolutely outlandish results: 
irrational behaviour leads to total cooperation, bounded 
rationality leads to more realistic patterns of cooperation 
and competition (coopetition) and an unmitigated rational 
behaviour leads to disaster (also known as Paretto 
dominated outcomes). 

Moreover, Game Theory refuses to acknowledge that real 
games are dynamic, not static. The very concepts of 
strategy, utility function and extensive (tree like) 
representation are static. The dynamic is retrospective, not 
prospective. To be dynamic, the game must include all the 
information about all the actors, all their strategies, all 
their utility functions. Each game is a subset of a higher 
level game, a private case of an implicit game which is 
constantly played in the background, so to say. This is a 
hyper-game of which all games are but derivatives. It 
incorporates all the physically possible moves of all the 
players. An outside agency with enforcement powers (the 



state, the police, the courts, the law) are introduced by the 
players. In this sense, they are not really an outside event 
which has the effect of altering the game fundamentally. 
They are part and parcel of the strategies available to the 
players and cannot be arbitrarily ruled out. On the 
contrary, their introduction as part of a dominant strategy 
will simplify Game theory and make it much more 
applicable. In other words: players can choose to compete, 
to cooperate and to cooperate in the formation of an 
outside agency. There is no logical or mathematical 
reason to exclude the latter possibility. The ability to thus 
influence the game is a legitimate part of any real life 
strategy. Game Theory assumes that the game is a given - 
and the players have to optimize their results within it. It 
should open itself to the inclusion of game altering or 
redefining moves by the players as an integral part of their 
strategies. After all, games entail the existence of some 
agreement to play and this means that the players accept 
some rules (this is the role of the prosecutor in the 
Prisoners' Dilemma). If some outside rules (of the game) 
are permissible - why not allow the "risk" that all the 
players will agree to form an outside, lawfully binding, 
arbitration and enforcement agency - as part of the game? 
Such an agency will be nothing if not the embodiment, the 
materialization of one of the rules, a move in the players' 
strategies, leading them to more optimal or superior 
outcomes as far as their utility functions are concerned. 
Bargaining inevitably leads to an agreement regarding a 
decision making procedure. An outside agency, which 
enforces cooperation and some moral code, is such a 
decision making procedure. It is not an "outside" agency 
in the true, physical, sense. It does not "alter" the game 
(not to mention its rules). It IS the game, it is a procedure, 
a way to resolve conflicts, an integral part of any solution 
and imputation, the herald of cooperation, a representative 



of some of the will of all the players and, therefore, a part 
both of their utility functions and of their strategies to 
obtain their preferred outcomes. Really, these outside 
agencies ARE the desired outcomes. Once Game Theory 
digests this observation, it could tackle reality rather than 
its own idealized contraptions. 

Return 



Market Impeders and 
Market Inefficiencies 



Even the most devout proponents of free marketry and 
hidden hand theories acknowledge the existence of market 
failures, market imperfections and inefficiencies in the 
allocation of economic resources. Some of these are the 
results of structural problems, others of an accumulation 
of historical liabilities. But, strikingly, some of the 
inefficiencies are the direct outcomes of the activities of 
"non bona fide" market participants. These "players" 
(individuals, corporations, even larger economic bodies, 
such as states) act either irrationally or egotistically (too 
rationally). 

What characterizes all those "market impeders" is that 
they are value sub tractors rather than value adders. Their 
activities generate a reduction, rather than an increase, in 
the total benefits (utilities) of all the other market players 
(themselves included). Some of them do it because they 
are after a self interest which is not economic (or, more 
strictly, financial). They sacrifice some economic benefits 
in order to satisfy that self interest (or, else, they could 
never have attained these benefits, in the first place). 
Others refuse to accept the self interest of other players as 
their limit. They try to maximize their benefits at any cost, 
as long as it is a cost to others. Some do so legally and 
some adopt shadier varieties of behaviour. And there is a 
group of parasites - participants in the market who feed 
off its very inefficiencies and imperfections and, by their 
very actions, enhance them. A vicious cycle ensues: the 
body economic gives rise to parasitic agents who thrive on 



its imperfections and lead to the amplification of the very 
impurities that they prosper on. 

We can distinguish six classes of market impeders: 

1 . Crooks and other illegal operators. These take 

advantage of ignorance, superstition, greed, avarice, 
emotional states of mind of their victims - to strike. They 
re-allocate resources from (potentially or actually) 
productive agents to themselves. Because they reduce the 
level of trust in the marketplace - they create negative 
added value. (See: "The Shadowy World of International 
Finance" and "The Fabric of Economic Trust") 

2. Illegitimate operators include those treading the 
thin line between legally permissible and ethically 
inadmissible. They engage in petty cheating 
through misrepresentations, half-truths, semi- 
rumours and the like. They are full of pretensions 
to the point of becoming impostors. They are 
wheeler-dealers, sharp-cookies, Daymon Ranyon 
characters, lurking in the shadows cast by the sun 
of the market. Their impact is to slow down the 
economic process through disinformation and the 
resulting misallocation of resources. They are the 
sand in the wheels of the economic machine. 

3. The "not serious" operators. These are people too 
hesitant, or phobic to commit themselves to the 
assumption of any kind of risk. Risk is the coal in 
the various locomotives of the economy, whether 
local, national, or global. Risk is being assumed, 
traded, diversified out of, avoided, insured against. 
It gives rise to visions and hopes and it is the most 
efficient "economic natural selection" mechanism. 



To be a market participant one must assume risk, it 
in an inseparable part of economic activity. 
Without it the wheels of commerce and finance, 
investments and technological innovation will 
immediately grind to a halt. But many operators 
are so risk averse that, in effect, they increase the 
inefficiency of the market in order to avoid it. 
They act as though they are resolute, risk assuming 
operators. They make all the right moves, utter all 
the right sentences and emit the perfect noises. But 
when push comes to shove - they recoil, retreat, 
defeated before staging a fight. Thus, they waste 
the collective resources of all that the operators 
that they get involved with. They are known to 
endlessly review projects, often change their 
minds, act in fits and starts, have the wrong 
priorities (for an efficient economic functioning, 
that is), behave in a self defeating manner, be 
horrified by any hint of risk, saddled and 
surrounded by every conceivable consultant, 
glutted by information. They are the stick in the 
spinning wheel of the modern marketplace. 

4. The former kind of operators obviously has a 
character problem. Yet, there is a more 
problematic species: those suffering from serious 
psychological problems, personality disorders, 
clinical phobias, psychoneuroses and the like. This 
human aspect of the economic realm has, to the 
best of my knowledge, been neglected before. 
Enormous amounts of time, efforts, money and 
energy are expended by the more "normal" - 
because of the "less normal" and the "eccentric". 
These operators are likely to regard the 
maintaining of their internal emotional balance as 



paramount, far over-riding economic 
considerations. They will sacrifice economic 
advantages and benefits and adversely affect their 
utility outcome in the name of principles, to quell 
psychological tensions and pressures, as part of 
obsessive-compulsive rituals, to maintain a false 
grandiose image, to go on living in a land of 
fantasy, to resolve a psychodynamic conflict and, 
generally, to cope with personal problems which 
have nothing to do with the idealized rational 
economic player of the theories. If quantified, the 
amounts of resources wasted in these coping 
manoeuvres is, probably, mind numbing. Many 
deals clinched are revoked, many businesses 
started end, many detrimental policy decisions 
adopted and many potentially beneficial situations 
avoided because of these personal upheavals. 

5. Speculators and middlemen are yet another 
species of parasites. In a theoretically totally 
efficient marketplace - there would have been no 
niche for them. They both thrive on information 
failures. The first kind engages in arbitrage 
(differences in pricing in two markets of an 
identical good - the result of inefficient 
dissemination of information) and in gambling. 
These are important and blessed functions in an 
imperfect world because they make it more 
perfect. The speculative activity equates prices 
and, therefore, sends the right signals to market 
operators as to how and where to most efficiently 
allocate their resources. But this is the passive 
speculator. The "active" speculator is really a 
market rigger. He corners the market by the 
dubious virtue of his reputation and size. He 



influences the market (even creates it) rather than 
merely exploit its imperfections. Soros and Buffet 
have such an influence though their effect is likely 
to be considered beneficial by unbiased observers. 
Middlemen are a different story because most of 
them belong to the active subcategory. This means 
that they, on purpose, generate market 
inconsistencies, inefficiencies and problems - only 
to solve them later at a cost extracted and paid to 
them, the perpetrators of the problem. Leaving 
ethical questions aside, this is a highly wasteful 
process. Middlemen use privileged information 
and access - whereas speculators use information 
of a more public nature. Speculators normally 
work within closely monitored, full disclosure, 
transparent markets. Middlemen thrive of 
disinformation, misinformation and lack of 
information. Middlemen monopolize their 
information - speculators share it, willingly or not. 
The more information becomes available to more 
users - the greater the deterioration in the 
resources consumed by brokers of information. 
The same process will likely apply to middlemen 
of goods and services. We are likely to witness the 
death of the car dealer, the classical retail outlet, 
the music records shop. For that matter, inventions 
like the internet is likely to short-circuit the whole 
distribution process in a matter of a few years. 

6. The last type of market impeders is well known 
and is the only one to have been tackled - with 
varying degrees of success by governments and by 
legislators worldwide. These are the trade 
restricting arrangements: monopolies, cartels, 
trusts and other illegal organizations. Rivers of 



inks were spilled over forests of paper to explain 
the pernicious effects of these anti-competitive 
practices (see: "Competition Laws") . The short 
and the long of it is that competition enhances and 
increases efficiency and that, therefore, anything 
that restricts competition, weakens and lessens 
efficiency. 

What could anyone do about these inefficiencies? The 
world goes in circles of increasing and decreasing free 
marketry. The globe was a more open, competitive and, in 
certain respects, efficient place at the beginning of the 20 th 
century than it is now. Capital flowed more freely and so 
did labour. Foreign Direct Investment was bigger. The 
more efficient, "friction free" the dissemination of 
information (the ultimate resource) - the less waste and 
the smaller the lebensraum for parasites. The more 
adherence to market, price driven, open auction based, 
meritocratic mechanisms - the less middlemen, 
speculators, bribers, monopolies, cartels and trusts. The 
less political involvement in the workings of the market 
and, in general, in what consenting adults conspire to do 
that is not harmful to others - the more efficient and 
flowing the economic ambience is likely to become. 

This picture of "laissez faire, laissez aller" should be 
complimented by even stricter legislation coupled with 
effective and draconian law enforcement agents and 
measures. The illegal and the illegitimate should be 
stamped out, cruelly. Freedom to all - is also freedom 
from being conned or hassled. Only when the righteous 
freely prosper and the less righteous excessively suffer - 
only then will we have entered the efficient kingdom of 
the free market. 



This still does not deal with the "not serious" and the 
"personality disordered". What about the inefficient havoc 
that they wreak? This, after all, is part of what is known, 
in legal parlance as: "force majeure". 

Note 

There is a raging debate between the "rational 
expectations" theory and the "prospect theory". The 
former - the cornerstone of rational economics - assumes 
that economic (human) players are rational and out to 
maximize their utility (see: "The Happiness of Others" , 
"The Egotistic Friend" and "The Distributive Justice of 
the Market" ). Even ignoring the fuzzy logic behind the ill- 
defined philosophical term "utility" - rational economics 
has very little to do with real human being and a lot to do 
with sterile (though mildly useful) abstractions. Prospect 
theory builds on behavioural research in modern 
psychology which demonstrates that people are more loss 
averse than gain seekers (utility maximizers). Other 
economists have succeeded to demonstrate irrational 
behaviours of economic actors (heuristics, dissonances, 
biases, magical thinking and so on). 

The apparent chasm between the rational theories 
(efficient markets, hidden hands and so on) and 
behavioural economics is the result of two philosophical 
fallacies which, in turn, are based on the misapplication 
and misinterpretation of philosophical terms. 

The first fallacy is to assume that all forms of utility are 
reducible to one another or to money terms. Thus, the 
values attached to all utilities are expressed in monetary 
terms. This is wrong. Some people prefer leisure, or 
freedom, or predictability to expected money. This is the 



very essence of risk aversion: a trade off between the 
utility of predictability (absence or minimization of risk) 
and the expected utility of money. In other words, people 
have many utility functions running simultaneously - or, 
at best, one utility function with many variables and 
coefficients. This is why taxi drivers in New York cease 
working in a busy day, having reached a pre-determined 
income target: the utility function of their money equals 
the utility function of their leisure. 

How can these coefficients (and the values of these 
variables) be determined? Only by engaging in extensive 
empirical research. There is no way for any theory or 
"explanation" to predict these values. We have yet to 
reach the stage of being able to quantify, measure and 
numerically predict human behaviour and personality 
(=the set of adaptive traits and their interactions with 
changing circumstances). That economics is a branch of 
psychology is becoming more evident by the day. It 
would do well to lose its mathematical pretensions and 
adopt the statistical methods of its humbler relative. 

The second fallacy is the assumption underlying both 
rational and behavioural economics that human nature is 
an "object" to be analysed and "studied", that it is static 
and unchanged. But, of course, humans change 
inexorably. This is the only fixed feature of being human: 
change. Some changes are unpredictable, even in 
deterministic principle. Other changes are well 
documented. An example of the latter class of changes in 
the learning curve. Humans learn and the more they learn 
the more they alter their behaviour. So, to obtain any 
meaningful data, one has to observe behaviour in time, to 
obtain a sequence of reactions and actions. To isolate, 
observe and manipulate environmental variables and 



study human interactions. No snapshot can approximate a 
video sequence where humans are concerned. 

Return 



The Pettifogger Procurators 
Diplomats in Post-Communist Countries 



In 2001, the most unusual event has gone unnoticed in the 
international press. A former minister of finance has 
accused the more prominent members of the diplomatic 
corps in his country of corruption. He insisted that these 
paragons of indignant righteousness and hectoring 
morality have tried to blackmail him into paying them 
hefty commissions from money allotted to exigent 
humanitarian aid. This was immediately and from afar - 
and, therefore, without proper investigation - denied by 
their superiors in no uncertain terms. 

The facts are these: most (though by no means all) 
Western diplomats in the nightmarish wasteland that is 
East Europe and the Balkan, the unctuously fulsome and 
the frowzily wizened alike, are ageing and sybaritic basket 
cases. They have often failed miserably in their bootless 
previous posts - or have insufficiently submerged in the 
Byzantine culture of their employers. Thus emotionally 
injured and cast into the frigorific outer darkness of a 
ravaged continent, they adopt the imperial patina of 
Roman procurators in narcissistic compensation. Their 
long suffering wives - bored to distraction in the 
impassibly catatonic societies of post communism - 
impose upon a reluctant and flummoxed population the 
nescient folderol of their distaff voluntary urges or 
exiguous artistic talents. Ever more crapulous, they 
aestivate and hibernate, the queens of tatty courts and 
shabby courtiers. 



The cold war having ebbed, these emissaries of 
questionable provenance engage in the promotion of the 
narrow interests of specific industries or companies. They 
lobby the local administration, deploying bare threats and 
obloquies where veiled charm fails. They exert subtle or 
brutal pressure through the press. They co-opt name- 
dropping bureaucrats and bribe pivotal politicians. They 
get fired those who won't collaborate or threaten to expose 
their less defensible misdeeds. They are glorified delivery 
boys, carrying apocryphal messages to and fro. They are 
bloviating PR campaigners, seeking to aggrandize their 
meagre role and, incidentally, that of their country. They 
wine and dine and banter endlessly with the provincial 
somnolent variety of public figures, members of the venal 
and pinchbeck elites that now rule these tortured 
territories. In short - forced to deal with the bedizened 
miscreants that pass for businessmen and politicians in 
this nether world - they are transformed, assuming in the 
process the identity of their obdurately corrupted hosts. 

Thus, they help to sway elections and hasten to endorse 
their results, however disputed and patently fraudulent. 
They intimidate the opposition, negotiate with 
businessmen, prod favoured politicians, spread roorbacks 
and perambulate their fiefdom to gather intelligence. 
More often than not, they cross the limpid lines between 
promotion and extortion, lagniappe and pelf, friendship 
and collusion, diplomacy and protectorate, the kosher and 
the criminal. 

They are the target and the address of a legion of 
pressures and demands. Their government may ask them 
to help depose one coalition and help install another. 
Their secret services - disguised as intrusive NGOs or 
workers at the embassy - often get them involved in shady 



acts and unscrupulous practices. Real NGOs ask for their 
assiduous assistance and protection. Their hosts - and 
centuries old protocol - expect them to surreptitiously 
provide support while openly refrain from intervening, 
maintaining equipoise. Other countries protest, compete, 
or leak damaging reports to an often hostile media. The 
torpid common folk resent them for their colonial ways 
and hypocritical demarches. Lacking compunction, they 
are nobody's favourites and everybody's scapegoats at one 
time or another. 

And they are ill-equipped to deal with these subtleties. 
Not of intelligence, they end where they now are and wish 
they weren't. Ignorant of business and entrepreneur ship, 
they occupy the dead end, otiose and pension-orientated 
jobs they do. Devoid of the charm, negotiating skills and 
human relations required by the intricacies of their 
profession - they are relegated to the Augean outskirts of 
civilization. Dishonest and mountebank, they persist in 
their mortifying positions, inured to the conniving they 
require. 

This blatantly discernible ineptitude provokes the 
"natives" into a wholesale rejection of the West, its values 
and its culture. The envoys are perceived as the cormorant 
reification of their remote controllers. Their voluptuary 
decadence is a distant echo of the West's decay, their 
nonage greed - a shadow of its avarice, their effrontery 
and hidebound peremptory nature - its mien. They are in 
no position to preach or teach. 

The diplomats of the West are not evil. Some of them 
mean well. To the best of their oft limited abilities, they 
cadge and beg and press and convince their governments 
to show goodwill and to contribute to their hosts. But soon 



their mettle is desiccated by the vexatious realities of their 
new habitation. Reduced to susurrus cynicism and 
sardonic contempt, they perfunctorily perform their 
functions, a distant look in their now empty eyes. They 
have been assimilated, rendered useless to their 
dispatchers and to their hosts alike. 

Return 



Microsoft's Third Front 
The Intellectual Property Wars 



Elated investors greeted chairman Bill Gates and chief 
executive officer Steve Ballmer for Microsoft's victory in 
the titanic antitrust lawsuit brought against it by the 
Department of Justice and assorted state attorneys general. 
They also demanded that Microsoft distribute its pile of 
cash - $40 billion in monopoly profits - as dividends. 

But Microsoft may need that hoard. The battle is far from 
over. The European Commission, though much weakened 
by recent European Court of First Instance rulings against 
its competition commissioner, Mario Monti, can fine the 
company up to one tenth its worldwide turnover if it finds 
against it. Microsoft is being investigated by the European 
watchdog for anti-competitive practices now threatening 
to spread into the high-end server software and digital 
media markets. 

But the software colossus faces an even more daunting 
third front in central and eastern Europe and Asia. It is the 
war against piracy. Both its operating system, Windows, 
and its office productivity suite, Office, are widely 
cracked and replicated throughout these regions. 

Three years ago, Microsoft negotiated a $3 million 
settlement with the government of Macedonia, one of the 
single largest abusers of intellectual property rights in this 
tiny country. More than 1 percent of Macedonia's GDP is 
said by various observers to be derived from software and 
digital content piracy. 



According to Yugoslavia's news agency, Tanjug, The 
governments of Serbia and Yugoslavia purchased, last 
month, 30,000 software licenses from the Redmond giant. 
Another 10-15,000 are in the pipeline. Aleksandar 
Bojovic, public relations manager of Microsoft's 
representative office in Belgrade was ebullient: 

"Before the signing of an agreement on a strategic 
partnership with authorities of Yugoslavia and Serbia, the 
percentage of legal software used by the citizens and 
industry of Serbia and Montenegro was only a few 
percents. Presently it is about 20 percents. Microsoft is 
more than surprised at the interest for legalization that 
exists in Yugoslavia." 

According to the Yugoslav newspaper Danas, Microsoft 
Yugoslavia has developed versions of Windows and 
Office in Serbian, replete with a spell-checker. There are 
c. 1 million computers in Yugoslavia. The company 
undertook, last year, to revamp the Yugoslav labyrinthine 
health, education, customs and tax systems. It also sent 
representatives to a delegation of businessmen that visited 
Bosnia-Herzegovina in February. 

Microsoft obstinately refused to price its products 
differentially - to charge less in poorer markets. The 
Office suite costs the equivalent of 6 weeks of the average 
wage in Macedonia and a whopping 3 months' wages in 
Serbia. This extortionate pricing gave rise to resentment 
and thriving markets in pilfered Microsoft applications. 
Pirated software costs between $1.5 per compact disk in 
Macedonia and $3 in Moscow's immense open-air 
Gorbushka market. 



According to the Russia-based Compulog Computer 
Consultants, quoted by USA Today, most communist 
states maintained large-scale hacking operations involving 
not only the security services, but also the computers and 
electrical engineering departments of universities and 
prestigious research institutes. American bans on the sale 
of certain software applications - such as computer-aided 
design and encryption - fostered the emergence of an 
officially-sanctioned subculture of crackers and pirates. 

In the last few years, Russian organized crime has evolved 
to incorporate computer fraud, identity theft, piracy of 
software and digital media and other related offenses. The 
Russian mafia employs programmers and graduates of 
computer sciences. The British Daily Express reported in 
September that - probably Russian - hackers broke into 
Microsoft's computer network and absconded with 
invaluable source codes. These are believed to be now 
also in the possession of the FSB, the chief successor to 
Russia's notorious KGB. 

The Business Software Alliance, a United States based 
trade group, claims that 87-92 percent of all business 
computer programs used in Russia are bootlegged - a 
piracy rate second only to China's. Microsoft sells c. $80- 
100 million a year in the Russian Federation and the CIS. 
Had it not been for piracy, its revenues could have 
climbed well above the $1 billion mark. 

According to Moscow Times and RosBalt, Microsoft's 
sales in Russia almost doubled in the last 12 months and it 
has decided to expand into the regions outlying Moscow 
and into Kazakhstan and Ukraine. Yet, the company's 
attempts to stamp out illicit copying in the last years of 
Russian president Boris Yeltsin's regime - including a 



much publicized visit by Bill Gates and a series of 
televised raids on disk stamping factories - floundered and 
yielded a wave of xenophobic indignation. 

Still, central and eastern Europe is a natural growth 
market for the likes of Microsoft. The region is awash 
with highly qualified, talented, and - by Western measure 
- sinfully cheap experts. Purchasing power has increased 
precipitously in countries like the Czech Republic, 
Hungary, Slovakia, Slovenia, parts of Russia, and Croatia. 
Both governments and businesses are at the initial stages 
of investing in information technology infrastructure. 
Technological leapfrogging rendered certain countries 
here more advanced than the West in terms of broadband 
and wireless networks. 

Return 



NGOs - The Self-Appointed Altruists 



Their arrival portends rising local prices and a culture 
shock. Many of them live in plush apartments, or five star 
hotels, drive SUV's, sport $3000 laptops and PDA's. They 
earn a two figure multiple of the local average wage. They 
are busybodies, preachers, critics, do-gooders, and 
professional altruists. 

Always self-appointed, they answer to no constituency. 
Though unelected and ignorant of local realities, they 
confront the democratically chosen and those who voted 
them into office. A few of them are enmeshed in crime 
and corruption. They are the non-governmental 
organizations, or NGO's. 

Some NGO's - like Oxfam, Human Rights Watch, 
Medecins Sans Frontieres, or Amnesty - genuinely 
contribute to enhancing welfare, to the mitigation of 
hunger, the furtherance of human and civil rights, or the 
curbing of disease. Others - usually in the guise of think 
tanks and lobby groups - are sometimes ideologically 
biased, or religiously-committed and, often, at the service 
of special interests. 

NGO's - such as the International Crisis Group - have 
openly interfered on behalf of the opposition in the last 
parliamentary elections in Macedonia. Other NGO's have 
done so in Belarus and Ukraine, Zimbabwe and Israel, 
Nigeria and Thailand, Slovakia and Hungary - and even in 
Western, rich, countries including the USA, Canada, 
Germany, and Belgium. 



The encroachment on state sovereignty of international 
law - enshrined in numerous treaties and conventions - 
allows NGO's to get involved in hitherto strictly domestic 
affairs like corruption, civil rights, the composition of the 
media, the penal and civil codes, environmental policies, 
or the allocation of economic resources and of natural 
endowments, such as land and water. No field of 
government activity is now exempt from the glare of 
NGO's. They serve as self-appointed witnesses, judges, 
jury and executioner rolled into one. 

Regardless of their persuasion or modus operandi, all 
NGO's are top heavy with entrenched, well-remunerated, 
extravagantly-perked bureaucracies. Opacity is typical of 
NGO's. Amnesty's rules prevent its officials from publicly 
discussing the inner workings of the organization - 
proposals, debates, opinions - until they have become 
officially voted into its Mandate. Thus, dissenting views 
rarely get an open hearing. 

Contrary to their teachings, the financing of NGO's is 
invariably obscure and their sponsors unknown. The bulk 
of the income of most non-governmental organizations, 
even the largest ones, comes from - usually foreign - 
powers. Many NGO's serve as official contractors for 
governments. 

NGO's serve as long arms of their sponsoring states - 
gathering intelligence, burnishing their image, and 
promoting their interests. There is a revolving door 
between the staff of NGO's and government bureaucracies 
the world over. The British Foreign Office finances a host 
of NGO's - including the fiercely "independent" Global 
Witness - in troubled spots, such as Angola. Many host 



governments accuse NGO's of - unwittingly or knowingly 
- serving as hotbeds of espionage. 

Very few NGO's derive some of their income from public 
contributions and donations. The more substantial NGO's 
spend one tenth of their budget on PR and solicitation of 
charity. In a desperate bid to attract international attention, 
so many of them lied about their projects in the Rwanda 
crisis in 1994, recounts "The Economist", that the Red 
Cross felt compelled to draw up a ten point mandatory 
NGO code of ethics. A code of conduct was adopted in 
1995. But the phenomenon recurred in Kosovo. 

All NGO's claim to be not for profit - yet, many of them 
possess sizable equity portfolios and abuse their position 
to increase the market share of firms they own. Conflicts 
of interest and unethical behavior abound. 

Cafedirect is a British firm committed to "fair trade" 
coffee. Oxfam, an NGO, embarked, three years ago, on a 
campaign targeted at Cafedirect's competitors, accusing 
them of exploiting growers by paying them a tiny fraction 
of the retail price of the coffee they sell. Yet, Oxfam owns 
25% of Cafedirect. 

Large NGO's resemble multinational corporations in 
structure and operation. They are hierarchical, maintain 
large media, government lobbying, and PR departments, 
head-hunt, invest proceeds in professionally-managed 
portfolios, compete in government tenders, and own a 
variety of unrelated businesses. The Aga Khan Fund for 
Economic Development owns the license for second 
mobile phone operator in Afghanistan - among other 
businesses. In this respect, NGO's are more like cults than 
like civic organizations. 



Many NGO's promote economic causes - anti- 
globalization, the banning of child labor, the relaxing of 
intellectual property rights, or fair payment for 
agricultural products. Many of these causes are both 
worthy and sound. Alas, most NGO's lack economic 
expertise and inflict damage on the alleged recipients of 
their beneficence. NGO's are at times manipulated by - or 
collude with - industrial groups and political parties. 

It is telling that the denizens of many developing countries 
suspect the West and its NGO's of promoting an agenda of 
trade protectionism. Stringent - and expensive - labor and 
environmental provisions in international treaties may 
well be a ploy to fend off imports based on cheap labor 
and the competition they wreak on well-ensconced 
domestic industries and their political stooges. 

Take child labor - as distinct from the universally 
condemnable phenomena of child prostitution, child 
soldiering, or child slavery. 

Child labor, in many destitute locales, is all that separates 
the family from all-pervasive, life threatening, poverty. As 
national income grows, child labor declines. Following 
the outcry provoked, in 1995, by NGO's against soccer 
balls stitched by children in Pakistan, both Nike and 
Reebok relocated their workshops and sacked countless 
women and 7000 children. The average family income - 
anyhow meager - fell by 20 percent. 



This affair elicited the following wry commentary from 
economists Drusilla Brown, Alan Deardorif, and Robert 
Stern: 

"While Baden Sports can quite credibly claim that their 
soccer balls are not sewn by children, the relocation of 
their production facility undoubtedly did nothing for their 
former child workers and their families." 

This is far from being a unique case. Threatened with 
legal reprisals and "reputation risks" (being named-and- 
shamed by overzealous NGO's) - multinationals engage in 
preemptive sacking. More than 50,000 children in 
Bangladesh were let go in 1993 by German garment 
factories in anticipation of the American never-legislated 
Child Labor Deterrence Act. 

Former Secretary of Labor, Robert Reich, observed: 

"Stopping child labor without doing anything else could 
leave children worse off. If they are working out of 
necessity, as most are, stopping them could force them 
into prostitution or other employment with greater 
personal dangers. The most important thing is that they be 
in school and receive the education to help them leave 
poverty." 

NGO-fostered hype notwithstanding, 70% of all children 
work within their family unit, in agriculture. Less than 1 
percent are employed in mining and another 2 percent in 



construction. Again contrary to NGO-proffered panaceas, 
education is not a solution. Millions graduate every year 
in developing countries - 100,000 in Morocco alone. But 
unemployment reaches more than one third of the 
workforce in places such as Macedonia. 

Children at work may be harshly treated by their 
supervisors but at least they are kept off the far more 
menacing streets. Some kids even end up with a skill and 
are rendered employable. 

"The Economist" sums up the shortsightedness, 
inaptitude, ignorance, and self-centeredness of NGO's 
neatly: 

"Suppose that in the remorseless search for profit, 
multinationals pay sweatshop wages to their workers in 
developing countries. Regulation forcing them to pay 
higher wages is demanded... The NGOs, the reformed 
multinationals and enlightened rich-country governments 
propose tough rules on third-world factory wages, backed 
up by trade barriers to keep out imports from countries 
that do not comply. Shoppers in the West pay more - but 
willingly, because they know it is in a good cause. The 
NGOs declare another victory. The companies, having 
shafted their third-world competition and protected their 
domestic markets, count their bigger profits (higher wage 
costs notwithstanding). And the third- world workers 
displaced from locally owned factories explain to their 
children why the West's new deal for the victims of 
capitalism requires them to starve." 

NGO's in places like Sudan, Somalia, Myanmar, 
Bangladesh, Pakistan, Albania, and Zimbabwe have 
become the preferred venue for Western aid - both 



humanitarian and financial - development financing, and 
emergency relief. According to the Red Cross, more 
money goes through NGO's than through the World Bank. 
Their iron grip on food, medicine, and funds rendered 
them an alternative government - sometimes as venal and 
graft- stricken as the one they replace. 

Local businessmen, politicians, academics, and even 
journalists form NGO's to plug into the avalanche of 
Western largesse. In the process, they award themselves 
and their relatives with salaries, perks, and preferred 
access to Western goods and credits. NGO's have evolved 
into vast networks of patronage in Africa, Latin America, 
and Asia. 

NGO's chase disasters with a relish. More than 200 of 
them opened shop in the aftermath of the Kosovo refugee 
crisis in 1999-2000. Another 50 supplanted them during 
the civil unrest in Macedonia a year later. Floods, 
elections, earthquakes, wars - constitute the cornucopia 
that feed the NGO's. 

NGO's are proponents of Western values - women's lib, 
human rights, civil rights, the protection of minorities, 
freedom, equality. Not everyone finds this liberal menu 
palatable. The arrival of NGO's often provokes social 
polarization and cultural clashes. Traditionalists in 
Bangladesh, nationalists in Macedonia, religious zealots 
in Israel, security forces everywhere, and almost all 
politicians find NGO's irritating and bothersome. 

The British government ploughs well over $30 million a 
year into "Proshika", a Bangladeshi NGO. It started as a 
women's education outfit and ended up as a restive and 
aggressive women empowerment political lobby group 



with budgets to rival many ministries in this 
impoverished, Moslem and patriarchal country. 

Other NGO's - fuelled by $300 million of annual foreign 
infusion - evolved from humble origins to become mighty 
coalitions of full-time activists. NGO's like the 
Bangladesh Rural Advancement Committee (BRAC) and 
the Association for Social Advancement mushroomed 
even as their agendas have been fully implemented and 
their goals exceeded. It now owns and operates 30,000 
schools. 

This mission creep is not unique to developing countries. 
As Parkinson discerned, organizations tend to self- 
perpetuate regardless of their proclaimed charter. 
Remember NATO? Human rights organizations, like 
Amnesty, are now attempting to incorporate in their ever- 
expanding remit "economic and social rights" - such as 
the rights to food, housing, fair wages, potable water, 
sanitation, and health provision. How insolvent countries 
are supposed to provide such munificence is conveniently 
overlooked. 

"The Economist" reviewed a few of the more egregious 
cases of NGO imperialism. 

Human Rights Watch lately offered this tortured argument 
in favor of expanding the role of human rights NGO's: 
"The best way to prevent famine today is to secure the 
right to free expression - so that misguided government 
policies can be brought to public attention and corrected 
before food shortages become acute." It blatantly ignored 
the fact that respect for human and political rights does 
not fend off natural disasters and disease. The two 



countries with the highest incidence of AIDS are Africa's 
only two true democracies - Botswana and South Africa. 

The Centre for Economic and Social Rights, an American 
outfit, "challenges economic injustice as a violation of 
international human rights law". Oxfam pledges to 
support the "rights to a sustainable livelihood, and the 
rights and capacities to participate in societies and make 
positive changes to people's lives". In a poor attempt at 
emulation, the WHO published an inanely titled document 
- "A Human Rights Approach to Tuberculosis". 

NGO's are becoming not only all-pervasive but more 
aggressive. In their capacity as "shareholder activists", 
they disrupt shareholders meetings and act to actively 
tarnish corporate and individual reputations. Friends of 
the Earth worked hard four years ago to instigate a 
consumer boycott against Exxon Mobil - for not investing 
in renewable energy resources and for ignoring global 
warming. No one - including other shareholders - 
understood their demands. But it went down well with the 
media, with a few celebrities, and with contributors. 

As "think tanks", NGO's issue partisan and biased reports. 
The International Crisis Group published a rabid attack on 
the then incumbent government of Macedonia, days 
before an election, relegating the rampant corruption of its 
predecessors - whom it seemed to be tacitly supporting - 
to a few footnotes. On at least two occasions - in its 
reports regarding Bosnia and Zimbabwe - ICG has 
recommended confrontation, the imposition of sanctions, 
and, if all else fails, the use of force. Though the most 
vocal and visible, it is far from being the only NGO that 
advocates "just" wars . 



The ICG is a repository of former heads of state and has- 
been politicians and is renowned (and notorious) for its 
prescriptive - some say meddlesome - philosophy and 
tactics. "The Economist" remarked sardonically: "To say 
(that ICG) is 'solving world crises' is to risk 
underestimating its ambitions, if overestimating its 
achievements." 

NGO's have orchestrated the violent showdown during the 
trade talks in Seattle in 1999 and its repeat performances 
throughout the world. The World Bank was so intimidated 
by the riotous invasion of its premises in the NGO- 
choreographed "Fifty Years is Enough" campaign of 
1994, that it now employs dozens of NGO activists and let 
NGO's determine many of its policies. 

NGO activists have joined the armed - though mostly 
peaceful - rebels of the Chiapas region in Mexico. 
Norwegian NGO's sent members to forcibly board 
whaling ships. In the USA, anti-abortion activists have 
murdered doctors. In Britain, animal rights zealots have 
both assassinated experimental scientists and wrecked 
property. 

Birth control NGO's carry out mass sterilizations in poor 
countries, financed by rich country governments in a bid 
to stem immigration. NGO's buy slaves in Sudan thus 
encouraging the practice of slave hunting throughout sub- 
Saharan Africa. Other NGO's actively collaborate with 
"rebel" armies - a euphemism for terrorists. 

NGO's lack a synoptic view and their work often 
undermines efforts by international organizations such as 
the UNHCR and by governments. Poorly-paid local 
officials have to contend with crumbling budgets as the 



funds are diverted to rich expatriates doing the same job 
for a multiple of the cost and with inexhaustible hubris. 

This is not conducive to happy co-existence between 
foreign do-gooders and indigenous governments. 
Sometimes NGO's seem to be an ingenious ploy to solve 
Western unemployment at the expense of down-trodden 
natives. This is a misperception driven by envy and 
avarice. 

But it is still powerful enough to foster resentment and 
worse. NGO's are on the verge of provoking a ruinous 
backlash against them in their countries of destination. 
That would be a pity. Some of them are doing 
indispensable work. If only they were a wee more 
sensitive and somewhat less ostentatious. But then they 
wouldn't be NGO's, would they? 



Interview granted to Revista Terra , Brazil, September 
2005 

Q. NGOs are growing quickly in Brazil due to the 
discredit politicians and governmental institutions face 
after decades of corruption, elitism etc. The young 
people feel they can do something concrete working as 
activists in a NGOs. Isn 't that a good thing? What kind 
of dangers someone should be aware before enlisting 
himself as a supporter of a NGO? 

A. One must clearly distinguish between NGOs in the 
sated, wealthy, industrialized West - and (the far more 



numerous) NGOs in the developing and less developed 
countries. 

Western NGOs are the heirs to the Victorian tradition of 
"White Man's Burden". They are missionary and charity- 
orientated. They are designed to spread both aid (food, 
medicines, contraceptives, etc.) and Western values. They 
closely collaborate with Western governments and 
institutions against local governments and institutions. 
They are powerful, rich, and care less about the welfare of 
the indigenous population than about "universal" 
principles of ethical conduct. 

Their counterparts in less developed and in developing 
countries serve as substitutes to failed or dysfunctional 
state institutions and services. They are rarely concerned 
with the furthering of any agenda and more preoccupied 
with the well-being of their constituents, the people. 

Q. Why do you think many NGO activists are narcissists 
and not altruists? What are the symptoms you identify 
on them? 

A. In both types of organizations - Western NGOs and 
NGOs elsewhere - there is a lot of waste and corruption, 
double-dealing, self-interested promotion, and, sometimes 
inevitably, collusion with unsavory elements of society. 
Both organizations attract narcissistic opportunists who 
regards NGOs as venues of upward social mobility and 
self-enrichment. Many NGOs serve as sinecures, 
"manpower sinks", or "employment agencies" - they 
provide work to people who, otherwise, are 
unemployable. Some NGOs are involved in political 
networks of patronage, nepotism, and cronyism. 



Narcissists are attracted to money, power, and glamour. 
NGOs provide all three. The officers of many NGOs draw 
exorbitant salaries (compared to the average salary where 
the NGO operates) and enjoy a panoply of work-related 
perks. Some NGOs exert a lot of political influence and 
hold power over the lives of millions of aid recipients. 
NGOs and their workers are, therefore, often in the 
limelight and many NGO activists have become minor 
celebrities and frequent guests in talk shows and such. 
Even critics of NGOs are often interviewed by the media 
(laughing). 

Finally, a slim minority of NGO officers and workers are 
simply corrupt. They collude with venal officials to enrich 
themselves. For instance: during the Kosovo crisis in 
1999, NGO employees sold in the open market food, 
blankets, and medical supplies intended for the refugees. 

Q. How can one choose between good and bad NGOs? 

A. There are a few simple tests: 

1. What part of the NGOs budget is spent on salaries and 
perks for the NGOs officers and employees? The less the 
better. 

2. Which part of the budget is spent on furthering the aims 
of the NGO and on implementing its promulgated 
programs? The more the better. 

3. What portion of the NGOs resources is allocated to 
public relations and advertising? The less the better. 

4. What part of the budget is contributed by governments, 
directly or indirectly? The less the better. 



5. What do the alleged beneficiaries of the NGO's 
activities think of the NGO? If the NGO is feared, 
resented, and hated by the local denizens, then something 
is wrong! 

6. How many of the NGO's operatives are in the field, 
catering to the needs of the NGO's ostensible 
constituents? The more the better. 

7. Does the NGO own or run commercial enterprises? If it 
does, it is a corrupt and compromised NGO involved in 
conflicts of interest. 

Q. The way you describe, many NGO are already more 
powerful and politically influential than many 
governments. What kind of dangers this elicits? Do you 
think they are a pest that need control? What kind of 
control would that be? 

A. The voluntary sector is now a cancerous phenomenon. 
NGOs interfere in domestic politics and take sides in 
election campaigns. They disrupt local economies to the 
detriment of the impoverished populace. They impose 
alien religious or Western values. They justify military 
interventions. They maintain commercial interests which 
compete with indigenous manufacturers. They provoke 
unrest in many a place. And this is a partial list. 

The trouble is that, as opposed to most governments in the 
world, NGOs are authoritarian. They are not elected 
institutions. They cannot be voted down. The people have 
no power over them. Most NGOs are ominously and 
tellingly secretive about their activities and finances. 



Light disinfects. The solution is to force NGOs to become 
both democratic and accountable. All countries and 
multinational organizations (such as the UN) should pass 
laws and sign international conventions to regulate the 
formation and operation of NGOs. 

NGOs should be forced to democratize. Elections should 
be introduced on every level. All NGOs should hold 
"annual stakeholder meetings" and include in these 
gatherings representatives of the target populations of the 
NGOs. NGO finances should be made completely 
transparent and publicly accessible. New accounting 
standards should be developed and introduced to cope 
with the current pecuniary opacity and operational double- 
speak of NGOs. 

Q. It seems that many values carried by NGO are 
typically modern and Western. What kind of problems 
this creates in more traditional and culturally different 
countries? 

A. Big problems. The assumption that the West has the 
monopoly on ethical values is undisguised cultural 
chauvinism. This arrogance is the 21st century equivalent 
of the colonialism and racism of the 19th and 20th 
century. Local populations throughout the world resent 
this haughty presumption and imposition bitterly. 

As you said, NGOs are proponents of modern Western 
values - democracy, women's lib, human rights, civil 
rights, the protection of minorities, freedom, equality. Not 
everyone finds this liberal menu palatable. The arrival of 
NGOs often provokes social polarization and cultural 
clashes. Return 



Quis Custodiet Ipsos Custodes? 



Who is Guarding the Guards in Countries in Transition 
from Communism? 



Written: August 23, 1999 

Izetbegovic, the nominal president of the nominal Bosnian 
state, the darling of the gullible western media, denies that 
he and his cronies and his cronies' cronies stole 40% of all 
civilian aid targeted at Bosnia - a minor matter of 1 billion 
US dollars and change, in less than 4 years. The tribes of 
the Balkans stop bleeding each other to death only when 
they gang up to bleed another. In this, there are no races 
and no traces - everyone is equal under the sign of the 
dollar. Serbs, Bosnians and Croats divided the loot with 
the loftiest of egalitarian instincts. Honour among thieves 
transformed into honour among victims and their 
murderers. Mammon is the only real authority in this god 
forsaken, writhing rump of a country. 

And not only there. 

In Russia, billions (3 to 5) were transferred to secret off 
shore bank accounts to be "portfolio managed" by 
mysterious fly-by-night entities. Many paid with their jobs 
when the trail led to the incestuous Yeltsin clan and their 
byzantine court. 

Convoys snake across the mountainous Kosovo, bringing 
smuggled goods at exorbitant prices to the inhabitants of 



this parched territory - all under the avuncular gaze of 
multinational peacekeepers. 

In Romania, Hungary and Greece, UN forces have been 
known to take bribes to allow goods into besieged Serbia. 
Oil, weapons and strategic materials, all slid across this 
greasy channel of the international brotherhood of cash. 

A lot of the aid, ostensibly intended to ameliorate the state 
of refugedom imposed upon the unsuspecting, harried 
population of Kosovo - resurfaced in markets, white and 
black, across the region. Food, blankets, tents, electrical 
equipment, even toys - were on offer in bazaars from 
Skopje to Podgorica and from Sofia to Thessaloniki, 
replete with the stamps of the unwitting donors. Aid 
workers scurried back and forth in expensive utility 
vehicles, buzzing mobile phones in hand and latest model, 
officially purchased, infrared laptops humming in the air 
conditioned coolness of their five star hotel rooms (or 
fancy apartments). In their back pockets they safeguarded 
their first class tickets (the food is better and the 
stewardesses ...). The scavengers of every carnage, they 
descended upon this tortured land in redundant hordes, 
feeding off the misery, the autoimmune deficiency of the 
syndrome of humanism. 

Ask yourselves: how could one of every 3 dollars - 50% 
of GNP - be stolen in a country the size of a tiny 
American state - without the knowledge and collaboration 
of the international organizations which ostensibly 
manage this bedlam? Why did the IMF renew the credit 
lines to a Russia which cheated bold-facely regarding its 
foreign exchange reserves? How was Serbia awash and 
flush with oil and other goods prohibited under the terms 
of the never-ending series of embargoes imposed upon it? 



The answer is that potent cocktail of fear and graft. First 
came fear - that Russia will collapse, that the Balkans will 
spill over, that Bosnia will disintegrate. Nuclear 
nightmares intermingled with Armenian and Jewish 
flashbacks of genocide. The west shut its eyes tight and 
threw money at the bad spirits of irredentism and re- 
emergent communism. The long arm of the USA, the 
"international" financial institutions, collaborated in 
constructing the habit forming dole house that Eastern and 
Southern Europe has become. This conflict-reticence, 
these approach- avoidance cycles led to an inevitable 
collusion between the ruling mob families that pass for 
regimes in these parts of the planet - and the unilateral 
institutions that pass for multilateral ones in the rest of it. 
An elaborate system of winks and nods, the sign language 
of institutional rot and decaying governance, took over. 
Greasy palms clapped one another with the eerie silence 
of conspiracy. The world looked away as both - 
international financial institutions and corrupt regimes - 
robbed their constituencies blind. This was perceived to 
be the inevitable moral cost of stability. Survival of the 
majority entailed the filthy enrichment of the minority. 
And the west acquiesced. 

But this grand design backfired. Like insidious bacteria, 
corruption breeds violence and hops from host to host. It 
does not discriminate, this plague of black conscience, 
between east and west. As it infected the indigenous, it 
also effected their guardians. They were all engulfed by 
raging greed, by a degradation of the inhibitions and by 
the intoxicating promiscuity of lawlessness. Inebriated by 
their newly found powers, little ceasars - natives and 
financial colonialists - claimed their little plots of crime 
and avarice, a not so secret order of disintegration of the 
social fabric. A ghoulish landscape, shrouded in the 



opaque mist of the nomenclature, the camaraderie of the 
omnipotent. 

And corruption bred violence. The Chicago model 
imported lock, stock and the barrel of the gun. Former 
cronies disappeared mysteriously, bloated corpses in stale 
hotel rooms - being the only "contracts" honoured. 
Territories were carved up in constant, unrelenting 
warfare. One billion dollars are worth a lot of blood and it 
was spilled with glee, with the enthusiasm of the 
inevitable, with the elation of gambling all on a single 
spin of the Russian roulette. 

It is this very violence that the west tried to drown with its 
credits. But unbeknownst to it, this very violence thrived 
on these pecuniary fertilizers. A plant of horrors, it 
devoured its soil and its cultivators alike. And 120,000 
people paid with their lives for this wrong gamble. 
Counting its losses, the west is poised to spin the wheel 
again. More money is amassed, the dies are cast and more 
people cast to die. 

Return 



The Honorary Academic 

Higher Education for Sale in Countries in Transition 
from Communism 



Mira Markovic is an "Honorary Academic" of the Russian 
Academy of Science. It cost a lot of money to obtain this 
title and the Serb multi-billionnaire Karic was only too 
glad to cough it up. Whatever else you say about Balkan 
cronies, they rarely bite the hand that feeds them (unless 
and until it is expedient to do so). And whatever else you 
say about Russia, it adapted remarkably to capitalism. 
Everything has a price and a market. Israel had to learn 
this fact the hard way when Russian practical-nurse-level 
medical doctors and construction- worker-level civil 
engineers flooded its shores. Everything is for sale in this 
region of opportunities, instant education inclusive. 

It seems that academe suffered the most during the 
numerous shock therapies and transition periods showered 
upon the impoverished inhabitants of Eastern and Central 
Europe. The resident of decrepit communist-era buildings, 
it had to cope with a flood of eager students and a deluge 
of anachronistic "scholars". But in Russia, the CIS and the 
Balkans the scenery is nothing short of Dantesque. 
Unschooled in any major European language, lazily 
content with their tenured positions, stagnant and formal - 
the academics and academicians of the Balkans are both 
failures and a resounding indictment of the rigor mortis 
that was socialism. Economics textbooks stop short of 
mentioning Friedman or Phelps. History textbooks should 
better be relegated to the science fiction shelves. A brave 
facade of self sufficiency covers up a vast hinterland of 



inferiority complex fully supported by real inferiority. In 
antiquated libraries, shattered labs, crooked buildings and 
inadequate facilities, student pursue redundant careers 
with the wrong teachers. 

Corruption seethes under this repellent surface. Teachers 
sell exams, take bribes, trade incestuous sex with their 
students. They refuse to contribute to their communities. 
In all my years in the Balkans, I have yet to come across a 
voluntary act - a single voluntary act - by an academic. 
And I have come across numerous refusals to help and to 
contribute. Materialism incarnate. 

This sorry state of affairs has a twofold outcome. On the 
one hand, herds of victims of rigidly dictated lectures and 
the suppression of free thought. These academic products 
suffer from the twin afflictions of irrelevance of skills and 
the inability to acquire relevant ones, the latter being the 
result of decades of brainwashing and industrial 
educational methods. Unable to match their anyhow 
outdated knowledge with anything a modern marketplace 
can offer - they default on to menial jobs, rebel or pull 
levers to advance in life. Which leads us to the death of 
meritocracy and why this region's future is behind it. 

In the wake of the downfall of all the major ideologies of 
the 20 th century - Fascism, Communism, etc. the New 
Order, heralded by President Bush, emerged as a battle of 
Open Club versus Closed Club societies, at least from the 
economic point of view. 

All modern states and societies must choose whether to be 
governed by merit (meritocracy) or by the privileged few 
(oligarchy). It is inevitable that the social and economic 
structures be controlled by elites. It is a complex world 



and only a few can master the knowledge it takes to 
govern effectively. What sets meritocracy apart is not the 
number of members of its ruling (or leading) class, 
usually no larger than an oligarchy. No, it is distinguished 
by its membership criteria and by the mode of their 
application. 

The meritocratic elite is an open club because it satisfies 
three conditions: 

1. The process and rules of joining up (i.e., the 
criteria) are transparent and widely known. 

2. The application and membership procedures are 
uniform, equal to all and open to continuous public 
scrutiny and criticism. 

3. The system alters its membership requirements in 
direct response to public feedback and to the 
changing social and economic environment. 

To belong to a meritocracy one needs to satisfy a series of 
demands, whose attainment is entirely up to he individual. 
And that is all that one needs to do. The rules of joining 
and of membership are cast in iron. The wishes and 
opinions of those who happen to comprise the club at any 
given moment are of no importance and of no 
consequence. Meritocracy is a "fair play" by rules of equal 
chance to derive benefits. Put differently, is the rule of 
law. 

To join a meritocratic club, one needs to demonstrate that 
one is in possession of, or has access to, "inherent" 
parameters, such as intelligence, a certain level of 
education, a potential to contribute to society. An inherent 



parameter must correspond to a criterion and the latter 
must be applied independent of the views and 
predilections of those who sometimes are forced to apply 
it. The members of a committee or a board can disdain an 
applicant, or they might wish not to approve a candidate. 
Or they may prefer someone else for the job because they 
owe her something, or because they play golf with him. 
Yet, they are permitted to consider only the applicant's or 
the candidate's "inherent" parameters: does he have the 
necessary tenure, qualifications, education, experience? 
Does he contribute to his workplace, community, society 
at large? In other words: is he "worthy" or "deserving"? 
Not WHO he is - but WHAT he is. 

Granted, these processes of selection, admission, 
incorporation and assimilation are administered by mere 
humans and are, therefore, subject to human failings. Can 
qualifications be always judged "objectively, 
unambiguously and unequivocally"? Can "the right 
personality traits" or "the ability to engage in teamwork" 
be evaluated "objectively"? These are vague and 
ambiguous enough to accommodate bias and bad will. 
Still, at least appearances are kept in most cases - and 
decisions can be challenged in courts. 

What characterizes oligarchy is the extensive, relentless 
and ruthless use of "transcendent" (in lieu of "inherent") 
parameters to decide who will belong where, who will get 
which job and, ultimately, who will enjoy which benefits. 
The trouble with transcendent parameters is that there is 
nothing much an applicant or a candidate can do about 
them. Usually, they are accidents, occurrences absolutely 
beyond the reach or control of those most affected by 
them. Race is such a transcendent parameter and so are 
gender, familial affiliation or contacts and influence. 



In many corners of the globe, to join a closed, oligarchic 
club, to get the right job, to enjoy excessive benefits - one 
must be white (racism), male (sexual discrimination), born 
to the right family (nepotism), or to have the right political 
(or other) contacts (cronyism). And often, belonging to 
one such club is the prerequisite for joining another. 

In France, for instance, the whole country is politically 
and economically run by graduates of the Ecole Normale 
d' Administration (ENA). They are known as the 
ENArques (=the royal dynasty of ENA graduates). 

The privatization of state enterprises in most East and 
Central European countries provided a glaring example of 
oligarchic machinations. In most of these countries (the 
Czech Republic, Macedonia, Serbia and Russia are 
notorious examples) - state companies, the nation's only 
assets, were "sold" to political cronies, creating in the 
process a pernicious amalgam of capitalism and oligarchy, 
known as "crony capitalism" or privateering. The national 
wealth was passed on to the hands of relatively few, well 
connected, individuals, at a ridiculously low price. The 
nations involved were robbed, their riches either 
squandered or smuggled abroad. 

In the affairs of humans, not everything falls neatly into 
place. Take money, for instance. Is it an inherent 
parameter or an expressly transcendent one? Making 
money indicates the existence of some merit, some 
inherent advantageous traits of the money-making 
individual. To make money consistently, a person needs 
to be diligent, resilient, hard working, to prevail and 
overcome hardships, to be far sighted and to possess a 
host of other - universally acclaimed - traits. On the other 
hand, is it fair when someone who made his fortune 



through corruption, inheritance, or luck - be preferred to a 
poor genius? 

That is a contentious issue. In the USA money talks. 
Being possessed of money means being virtuous and 
meritorious. To preserve a fortune inherited is as difficult 
a task as to make it in the first place, the thinking goes. 
Thus, the source of the money is secondary. 

An oligarchy tends to have long term devastating 
economic effects. 

The reason is that the best and the brightest - when shut 
out by the members of the ruling elites - emigrate. In a 
country where one's job is determined by his family 
connections or by influence peddling - those best fit to do 
the job are likely to be disappointed, then disgusted and 
then to leave the place altogether. 

This is the phenomenon known as "Brain Drain". It is one 
of the biggest migratory tidal waves in human history. 
Capable, well-trained, educated, young people leave their 
oligarchic, arbitrary, influence peddling societies and 
migrate to less arbitrary meritocracies (mostly to be found 
in what is collectively known as "The West"). 

This is colonialism of the worst kind. The mercantilist 
definition of a colony is a territory which exports raw 
materials only to re-import them in the form of finished 
products. The Brain drain is exactly that: the poorer 
countries are exporting raw brains and buying back the 
finished products masterminded, invented and 
manufactured by theses brains. 



Yet, while in classical colonialism, the colony at least 
received some recompense for its goods - here the poor 
country is actually the poorer for its exports. The bright 
young people who depart (most of them never to return) 
carry with them an investment of the scarce resources of 
their homeland - and award it to their new, much richer, 
host countries. This is an absurd situation, a subsidy 
granted reluctantly by the poor to the rich. This is also one 
of the largest capital transfers (really capital flight) in 
history. 

Some poor countries understood these basic, unpleasant, 
facts of life. They extracted an "education fee" from those 
emigrating. This fee was supposed to, at least partially, 
recapture the costs of educating and training the 
immigrants. Romania and the USSR imposed such levies 
on Jews emigrating to Israel in the 1970s. Others 
despairingly regard the brain drain as a natural 
catastrophe. Very few countries are trying to tackle the 
fundamental, structural and philosophical flaws of the 
system, the roots of the disenchantment of those who 
leave. 

The Brain Drain is so serious that some countries lost up 
to a third of their total young and educated population to it 
(Macedonia in South-eastern Europe, some less developed 
countries in South East Asia and in Africa). Others were 
drained of almost one half of the growth in their educated 
workforce (for instance, Israel during the 1980s). 

Brains are an ideal natural resource: they can be 
cultivated, directed, controlled, manipulated, regulated. 
They are renewable and replicable. Brains tend to grow 
exponentially through interaction and they have an 
unparalleled economic value added. The profit margin in 



knowledge and information related industries far exceeds 
anything common to more traditional, second wave, 
industries (not to mention first wave agriculture and 
agribusiness). 

What is even more important: 

Poor countries are uniquely positioned to take advantage 
of this third revolution. With cheap, educated workforce - 
they can monopolize basic data processing and 
telecommunications functions worldwide. True, this calls 
for massive initial investments in physical infrastructure. 
But the important input is the wetware, the brains. To 
constrain them, to disappoint them, to make them run 
away, to more merit-orientated places - is to sentence 
oneself to a permanent disadvantage and deprivation. 

This is what the countries in the Balkans are doing. 
Driving away the best part of their population by 
encouraging the worst part. Abandoning their future by 
dwelling on their past. Caught in a fatal spider web of 
family connections and political cronyism of their own 
design. Their factories and universities and offices and 
government filled to the brim with third rate relatives of 
third rate professors and bureaucrats. Turning themselves 
into third rate countries in a self perpetuating, self feeding 
process of decline. And all the while eyeing the new and 
the foreign with the paranoia that is the result of true guilt. 

Return 



Rasputin in Transition 

Frauds and Con-men in Countries in Transition from 
Communism 



The mad glint in his eyes is likely to be nothing more 
ominous than maladjusted contact lenses. If not clean 
shaven, he is likely to sport nothing wilder than a goatee. 
More likely an atheist than a priest, this mutation of the 
ageless confidence artist is nonetheless the direct spiritual 
descendent of Rasputin, the raving maniac who governed 
Russia until his own execution by Russian noblemen and 
patriots. 

They are to be found in all countries in transition. Wild 
and insidious weeds, the outcome of wayward pollination 
by mutated capitalism. They prey on their victims, at first 
acquiring their confidence and love, then penetrating their 
political, social and financial structures almost as a virus 
would: stealthily and treacherously. By the time their 
quarry wakes up to its infection and subjugation - it is 
already too late. By then, the invader will have become 
part of the invaded or its master, either through blackmail 
or via tempting subornation. 

This region of the CEE and the Balkans provides for 
fertile grounds. It is a Petrie dish upon which cultures of 
corruption and scandalous conduct are fermented. The 
typical exploiter of these vulnerabilities is a foreigner. 
Things foreign are held in awe and adulation by a 
populace so down trodden and made to feel inferior in 
every way, not least by foreign tutors and advisors. The 
craving to be loved, this gnawing urge to be accepted, to 



be a member of the club, to be distinguished from one's 
former neighbours - are irresistible. The modern Rasputin 
doles out this unconditional acceptance, this all 
encompassing affinity, the echoes of avuncularity. In 
doing so, he evokes in the recipients such warmth, such 
relief, such fervour and reciprocity - that he becomes an 
idol, a symbol of a paradise long lost, a golden braid. 
Having thus completed the first phase of his meticulous 
attack - he moves on to the second chapter in this book of 
body snatching. 

Armed with his new-fangled popularity, the crook moves 
on and leverages it to the hilt. He does so by feigning 
charity, by faking interest, by false "constructive 
criticism". To his slow forming army, he recruits the 
media, the flower children, the bleeding hearts, reformers, 
dissidents and the occasional freak. By holding old 
authority in disdain, by declaring his contempt for the 
methods of the "tried and true", by appearing to make war 
upon all rot and immorality - this creature of expediency 
emerges as a folk hero. It is the more cynical and world 
weary and "sophisticated" members of society that lead 
the way, succumbing to his ardour and conviction, to his 
child-like innocence, to his unwavering agenda. He 
cleverly thrusts at them the double edge of their own 
disillusionment and disappointment. Thus mirrored, they 
are transformed and converted into his camp of renewal 
and clean promises by this epiphany. They hand him the 
keys to every medium, the very codes and secrets that 
make him so powerful. They pledge their alliance and 
allegiance and render to him the access they possess to the 
nerve centres of society. The castle gates thus opened 
from inside, his victory assured, the rogue moves on to 
consummate this unholy marriage between himself and 
the deceived. 



Always in fear of light, he surreptitiously and cunningly 
begins to interact with the foci of power and money in the 
land. However loathsome he is to them, however 
repulsive the experience, however undesirable the effects 
of their surrender - they are made to recognize him as 
their equal. With the might of the media and a large part 
of the people behind him, he can no longer be ignored. 
Their conspiracy-prone mind, awash with superstitions 
and its attaching phobias, tries to comprehend his 
meteoric rise, the forcefulness with which he treads, his 
unmitigated, inane, self confidence. Is he a spy? A 
member of a secret order? The latent agent of a 
hyperpower? The heart of a world conspiracy? Has he no 
fear of retribution and no remorse? Before this great 
unknown, they kneel and yield, an atavistic reaction to 
atavistic fears. Now all doors are thrown open, all deals 
are made available, all secrets are revealed. The more he 
learns, the mightier he becomes - the more his might, the 
more he learns. To him, a virtuous cycle, to his hosts - a 
vicious one. 

In all this tumult, he does not lose sight of his original 
goals - power, money, fame, all three. It is a relentless 
pursuit, an obsessive hunt, a ruthless and unscrupulous 
chase. In his war, no prisoners are taken, no price too 
dear, no human in his orbit left untouched. He will 
manipulate and threat and beg and promise and plead and 
blackmail and extort to accomplish that which he set out 
to achieve: decision making powers, wealth, clout, 
exposure and resultant fame. It is at this stage that the 
latter day Rasputin emerges from the shadows and joins 
officialdom or concludes lucrative transactions based on 
favourably deflated prices and insider dealing. By now, 
his shady past is no longer a hindrance. His prowess far 
exceeds his invidious biography. Well installed, he 



ignores both media and the people. He brushes aside 
contemptuously all criticism and enquiry. His true, 
narcissistic, face is exposed and it is hideous to behold. 
But there is nothing to be done and all resistance is futile. 
The con-man now is in a haste to maximize his hard 
earned profits and exit the scene, on his way to another 
realm of guile and naivete. 

Return 



The Eureka Connection 

How East and Central Europeans Defraud the Gullible 

West 



A common, guttural cry of "Eureka" echoed as the 
peoples of East Europe and the Balkan emerged from the 
Communist steam bath. It was at once an expression of 
joy and disbelief. That the West should be willing to 
bankroll the unravelling of a failed social experiment, 
freely entered into, exceeded the wildest imaginings. That 
it would do so indefinitely and with no strings attached 
was a downright outlandish fortuity. 

Transition in the post communist countries was coupled 
with a hubristic and haughty conviction in the 
transforming powers of the Western values, Western 
technology, and Western economics. The natives - awe 
struck and grateful - were supposed to assimilate these 
endowments and thus become honorary Westerners 
("white men"). Where osmosis and immitation failed - 
bayonets and bombs were called upon. These were later 
replaced by soft credits and economic micromanagement 
by a host of multilateral institutions. 

Accustomed to Pavolvian interactions, adept at 
manipulating "the system", experts in all manner of make 
belief - the shrewd denizens of the East exercised the 
reflexive levers of the Great Democracies. They adopted 
stratagems whose sole purpose was to extract additional 
aid, to foster a dependency of giving, to emotionally 
extort. In one sentence: they learned how to corrupt the 
donors. 



The most obvious subterfuge involved the mindless 
repetition of imported mantras. Possessed of the same 
glazed eyes and furled lips, the loyal members of a 
perfidious nomenklatura uttered with the same seemingly 
perfervid conviction the catechism of a new religion. 
Yesterday communism - today capitalism, unblushingly, 
unhesitatingly, cynically. Yesterday, a recondite 
dictatorship of the proletariat or, more often, a personality 
cult - today "democracy". Yesterday - brotherhood and 
unity, today - genocidal "self determination". Yesterday - 
genocidal inclinations, today - a "growth and stability 
pact". If required to bark in the nude in order to secure the 
flow of unsupervised funding (mainly to their pockets), 
these besuited "gentlemen" would have done so with self- 
sacrificial ardour, no doubt. 

When it dawned upon them that the West is willing to pay 
for every phase of self-betterment, for every stage of self- 
improvement, for every functioning institution and law 
passed - this venal class (the soi-disant "elite" in 
government, in industry and academe) embarked on a 
gargantuan blackmail plot. The inventors of the most 
contorted and impervious bureaucracies ever, have 
recreated them. They have transformed the simplest tasks 
of reform into tortuous, hellish processes, mired in a 
miasma of numerous committees and deluged by cavils, 
captious "working" papers and memoranda of stupefying 
trumpery. They have stalled and retraced, reversed and 
regressed, opined and debated, refused and accepted 
grudgingly. The very processes of transformation and 
transition - a simulacrum to begin with - acquired an aura 
of somnolent lassitude and the nightmarish quality of 
ensnarement. And they made the West bribe them into 
yielding that which was ostensibly in their very own 
interest. Every act of legislation was preceded and 



followed by dollops of foreign cash. Every ministry 
abolished was conditioned upon more aid. Every court 
established, every bloodletting firm privatized, every bank 
sold, every system made more efficient, every procedure 
simplified, every tender concluded and every foreign 
investor spared - had a tariff. "Pay or else ..." was the 
overt message - and the West preferred to pay and to 
appease, as it has always done. 

The money lavished on these "new democracies" was 
routed rather conspicuously into the private bank accounts 
of the thin layer of vituperable "leaders", "academics" and 
"businessmen" (often the same people). One third 
cigarette smugglers, one third uncommon criminals and 
one third cynical con-artists, these people looted the 
coffers of their states. The IMF - this sanctuary of fourth 
rate economists from third world countries, as I am never 
wont of mentioning - collaborated with the US 
government, the European Union and the World Bank in 
covering up this stark reality. They turned a common 
blind eye to the diversion of billions in aid and credits to 
mysterious bank accounts in dubious tax havens. They 
ignored fake trading deals, itinerant investment houses, 
shady investors and shoddy accounting. They expressed 
merely polite concern over blatant cronyism and rampant 
nepotism. They kept pouring money into the rapidly 
growing black hole that Eastern Europe and the Balkan 
have become. They pretended not to know and feigned 
surprise when confronted with the facts. In their 
complicity, they have encouraged the emergence of a 
criminal class of unprecedented proportions, hold and 
penetration in many of the countries within their remit. 

To qualify to participate in this grand larceny, one needed 
only to have a "sovereign" "state". Sovereign states are 



entitled to hold shares in multilateral financial institutions 
and to receive international aid and credits. In other 
words: sovereignty is the key to instant riches. The 
unregenerate skulks that pass for political parties in many 
countries in East Europe and the Balkan (though not in all 
of them - there are exceptions), carved up the territory. 
This led to a suspicious proliferation of "republics", each 
with its own access to international funds. It also led to 
"wars" among these emergent entities. 

Recent revelations regarding the close and cordial co- 
operation between Croatia's late president, Franjo 
Tudjman and Yugoslavia's current strongman, Slobodan 
Milosevic - ostensibly, bitter enemies - expose the role 
that warfare and instability played in increasing the flow 
of aid (both civil and military) to belligerent countries. 
The more unstable the region, the more ominous its 
rhetoric, the more fractured its geopolitics - the more 
money flowed in. It was the right kind of money: 
multilateral - not multinational, public - not private, 
deliberately ignorant - not judiciously cognizant. It was 
the "quantum fund" - capable of "tunnelling" (as the 
Czechs called it) - vanishing in one place (the public 
purse) and appearing in another (the private wallet) 
simultaneously. Even the exception - the never-enforced 
sanctions against Yugoslavia - served to enrich its 
cankerous ruling class by way of smuggling and 
monopolies. 

And why did the West collaborate in this charade? Why 
did it compromise its goodwill, its carefully crafted 
institutions, its principles and ethos? The short and the 
long of it is: to get rid of a nuisance at a minimal cost. It is 
much cheaper to grease the palms of a deciding few - than 
to embark on the winding path of true and painful growth. 



It is more convenient to co-opt a political leader than to 
confront an angry mob. It is by far easier to throw money 
at a problem than to solve it. 

It was not a sinister conspiracy of the Great Powers as 
many would have it. Nor was it the result of foresight, 
insight, perspicacity, or planning. It was a typical 
improvident European default, adopted by a succession of 
lacklustre and lame American administrations. It enriched 
the few and impoverished the many. It fostered anti- 
Western sentiments. It provoked skirmishes that provoked 
wars that led to massacres. To reverse it would require 
more resources than should have been committed in the 
first place. These are not forthcoming. The West is again 
misleading and deceiving and collaborating to defraud the 
peoples of these unfortunate netherlands. It again 
promises prosperity it cannot deliver, growth it will not 
guarantee and stability it cannot ensure. This 
prestidigitation is bound to lead to ever larger bills and to 
the attrition of good will of both donor and recipient. 
Never before was such a unique historical opportunity so 
thoroughly missed. The consequences may well be as 
unprecedented. 

Return 



The Treasure Trove of Kosovo 



Nothing like a juicy, photogenic human catastrophe to 
enrich corrupt politicians and bottom-line-orientated, 
stock-option-motivated corporate executives. The Balkan 
is teeming with both these sad days. 

Even as the war was raging, shortages of food and other 
supplies led to the dispensation of political favours (in the 
form of import licences, for instance) to the chosen few. 
Bulgarian, Greek and Albanian firms, owned by ruthless 
criminals and criminals-turned-politicians benefited 
mightily. Millions were made and shared as artificially 
high prices were maintained by various means while 
cronies and crime controlled firms shared the spoils. This 
orgiastic intercourse between the corrupt and the criminal 
was not confined to one country. The whole region 
partook in robbing the most impoverished populations in 
Europe by "legal" means. 

Their more refined and perfumed Western brethren were 
never far behind in taking advantage of American largesse 
on the one hand and re-emerging alarmist tendencies, on 
the other. Thus, American, German, Greek, French and 
Italian firms enjoyed funds allocated to international 
humanitarian aid by the likes of the US government, the 
United Nations, the World Bank, the IMF and other long 
arms of the American octopus. Defence contractors and 
the dubious characters known as weapons intermediaries 
stoked the atavistic fires of war in securing defence 
contracts. And aid workers resided in six star hotels, 
driving the latest sports utility vehicles and brandishing 
futuristic laptop computers as they went about the 



business of dispensing aid. In the meantime, at least one 
half of all aid money was pilfered - not to use a harsher 
term. Aid rations were freely available in Macedonian, 
Albanian, Greek and Bulgarian markets - offered at a 
discount by aid workers who stole them from their 
supposed recipients. The refugees were never given 
mattresses, were short of blankets, water, showers and 
toilets (I visited the camps - this is an eyewitness 
account). Only bread was abundant. 

Now that the war is over, some people are counting their 
dead - while others are counting their blessings. But this 
has all been a prelude. It is the next wave of aid which is 
the main course in this bacchanalia. Outlandishly feverish 
numbers are tossed around. Kosovo's immediate 
reconstruction (housing and infrastructure) will require 
well over 2 billion US dollars in the next 2 years. Of this, 
1.5 billion dollars has already been raised. A further 2 
billion USD is slated as direct aid to the shattered 
economies of Macedonia and Albania. But the real booty 
lies in Serbia. A minimum of 10-13 billion dollars will be 
required simply to restore Serbia's infrastructure to its 
former, inglorious self. To resuscitate the whole 
languishing area, a staggering 30 billion dollars is touted 
as the minimal bill. 

Rest assured that at least one third of this generous 
cornucopia will end up lining the pockets of the rich and 
mighty. At least 1 billion dollars will end up festering in 
Swiss, Cypriot, South African and Israeli bank accounts. 
The politicians know it, the "grupirovki" (business cartels 
controlled by mafia-style organizations) know it, Western 
governments know it. This is the REAL stability pact. 
Financially inebriated politicians are better motivated to 
maintain peace and stability, or so the thinking goes. 



The history of the Balkans will play a major role in 
determining the topography and geography of this flood 
of cronyism, nepotism, criminality and vice. The Balkan 
is composed of states run by crime organizations and 
crime organizations run by states. Old alliances last long 
(as opposed to the Middle East where alliances, dune-like, 
shift with the winds). Bulgaria and Macedonia, for 
instance. Serbia and Greece. Albania and Kosovo. And 
now Albania and Macedonia. Meetings of regional 
"leaders" in the Balkans were always reminiscent of 
scenes from "The Godfather". The dons, uncomfortably 
clad in expensive business suits and wearing golden rings, 
deciding life and death and a jovial yet vaguely menacing 
atmosphere. Only the leaders of the New Balkans are 
much younger, less experienced, more prone to 
superstition, extremism and moodiness. The old tension 
are bound to re-emerge, this time in the employ of 
business interests. Expect a flare up of animosity between 
Greece and Macedonia. Despite its Bulgarophile regime, 
expect uneasy moments between Bulgaria and Macedonia. 
And expect an unholy alliance of business interests 
between Mr. Thaci and his sprawling business empire and 
the governments of Albania and Macedonia. If not 
assassinated before, Thaci is definitely the Man to watch. 
Young, well educated, ruthless, involved in business 
(read: corrupt to the core) - an aptly dangerous man in 
dangerous times. 

The problem is that everyone hold high expectations. This 
is a poor recipe for an amicable carving of the cake of 
international funding. Macedonia expects to lead the 
reconstruction effort of Kosovo. It was offended greatly 
by the decision to base the Kosovo reconstruction agency 
in Pristina. Greek and Italian firms expect to snatch profits 
out of the jaws of their near treacherous behaviour during 



the war. Turkish firms except to be rewarded for the 
loyalty of Turkey during the same. American and German 
firms expect to exclude all else in gaining access to 
American and German (=EU) funds (as they have done in 
Bosnia). These all are mutually incompatible expectations 
and they will lead to mutually exclusive behaviour. 
Expect some very ugly scenes, including spilt doses of 
this cheap, red liquid, blood. 

Albania, already governed by the ungovernable crime 
gangs it spawned in the last few years, has formed an 
alliance with the KLA, never a moral standard-bearer. 
This expanded amusement park of drug trafficking, 
prostitution, weapons smuggling, contraband and much 
worse is now threatening to take over its more virtuous 
(though by no means virginal) neighbour, Macedonia. A 
flare up of hitherto unimaginable brotherly love has 
indicated this sacrilegious rapprochement. The 
Macedonian Prime Minister - encumbered by a 
demanding Albanian coalition partner - has met Thaci and 
the encounter had all the trappings of a state visit. Soon 
after senior albanian politicians started talking about a 
Macedonian recognition of an independent state of 
Kosovo and an Albanian language university (the reason 
for student riots just two years before). 

To a large extent, the Kosovo war was a gang warfare. 
The Serb criminal organization known as Yugoslavia 
against the Albanian gang known as the KLA. It was a 
war over turf and lucrative businesses. In what used to be 
the Third World and moreso in the post-communist 
countries in transition, criminal activities often 
accompany "wars of liberation". In Congo, in Sierra 
Leone, in Chechnyia, in Kashmir - wars are as much 
about diamonds, oil and opium poppies as about national 



aspirations. Kosovo is no exception but it was here that 
the West was duped into intervention. NATO was called 
upon to arbiter between two crime gangs. There is no end 
to the mischievous irony of history. 

Perhaps the following incidents are more telling than any 
learned analysis: 

In late April, the Albanian telecom switched off the 
roaming facility of cell phones in Albania. Foreigners - 
including aid workers - had to pay the company 1000 
dollars for a special roaming-enabled chip. 

Rumour has it that the post of the Chief of Police in the 
Tirana Airport was "sold" at the beginning of April for an 
undisclosed amount (presumably 250,000 US dollars). 
The reasons: all shippers (including NATO and aid 
organizations) have to pay enormous kickbacks to airport 
and customs officials to release their goods. 

Most Albanian families charged refugee families an 
average of 500 DM a month for their accommodation in 
subhuman conditions. Refugees who could not pay (or 
who had no relatives in Germany and Switzerland to pay 
for them) were evicted, often cruelly. 

As Serbs were murdering their supposed brothers in 
Kosovo, Albanian crime gangs laid an oil pipeline 
(through Lake Shkoder) to Serbia and supplied the Serb 
army with the oil it was deprived of by NATO. 

Welcome to the Balkans. 

Return 



Milosevic's Treasure Island 



Milosevic and his cronies stand accused of plundering 
Serbia's wealth - both pecuniary and natural. Yet, the 
media tends to confuse three modes of action with two 
diametrically opposed goals. There was state sanctioned 
capital flight. Gold and foreign exchange were smuggled 
out of Yugoslavia and deposited in other countries. This 
was meant to provide a cushion against embargo and 
sanctions imposed on Yugoslavia by the West. 

The scale of these operations has been wildly over- 
estimated at 4 billion US dollars. A figure half as big is 
more reasonable. Most of the money was used 
legitimately, to finance the purchase of food, medicines, 
and energy products. Yugoslavia would have frozen to 
death had its leaders not have the foresight to act as they 
did. 

This had nothing to do with party officials, cronies, and 
their family members enriching themselves by "diverting" 
export proceeds and commodities into private accounts in 
foreign lands. The culprits often disguised these acts of 
plunder as sanctions-busting operations. Hence the 
confusion. 

Thirdly, members of the establishment and their relatives 
were allowed to run lucrative smuggling and black market 
operations fuelled by cheap credits coerced out of the 
dilapidated and politicised "banking" system. 



As early as 1987, a network of off-shore bank accounts 
and holding companies was established by Serbia's 
Communist party and, later, by Yugoslavia. This frantic 
groping for alternatives reached a peak during 1989 and 
1991 and after 1992 when accounts were opened in 
Cyprus, Israel, Greece, and Switzerland and virtually all 
major Yugoslav firms opened Cypriot subsidiaries or 
holding structures. Starting in 1991, the Central Bank's 
gold (and a small part of the foreign exchange reserves) 
were deposited in Switzerland (mainly in Zurich). A 
company by the name of "Metalurski Kombinat 
Smederevo - MKS" (renamed "Sartid" after its bogus 
privatisation) was instrumental in this through its MKS 
Zurich subsidiary. MKS was a giant complex of metal 
processing factories, headed by a former Minister of 
Industry and a Milosevic loyalist, Dusko Matkovic. The 
latter also served as deputy chairman of Milosevic's party. 
The lines between party, state and personal fortunes 
blurred fast. Small banking institutions were established 
everywhere, even in London (the AY Bank) and 
conducted operations throughout the world. They were 
owned by bogus shareholders, out of the reach of the 
international sanctions regime. 

When UN sanctions were imposed in stages (1992-5), the 
state made sure its export proceeds were out of harm's 
way and never in sanctions-bound UK and USA banks. 
The main financial agent was "Beogradska Banka" and its 
branch in Novi Sad. In a series of complex transactions 
involving foreign exchange trades, smuggled privatisation 
proceeds, and inflated import invoices, it was able to stash 
away hundreds of millions of dollars. This money was 
used to finance imports and defray the exorbitant 
commissions, fees, and costs charged by numerous 
intermediaries. Yugoslavia (and the regime) had no choice 



- it was either that or starvation, freezing and explosive 
social discontent. 

Concurrently, a massive and deeply criminalized web of 
smuggling, illegal (customs-exempt) imports, bribe and 
corruption has stifled all legal manufacturing and 
commerce activities. Cigarettes through Montenegro, 
alcohol and oil through Romania, petrol, other goods 
(finished and semi-finished) and raw materials from 
Greece through the Vardar river (Macedonia), absolutely 
everything through Croatia, drugs from Turkey (and 
Afghanistan). UN personnel happily colluded and 
collaborated - for a fee, of course. The export of 
commodities - such as grain or precious metals (gold, 
even Uranium) - was granted in monopoly to Milosevic 
stalwarts. These were vast fiefdoms controlled by a few 
prominent "families" and Milosevic favourites. It was also 
immensely lucrative. Even minor figures were able to 
deposit millions of US dollars in their Russian, Cypriot, 
Lebanese, Greek, Austrian, Swiss, and South African 
accounts. The regime leaned heavily on Yugoslav banks 
to finance these new rich with cheap, soft, and often non- 
returnable, credits. These were often used to speculate in 
the frenetic informal foreign exchange markets for 
immediate windfalls. 

The new Yugoslav authorities are likely to be deeply 
frustrated and disappointed. Most of the money was 
expended on essentials for the population. The personal 
fortunes made are tiny by comparison and well-shielded 
in off-shore banking havens. Milosevic himself has almost 
nothing to his name. His son and daughter may constitute 
richer pickings but not by much. The hunt for the 
Milosevic treasure is bound to be an expensive, futile 
undertaking. Return 



Macedonia's Augean Stables, or: 
Don 't Hurry to Invest in Macedonia 



In the near past, Macedonia seemed to have been bent on 
breaking its own record of surrealism. While politicians in 
other countries in transition from communism and 
socialism strive to be noticed for not stealing, their 
Macedonian counterparts, without a single exception, aim 
to steal without being noticed. 

The previous VMRO-DPMNE government (1999-2002), 
in which Nikola Gruevski, the current Prime Minister, 
served as Minister of Finance, plundered the country 
shamelessly. The local papers accused then outgoing 
prime minister, Ljubco Georgievski - a virtual pauper 
when he attained power - of owning land and a residential 
building in the capital's most expensive neighborhood. 
The erstwhile Minister of Defense, Ljuben Paunovski, 
was recently sentenced to 42 months in prison for his 
pecuniary shenanigans during his tenure. Another leading 
figure, the former Minister of interior, Ljube Boskovski, is 
in the dock in the Hague on war crime charges. 

Inevitably, VMRO-DPMNE lost power to the SDSM in 
the heated elections of 2002 and then fractured as its new 
leader, Gruevski, purged the old guard and installed his 
own cohorts everywhere. 

Then prime minister designate, Branko Crvnkovski (the 
country's current President whose legitimacy is contested 
by the Gruevski government), vowed to learn from his 
party's (SDSM) past mistakes when they venally ruled the 



land until 1998. In a sudden and politically-motivated 
resurrection, the high court began scrutinizing the "Okta" 
deal: the opaque sale of the country's loss-making refinery 
to the Greeks in 1999. Heads will roll, promised both the 
election victors (the SDSM) and their Western sponsors. 
Nothing happened. 

The country's current Governor of the Central bank and 
then minister of finance, Petar Goshev, a former socialist 
high-level functionary known for his integrity, announced 
that his top priority would be to eradicate corruption by 
instituting structural and legal reforms. His newfound 
socialist partners - he headed a center-right outfit - found 
this bizarre ardor unpalatable and promptly kicked him 
out of office. 

Four years later, with Georgievski relegated to the 
political wasteland, Crvnkovski ensconced in the 
presidential suite, and his successor, Buckovski a 
resounding failure, Gruevski's ascent in 2006 was all but 
secure. It was the SDSM's turn to crumble acrimoniously 
amid a virulent contest for its leadership. It has never 
recovered and Macedonia has had no viable opposition 
ever since. 

Macedonia's post-electoral euphoria faded, in July 2006, 
into arduous coalition-building negotiations replete with 
arm-twisting by the worried representatives of the 
"international community". 

The country's new VMRO-DPMNE Prime Minister, 
Nikola Gruevski (36), excluded from his government the 
party that won the majority of Albanian votes because of 
its roots in the much-hated Albanian NLA, National 
Liberation Army, the instigator of the 2001 near-civil- war. 



Albanian factions clashed in a chilling reminder of the 
country's inter-ethnic fragility. 

To add to Macedonia's precarious standing, its greenhorn 
Minister of Foreign Affairs, Antonio Milososki, engaged 
in intermittent - and utterly avoidable - spats with its 
neighbor and biggest foreign investor, Greece, virtually 
guarantee delayed accession to both NATO and the 
European Union, the much ballyhooed strategic goals of 
the current administration. Milososki adopted a similarly 
belligerent and ill-informed stance against Bulgaria, 
another flanking polity and the newest member of the 
coveted European club. 

Where the government claims great strides is in its 
uncompromising stance against all forms of malfeasance 
and delinquency in both the public and the private sectors. 
From the army to various municipalities, scandals erupt 
daily in an atmosphere often bordering on a frenzied, 
media saturated, witch-hunt. 

Gruevski is alleged to have rejected a bribe of 3 million 
euros (c. 4 million USD) offered to him by a Serb firm. 
His government embarked on highly publicized 
campaigns against illegal construction (the "urban mafia") 
and other festering nests of corruption. 

Alas, Gruevski himself appointed members of his family 
and innumerable political hacks to senior government 
positions in a series of blatant acts of nepotism and 
cronyism decried by the European Union and other 
watchdogs. Consequently, with one exception (Zoran 
Stavreski, the talented vice-premier), the government in 
all echelons is largely made up of utterly inexperienced 
operators. Plus ca change. 



Politics, venality, and terrorism are the sole venues of 
social mobility in this tiny, landlocked, country of 2 
million impoverished people. Immediately following their 
insurgency, the former terrorists of the Albanian National 
Liberation - courtesy of Western pressure and the 
Albanian voters - occupied crucial ministries with 
lucrative opportunities of patronage of which they are 
rumored to have availed themselves abundantly. 

Comic relief is often provided by bumbling NGOs, such 
as the International Crisis Group. In 2001, its 
representative in Macedonia, Edward Joseph, went to 
Prilep to conduct an impromptu investigation of the 
thriving cigarette smuggling trade. Posing to the cameras 
he declared that only the local leaf-rolling plant was not 
involved in this pernicious line of work. 

Macedonia is a hub of expats and consultants in the 
Balkans. Ante Markovic, an Austria-based former 
Yugoslav prime minister, who served as an oft-criticized 
economic advisor to the government until he was dumped, 
sued Macedonia for $1 million. In 2001-3, the youthful 
former minister of finance, Nikola Gruevski, was asked 
by USAID, on behalf of the Serbian-Montenegrin 
government, to serve as its consultant on matters of 
reform of the financial system. The author of this article 
acted as Economic Advisor to Georgievski's government 
and, later, to Gruevski himself. 

But to no avail. The country is a shambles. In the wake of 
a civil war, the official unemployment rate is 31-35 
percent. Close to 70,000 people work in the bloated 
central and local administrations. The trade deficit is an 
unparalleled 17 percent of GDP. In 2001, the budget 
deficit climbed to 5 percent, though it was since halved. 



"The Heritage Foundation" has consistently ranked 
Macedonia 95-97 out of 155 countries in terms of 
economic freedom. The country is "mostly unfree" it 
correctly concludes in its reports, though it cites 
sometimes erroneous data. A moderate level of trade 
protectionism, low tax rates, moderate inflation, a 
moderate burden of the government, moderate barriers to 
capital flows and foreign investment, and moderate 
interference in the economy are offset by a dysfunctional 
banking system, intervention in wages and prices, low 
level of protection of property, a high level of regulation, 
and a very high level of activity of the black market. 

Owing to the IMF's misguided emphasis on exchange rate 
stability, the currency is inanely overvalued. The 
manufacturing sector has all but evaporated. Industrial 
production declined by a vertiginous 20 percent in August 
2002 compared to the average the year before - or by 1 1 
percent year on year. The trend has not been reversed 
since. 

Macedonian steel is exempt from the latest bout of 
American protectionism, but not so its textile industry. 
Europe is fending off the country's agricultural products. 
People make their meager and desultory living catering to 
the needs of an ever-expanding international presence or 
dabbling in illicit activities. Piracy of intellectual property, 
for instance, is thought to yield c. 1 percent of GDP. 

Close to half the population is under the poverty line. The 
number of welfare cases increased by 70 percent between 
1994 and 2002. Generous and incessant multilateral and 
bilateral credits sustain the faltering economy (and line 
politicians' ever-deepening pockets). The country is 



alternately buffeted by floods and droughts. There has 
been only one day of rain in all of January 2007. 

In a much-touted donor conference after the 2001 
skirmishes, the pledges amounted to a whopping 15 
percent of GDP. Then governor of the central bank, Ljube 
Trpski (currently detained for his role in a murky affair 
involving the country's foreign exchange reserves), 
cheerfully predicted that these handouts will cover the 
gaping hole in the balance of payments. 

Macedonia also received 7.5 percent of the gold reserves 
of the former federated Yugoslavia of which it was a 
component. At between $700 million and one billion USD 
net, foreign exchange reserves are at an all-time high. 
Macedonia has recently decided to prepay its $104 million 
debt to the Paris Club creditors. 

Both the IMF and the World Bank, who did their best to 
obstruct the previous VMRO-DPMNE government in its 
last few months in power, promised a speedy return to 
business as usual. An hitherto elusive standby 
arrangement is likely to be concluded by the end of the 
year. World Bank funds, frozen in material breach of its 
written contracts with the state, will flow again. The EU 
promised development funds if the new government acts 
in a "European spirit" - i.e., obeys the diktats of Brussels. 

The incoming administration is likely to enjoy a period of 
grace with both the trade unions and international 
creditors. Strikes and demonstrations by dispossessed 
miners and underpaid railways workers have waned. But 
Macedonia joined the WTO in 2002 and will thus be 
forced to open even more to devastating competition. 
Labor unrest is likely to re-erupt soon. 



Foreign investment in the country mysteriously wanes and 
waxes - some of it laundered money reinvested in 
legitimate businesses. The government is doing a great job 
of building up the image of Macedonia as an FDI (Foreign 
Direct Investment) destination. But public relations and 
perceptions management must be followed by palpable 
actions and the new government is woefully short on 
concrete steps. It talks the talk but hitherto does not walk 
the walk. 

The government's attempts to attract foreign investors by 
introducing lower taxes may backfire: studies clearly 
evince that multinationals worry less about taxation and 
more about functioning institutions, a commodity that 
Macedonia is irreparably short of. Moreover, vanishingly 
lower taxes signal desperation and Macedonia indeed 
sounds more desperate than confident. No one wants to 
buy the country's leading bank, long on offer. Only one 
contender (Mobilkom Austria) entered a bid for 
Macedonia's third operator cellular network licence. 

On a few occasions, domestic firms, using international 
fronts, have bid for local factories, such as the textile plant 
"Astibo". The national payment card project has been 
guzzled by two banks incestuously close to the outgoing 
ruling party, VMRO-DPMNE. 

But there are real investments, too. The capital's central 
heating utility was purchased by a unidentified French 
energy outfit, announced the general manager. The 
utility's shares were listed in the Athens stock exchange. 
The Macedonian construction firm "Granit" will build a 
$59 million highway in Ukraine, with which Macedonia 
enjoyed an unusually cordial relationship, to American 
chagrin. Johnson Controls and others are eying a string of 



free trade zones and infrastructure projects (dams, roads, 
railways, oil pipeline). A much hyped Vardar Silicone 
Valley is in the works. 

The contentious census in the first two weeks of 
November 2002, a part of the "Ohrid Framework 
Agreement" which ended the internecine fighting the year 
before, was conducted fairly. The count showed that 
Albanians make c. one quarter of the population rather 
than one third, as most Albanians spuriously insisted. 

But, with Kosovo's independence looming across the 
border, the restive Albanians are likely to coerce the 
enfeebled Macedonia into translating this numerical 
reality into political and economic clout. The 
Macedonians are likely to resist. The West will intervene. 
Macedonia is facing a hot spring and a sizzling summer. 

Return 



The Macedonian Lottery 



Every conflict has its economic moments and dimensions. 
The current conflict in Macedonia perhaps even more so. 

The USA and its Western allies regard Macedonia as a 
bridge between Greece, Bulgaria, Serbia and Albania. 
Hence the EU's plans for the revival of transport corridors 
8 and 10 connecting these countries. If all goes well (and 
nothing has hitherto), railways will connect Bulgaria to 
Macedonia and river traffic will flow to Serbia from its 
southern neighbours. All this is envisioned in the Stability 
Pact. There are talks of an oil pipeline across Macedonia's 
territory. A pacified Macedonia is fairly crucial to Serbia's 
recovery and to the prospects of the whole region to 
attract FDI. 

NATO is afraid of Turkish-Greek clashes in the aftermath 
of Kosovo and Macedonia. Turkey has increasingly cast 
itself in its ancient role of "protector of the Balkan 
Muslims". Greece is the only Orthodox-Christian member 
of the EU and an old foe of the erstwhile Sick Man of 
Europe from which it won bloody independence at the 
beginning of the 19th century. Such clashes are likely to 
destabilize the southern flank of NATO and block the 
West's access to Iraq, the Middle East, oil-rich Central 
Asia, and northern China. This will seriously dent the new 
"Pacific and Middle East Orientations" of the Bush 
Administration. 

And what about the actual combatants? 



Albanians and Macedonian crime gangs (in cahoots with 
kleptocratic and venal local politicians) regard Macedonia 
as a vital route for drugs, stolen cars, smuggled cigarettes 
and soft drinks, illegal immigrants, white slavery, and 
weapons dealing. These criminal activities far outweigh 
the GDP of all the adversary states combined. This 
conflict is about controlling territory and the economic 
benefits attendant to such control. 

Crime and war provide employment, status, regular 
income, perks, and livelihood to many denizens of 
Macedonia, Albania, and Bulgaria. They constitute an 
outlet for entrepreneur ship, however perverted. Fighting 
for the cause and smuggling often means travel abroad 
(for instance, on fund raising missions), five star 
accommodation, and a lavish lifestyle. It also translates 
into powers of patronage and excesses of self-enrichment. 

Moreover, in ossified, socially stratified, ethnically 
polarized, and economically impoverished societies, war 
and crime engender social mobility. The likes of Hashim 
Thaci, Ramush Harajdini, and Ali Ahmeti often start as 
rebels and end as part of the cosseted establishment. Many 
a criminal dabble in politics and business. 

Hence the tenacity of both phenomena. Hence the bleak 
and pessimistic outlook for this region. The "formal" 
economies simply cannot compete. Jobs are not created, 
the educated are often bitterly idle, salaries are minuscule 
if paid at all, the future is past. Crime and politics (one 
and the same in the Balkan) are alluring alternatives. 

Moreover, the NLA and its political successor DUI is not 
a monolithic entity. It is more like an umbrella 
organization with serious and fracturing differences of 



opinion regarding the ultimate goals of the insurrection 
four years ago (2001) and the means to obtain these goals. 

Roughly, NLA was made up of one third veteran Kosovo 
fighters, some of them professional soldiers, who also 
fought in Croatia, or in the Foreign Legion. These people 
are bitter and disgruntled by what they see as the betrayal 
of the West in refusing to guarantee an independent 
Kosovo and the failure of the current Kosovar leadership 
to integrate them economically into the emerging polity 
there. Their motives for joining the fighting in Macedonia 
were part emotional and part pecuniary. 

Another third was made of unemployed, young Albanians, 
mainly from Macedonia itself. Their fighting is self- 
interested. They get a monthly salary and perks and, 
lacking education and skills, they don't have much of a 
choice outside the killing fields. 

The rest are diehard, hardcore, idealists who either 
fervently espouse a Great Albania, or would like to take 
over Western Macedonian in a "constitutional coup" 
which will grant them their own police force, 
municipalities, institutions, universities, budgets, and 
semi-political structures. 

The NLA itself was not directly involved in criminal 
activities, though a few of its members are. But the money 
that financed it (from the Czech Republic, Switzerland, 
Germany, and the USA) is tainted by drug dealing, white 
slavery, illegal immigration, and the smuggling of 
everything illicit, from cigarettes to stolen cars, to 
weapons. In this they collaborate with politicians and 
criminals in Macedonia - both Albanian and Macedonian. 



Being a politician in the Balkan is an extremely lucrative 
proposition. Both Albanian and Macedonian politicians 
will abandon the peace process if they believe it leads to 
electoral ruin. Given the current atmosphere, it pays to be 
a pacifist. Virulent nationalism is a guaranteed vote 
loser. But every re-election ticket still requires a modicum 
of xenophobia, ethnic exclusivity, and radicalism. Here 
lies the future. 

Return 



Crime Fighting Computer Systems and 
Databases 



As crime globalizes, so does crime fighting. Mobsters, 
serial killers, and terrorists cross state lines and borders 
effortlessly, making use of the latest advances in mass 
media, public transportation, telecommunications, and 
computer networks. The police - there are 16,000 law 
enforcement agencies in the Unites States alone - is never 
very far behind. 

Quotes from the official Web pages of some of these 
databases: 

National Center for the Analysis of Violent Crime 

(NCAVC) 

Its mission is to combine investigative and operational 
support functions, research, and training in order to 
provide assistance, without charge, to federal, state, local, 
and foreign law enforcement agencies investigating 
unusual or repetitive violent crimes. The NCAVC also 
provides support through expertise and consultation in 
non-violent matters such as national security, corruption, 
and white-collar crime investigations. 

It comprises the Behavioral Analysis Unit (BAU), Child 
Abduction and Serial Murder Investigative Resources 
Center (CASMIRC), and Violent Criminal 
Apprehension Program (VICAP). 



VICAP is a nationwide data information center designed 
to collect, collate, and analyze crimes of violence - 
specifically murder. It collates and analyzes the 
significant characteristics of all murders, and other violent 
offenses. 

Homicide Investigation Tracking System (HITS) 

A program within the Washington state's Attorney 
General's Office that tracks and investigates homicides 
and rapes. 

Violent Crime Linkage System (ViCLAS) 

Canada-wide computer system that assists specially 
trained investigators to identify serial crimes and 
criminals by focusing on the linkages that exist among 
crimes by the same offender. This system was developed 
by the RCMP (Royal Canadian Mounted Police) in the 
early 1990s. 

UTAP, stands for The Utah Criminal Tracking and 
Analysis Project 

Gathers experts from forensic science, crime scene 
analysis, psychiatry and other fields to screen unsolved 
cases for local law enforcement agencies. 

International Criminal Police Organization (ICPO) - 
Interpol's DNA Gateway 

Provides for the transfer of profile data between two or 
more countries and for the comparison of profiles that 
conform to Interpol standards in a centralized database. 
Investigators can access the database via their Interpol 
National Central Bureau (NCB) using Interpol's secure 
global police communications system, 1-24/7. 



Interpol's 1-24/7 

Global communication system to connect its member 
countries and provide them with user-friendly access to 
police information. Using this system, Interpol National 
Central Bureaus (NCBs) can search and cross-check data 
in a matter of seconds, with direct and immediate access 
to databases containing critical information (ASF 
Nominal database of international criminals, electronic 
notices, stolen motor vehicles, stolen/lost/counterfeit 
travel and ID documents, stolen works of art, payment 
cards, fingerprints and photographs, a terrorism watch list, 
a DNA database, disaster victim identification, 
international weapons tracking and trafficking in human 
beings-related information, etc). 

Interpol Fingerprints 

Provides information on the development and 
implementation of fingerprinting systems for the general 
public and international law enforcement entities. 

Europol (European Union's criminal intelligence 
agency) Computer System (TECS) 

Member States can directly input data into the information 
system in compliance with their national procedures, and 
Europol can directly input data supplied by non EU 
Member States and third bodies. Also provides analyses 
and indexing services. 

http://www.atg.wa.gov/hits/index.shtml 

http://www.mass.gov/msp/unitpage/vicap.htm 



http ://w ww .fbi . go v/hq/i sd/cirg/ncavc . htm 

http://www.rcmp.ca/techops/viclas_e.htm 

http://www.justicejunction.com/innocence_lost_ian_wing 
_utap.htm 

http://www.interpol.int/Public/ICPO/FactSheets/fsADN20 
0501 .asp 

http://www.interpol.int/Public/ICPO/FactSheets/i247.asp 

http://www.europol.eu.int/index.asp?page=facts 

How to Surf the Internet Safely 

1. NEVER click on a link that is contained in an 
e-mail, instant message, or post to a Usenet or other 
group. 

2. NEVER open or install a program directly 
from the Internet . First, download it to your hard 
disk, scan it with your anti-virus software, and only 
then, if it is clean, install it. 

3. NEVER open or install a program directly 
from a CD-ROM or DVD . First, scan it with your 
and- virus software, and only then, if it is clean, 
install it. 

4. NEVER enter any personal details in forms on 
unknown sites. 



5. NEVER type your User ID or password unless 
you see the LOCK icon at the bottom of the screen 
and the Web address starts with https:// 

6. NEVER click on a pop-up , no matter what it 
says! Don't click on it even if you want to close it. 

7. NEVER open attachments that you receive by 
e-mail. If in doubt, save the attachment to the hard 
disk, scan it with your anti-virus software, and only 
then, if it is clean, open it. Try to read all your e- 
mail messages in text format, rather than HTML. 

8. NEVER visit unfamiliar Websites . First, go to 
Google (www.google.com) and check whether the 
site is legitimate and does not carry malware. Only 
if it is clean, visit it for the first time using the 
Opera browser. 

9. CHANGE your passwords frequently; use 
complex passwords (example: 7Yby89IfD); never 
give your passwords to anyone. 

10. UPDATE your Operating System, Antivirus, 
Firewall, Antispyware, and computer 
manufacturer's utilities DAILY . 

1 1 . SCAN your computer for malware every time 
you use the computer, after you have used it . 

12. ANYTHING SUSPICIOUS? Stop everything 
you are doing , disconnect from the Internet, and 



scan the computer for malware. Examples of 
suspicious behavior: persistent pop-ups; the 
computer or connection slow down considerably; 
repeated re-boots; mouse or keyboard freeze; 
strange messages and alerts. 

European Banks Threatened by Identity Theft 

European banks, from Sweden to Austria, are likely to 
face, in the near future, an unprecedented wave of 
attempts at identity theft. Hackers from Latvia to Ukraine 
and from Serbia to Bulgaria are now targeting financial 
institutions. The global crisis has added to the rows of 
unemployed former spies, laid-off bankers, and computer 
programmers. Networks of secret agents, knowledgeable 
financiers, and computer- savvy criminals have sprung all 
over Eastern and Central Europe and the Balkans. 

How can Europe's banks defend themselves? 

1. By assigning account or relationship managers to all 
business accounts and individual accounts above a certain 
size. This is the practice in private banking and 
investment banking, but it has yet to spread to retail. A 
one-on-one line of communication between client and 
specific bank officer places an insurmountable obstacle in 
front of hackers and criminals. 

2. Banks should allow their clients to "block" their 
accounts at no charge to the client. Account blockage 
means that all transfers from the account require the 
confirmation and approval of one or two specific bank 
officers who know the client personally. Thus, even if a 
hacker or a criminal were to succeed to effect a transfer of 



funds, such illicit and damaging activity could be blocked 
by the bank. 

3. Banks should ignore and disallow instructions in the 
account received by e-mail. E-mail communication is 
amenable to spoofing, hijacking, hacking, and other forms 
of impersonation. Even Web-based e-mail services such 
as Gmail are highly insecure, especially over wireless 
networks. 

4. Instructions by fax should be accepted only after the 
client provided, verbally, a one time code (see below). 

5. Verbal communication should be conducted via mobile 
phones, not fixed or land lines. The mobile phone's SIM 
card guarantees the identity of the specific device used 
and allows for tracing in case a crime has been committed. 
On many networks the communication flow is encrypted. 
Man-in-the-middle attacks and interception are more 
difficult with cell phones. 

Online Banking Safeguards 

All of Europe's major banks offer to their customers 
financial services and products through the Internet. But 
there's a problem: computer security. To withstand the 
coordinated onslaught of hackers and cyber-criminals, 
who are constantly trying to empty the bank accounts of 
their victims, online banking Websites must incorporate 
many defensive safety features. These render the entire 
experience cumbersome and complicated and deter the 
vast majority of clients. 

Generally speaking, European banks are far safer than 
American ones as far as online banking and their online 



presence go. The list below is short and by no means 
exhaustive and is based on a study conducted at the 
University of Michigan by Atul Prakash, a professor in 
the department of electrical engineering and computer 
science, and two doctoral students, Laura Falk and Kevin 
Borders: 

1. All the pages of the bank's Website must use SSL 
(Secure Sockets Layer) and TLS encryption technologies. 
In the Internet Explorer Web browser, a small, yellow 
padlock icon appears at the bottom or the top of the page 
when such encryption is available. It prevents hackers 
from tapping into the exchange of information between 
the user's computer and the bank's servers and routers. 
Most browsers now offer also a wide variety of anti- 
phishing protections. 

2. Users should not use their computer keyboard to type in 
passwords. Many computers are infected with keyloggers: 
small software applications that monitor the user's typing 
and pass on the information to networks of criminals. 
Instead, the bank should provide a "virtual keyboard" (a 
tiny on-screen graphic that looks like a keyboard). Users 
can then click their mouse and press the various "keys" of 
the virtual keyboard to form the password. Some banks 
use Java "sandboxing" and virtualization technologies in 
order to isolate the online banking session from the user's 
potentially-infected browser or computer. 

3. The banking Website should not re-direct the user to 
other domains or sites (which potentially are not as 
secure). 

4. The bank should insist on strong passwords: minimum 
five characters, allowing combinations of numerals and 



letters, including capitalized ones. Few banks adhere to 
this rule, though. Many of them allow passwords with 
only 4-5 numerals. 

5. The bank should never send any information pertaining 
to the account - especially not passwords - via e-mail. 
Many European banks violate this cardinal rule by 
sending a staggering amount of information about the 
account via email, including account numbers, balances, 
movements, and ownership. 

6. The bank should insist on "two-factor authentication". 
The user would need a username and password to access 
the Website. But, to transact in the account, he would 
make use of one time "tokens" (codes). Each user should 
be equipped with printed lists of such codes or with a 
special device that generates them. They can also receive 
the codes via SMS. The codes are used to transfer money, 
change the password, change the limit of withdrawal, give 
instructions regarding securities and deposits, etc. 

Cyber (Internet) Narcissists and Psychopaths 

To the narcissist, the Internet is an alluring and irresistible 
combination of playground and hunting grounds, the 
gathering place of numerous potential Sources of 
Narcissistic Supply, a world where false identities are the 
norm and mind games the bon ton. And it is beyond the 
reach of the law, the pale of social norms, the strictures of 
civilized conduct. 

The somatic finds cyber-sex and cyber-relationships 
aplenty. The cerebral claims false accomplishments, fake 
skills, erudition and talents. Both, if minimally 
communicative, end up at the instantly gratifying 



epicenter of a cult of fans, followers, stalkers, 
erotomaniacs, denigrators, and plain nuts. The constant 
attention and attendant quasi-celebrity feed and sustain 
their grandiose fantasies and inflated self-image. 

The Internet is an extension of the real-life Narcissistic 
Pathological Space but without its risks, injuries, and 
disappointments. In the virtual universe of the Web, the 
narcissist vanishes and reappears with ease, often 
adopting a myriad aliases and nicknames. He (or she) can 
thus fend off criticism, abuse, disagreement, and 
disapproval effectively and in real time - and, 
simultaneously, preserve the precarious balance of his 
infantile personality. Narcissists are, therefore, prone to 
Internet addiction. 

The positive characteristics of the Net are largely lost on 
the narcissist. He is not keen on expanding his horizons, 
fostering true relationships, or getting in real contact with 
other people. The narcissist is forever the provincial 
because he filters everything through the narrow lens of 
his addiction. He measures others - and idealizes or 
devalues them - according to one criterion only: how 
useful they might be as Sources of Narcissistic Supply. 

The Internet is an egalitarian medium where people are 
judged by the consistency and quality of their 
contributions rather than by the content or bombast of 
their claims. But the narcissist is driven to distracting 
discomfiture by a lack of clear and commonly accepted 
hierarchy (with himself at the pinnacle). He fervently and 
aggressively tries to impose the "natural order" - either by 
monopolizing the interaction or, if that fails, by becoming 
a major disruptive influence. 



But the Internet may also be the closest many narcissists 
get to psychodynamic therapy. Because it is still largely 
text-based, the Web is populated by disembodied entities. 
By interacting with these intermittent, unpredictable, 
ultimately unknowable, ephemeral, and ethereal voices - 
the narcissist is compelled to project unto them his own 
experiences, fears, hopes, and prejudices. 

Transference (and counter-transference) are quite 
common on the Net and the narcissist's defence 
mechanisms - notably projection and Projective 
Identification - are frequently aroused. The therapeutic 
process is set in motion by the - unbridled, uncensored, 
and brutally honest - reactions to the narcissist's repertory 
of antics, pretensions, delusions, and fantasies. 

The narcissist - ever the intimidating bully - is not 
accustomed to such resistance. Initially, it may heighten 
and sharpen his paranoia and lead him to compensate by 
extending and deepening his grandiosity. Some narcissists 
withdraw altogether, reverting to the schizoid posture. 
Others become openly antisocial and seek to subvert, 
sabotage, and destroy the online sources of their 
frustration. A few retreat and confine themselves to the 
company of adoring sycophants and unquestioning 
groupies. 

(continued below) 



This article appears in my book, "Malignant Self Love 
- Narcissism Revisited" 



Click HERE to buy the print edition from Barnes and 
Noble or HERE to buy it from Amazon or HERE to 
buy it from The Book Source 

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But a long exposure to the culture of the Net - irreverent, 
skeptical, and populist - usually exerts a beneficial effect 
even on the staunchest and most rigid narcissist. Far less 
convinced of his own superiority and infallibility, the 
online narcissist mellows and begins - hesitantly - to 
listen to others and to collaborate with them. 

Ultimately, most narcissists - those who are not schizoid 
and shun social contact - tire of the virtual reality that is 
cyberspace. The typical narcissist needs "tangible" 
narcissistic supply. He craves attention from real, live, 
people, flesh and blood. He strives to see in their eyes 
their admiration and adulation, the awe and fear that he 
inspires, the approval and affirmation that he elicits. 

There is no substitute to human contact, even for the 
narcissist. Many narcissists try to carry online 



relationships they nurtured into their logical extension and 
conclusion offline. Other burst upon the cyber scene 
intermittently, vanishing for long months, only to dive 
back in and reappear, reinvigorated. Reality beckons and 
few narcissists resist its siren call. 

Interview granted to Misty Harris of CanWest on 
February 23, 2005 

Q. How might technology be enabling narcissism, 
particularly for the Internet generation? 

A. To believe that the Internet is an unprecedented 
phenomenon with unique social implications is, in itself, 
narcissistic. The Internet is only the latest in a long series 
of networking-related technological developments. By 
definition, technology is narcissistic. It seeks to render us 
omnipotent, omniscient, and omnipresent - in other words, 
Godlike. 

The Internet allows us to replicate ourselves and our 
words (through vanity desktop publishing, blogs, and 
posting online content on Web sites), to playact our 
favorite roles, to communicate instantly with thousands 
(narrowcasting), to influence others, and, in general, to 
realize some of our narcissistic dreams and tendencies. 

Q. Why is it a bad thing to have a high opinion of 
yourself? 

A. It is not a bad thing if it is supported by commensurate 
achievements. If the gap between fantasy and reality is too 
big, a dysfunction that we call "pathological narcissism" 
sets in. 



Q. What does it say about our culture that we encourage 
narcissistic characteristics in people? (example: Paris 
Hilton - we made her a star for loving herself) 

A. Celebrity culture is not a new thing. It is not a culture- 
dependent phenomenon. Celebrities fulfil two emotional 
functions for their fans: they provide a mythical narrative 
(a story that the fan can follow and identify with) and they 
function as blank screens onto which the fans project their 
dreams, hopes, fears, plans, values, and desires (wish 
fulfilment). 

Western culture emphasizes ambition, competitiveness, 
materialism, and individualism. These admittedly are 
narcissistic traits and give the narcissist in our society an 
opening advantage. 

But narcissism exists in a different form in collectivist 
societies as well. As Theodore Millon and Roger Davis 
state in their seminal tome, "Personality Disorders in 
Modern Life": 

"In an individualistic culture, the narcissist is 'God's 
gift to the world'. In a collectivist society, the narcissist is 
'God's gift to the collective'". 

More here - It's all about me - narcissism in a high-tech 
era 

Read about the Wikipedia as a case of online 
pathological narcissism 

Twitter: Narcissism or Age-old Communication? 



It has become fashionable to castigate Twitter - the 
microblogging service - as an expression of rampant 
narcissism. Yet, narcissists are verbose and they do not 
take kindly to limitations imposed on them by third 
parties. They feel entitled to special treatment and are 
rebellious. They are enamored with their own voice. Thus, 
rather than gratify the average narcissist and provide him 
or her with narcissistic supply (attention, adulation, 
affirmation), Twitter is actually liable to cause narcissistic 
injury . 

From the dawn of civilization, when writing was the 
province of the few and esoteric, people have been 
memorizing information and communicating it using 
truncated, mnemonic bursts. Sizable swathes of the Bible 
resemble Twitter-like prose. Poetry, especially blank 
verse one, is Twitterish. To this very day, newspaper 
headlines seek to convey information in digestible, 
resounding bits and bites. By comparison, the novel - an 
avalanche of text - is a newfangled phenomenon. 

Twitter is telegraphic, but this need not impinge on the 
language skills of its users. On the contrary, coerced into 
its Procrustean dialog box, many interlocutors become 
inventive and creativity reigns as bloggers go atwitter. 

Indeed, Twitter is the digital reincarnation of the 
telegraph, the telegram, the telex, the text message (SMS, 
as we Europeans call it), and other forms of business-like, 
data-rich, direct communication. Like them, it forces its 
recipients to use their own imagination and creativity to 
decipher the code and flesh it out with rich and vivid 
details. It is unlikely to vanish, though it may well be 
supplanted by even more pecuniary modes of online 
discourse. 



Interview granted to Agenda Efe, Spain, April 2008 

1. Does the Internet make a special amplification of 
narcissism or is just the reflection of reality? How, 
despite of the fact that many people is disturbed by the 
anonymous characters that you can adopt in the 
Internet, the exhibitionism is, maybe, more usual. I 
mean, in terms of narcissism? Can a person be addicted 
to the web because is own narcissism? 

A. The narcissist likes to appear to be mysterious. It 
enhances his self-perceived sense of omnipotence, it 
renders him "unique" and "interesting". The right moniker 
(Internet alias or handle) imbues the narcissist with a 
sense of immunity and superiority and permits him to 
commit the most daring or heinous acts . 

2. What kind of lacks or necessities there are behind this 
behaviour? What are we expecting when we search our 
name on Google? Can we construct our image with the 
pieces of us in the internet? 

A. The Internet is the hi-tech equivalent of a giant mirror. 
Like the mythical Narcissus, it allows us to fall in love 
with our reflection every day anew. We gaze into the 
depths of the Internet to reassure ourselves of our 
continuity and very existence. It is our modern photo 
album; a repository of snippets of our lives; and our 
external memory. 

In psychoanalytic terms, the Internet replaces some of our 
ego functions: it regulates our sense of self- worth; puts us 



in touch with reality and with others; and structures our 
interactions (via its much vaunted peer-pressure of the 
Netiquette and the existence of editors and moderators). 

We crave attention and feedback: proof positive that we 
matter, that someone cares about us, that we are not mere 
atoms in a disjointed and anomic Universe. In this sense, 
the Internet substitutes for God and many social functions 
by reassuring us that we fit into a World that, though 
amorphous and protean, is sustaining, predictable, 
constant, and nurturing. The Internet replaces our parents 
as a source of nourishment, support, caring, discipline, 
and omniscience. 

3. In the case of the blogs, what's the point in common 
in the idea of doing a private diary and be available for 
everybody? 

A. I am not sure what you mean. Blogs are anything but 
private. They are explicitly meant for public consumption, 
thrive on public attention, and encourage interaction with 
the public (through the comments area). One can set one's 
blog or online journal to "private", though, as the hi-tech 
equivalent of a personal diary. 

4. Internet, with their blogs, Facebook, Myspace or 
YouTube, has create the possibility of make yourself 
famous without promotion, just with the progressive 
diffusion of your material. Examples like the singers 
Mika and Lilly Allen or many bloggers, can it make a 
new way of realizing the "American dream" for the 
users of the Internet? 

A. Being famous encompasses a few important functions: 
it endows us with power, provides us with a constant 



Source of Narcissistic Supply (admiration, adoration, 
approval, awe), and fulfils important Ego functions. 

The Internet caters to our narcissistic traits and 
propensities and allows us to become "celebrities-by- 
replication". The image that the blogger or artist projects 
is hurled back at him, reflected by those exposed to his 
instant celebrity or fame. By generating multiple copies of 
himself and his work, he feels alive, his very existence is 
affirmed and he acquires a sensation of clear boundaries 
(where he ends and the world begins). 

There is a set of narcissistic behaviours typical to the 
pursuit of celebrity. There is almost nothing that the Net 
celebrity refrains from doing, almost no borders that he 
hesitates to cross to achieve renown. To him (or, 
increasingly, her), there is no such thing as "bad 
publicity": what matters is to be in the public eye at any 
price. 

Because narcissistic individuals equally enjoy all types of 
attention and like as much to be feared as to be loved, for 
instance - they don't mind if what is published about them 
is wrong ("as long as they spell my name correctly"). The 
celebrity blogger or artist experiences bad emotional 
stretches only when he lacks attention, or publicity. 

It is then that some bloggers, artists, and Webmasters plot, 
contrive, plan, conspire, think, analyse, synthesise and do 
whatever it takes to regain the lost exposure in the public 
eye. The more they fail to secure the attention of the target 
group (preferably, the entire Internet community), the 
more daring, eccentric and outlandish they become. A 
firm decision to become known is transformed into 



resolute action and then to a panicky pattern of attention 
seeking behaviours. 

It is important to understand that the 
blogger/artist/Webmaster are not really interested in 
publicity per se. They appear to be interested in becoming 
a celebrity, but, in reality, they are concerned with the 
REACTIONS to their newly- acquired fame: people watch 
them, notice them, talk about them, debate their actions - 
therefore they exist. 

5. There are many new applications to feed human 
narcissism on the net: Googlefight, Egosurf.org, the 
blogs themselves... Could be used narcissism as a 
business? 

A. Every good business is founded on the mass 
psychology of its clientele. In a narcissistic civilization , 
business is bound to adapt and become increasingly more 
narcissistic. The Internet started off as an information 
exchange. The surge of (mainly American) users 
transformed it in profound ways. User-generated 
"content" is a thin veneer beneath which lurks the seething 
and pathological narcissism of the masses. Narcissism is 
our main business organizing principle outside the 
Internet as well: cosmetics, fashion, health, publishing, 
show business, the media, and the financial industries all 
rest on firm narcissistic foundations. The management 
class itself is highly narcissistic! 

6. Can be satisfied the true and pathologic narcissism 
just with the feed-back on the Internet or it needs, 
finally, to put in "real" his power of attraction. 



A. What's not real about the Internet? This dichotomy 
between virtual and real is false. The Internet is as real as 
it gets and, for many of its users, it is the only reality and 
the only frame of reference. It is "reality" as we used to 
know it that is gradually vanishing and being replaced by 
"virtual" substitutes: print media are dying and giving way 
to blogs and online news aggregators; iTunes and Napster 
and BitTorrent and eMule are ruining the very physical 
music CD; there is more published on the Internet than is 
available in many brick and mortar libraries, and so on. 

7. Could presence or non-presence in Internet create a 
new kind of social class? 

A. Like every other social phenomenon, the Internet gave 
rise to a stratified society with hackers, crackers, nerds, 
geeks, Wikipedians, bloggers, etc. occupying various 
niches. Not using the Internet - a kind of Internet Luddism 
- may yet become a badge of honor. Internet addicts may 
become either outcasts or the new elite . Who knows? 
Everything digital is still in its formative years and still in 
flux. 

8. How dangerous is narcissism, inside or outside the 
web? 

A. Very dangerous. Just read the list of diagnostic criteria 
for the Narcissistic Personality Disorder (NPD): the 
narcissist lacks empathy, is arrogant, exploits people, is 
envious, has a strong and unjustified sense of entitlement, 
and is obsessive and delusional. Many narcissists are also 
psychopaths . Pathological narcissism is often diagnosed 
with other mental health disorders (a phenomenon called 
" co-morbidity "). Narcissists are over-represented among 



criminals, gamblers, and people with reckless and 
inconsiderate behaviors. 



Interview granted to About.com about Online Dating 

1. In your opinion, why does the Internet seem to be an 
easy forum to fall in love? 

A. Frequently, in online dating, the partners are treated as 
"blank screens" onto which the online dater projects her 
dreams, wishes, and unfulfilled needs and yearnings. The 
Internet allows the two sides to maintain an emotionally 
riskless intercourse by fully controlling the interaction 
with their interlocutors or correspondents. While 
thoroughly gratified, they are less likely to get hurt and 
feel less vulnerable because they invest - emotionally and 
otherwise - far less than in a full-fledged, "real" life 
liaison. Of course, they are usually disappointed when 
they try to flesh out their online fantasy by moving the 
relationship offline, "down to earth" and into "brick-and- 
mortar" venues. 

2. Despite an online relationship being made up of text 
messages and pictures, why does it seem people more 
easily get into Internet relationships than they do in real 
life? 



A. "Internet relationship" is an oxymoron. A relationship 
entails the existence of a physical dimension, time spent 
together, friction and conflict, the satisfaction of all the 
senses, and experiences shared. IM, chat, webcams, and 
the like can seemingly bring people closer and create the 
illusion of intimacy, but actually it is a narcissistic sham, 
an echo chamber, a simulacrum. People "fall in love" with 
their own reflections and with idealized partners, not with 
the real items. Their counterparty is merely a peg on 
which they hang their desire for closeness, a sounding 
board. It is like watching a film: one can be moved to 
tears by what is happening on the screen, but very few 
confuse the flickering lights with reality itself. 

3. What dangers are there in falling in love online? 

A. Online "love" is not love at all and, therefore, it is less 
prone to heartbreak and disappointment. The parties fully 
control their side of the interaction and limit it at will. The 
information exchanged is doctored and there is no way of 
verifying it (for instance, by paying attention to body 
language and social cues). Online "love" is more akin to 
infatuation, comprised of equal measures fantasy and 
narcissism. The parties fall in love with the idea of falling 
in love: the actual online partner is rather incidental. The 



extant technology dictates the solipsistic and self-centered 
nature of these exchanges. 

Online dating is inherently unsafe as it affords no way to 
ascertain the identity of your interlocutor or 
correspondent. When you date online, you are missing out 
on critical information such as your potential partner's 
body language; the pattern of his social interactions ; his 
behavior in unexpected settings and circumstances; his 
non-scripted reactions; even his smell and how he truly 
looks, dresses, and conducts himself in public and in 
private. The dangers, like in real life, is when one comes 
across a predator: a psychopath, a stalker, or a bully. Click 
on this link to learn how to avoid these people: How to 
Recognize a Narcissist or Psychopath Before It is Too 
Late? 

4. What tips can you share with readers who have fallen 
in love online and have been burnt by the rejection of a 
breakup online who might do it again? 

A. The Internet is merely a sophisticated, multimedia 
communication channel, a glorified videophone. 
"Distance relationships" don't work. Real, lasting, 
emotionally-rewarding relationships that lead to happiness 
and personal growth require propinquity, familiarity, 
intimacy, and sacrifices. Don't make the Internet your 
exclusive dating venue and don't use it to shield you from 
life itself . Deploy it merely to find information and reach 
out and, on the first opportunity, log off and go out there 
to confront multidimensional reality with all its 
complexity and ambiguities. Do not use the Internet to 
fend off potential hurt: there is no growth without pain 
and no progress without experience. 



5. Despite some problems, do you think the Internet 
should be sworn off as a means of finding love? 

A. Online dating is a great tool for people who, for various 
reasons, have limited access to other dating options or 
venues where you can date "real" people face-to-face, 
instead of mere avatars. 

Return 



Using Data from Nazi Medical Experiments 

Fruits of the Poisoned Tree 

"Even so every good tree bringeth forth good fruit; but a 
corrupt tree bringeth forth evil fruit. A good tree cannot 
bring forth evil fruit, neither [can] a corrupt tree bring 
forth good fruit. Every tree that bringeth not forth good 
fruit is hewn down, and cast into the fire. Wherefore by 
their fruits ye shall know them. " 

Gospel of Matthew 7:17-20 

I. Fruits of the Poisoned Tree 

Nazi doctors conducted medical experiments on prisoners 
in a variety of concentration and extermination camps 
throughout Europe, most infamously in Auschwitz, 
Ravensbriick, Sachsenhausen, Dachau, and Mauthausen. 
The unfortunate subjects were coerced or tricked into 
participating in the procedures, which often ended in 
agonizing death or permanent disfigurement. 

The experiments lasted a few years and yielded reams of 
data on the genetics of twins, hypothermia, malaria, 
tuberculosis, exposure to mustard gas and phosphorus, the 
use of antibiotics, drinking sea water, sterilization, 
poisoning, and low-pressure conditions. Similarly, the 
Japanese conducted biological weapons testing on 
prisoners of war. 

Such hideous abuse of human subjects is unlikely ever to 
be repeated. The data thus gathered is unique. Should it be 



discarded and ignored, having been obtained so 
objectionably? Should it be put to good use and thus 
render meaningful the ultimate sacrifices made by the 
victims? 

There are three moral agents involved in this dilemma: the 
Nazi Doctors, their unwitting human subjects, and the 
international medical community. Those who conducted 
the experiments would surely have wanted their outcomes 
known. On a few occasions, Nazi doctors even presented 
the results of their studies in academic fora. As surely, 
their wishes should be roundly and thoroughly ignored. 
They have forfeited the right to be heard by conducting 
themselves so abominably and immorally. 

Had the victims been asked for their informed consent 
under normal circumstances (in other words: not in a 
camp run by the murderous SS), they would have surely 
denied it. This counterfactual choice militates against the 
publication or use of data gathered in the experiments. 

Yet, what would a victim say had he or she been 
presented with this question: 

"You have no choice but to take part in experiment (E) 
and you will likely die in anguish consequently. 
Knowing these inescapable facts, would you rather that 
we suppress the data gathered in experiment (E), or 
would you rather that we publish them or use them 
otherwise?" 

A rational person would obviously choose the latter. If 
death is inescapable, the only way to render meaningful 
an otherwise arbitrary, repugnant, and cruel circumstance 
is to leverage its outcomes for the benefit of future 



generations. Similarly, the international medical 
community has a responsibility to further and guarantee 
the well-being and health of living people as well as their 
descendants. The Nazi experiments can contribute to the 
attainment of this goal and thus should be reprinted, 
studied, and cited - but, of course, never emulated or 
continued. 

But what about the argument that we should never make 
use - even good use - of the "fruits of a poisoned tree" (to 
borrow a legal term)? That we should eschew the 
beneficial outcomes of evil , of the depraved, the immoral, 
the illegal, or the unethical? 

This argument flies in the face of reality. We frequently 
enjoy and consume the fruits of irredeemably poisoned 
trees. Museum collections throughout the world amount to 
blood-tainted loot, the by-products of centuries of 
colonialism, slavery, warfare, ethnic cleansing, and even 
genocide; criminals are frequently put behind bars based 
on evidence that is obtained unethically or illegally; 
countries go to war to safeguard commercial interests and 
continued prosperity; millions of students study in 
universities endowed with tainted money; charities make 
use of funds from dubious sources, no questions asked. 
The list is long. Much that is good and desirable in our 
lives is rooted in wickedness, sadism , and corruption . 

//. The Slippery Slope of Informed Consent 

In the movie "Extreme Measures", a celebrated 
neurologist is experimenting on 12 homeless "targets" in 
order to save millions of quadriplegics from a life of 
abject helplessness and degradation. His human subjects 
are unaware of his designs and have provided no informed 



consent. Confronted by a young, idealistic doctor towards 
the end of the film, the experimenter blurts something to 
the effect of "these people (his victims) are heroes". His 
adversary counters: "They had no choice in the matter!" 

Yet, how important is the question of choice? Is informed 
consent truly required in all medical and clinical 
experiments? Is there a quantitative and/or qualitative 
threshold beyond which we need ask no permission and 
can ethically proceed without the participants' agreement 
or even knowledge? For instance: if, by sacrificing the 
bodies of 1000 people to scientific inquiry, we will surely 
end up saving the lives of tens of millions, would we be 
morally deficient if we were to proceed with fatal or 
disfiguring experimentation without obtaining consent 
from our subjects? 

Taken a step further, we face the question: are decision- 
makers (e.g., scientists, politicians) ethically justified 
when they sacrifice the few in order to save the many? 
Utilitarianism - a form of crass moral calculus - calls for 
the maximization of utility (life, happiness, pleasure). The 
lives, happiness, or pleasure of the many outweigh the 
life, happiness, or pleasure of the few. If by killing one 
person we save the lives of two or more people and there 
is no other way to save their lives - such an act of 
desperation is morally permissible. 

Let us consider a mitigated form of "coercion": imagine a 
group of patients, all of whom are suffering from a newly- 
discovered disease. Their plight is intolerable: the 
affliction is dehumanizing and degrading in the extreme, 
although the patients maintain full control over their 
mental faculties. The doctors who are treating these 
unfortunates are convinced beyond any reasonable doubt 



that by merely observing these patients and subjecting 
them to some non-harmful procedures, they can learn how 
to completely cure cancer, a related group of pathologies. 
Yet, the patients withhold their informed consent. Are we 
justified in forcing them to participate in controlled 
observations and minimally invasive surgeries? 

The answer is not a clear-cut, unequivocal, or resounding 
"no". Actually, most people and even ethicists would tend 
to agree that the patients have no moral right to withhold 
their consent (although no one would dispute their legal 
right to "informed refusal"). Still, they would point out 
that, as distinct from the Nazi experiments, the patients' 
here won't be tortured and murdered. 

Now, consider the following: in a war, the civilian 
population is attacked with a chemical that is a common 
by-product of certain industrial processes. In another 
conflict, this time a nuclear one, thousands of non- 
combatants die horribly of radiation sickness. The 
progression of these ailments - exposure to gas and to 
radiation - is meticulously documented by teams of army 
doctors from the aggressor countries. Should these data be 
used and cited in future research, or should they be 
shunned? Clearly the victims did not give their consent to 
being so molested and slaughtered. Equally clearly, this 
unique, non-replicable data could save countless lives in 
the event of an industrial or nuclear accident. 

Again, most people would weigh in favor of making good 
use of the information, even through the victims were 
massacred and the data were obtained under heinous 
circumstances and without the subjects' consent. 
Proponents of the proposition to use the observations thus 
gathered would point out that the victims' torture and 



death were merely unfortunate outcomes of the 
furtherance of military goals ("collateral damage") and 
that, in contrast to the Nazi atrocities, the victims were not 
singled out for destruction owing to their race, nationality, 
or origin and were not subjected to gratuitous torment and 
mortification. 

Let us, therefore, escalate and raise the moral stakes. 

Imagine a group of patients who have been in a persistent 
vegetative state (PVS, or "coma") for well over 20 years, 
their lives maintained by expensive and elaborate 
machinery. An accidental scientific discovery 
demonstrates that their brain waves contain information 
that can effectively and thoroughly lead to a cure for a 
panoply of mental health disorders, most notably to the 
healing of all psychotic states, including schizophrenia- 
paranoia. Regrettably, to obtain this information reliably 
and replicably, one must terminate the suspended lives of 
many comatose people by detaching them from their life- 
support units. It is only when they die convulsively that 
their brains produce the aforementioned waves. Should 
we sacrifice them for the greater good? 

This depends, many would say. If the patient does not 
recover from PVS within 1 month, the prognosis is bad. 
Patients in PVS survive for years (up to 40 years, though 
many die in the first 4 years of their condition) as long as 
they are fed and hydrated. But they very rarely regain 
consciousness (or the ability to communicate it to others, 
if they are in a "locked-in" state or syndrome). Even those 
who do recover within days from this condition remain 
severely disabled and dependent, both physically and 
intellectually. So, PVS patients are as good as dead. 
Others would counter that there is no way to ascertain 



what goes on in the mind of a comatose person. Killing a 
human being, whatever his or her state, is morally 
impermissible. 

Still, a sizable minority would argue that it makes eminent 
sense to kill such people - who are not fully human in 
some critical respects - in order to benefit hundreds of 
millions by improving their quality of life and 
functionality. There is a hierarchy of rights, some would 
insist: the comatose have fewer rights than the mentally ill 
and the deranged and the "defective" are less privileged 
than us, normal, "full-fledged", human beings. 

But who determines these hierarchies? How do we know 
that our personal set of predilections and prejudices is 
"right", while other people are patently wrong about 
things? The ideology of the Nazis assigned the mentally 
sick, the retarded, Jews, Gypsies, and assorted Slavs into 
the bottom rung of the human ladder. This stratification of 
rights (or lack thereof) made eminent sense to them. 
Hence their medical experiments: as far as the Nazis were 
concerned, Jews were not fully-human (or even non- 
human) and they treated them accordingly. We strongly 
disagree not only with what the Nazis did but with why 
they acted the way they did. We firmly believe that they 
were wrong about the Jews, for instance. 

Yet, the sad truth is that we all construct and harbor 
similar ladders of "lesser" and "more important" people. 
In extreme situations, we are willing to kill, maim, and 
torture those who are unfortunate enough to find 
themselves at the bottom of our particular pecking order. 
Genocide, torture, and atrocities are not uniquely Nazi 
phenomena. The Nazis have merely been explicit about 
their reasoning. 



Finally, had the victims been fully informed by the Nazi 
doctors about the experiments, their attendant risks, and 
their right to decline participation; and had they then 
agreed to participate (for instance, in order to gain access 
to larger food rations), would we have still condemned 
these monstrous procedures as vociferously? Of course we 
would. Prisoners in concentration camps were hardly in 
the position to provide their consent, what with the 
conditions of hunger, terror, and disease that prevailed in 
these surrealistic places. 

But what if the very same inhumane, sadistic experiments 
were conducted on fully consenting German civilians? 
Members of the Nazi Party? Members of the SS? Fellow 
Nazi doctors? Would we have risen equally indignantly 
against this barbarous research, this consensual crime - or 
would we have been more inclined to embrace its 
conclusions and benefit from them? 

Return 



Surviving on Nuclear Waste 

Also published by United Press International (UPI) 

On May 11, 2005, Romania hosted a two-day exercise 
simulating a nuclear accident. It was conducted at the 
Cernavoda nuclear power plant. But the real radiological 
emergency is already at hand and unfolding. 

Nuclear waste is both an environmental problem and an 
economic solution in the countries of east Europe and 
central Asia. Kazakhstan announced in November 2002 
that it plans to import other countries' nuclear waste - and 
get paid for its shoddy disposal-by-burial, contrary to 
international conventions. 

Ironically, the money thus generated is earmarked for 
ridding of Kazakhstan of its own pile of fissionable trash. 
This emulates a similar scheme floated five years ago in 
Russia. The Atomic Energy Ministry planned to import 
20,000 tons of nuclear waste to earn $21 billion in the 
process. 

The collapse of the Warsaw Pact left many countries in 
the former Soviet block with an ageing and prohibitively 
expensive to maintain nuclear arsenal. Dismantling the 
war heads - often with American and European Union 
Euratom funding - yielded mounds of lethal radioactive 
materials. 

Abandoned nuclear test sites - such as the USSR's central 
facility in Semipalatinsk, Kazakhstan - contain thousands 
of tons of radioactive leftovers. Add to this the network of 
decrepit, Chernobyl-like, reactors strewn throughout the 



region and their refuse and the gargantuan dimensions of 
the threat emerge. 

Take, again, Kazakhstan. According to Mukhtar 
Dzakishev, then president of Kazatomprom, the country's 
national nuclear agency, the country is immersed in 
230,000 tons of waste. It would cost more than $1 billion 
to clean. The country should earn this amount in a single 
year of imports of nuclear litter. 

The going rate in Europe is c. $3-5000 per 200-liter 
barrel, only a fifth of which is spent on its burial in old 
mines or specially constructed depositories. This 
translates to a profit of $80-140 per cubic meter of 
uranium buried - compared to less than $10 per cubic 
meter of uranium extracted. The countries of east Europe 
have entered the fray with relish. In 2001, president Putin 
rushed through the Duma a much-debated law that allows 
for the importation and disposal of nuclear waste. 

Getting rid of nuclear waste and dismantling nuclear 
facilities - both military and peacetime - do not come 
cheap. 

According to the ELTA news agency, Lithuania's 
decommissioning of the Ignalina Nuclear Power Plant 
would require 30 years and should cost $90 million in 
2008 alone. In October 2002, Russia's Atomic Energy 
Minister Yevgeny Adamov pegged the cost of a USA- 
Russian agreement to dispose of 34 tons of weapons- 
grade plutonium at $750 million. Russia plans to resell the 
end product, mixed oxide (MOX), to various countries in 
Europe and to Japan. MOX can be used to fuel specially- 
fitted power plants. 



The European Commissions, alarmed by these 
developments in its backyard, announced, according to 
EUObserver.com, that it "gives priority to geological 
burial of dangerous material as the safest disposal method 
to date. Member states will be required to establish 
national burial sites for the disposal of radioactive waste 
by 2018. Research for waste management will also be 
stepped up." 

Even private NGO's got into the act. In August 2002, 
Russia reclaimed from the Vinca Institute of Nuclear 
Sciences in Belgrade, Yugoslavia 45 kilograms of highly 
enriched uranium. The Nuclear Threat Initiative (NTI), a 
Washington-based NGO established by Ted Turner of 
CNN fame and former Senator Sam Nunn, was 
instrumental in arranging the air transport of the sensitive 
substance. According to Radio Free Europe/Radio 
Liberty, the Vinca Institute conditioned its surrender of 
the uranium rods on financial aid to dispose of 2.5 tons of 
spent nuclear fuel. NTI provided the $5 million needed to 
accomplish the cleanup. 

A donor conference, in the framework of the Northern 
Dimension Environmental partnership (NDEP) pledged in 
November 2002 c. $110 million to tackle environmental 
and nuclear waste in northwest Russia. This fund will 
supplement loans from international financial institutions. 
Yet, according to the BBC, of the twelve priority projects 
worth $1.3 billion that have been agreed - not one 
concerns atomic trash. 

The NDEP, set up in 1997, is a partnership of the 
European Commission, Russia, the European Regional 
Development Bank, the European Investment Bank, the 
Nordic Bank and the World Bank. But it is predicated on 



a crucial document - the Multilateral Nuclear 
Environment Programme in Russia (MNEPR) - which 
Russia for long evaded signing. 

The sorry state of underfunded efforts to cope with the 
aftermath of nuclear power and weaponry and the blatant 
venality that often accompanies shady waste deals 
provoked a green backlash throughout the otherwise 
docile region. The Guardian quoted courageous Kazakh 
environmental activists as saying: 

"The same is repeated again and again. It is just another 
money-making venture ... The World Bank is worried 
about corruption in Kazakhstan. In our current situation 
there is no guarantee of public safety, no system for 
compensation, no confidence in the ability of customs to 
deal with these cargoes. Everyone has a human right to 
a safe environment - but apparently not here. " 

Similar sentiments are expressed by groups in Russia, 
Romania, Bulgaria, Yugoslavia, Ukraine, the Czech 
Republic, Poland and elsewhere. Being "environmentally 
correct" is so important that Tanjug, the Yugoslav news 
agency, in its relentless campaign against NATO, 
implausibly accused Germany of storing its waste in the 
mines of Kosovo. 

A prime example of activism involved a Russian scientific 
expedition which found a nuclear submarine dumped, 
with spent radioactive fuel, in the northern Kara Sea. 
According to news agencies, quoting environmental 
groups, dumping nuclear waste, hundreds of submarines 
and decommissioned nuclear reactors into Arctic waters 
was common practice in the Soviet Union. 



In late 2002, the governor of the Murmansk region, 
bordering on Norway, has announced a 6-year cleansing 
program of the Kola peninsula, designed to assuage the 
worried Scandinavians. The Norwegians built a waste 
recycling facility in the area, constructed a special train to 
ferry the waste away and invested in renovating a storage 
dump. 

Many east European countries do not store nuclear waste 
but serve merely as transit routes. The waste the Kazakhs 
plan to dispose of, for instance, should cross Russian 
territory. Yet, the Russians are the easy part. In 1998, they 
have agreed to continue to store in east Siberia fission by- 
products from Bulgaria's controversial Soviet-built 
Kozloduy nuclear power plant. Russia also stores waste 
from Slovakia, Hungary, the Czech Republic and 
Lithuania. Waste disposal was part of the standard 
construction contracts of Soviet reactors abroad. 

But getting the waste to Russia often requires permission 
from other, a lot less forthcoming, countries such as 
Moldova, Ukraine and Romania. By the beginning of 
2003, according to the Bulgarian reactor's management, 
the old storage pits were exhausted and the plant had to 
close down. 

According to the Regional Environmental Center, the 
transit countries cite ill-equipped railways, antiquated 
containers and other environmental concerns as the 
reasons for their reluctance. In reality, they are under 
pressure by the European Union and the USA to 
collaborate with waste transport and disposal companies 
in the West, such as British Nuclear Fuels (BNFL), or 
Cogema. In the wastelands that constitute large swathes of 



the post-communist world, nuclear waste, it seems, is a 
growth industry. 

Note: Nuclear Technology and our Future Energy Mix 

More than 70% of contracts for new nuclear power plants 
were cancelled between 1970 and 1990. Nuclear energy 
has proven to be by far too expensive, partly the outcome 
of meager investment in research and development. But 
why didn't this promising industry seek efficiency and 
productivity gains? Why didn't it increase its capacity to 
remove production bottlenecks (for instance of 
containment vessels)? Why did the entire civilian nuclear 
sector capitulate even in the face of volatile oil prices 
which should have rendered it more of an attractive 
energy option? The short answer is: the malignantly 
romantic (not to mention highly lucrative) cult known as 
" environmentalism " . 

Nuclear energy is a prime example of how environmental 
hype and spin can and does become self-defeating. 
Chernobyl aside, nuclear power is by far the safest and 
cleanest of sustainable energy sources. Yet, instead of 
embracing it wholeheartedly, well-paid and self- 
promoting activists used a lethal cocktail of data - both 
wrong and misinterpreted - to derail its deployment with 
scare tactics and apocalyptic, headline-grabbing 
"analyses", sometimes even maliciously or erroneously 
conflating nuclear power with atomic weapons! 

Their egos sated with media exposure and their wallets 
fattened by grants and contributions from gullible 
governments and individuals, environmental "scholars" 
then proceeded to leverage public ignorance, prejudices, 
and superstitions to press for legislation (often via 



litigation) that has retarded the industry, stunted its 
growth, and indirectly enhanced emissions of greenhouse 
gases. Today, less than one seventh of the world's 
electricity (and 2.5% of total energy consumed) is 
produced by nuclear fission. The environmental 
conspiracy theorists have prevailed yet again. 

Happily, this is fast changing. Electricity shortages, 
brownouts and blackouts have grown increasingly 
common in many developing countries; the prices of 
fossil fuels - even after the recent precipitous fall - are still 
expensive; global warming is real; even more ominously, 
our atmosphere is suffused with heavy metals emitted by 
burning coal and oil. All these conspire in favor of the 
nuclear option. So do new safety and green radiation 
technologies (e.g., passively safe plants and, in the near 
future, fourth generation reactors); rising concerns 
regarding national energy security; and commercial by- 
products of nuclear power generation which render it 
more feasible (examples being: desalination; heating; and 
the production of hydrogen). 

Countries like France and Japan (and, to a lesser extent, 
the United States) serve as role models. Thanks to its 
nuclear policy, according to various media, France has the 
cleanest air of any industrialized country and the cheapest 
electricity in Europe. Nuclear power plants are in 
operation or being constructed in 43 countries. Nuclear 
energy produced by 2015 (in the pipeline) will exceed 400 
GW (and 800 GW by 2030). Europe is the continent most 
open to nuclear technology, though some members of the 
European Union have yet to overcome their 
environmental propaganda hangover. 



Still, it is a steep incline. Even under the most optimistic 
of scenarios, four years hence (in 2013), the nuclear 
power generation segment in North America is likely to 
amount to a fraction (less than 20%) of the gas and coal 
industries, not to mention the petroleum complexes. Wind 
energy may surpass nuclear sources within 20 years. The 
International Atomic Energy Agency predicted, in 2008, 
that the share of nuclear-generated power in the global 
energy mix will remain stable in the next 20 years, even 
under the most optimistic assumptions. 

Return 



Human Trafficking in Eastern Europe 



Human trafficking is a sterile term, used to mask the 
grimmest of realities. Popular culture - from Peter 
Robinson's police procedural "Strange Affair" to the film 
"Taken" - captures the more sensationalist dimensions of 
this vile and pernicious phenomenon: the coercion or 
abduction or of young girls (some of them minors) and 
their forced conversion into prostitutes. But there is a lot 
more to it than that. 

Enter Vladimir Danailov, who is currently running a law 
office in Skopje, Macedonia. 

He served as a National Legal Officer in the International 
Organization for Migration - Mission in the Republic of 
Macedonia for six years ( from 2000-2006), and found 
himself involved in the counter trafficking capacity 
building projects for the local Police and Judiciary. 

He spent years in analysing and researching the 
multifarious facets of human trafficking and his 
professional opinion is often sought. He is an author of 
books on human trafficking problems, among which is: 
"Handbook for Public Prosecutors regarding Prosecution 
of the Human Trafficking Crime" (2005), published 
within the training program for Public Prosecutors, Police 
officers, and Judges. The book actually summarizes the 
Case Management Training program and analysis he had 
performed and deals with methods for the eradication of 
the crime of organized human trafficking. 



SV: What is human trafficking and what is the 
difference between it and other forms of slavery and 
prostitution? 

VD: Human trafficking or Trafficking in Persons should 
be understood primarily as a serious violation of 
fundamental human rights and freedoms: the right not to 
be held in slavery or servitude, the right to liberty and 
security, the right to be free from cruel or inhumane 
treatment and the freedom of movement. 

Inconsistent in the past, the description of the crime has 
expanded and evolved beyond its historical 
characterizations as the realities of the movement of, and 
trade in people changed. Consequently, under the term 
"trafficking in human beings" already used in early 
twentieth century treaties and conventions, a separate 
international legal regime has gradually emerged. 

In this regard, the so called "Anti-Trafficking Protocol" as 
a supplementing protocol to the UN Convention Against 
Translational Organised Crime, (full title: UN Protocol to 
Prevent, Suppress and Punish Trafficking in Persons, 
especially Women and Children, opened to signature in 
December 2000), represents a major development in 
international law. It was the first time a consensus 
definition of trafficking in human beings has been 
achieved within a legally binding international instrument. 



In this Protocol (Also known as the Palermo Protocol), 
trafficking is viewed as a contemporary form of slavery, 
which involves a variety of acts (recruitment, 
transportation, transfer, harbouring, receipt of person), 
actors (several intermediaries are often involved in the 
trafficking chain), coercive means (threat or use of force 
or other forms of coercion, abduction, fraud, deception, 
abuse of power or position of vulnerability, etc) and 
exploitative purposes (forced labour or services, slavery 
or slavery- like conditions, sexual exploitation, etc). These 
four elements, cumulatively, describe the essence of the 
human trafficking crime. 

This means that each of these parts has to be completed 
and interrelated, or linked, in order for the crime of 
Trafficking in Human Beings (THB) to occur. Stated 
another way: the activity must be realized by one of the 
means and both must be linked/tied to achieving the 
exploitative purpose. If any one of the three categories is 
absent, then the crime of trafficking has not been 
committed (except where minors are involved when the 
coercive elements are not required). 

For the purposes of this Protocol: "trafficking in persons" 
shall mean the recruitment, transportation, transfer, 
harbouring or receipt of persons, by means of the threat or 
use of force or other forms of coercion, of abduction, of 



fraud, of deception, of the abuse of power or of a position 
of vulnerability or of the giving or receiving of payments 
or benefits to achieve the consent of a person having 
control over another person, for the purpose of 
exploitation. Exploitation shall include, at a minimum, the 
exploitation of the prostitution of others or other forms of 
sexual exploitation, forced labour or services, slavery or 
practices similar to slavery, servitude or the removal of 
organs; 

(b) The consent of a victim of trafficking in persons to the 
intended exploitation set forth in subparagraph (a) of this 
article shall be irrelevant where any of the means set forth 
in subparagraph (a) have been used; (c) The recruitment, 
transportation, transfer, harbouring or receipt of a child 
for the purpose of exploitation shall be considered 
"trafficking in persons" even if this does not involve any 
of the means set forth in subparagraph (a) of this article; 
(d) "Child" shall mean any person under eighteen years of 
age. 

The effective prosecution of the human trafficking crime 
in the region or beyond requires a unified understanding 
of this type of very serious crime with a recognition of its 
constitutive elements, including all the necessary 
governmental measures to be adopted for its proper and 
effective prosecution and suppression. 



With this goal in mind, the Palermo Convention (UN 
Convention Against Transnational Organised Crime) and 
its two supplementary protocols (which deal with Human 
Counter-trafficking and Counter-smuggling), gave rise to 
the intensive process of legislative harmonisation in the 
region. Nowadays, 8 years after this instrument was 
opened to signature in 2000, we may say that we have 
significant efforts in place to unify and harmonise the 
criminal recognition of the phenomenon region- wide. 

As a result of this, in the Macedonian Criminal Code in 
January 2002, a new article on human trafficking has 
been introduced (Article 418-a). In spite of the enormous 
importance of its adoption, the new Article has 
commonly been understood as constituting only a partial 
fulfilment of the country's obligation to ensure the 
appropriate criminalization of THB as a separate and 
serious criminal offence. 

A further legislative process of amending/revising 
Article 418-a on human trafficking tended to ensure its 



conformity and compliance with the existing UN 
definitions, providing for strengthened penalties for 
organising trafficking, as well as for invoking, 
encouraging and supporting the crime of THB, in 
accordance with the relevant international instruments 
(see footnote). 

This process builds also upon previous amendments of 
the article, which encompassed other forms of 
exploitation (like forced marriages, exploitation for 
pornography, forced fertilization, and illegal adoption). 

The last amendments of the national Criminal Code and 
Procedure were enacted in January 2008. A lot has been 
done by the Macedonian authorities and Macedonian law 
enforcement has at its disposal now a rather appropriate 
and well defined legislative tool for effectively fighting 
against human trafficking (and migrant smuggling) 
crimes. 



In terms of the difference between human trafficking 

and prostitution, it is worthwhile to mention that in the 
period before the formal signature of this instrument 
(2000), there was quite a misperception of the human 
trafficking crime and it was confused with the 
phenomenon of prostitution, where victims of THB were 
treated as foreign prostitutes with illegal stay, and were 
regularly fined and expelled. This was mainly owing to 
the fact that the most common manifestation (form of 
exploitation) of the crime of human trafficking in the 
region was for the purpose of sexual exploitation i.e. 
forced prostitution. The other forms of exploitation as 
foreseen by the Protocol, such as forced labour, slavery, 
servitude, and illegal removal of human organs were 
rarely or never encountered. 

This is why, in Macedonia's case, the amendment of the 
Criminal Code with the introduction of the article on 
human trafficking, anticipated also other possible forms of 
labour-related exploitation, such as forced and illegal 
adoption, forced fertilisation, and marriage of 
convenience, in order to render them more easily 
recognised by the law enforcement. 

The main difference between the phenomenon of 
prostitution and the crime of human trafficking should be 
viewed through the status of the victim vs. that of the 



prostitute. The voluntarily act of giving one's body and 
the provision of sexual services for a certain material 
compensation is a significant characteristic in the 
determination of prostitution. This element can be 
recognized by the ability of the individual prostitute to 
terminate this activity more easily and at will. 

In the human trafficking crime, this possibility simply 
does not exist for the trafficked women, i.e. victims. They 
have a system of dependence imposed over them, 
which, through threats and other coercive and physical 
enforcement methods and with the aid of additional 
artificially-created liabilities (debt bondage), make the 
victims incapable of freeing themselves from this devious 
circle of subordination, sexual exploitation and slavery. In 
this sense, there is a strong violation of elementary 
human rights and freedoms, which as such are 
inalienable, natural and inseparable, and are subject to 
international protection. Unlike the prostitutes, the victims 
of human trafficking, i.e. the trafficked women, are not 
able to enjoy any of these guaranteed basic human rights 
and freedoms 

In addition, the legal treatment of prostitution is varied 
and ranges from complete legality, through different 
forms of milder criminalization, to total prohibition, i.e. a 
ban on prostitution. In legal terms, this means that 



prostitution is regarded somewhere as a crime, while 
elsewhere it is not a crime. In some places, its public 
performance is regarded as a criminal action, and, like in 
Macedonia, as an act against public morals and order . 

It is precisely because of this need for precision that I 
once again emphasize that human trafficking entails the 
illicit engagement of the person, by kidnapping, by 
trafficking and moving, regardless whether it is within or 
out of the state boundaries. It occurs where the mediators, 
i.e. the human traffickers, have economic gains or other 
benefits through the different forms of exploitation 
established by using various techniques of coercion, 
intimidation, cheating and threats, and fostering 
dependence under conditions that break the basic 
fundamental rights and freedoms of the migrants 
(victims). 



See the Council framework decision of 19 July 2002 on 
Combating Trafficking in Human Beings, OJ L 203, 
1/08/2002, p. 0001-0004. 

SV: The film "Taken" portrays Albanians as cruel 
human traffickers. Is the Balkans really a hub of 
human trafficking? Which countries and ethnicities 
are particularly and specifically implicated - or is it a 



multi-ethnic venture that knows no national 
boundaries? 

VD: I saw the film "Taken" and I liked it very much. I 
consider it very important for broader message outreach 
when famous actors like Liam Neeson are engaged in its 
promotion and thus foster public awareness. The film 
shows one of the modi operandi of traffickers: recruitment 
by kidnapping. It also shows forcible drug addiction as a 
method of making victims obey orders, while they remain 
silent, motionless and unable to escape. One part of the 
movie tackles the fact that drug-related crime and human 
traffickers use the same routs, which is very true as far as 
the Balkans go. The victims' suffering is rather realistic 
and fully depicted, and I agree that these harrowing scenes 
can have a truly preventive effect on teen-audiences. 

In terms of the ethnicity implicated, the Republic of 
Macedonia has successfully overcome a really 
challenging period. During the armed conflict in 
Macedonia in 2000-2001 between the Macedonian Police 
Forces and the Albanian rebels (later recognised as 
members of the so-called ONA -Liberation Army of the 
Albanians), a very negative attitude has been engendered 
towards the Albanians, singling them out as the main 
organisers and perpetuators of the human trafficking 
crime. 



The Macedonian Police in that period was not in control 
of the whole territory of the country, especially the 
western part of Macedonia, which was predominantly 
Albanian. This lack of access of law enforcement allowed 
human trafficking to become a flourishing business in 
those parts, run mainly by ethnic Albanian bar-owners. In 
that period, there were a number of night bars, operating 
in the western part of the country, with an enormous 
number of girls kept in custody by the local bar- 
owners. Statistics presented by a respected local NGO 
"All for Fair Trials", based on the outcomes of the cases 
initiated as human trafficking and prostitution offenses, 
show that almost all of the accused in that period were of 
Albanian ethnicity. Other ethnicities mainly appeared as 
accomplices. Such ethnic homogeneity prevailed and 
continued also during 2005, 2006 and 2007. 

Throughout this period, a number of reports published by 
venerable international magazines, illustrated the 
expansion of the Albanian Mafia into continental Europe, 
gaining control over the prostitution business in Italy and 
with an increased control of the same in London. 
Czechoslovakia was mentioned on several occasions as a 
country where Albanians were in charge of the drug 
business and trafficking in stolen cars. Many of those 
reports describe Kosovo as drug cartel zone with all the 



logistics provided for drug, arm and human trafficking 
routs towards Europe. 

These circumstances contributed to the creation of a 
prevailing attitude during and after the armed conflict in 
the country, depicting the Albanian ethnicity as especially 
affiliated with this type of crime in Macedonia and the 
human trafficking crime as something imported and the 
outcome of the Kosovo crises and the increased 
international presence in the region. It was really difficult 
to argue against such extreme ethnically-based figures and 
approaches towards the human trafficking crime which 
might have had a very negative effect upon the 
reconciliation efforts in that period and the confidence 
building process developed by the Ohrid Framework 
Agreement afterwards. 

Fortunately, the latest legislative and structural reforms 
and the training of law enforcement agencies and 
institutions, as well as energetic anti-corruption measures 
applied countrywide, have increased the effectiveness of 
the overall suppression of organised crime, including 
human trafficking. They also exposed the involvement of 
other ethnicities, whether as accomplices or in the crimes 
of corruption, bribery, or abuse of one's official position 
and duty. 



In this respect, the latest publications by IOM 
(International Organization of Migration) and the data 
shared by different NG (non-governmental) forums 
including the above mentioned and respected NGO - 
Coalition for Fair Trials - based on indictments and court 
cases analysed, confirmed a balanced and more 
multiethnic profile of the defendants involved in the 
offences related to human trafficking. For example: as far 
as the offences of trafficking in persons (article 418-a, 
Criminal Code (CC)), the smuggling of migrants (418-b, 
CC), organizing a criminal group (418-c, CC), and 
mediation in prostitution (191, CC), the ethnic structure of 
the defendants in the cases before the Macedonian Basic 
Courts is: 55% Albanian, 36% Macedonian, and 9% of the 
defendants belong to other ethnic groups. 

In addition, most of the local clients of the sexual services 
of trafficked women in Macedonia are Macedonians 
(regardless of ethnicity) and analyses show that 
Macedonia has provided a sizable market for the 
"services" of trafficked victims even before the arrival of 
the international community. Consequently, it stands to 
reason that the regional organized criminal networks are 
rather multi ethnic. 

This helped in regaining the desired (and recommended) 
attitude vis-a-vis the human trafficking crime: as a 



regional phenomenon and as a multi-ethnic venture that 
knows no national boundaries, and is merely concerned 
with money and profit. As mentioned in the reports from 
this period, trafficking to Macedonia can be traced back to 
the beginning of the eighties when numerous groups of 
"exotic dancers" from Bulgaria, the Ukraine and Russia 
already performed dances in the nightclubs in the national 
capital. These women were effectively victims of 
trafficking at that time as information obtained from 
various sources shows that they were already subject to 
the mechanisms that bind victims to criminal 
organizations, with the implementation of similar 
measures of coercion, intimidation, abuse and torture, 
typical of the criminal groups operating today. 

While Macedonia has emerged as a transit and source 
country (and to a lesser extent, a destination country), this 
is rather confined to women and children trafficked for the 
purpose of sexual exploitation (US 2007 Trafficking in 
Persons Report). The problem of internal trafficking is 
nowadays becoming more visible. 

As mentioned, the recent reports by the Macedonian 
Ministry of Interior detected and confirmed two prevailing 
tendencies of the human trafficking crime in the country: 

The first is related to the growing numbers of internally 
trafficked persons. 



The second tendency is the increased number of minors 
among the victims rescued or detected. According to the 
Ministry of Interior's statistics from this year (January- 
November 2008), there were 21 cases of detected and 
suspected traffickers involving minors! Eleven of these 
were recognized as the victims of trafficking, of which 10 
were minors. By comparison, during the same period last 
year there were three registered cases and 5 victims 
rescued, of which 3 were minors. 

SV: How involved are law enforcement officers, 
judges, and the state in these crimes in various 
countries? 

DV: It is obvious that such a complex type of crime which 
is conducted in three disparate phases, i.e. recruitment, 
transportation (and harboring), and exploitation, cannot be 
executed solely by organized gangs without the 
involvement of various levels of state officials as 
facilitators or accomplices. Based on victim statements, 
obtained through standardized questionnaires while 
sheltered, they often point out some illicit involvement of 
different authorities, related to facilitation in obtaining 
required documents, visas, work permits, or simply an 
illegal entry into the territories of various countries 
during the transportation phase. 



In the Republic of Macedonia, the issue of the 
involvement of the authorities could be roughly divided to 
two periods, although a very firm line cannot be drawn 
between them: 

• The first period is before and immediately after the 
official recognition of the human trafficking crime 
by the national Criminal Code (2002) 

• The second period is after the formal adoption and 
application of the Palermo criminal criteria in the 
Criminal Code, from 2002 to the present. 

The second period is when the national law enforcements 
agencies and institutions started acquiring effective 
knowledge as to how to combat the human trafficking 
crime, using the the new legislative and procedural tools 
for adequate detection and prosecution. During this 
period, the national institutional response was getting 
much more organized: shelters were established for the 
rescued victims; a national referral system for the victims 
of trafficking; the adoption of multidisciplinary 
approaches to processing and assisting rescued victims; 
improved legislation; specialized police investigation 
teams; specialized case management training and courses 
for the police and judiciary; the new special anti organized 
crime prosecutorial unit was established and so were the 
tribunals in charge of organized crime cases; new and 
special investigative measures were introduced; the new 
Law on Witness Protection was promoted, and so on. 



This is the period when the prosecution of the human 
trafficking crime was getting more effective in general. 

Of course, there were a number of procedural 
inconsistencies and corrupt behaviors reported during this 
period while processing THB caseloads. Many 
inconsistencies have been denounced by the general 
public, which provoked the Ministry of Justice to take 
appropriate actions. The media and the general public 
gave high marks to the the National Court Council 
decision regarding the measures taken against the local 
judge in the Struga Basic Court (Mr. Dimitrija Cobovski) 
who has dealt inappropriately (between 2000-2005) with a 
number of indictments against a well known trafficker 
(Dilaver Bojku Leku) related to human trafficking and 
organizing and mediating prostitution. Public opinion 
reacted also against the promotion of a judge (Mr Krste 
Sivakov) to the Appellate Court in Bitola, despite serious 
criticisms addressed at him for the unjustified mitigation 
of a jail sentence for the same accused (Dilaver Bojku), 
and his early release due to his "effective repentance". 

Despite the success stories of effective cooperation among 
the media, the general public, NGOs (non-governmental 
organizations) and the authorities, there were a number of 
inconsistencies reported in dealing with and the 
processing of human trafficking caseload which are still 



left without proper attention and counteraction. It is 
reasonable to believe that similar unjustified "toleration, 
servility and receptiveness" was also demonstrated by 
some local judiciary officials towards 

defendants. Although it can not be fully proved, it is 
obvious that such obsequiousness and protection are 
results of corrupt behaviors and collusion developed 
among different court actors. 

One of the most frequently manifested forms of 
"toleration" of traffickers while on trial is the "ease" with 
which arguments for postponing and unnecessarily 
prolonging court procedures are heard. In reviewing the 
duration and the effectiveness of court proceedings and 
verdicts reached in the Macedonian courts, we may say 
that procedural improvements and the update of the 
criminal provisions aside, the average duration of the 
procedures for the offences related to the human 
trafficking crime is still way too long. The postponing of 
hearings related to the absence of the defendant owing to 
the improper delivery of summons is still among the 
prevailing tricks. Many delay tactics used by experienced 
defence lawyers cause the dragging of cases and the 
initiation of time consuming procedural measures, 
compounding the presence of victim-witnesses. 



According to the NGO Coalition for Fair Trials, until 
2005, human trafficking trials in more than a half of the 
cases have been postponed for periods of more than 30 
days. For example: in 2005, the average duration of the 
proceedings, from the initiation of the indictment in front 
of the basic court until the verdict reached or the last 
hearing completed , was around 305 days. 

In addition, during the investigation phases, there were a 
number of attempts to approach victims-witnesses 
sheltered in the Transit Center for VoT (Victims of 
Trafficking), using mediators and sometimes corrupt local 
police officers with the aim of influencing (intimidating) 
the victims during their transportation and prior to their 
appearance in court. 

In this regard, it is worth mentioning a situation that has 
not been investigated thoroughly, of a well founded 
suspicion for a firm link established between a former 
investigative police team and the case worker(s) who was 
working with victims rescued and sheltered. Apparently, 
the info gathered from the victims' testimonies was 
unprofessionally maintained and disclosed by the case 
worker to the corrupt investigators that benefited by 
informing the perpetrators mentioned in the victims' 
testimonies and, thus, obstructed the investigation. 



The other aspect of the corrupt involvement of judiciary 
officials, typical of the beginning of this second period, is 
the problematic interrelations developed between local 
investigative judges and prosecutors especially in the 
ethnically mixed or predominantly Albanian (of 
Macedonian citizenship) areas. This may be called "ethnic 
corruption" or protection and toleration developed by the 
local investigation judges of suspects of the same 
ethnicity. The local investigative judges, acting upon the 
instructions of prosecutors, were regularly protecting the 
suspected or accused perpetrators, which were their 
"ethnic kin and kith". There were a number of cases 
reported internally, where the local investigative judges 
were obstructing investigative acts against their local 
neighbors, or friends. In such situations, the outcome was 
a prolonged, incomplete, or interrupted investigation, 
forged or manufactured evidence, suspects who fled "just- 
in-time", or the submission of very subjective and altered 
judicial findings. 

If the suspect happened to be known as a political 
fundraiser or donor to any of the Albanian political parties 
or to former insurgents, the investigative action was 
usually treated as a local political and security risk. 

Based on those findings, the Macedonian authorities have 
built up an A-team of Public Prosecutors (10 members), 



with a country-wide remit, to deal especially with 
organized crime and corruption. It was followed by a 
similar team of investigators (4) and trial judges (5) for 
the same offences and by five special courts, assigned to 
be in charge of the organized crime caseloads. Those 
measures significantly diminished the possibility of 
further "ethnic loyalty" and corruption involving judiciary 
officials on the local level. 

An example of an investigation stopped against a former 
fighter, a member of the Albanian ethnicity, now a 
respected member of the Macedonian Parliament (Daut 
Redjepi Leka): Leka was indicted and summoned as an 
accomplice in a human trafficking crime, Despite the 
alleged evidence gathered (material evidence, 
identification and statements of the victim, pointing at him 
as the man who coerced a pregnant victim from Moldova, 
working in the night bar "Cafe Europe", to get rid of her 
fetus by beating her, forcing her to miscarry, and helping 
in burying the miscarried child), the investigation has not 
been completed, evidence gathered is now missing, and 
the whole case is still a thorn in the public's side. 

The other negative manifestation of the politically corrupt 
involvement of the authorities is the emergence of the 
spoils system of administration versus the state-mandated 
merit system (or at least a composite one). This is 



especially obvious and dangerous within the Ministry of 
Interior where usually the changes in the governing 
political structure cause radical shifts in staff, often 
sacrificing profoundly knowledgeable and already trained 
faces on all levels. These changes require additional 
periods for the training of newly assigned personnel and 
the wasting of donor community funding. 

On the other hand, in order to survive and maintain a 
proper career development path, good police professionals 
are not immune to political pressures and affiliations. 
They are often ready to be attached to and be perceived as 
political fans of or sometime even formal members of the 
governing parties, securing in this way their position or 
further professional promotion. The undeclared 
administrative staff in the police is silently regarded as 
adherents of the opposition and therefore are marginalized 
or downgraded. As a result of this situation, which is 
never addressed openly, police professionalism, 
education, training and effectiveness suffer. The result of 
these practices is the long term polarization of police 
officers on all levels, shifting politically attached teams of 
professionals around, with professional agendas being 
regularly "flavored politically". It is really dangerous to 
predict the consequences to the rule of law if the above 
internal semi-political constellations within the Police, 
now replicated in police work in the field, were to create 



similar political configurations among the criminal 
groups. 



As a result of such activities, a police officer has been 
arrested recently, (A.C., aged 37, from the Matejce village 
in the Kumanovo region) on the Macedonian - FR 
Yugoslav border, who "facilitated" the illegal crossing of 
trafficked persons and even the return of some victims - 
illegal migrants who were subjected to expulsion - for a 
certain amount of money (1500 DM on every occasion). 

SV: What are the effects of the crime on its victims? 

DV: The effects of the crime on the victims directly 
depend on the phase in which they have been rescued and 
processed and on the duration of the exploitation period. 

Traffickers lure women and girls into their networks 
through false promises of decent working conditions at 
relatively good pay as nannies, maids, dancers, factory 
workers, restaurant workers, sales clerks, or models. They 
often transport victims from their home communities to 
unfamiliar destinations, including foreign countries away 
from family and friends, religious institutions, and other 
sources of protection and support, leaving the victims 
defenseless and vulnerable. With defective travel 
documents or with none, without proper visas and with an 
unlawful stay in a foreign country, the victims become 
submissive and obedient, thus creating an even greater 



dependence on the traffickers. Almost without exception 
they are forced to work to pay off their debts "created" by 
the organizers of the trafficking, ostensibly to cover the 
"very high amounts paid" for the illegal crossing of 
borders, for mediation services for job hunting, the 
issuance of papers, working permits etc. Almost all of 
them are coerced into "working off' these debts through 
forced prostitution or labor. The living conditions during 
"the trafficking journey" include complete isolation of the 
victims and their inability to communicate with the 
outside world, with friends, relatives, social or religious 
groups. The victims are often left without elementary 
hygienic and technical conditions in the premises used to 
incarcerate them. 

Almost without exception, victims are reported to have 
been beaten, maltreated, with completely reduced 
mobility and communication, blackmailed, terrified, 
forced to engage in sex acts or slave-like labour. Such 
enforcement usually includes rape and other forms of 
sexual abuse, torture, starvation, imprisonment, forcible 
drug addiction, threats, psychological abuse, and coercion. 
Sometimes they are told that physical harm may occur to 
them or to others should the victim escape or attempt to 
escape. It is a fact that in most cases victims in trafficking 
are exposed to the most brutal violations of basic human 
rights and freedoms. Frequently, they are treated as 



animals and objects for trade, exposed to the highest 
degree of disrespect and lack of dignity and to very 
serious health risks including HIV and AIDS, completely 
devoid of any access to medical care. 

As the subjects of enormous and brutal psychological and 
physical abuse, all the rescued victims are in desperate 
need of professional psychological and medical attention 
and treatment. Almost without exception during the 
recovery phase, victim suffer from repulsive affect and 
behavior, having been exposed for a long time to a system 
of firm subordination established by the traffickers. That 
is why the psycho-social therapy has to be individually 
tailored in order to be persuasive enough in countering the 
physical abuse suffered, and the strong and frequent 
flashbacks of rape, torture, maltreatment and threats with 
firearms, experienced. It is a fiendishly difficult job. 

SV: Why do some victims, having been rescued and 
repatriated, allow themselves to be trafficked yet 
again? 

DV: This issue should be analysed on two levels. One is 
the fact that direct assistance, protection and repatriation 
programs implemented in the transit countries and the 
final destinations have always attracted funding and 
preferred by the donor community. There is a variety of 
protection programs and schemes that have been 



successfully implemented in the region, assisting 
governments in transition to meet the required standards 
in these areas as part of their EU harmonisation priorities 
and stabilization and association programs. 

The IOM program of protection and assistance and the 
voluntary repatriation of victims rescued in the Republic 
of Macedonia has been one of the more successful in the 
region. The capacity building components of many 
projects implemented here have contributed to a rather 
speedy, adaptive and organised institutional response by 
the Macedonian authorities in preventing, combating and 
suppressing the human trafficking crime on its territory. 

Other NGOs active in this region have also regularly 
reported similar stories of success. But all of these 
projects and technical assistance programs, funds and 
assets spent, have been lopsided, empahsizing the 
countries of final destination or the transit countries, 
which means that all of them were (and still are) 
predominantly tailored to cure the negative consequences 
of THB. The amounts allocated by the international 
community through different programs reflect a rather 
imbalanced approach from the very conception and did 
not sufficiently address the roots of the human trafficking 
crime, i.e. the recruitment zones, the countries of origin, 
where trafficking journeys usually start. 



Not enough attention has been given to the amelioration 
of the repercussions of the so called push-pull factors 
within the countries of origin and their environments: 
mainly, the all-pervasive poverty and the very limited and 
undeveloped absorption capacities of the local economy, 
resulting in scarce employment opportunities, especially 
for women; gender issues and equality in those societies 
(women's restricted access to the labour markets); 
restrictive visa regimes; and so on. 

Addressing these root causes in the countries of origin 
would have had a significant preventive effect and would 
have made it more difficult to recruit new victims in the 
trafficking chain. It would have allowed those who have 
been repatriated to get steady jobs or perspectives 
preventing them from new dangerous adventures. One 
should not forget that the lingering debts of trafficked 
victims who have returned home, combined with their 
continuing need to support their family members, make it 
more likely for them to migrate again with hopes of 
earning easy money. Regretfully, many of them end up 
being re-trafficked. 

The other level of analysis is the imbalance between the 
existing assistance and protection programs for VoT and 
the voluntary repatriation programs which take place in 
the final destination or transition countries. The post- 



repatriation components of most of the protection and 
assistance programs are still vague and have yet to be 
developed to be sustainably continued in certain countries 
of origin. Limited in funding, the post-repatriation and re- 
socialisation project components are usually designed 
strictly on a voluntary basis and rely upon the victims' will 
to attend or be a part of them. This pertains also to the 
reintegration assistance or vocational training courses 
organised within the victims' environment. Additionally, 
those societies are still stigmatising women visiting such 
rehabilitation and reintegration programs, which indicates 
their prior status as prostitutes. 

Yet, the countries of origin chronically suffer form 
budgetary constrains and lack of sustainable funding for 
any local reintegration measures to be feasible. The NGO 
sector in these countries is not well developed, nor is it 
qualified and skilled in fundraising issues making it 
dependent of funding from abroad mainly as a component 
of programs or projects implemented elsewhere. Although 
the picture as far as funding is concerned is now slowly 
changing, the aforementioned observations still remain 
valid. The intensified process of bilateral readmission 
state-level arrangements (especially between countries of 
origin and of destination such as the one signed between 
Macedonia and Moldova) might make the repatriation 
process less expensive but cannot resolve the problem of 



the increased need for proper reintegration and re- 
socialisation of the repatriated victims. 

Bearing in mind all that, it is a really challenging for the 
victim to find her way after the process of repatriation. 
Suffering from many frequent and unpleasant 
flashbacks and a variety of psychological disorders, and 
left without proper assistance by professionals, many of 
them cannot get reintegrated successfully and are rejected 
by the local community. Thus, they easily get recruited 
back into the trafficking chain by the local tentacles of 
organised crime. 

According to the local IOM Mission in Skopje the 
following figures were reported: 19 out of 262 victims 
assisted in 2001 were trafficked in the past; 17 out of 214 
assisted victims in 2002 and 14 out of 141 assisted victims 
in 2003 claimed to have been trafficked before. IOM 
Skopje has twice assisted 4 re-trafficked victims: two 
Moldavians assisted in 2003 were assisted by IOM Skopje 
previously and one Ukrainian assisted in 2004 was 
assisted previously in 2002. One victim from Belarus was 
assisted initially in 2000 and then again in 2001. IOM 
Skopje has also assisted a Romanian victim who was 
previously trafficked and assisted by IOM Sarajevo. 



SV: What is the profile of the typical human 
trafficking victim? Are there children and Westerners 
among the victims? 

DV: Generally, traffickers primarily target women and 
girls, who are disproportionately affected by poverty, the 
lack of access to education, chronic unemployment, 
gender discrimination, and the lack of economic 
opportunities in the countries of origin. Most of the 
victims rescued and assisted originate from the countries 
of Eastern Europe and especially from Moldova. 

Traffickers lure women and girls into their networks 
through false promises of decent working conditions at a 
relatively good pay as nannies, maids, dancers, factory 
workers, restaurant workers, sales clerks, or models. 

Traffickers also buy children from poor families and sell 
them into prostitution or into various types of forced or 
bonded labor. 

The figures and profile of the assisted victims of 
trafficking rescued on the territory of Macedonia by the 
local IOM Mission (August 2000- Dec 2007): 



YEAR 



VoTs FOREIGNIVoTs 

CITIZENS ASSISTED 



2000 



by IOM Skopje 



114 



MACEDONIAN 
CITIZENS Assisted 

by IOM Skopje 



2001 


257 


- 


2002 


220 


- 


2003 


135 


1 


2004 


15 


- 


2005 


3 


1 


2006 


14 


3 


2007 


13 


2 


SUB TOTALS 


771 


7 


TOTAL 778 victims assisted 



Nationality of the victim's assisted according to the 
same source 



Nationality 


2000- 
2003 


2004-2007 


Albania 


- 


3 


Bosnia and Herzegovina 


1 


- 


Bulgaria 


28 


3 


Belarus 


11 


- 


China 


- 


11 


Croatia 


1 


1 


Czech Republic 


1 


- 


Dominican Republic 


- 


1 



Lithuania 


1 


1 


Moldova, Republic of 


352 


9 


Macedonia 


1 


6 


Romania 


227 


2 


Russian Federation 


17 


1 


Serbia 


2 


7 


Ukraine 


81 


1 


Montenegro 


- 


3 


Kosovo 


4 


2 


Total 


727 


51 



Gender and age profile of the victims assisted 
according to the same source (IOM) 



Gender vs. Age 
Breakdown 


2000-2003 


2004-2007 


Female 


727 


40 




Under 14 years 


- 


7 


14 to 17 years 


88 


7 


18 to 24 years 


445 


17 


25 to 30 years 


157 


5 


Over 30 years 


37 


4 


Male 





11 




14 to 17 years 


- 


2 


18 to 24 years 


- 


3 



25 to 30 years 



Over 30 years 



Total 



727 



51 



Educational Level of the victims assisted according to 
the same source 



Educational Level 


Number 


Percentage 


Primary School 


192 


24.68 


Middle / Elementary 
School 


126 


16.20 


High School 


246 


31.62 


Trade / Technical / 
Vocational School 


78 


10.03 


College / University 


38 


4.88 


None 


18 


2.32 


Other 


42 


5.40 


N/A 


38 


4.88 


Total 


778 


100.00 



Economic Status- of the victims assisted in the country 
of origin 



Family - Economics 
Status 


Number 


Percentage 



Well-Off 


2 


0.26 


Standard 


119 


15.17 


Poor 


361 


46.40 


Very Poor 


76 


9.77 


N/A 


220 


28.29 


Total 


778 


100.00 



SV: To what extent do victims enjoy institutional 
protection in Macedonia? 

DV: The legislative harmonization initiated by the 
currently binding Palermo protocols and the Palermo 
Convention in general, made a significant positive impact 
towards a more effective and proper prosecution of the 
human trafficking crime on the national level. The 
institutional response in this regard has become more 
organized and consolidated, along with the fulfilment of 
all the requirements as proclaimed in binding or related 
instruments. 



The crucial step with regards to proper housing and 
assistance provided to the victims was taken when the 
former ministry of interior asylum shelter has been 
reconstructed and reassigned by the authorities to serve as 
a shelter transit centre for foreign nationals, victims of 
trafficking rescued on the territory of the country. This 



Transit Centre was formally opened on April 4, 2001. 
Since its establishment, the immediate deportation and 
banning of the rescued victims from the territory of 
Macedonia has been prevented as a mandatory 
processing of all identified victims was implemented 
through the Transit Centre (TC), granting them (by the 
new Law on Foreigners) an extended decriminalised 
status and lawful stay until they are voluntarily 
repatriated to their country of origin. 

Within the centre and in coordination with the authorities 
(the Ministry of Interior and the Ministry of Labour and 
Social Policy), victims have now started being provided 
with an adequate post-traumatic, socially re-integrative 
and psycho-social therapy by experts including 
counselling services by specialized and trained NGOs, 
which fully corresponds with the standards and 
requirements proclaimed in the Palermo Protocol and 
other relevant and related instruments (see footnote). 

Once accommodated in these sheltering premises, victims 
receive appropriate legal advice on their legal status, their 
rights and obligations in accordance with the existing 
legislation and, in case they are involved in court hearings 
or pre-investigative activities, they are provided with free 
legal counselling, assistance and representation by the 
team of NGO women lawyers assigned to this centre. 



A big step ahead was also the establishment of the 
specialised team of senior police inspectors qualified for 
the timely detection and prosecution of human trafficking 
operations within the anti organised crime sector in the 
Ministry of Interior. Continuing education and training of 
the police officers of those units, including the new 
Border Police structures, have been ensured through the 
specialised training curricula at the Police Academy and 
the Centre for Education of the Police Forces, supported 
by the CARDS funding mechanisms or by various project 
funding actions of various donors. 

On the inter-ministerial level a special National 
Commission for Combating Trafficking in Persons and 
Irregular Migration has been formed on the 27 th of 
February 2001, comprising representatives from different 
ministries ensuring a multidisciplinary approach to the 
suppression of the THB crime and its prevention on the 
national level. The work of the Commission has been 
facilitated by the establishment of the Secretariat as an 
executive body of the Commission, in 2003. 

On 16th January 2002, urged by the Stability Pact, a 
special sub-group for the prevention of the trafficking in 
children started operating within the National 
Commisison. 



Drafted by this Commisison, the Government of the 
Republic of Macedonia has formally adopted on March 
23rd, 2006 a National Action Plan and a comprehensive 
National Strategy to Combat Trafficking in Persons. 

In May 2005, a Law on Witness Protection has been 
adopted provididng for posibilities for additional 
protection of victims who serve as witnesses. 

The Ministry of Labour and Social Policy established in 
September 2005 the National Referral Mechanism for 
Victims of Trafficking with the core objective of 
improving and ensuring that proper victim identification, 
referral and assistance are systematically carried out. The 
system, theoretically in place for both international and 
national victims of trafficking, is for the time being 
mainly focused on the national caseload. This referral 
mechanism is also involved in the procedure of 
appointing guardians for minors who are victims of 
trafficking, incorporating specially trained teams of the 
local Centers for Social Care in charge, operating within 
the Ministry of Labor and Social Policy and the national 
NGO sector active in this field. 

With the support and collaboration of the international 
donor community, there were a number of campaigns to 
raise public awareness and of a preventive nature as well 
as initiatives supported by the national authorities 



regarding the human trafficking phenomenon, launched 
and implemented countrywide. Some of them were 
specially tailored to reach out to particularly vulnerable 
categories of population, which are exposed to risk. 

The Academy for the Continuing Education of Judiciary 
Officials (judges and public prosecutors) requires an 
official exam at the end to qualify for election and 
reelection processes. The Academy's curriculum also 
includes instruments and best practices in the prosecution 
of the human trafficking crime. 



See also the Council of Europe's Recommendation R 
2000) 11 on Action against THBs for the Purpose of 
Sexual Exploitation (19 May, 2000) which calls on 
member states to grant victims a temporarily residence 
status in the country of destination in order to enable them 
to act as witnesses during judicial proceedings against 
offenders " and to provide victims with social and medical 
assistance 

SV: Are the courts knowledgeable and efficient in 
processing human trafficking cases? 

DV: The intensive EU association process compelled the 
signature and ratification by the Macedonian authorities of 
a number of new treaties and international conventions, 
which made them applicable and a part of the national 



legal system. In order to render national legislation in 
conformity with all of those instruments, the national laws 
has been subjected to a process of intensive 
harmonisation, introducing a number of changes, new 
articles, and modifications. 

Because laws are continually being revised and amended, 
the process of the continuing education of judges and 
prosecutors is crucial to the proper functioning of the rule 
of law in the country. 

The involvement of the judiciary, especially trial judges, 
in educational and training courses for police officers was 
mainly done on ad hoc basis which caused them to be 
somewhat inferior as far as the timely acknowledgement 
of the new treaty requirements regarding human 
trafficking caseloads. From 2002- 2004, there were court 
verdicts related to human trafficking offences that have 
been regarded as rather inappropriate from the punishment 
point of view. Although 2004 is a turning point in terms 
of more severe punishment for traffickers, the need for 
continued education of judges and prosecutors emerged as 
a priority. 

In March 2006, a new Academy for the Training of 
Judges and Prosecutors was opened in the capital city 
(Skopje), marking the institutionalisation of an erstwhile 
ad hoc educational approach previously carried out by the 



domestic Association of Judges. The establishment of this 
Academy was an important step in the process of the 
ongoing overall judicial reform, ensuring the effectiveness 
and professionalism of the judiciary officials during the 
application and interpretation of laws and other legal 
provisions. . 

The main purpose of the Academy is to ensure the 
competent, professional, independent, impartial and 
efficient performance of judicial and prosecution 
functions through the selection, organisation, and 
implementation of initial training for candidates forjudges 
and prosecutors as well as the continuous professional 
training of judges and prosecutors. 

The Academy's training curricula also includes relevant 
ratified instruments and conventions related to the human 
trafficking crime. The Academy's educational program for 
the new candidates and the ongoing refresher courses 
organized for their active colleagues is allowing the 
national judiciary to be knowledgeable and aware of all 
the relevant aspects while processing human trafficking 
caseloads, among others. 

SV: What are the most efficacious deterrents and 
punishments for human traffickers: monetary fines, 
confiscation of property, or imprisonment? 

DV: Imprisonment is being regularly imposed as the main 
punishment for convicted traffickers. To effectively 
combat this crime it is necessary to combine 



imprisonment with monetary fines and the confiscation of 
property, thus depleting the resources of organised crime. 
Regretfully, the last two remedies have been rather poorly 
applied in practise and do not fully meet expectations. 
Namely, the monetary fine as envisaged by the Law on 
Criminal Procedure has been exercised as sporadic 
punishment next to imprisonment. Additionally, even 
when imposed, it was usually in an amount that does not 
reflect the gravity of the crime and could not compensate 
the victim's claims for psychosocial damage suffered. The 
confiscation of property, or forfeiture of profits generated 
by the crime usually amount to the seizure of movable 
property, money, and vehicles used for the transportation 
of the victims at the crime scene. Although the law now 
foresees the confiscation of real estate, none of these 
remedies have been applied in human trafficking cases, 
yet. 

In general, as observed by some local NGOs, in the period 
from 2002 until 2004, almost half of prison sentences in 
the Republic of Macedonia for human trafficking crimes 
were below the legal minimum (4 years). This evidences 
the gap between the court practice in that period and the 
concept of the penal policy of the country to sanction and 
underline the severity of the crime. 

The picture has changed in 2004 when the penal policy 
has been made more rigorous, but still with a judicial 



tendency to hover around the minimum imprisonment 
prescribed. 

SV: Victims sometimes serve as witnesses against 
human traffickers. Having testified, they are usually 
repatriated. Can you discuss these two complex 
problems: witness protection and repatriation? How 
does one make sure that the victims won't fall prey 
again to human trafficking or be "penalized" by the 
perpetrators for their testimony? 

DV: Since the Article on Human Trafficking in the 
Criminal Code of Republic of Macedonia has been 
introduced and applied, the practise confirmed the fact 
that victims' statements were the most solid and crucial 
pieces of evidence that effectively led to the locking up of 
traffickers. Therefore, law enforcement in that period was 
focused on obtaining and upholding quality victim 
statements and charges against traffickers until the end of 
the criminal procedure and the court proceedings initiated. 
Law enforcement practise has demonstrated that once the 
victims are rescued and have properly recuperated while 
sheltered in the transit centre, it was not difficult to sustain 
such charges and statements, mainly due to sufficient 
security measures and protection afforded the intimidated 
witnesses as granted by the national Law on Criminal 
procedure. 

The problems started if the initiated procedures got 
extended and lasted a long time, during which period the 
victims-witnesses got repatriated (returned to their 
countries of origin) even as appeals were not yet 
consummated and final verdicts not handed down. The 



principles of "directness " and "contradiction" (the ability 
to directly confront the witness and question her under 
oath) in the Macedonian Criminal Procedure constitute a 
legitimate right of the defendant (trafficker). They allow 
him to oppose, challenge, deny and argue the evidence 
against him brought to the court and to question and 
oppose witnesses. The need for the repeated and 
permanent presence of the victims during the whole 
procedure was a real problem for proper prosecution in 
that period especially because most of the victims, once 
repatriated, became part of special social reintegration 
programs, which regularly prevented them from anything 
that might lead to re-victimisation or harm the process of 
their of psycho -social reintegration. In the absence of a 
crucial testimony, the indictment against the trafficker 
was difficult to uphold. 

On the other hand it was not always easy for Macedonian 
law enforcement authorities to secure the presence of the 
victim with the same quality of statements or testimony 
during the initial and other phases or instances of the trial, 
especially in terms of the victim's consent (to be exploited 
by the trafficker) which was seen and regularly interpreted 
as a radically mitigating circumstance for the 
accused. This reversal of testimony was mainly due to the 
fact that that the victim (regardless whether repatriated or 
still sheltered in the country of destination) may have 
received threats and got seriously intimidated (even 
through their families) by the tentacles of organised crime, 
or by the traffickers' relatives. 

A positive step in overcoming the problem regarding the 
victim's presence was the installation of an audio-visual 
link between the court and the office of the prosecution in 
Macedonia on the one side and the corresponding 



institutions (or via the Embassy) in the victim's country of 
origin. This was made possible with a donation through a 
US Embassy supported project in Macedonia. 

A positive legislative development with regards to witness 
protection on the national level was the enactment of the 
Law on Witness Protection which foresees also 
possibilities for the victims of trafficking to enter the 
program if they meet certain criteria and conditions. But, 
up to now, there hasn't been a victim of trafficking that 
has entered the national program of witness protection. 

Perhaps the most valuable amendment to the Article on 
Human Trafficking in the Criminal Code was the last one, 
introduced in January this year (2008). It finally defined 
the victim's consent as irrelevant for the crime of human 
trafficking. This actually reinforced the principle 
highlighted in the Palermo Protocol and the Council 
Framework Decision that an investigation or prosecution 
of offences of trafficking in human beings will not depend 
on reports or accusations made by the persons subjected to 
the offence (see footnote). 

Taken practically, this is expected to alleviate the burden 
of proof, currently always borne by the victim and her 
statements. Now law enforcement and investigations 
focus only on the statements of victim-witnesses as a 
means to verifying the existing conditions where, 
additionally, the victim's abuses are photo-documented 
and material evidence is gathered carefully and secured 
independently from the victim's statement. Furthermore, 
the relevance of the victim's statements is considered to be 
merely one instrument among others in support of the 
prosecution of the traffickers. Such a solution is expected 
to further ameliorate the pressure and intimidation of 



victims-witnesses, exerted by organised crime networks 
and the relatives of the traffickers accused. 

Apart from this amendment to the law, it is worthwhile to 
mention the international cooperation that has developed 
among law enforcement agencies in the region within the 
SECI Initiative and its Regional Centre in Bucharest 
during 2002- 2004. The purpose of the SECI Initiative and 
the Centre was to improve regional law enforcement 
cooperation, through the joint activities of police and 
customs administrations of the different countries 
involved. This was accomplished by facilitating 
investigations, sharing experiences, establishing common 
operations, and continually evaluating and analyzing the 
crime situation in the region (Operation Mirage ). The 
system of protection of victims as witnesses was also one 
of the common activities coordinated. 



Council Framework Decision from 19 July 2002 on 
Combating THB 2002/629/JHA 

SV: What is the role of NGOs (non-government 
organizations) in victim rehabilitation and victim 
interface with law enforcement authorities? 

DV: The role of the NGO sector in Macedonia in 
effectively countering and suppressing the human 
trafficking crime has been underestimated in the past, 
when the victim identification process was a solemn right 
of the Macedonian Ministry of Interior (i.e., the Unit in 



charge of Human Trafficking, within the Organised Crime 
sector). 

That period was characterise by major cases of rescued 
victims being treated as foreign nationals and an official 
attitude of the authorities who denied the existence of any 
domestic human trafficking caseload. In that period, the 
national police was rather sceptic and distrustful towards 
any attempt at joint action or cooperation with NGOs. A 
few cases of criminal infiltration and illicit intimidation of 
victims sheltered in the Transit Centre, justified for a 
while this kind of suspicious and protective police 
approach. 

A deeper, trust-based cooperation and coordination has 
been achieved within the Transit Centre between the 
Police and the NGOs involved in the victims' assistance 
and rehabilitation programs. Under the auspices of the 
Ministry of Interior, National Commissions, and 
Secretariat a few specialised and trained NGOs have been 
entrusted and security-cleared to access the Transit Centre 
on a daily basis in order to provide regular psycho-social, 
medical and legal aid to the victims sheltered (in 
accordance with the requirements set in the Article 5 of 
the Palermo Protocol). 

Each VoT (Victim of Trafficking) accommodated in 
Transit Centre C (TC) is provided with medical care, 



treatment and checkups by a non-government medical 
team, available 12 hours a day and on an on call basis, 7 
days a week. With mediation and financial support from 
various donors, victims are provided with adequate and 
expert post-traumatic, socially re-integrative and psycho- 
social therapy and counselling by an appropriate NGO 
specialized and trained for this type of assistance. In the 
same manner, VoT accommodated in the TC are provided 
with free legal assistance, counselling and legal 
representation. Immediately following their 

accommodation, victims receive appropriate legal advice 
on their legal status, their rights and obligations in 
accordance with the existing legislation and, in case they 
are invited to a court hearing or to take part in pre- 
investigative activities, they are provided with free legal 
counselling, assistance and representation. This enables 
the victims to obtain - in a timely manner - all necessary 
advice regarding their rights and obligations as a damaged 
and plaintiff party; in particular their right to claim 
compensation, the right to an interpreter and legal 
defence, i.e. authorized legal representation, at the very 
initial stages of the procedure, regardless of the capacity 
in which they are acting. 

This form of coordination and cooperation has been 
further formalised through the internal endorsement and 
application of the so-called special Standard Operation 



Procedures (SOP), developed with aim of regulating all 
the procedures and internal and external duties and 
responsibilities of each of the players (state organs, 
ministries, and NGOs) involved in the referral system 
developed (see footnote). 

The experience gleaned from this period underlined that 
multiple possible referral sources had no access to the 
victims prior to their entry into the Transit Centre. 
Everyone had to solely rely upon the judgment of the 
police, thus casting in doubt also the eligibility of persons 
brought to the Transit Centre. 

From this perspective, local NGOs, acting on a 
decentralized level, as well as social centres were 
suggested and considered as safer and more dignified 
venues. The Transit Centre also became accessible to 
other state institutions such as Local Social Care centres 
who were able to provide appropriate care and social 
assistance to victims, especially minors in need of 
appointment of special guardians. 

In the meantime, local NGOs reported the existence of a 
caseload of internal trafficking, persistently denied by the 
authorities. 



Time was getting ripe for more comprehensive action to 
be undertaken on the national level by expanding the 
referral mechanisms to cover internal caseloads, too. 

As mentioned before, in September 2005, the Ministry of 
Labour and Social Policy, in coordination with the NGO 
sector and supported by various donors, established the 
National Referral Mechanism for Victims of 
Trafficking for processing victims of trafficking in 
Macedonia. It is characterized by an improved and 
multifarious victim identification process, based on 
secured and systematic victims referrals and assistance 
schemes countrywide. Although initially focused on the 
national caseload, this system is now operational for both 
international and national victims rescued. 

The presentation made by the coordinative office of the 
National Referral System in 2008 confirmed that it is run 
by a permanent staff of three, together with 58 social 
workers from 27 social centers countrywide who are 
available 24 hours a day, for the purpose of timely 
information, detection, coordination, and direct assistance 
to the victims who are detected or referred by the local 
NGOs. This yielded an improvement in the prescreening 
identification system and provided the potential victims 
with the most appropriate referrals, sheltering and 
assistance. . 



As was reported, from 2005 to 2008, the National Referral 
Mechanism succeeded to train about 525 different 
profiles: members of social centers expert teams, 10 
representatives of different gender commissions and 
bodies, police counter-trafficking and border police 
inspectors. Twenty-one training seminars were organized 
for local NGOs countrywide and for 58 social workers of 
27 local Centers for Social Care across the nation. The 
offices of 19 Centers are specifically equipped to work 
with victims of trafficking who are minors. They provide 
this class of victims with applicable reintegration and re- 
socialization programs. Apart from many awareness 
campaigns and public pool surveys conducted by the 
Coordinative Office of the National Referral System in 
conjunction with local NGOs the following figures 
demonstrate the practical impact of the referral activities: 

From September 2005 to December 2006, there were 23 
potential victims registered throughout this referral 
mechanism, out of which 16 were minors. 

From December 2006 to December 2007, there were 30 
domestic victims of trafficking identified, out of whom 5 
were foreign nationals and 28 were minors. From 2005 
until December 2008 there were 13 individuals that have 
been referred through the National Referral Mechanisms 
to the sheltering premises of the NGO Open Gate. Four of 



them underwent risk and family assessments, requisite for 
their safe return home. Four girls have received direct 
assistance and included in reconciliation and reintegration 
programs run by IOM (International Organization of 
Migration). A temporary social guardian has been 
appointed for seven minors within the current Transit 
Centre. 

Generally speaking, the role of the NGO sector in the 
effective suppression of human trafficking is becoming 
crucial. It is irreplaceable due to its outreach: the best and 
farthest compared to other preventive and awareness 
messages launched. NGOs also expand the usually limited 
local capacities and the reintegration opportunities for 
victims. 

On the other hand, the NGO sector should be used as a 
valuable and helpful resource at the disposal of the 
authorities in their quest to attain desired standards and 
practical solutions. NGOs maintain flexible international 
networking, cooperation, knowledge flow and transfer and 
the sharing of best practices in a manner accessible to all. 
Something that can be rather formal and time consuming 
as far as the state organs go, the NGO sector can easily 
expedite by making use of experience encountered 
worldwide. 



In these contexts, trafficking-related issues and strategies 
should be anticipated and implemented within the human 
rights framework consistent with international 
conventions and instruments, especially with those that 
have already been subject to ratification. As mentioned in 
the Palermo Protocol, the signatory-country assumes the 
responsibility to review the possible measures for the 
appropriate psychological, psychophysical and 
sociological treatments for the healing and recovery of the 
victims, material help, as well as legal advice regarding 
their rights in a language they understand. 

Legal aid is an exceptionally important precondition and a 
guarantee for the realization and appropriate protection of 
victims' rights and freedoms set forth in the Constitution 
and in all internationally-ratified conventions. Presenting 
the facts this way and with properly addressed and timed 
campaigns, NGOs must enlarge their preventive and 
educational impact on the vulnerable parts of the 
population: women, i.e. girls and children, alerting them 
to new and nefarious forms of recruitment. As part of its 
gender mainstreaming, the NGO Sector is actually 
expected to further incorporate anti-trafficking measures 
into its ongoing human rights and institution-building 
programs. 

In this regard, it is worth mentioning the positive impact 
of the Council of Europe Convention on Action against 



Trafficking in Human Beings of 2005 which calls upon 
the treaty signatories to further adopt measures for victim 
protection regardless of their collaboration in the criminal 
prosecution of traffickers, preventing them from being 
repatriated in the meantime. This Convention openly 
prompts the authorities to extend their cooperation with 
the NGO sector and with professional organizations 
that deal with these issues. The treaty also prevents 
victims from being repatriated before all legal proceedings 
are completed. The other progressive feature offered in 
this instrument is that the problem of human trafficking 
has been finally decoupled from what used to be the 
prevalent focus on illegal migration patterns. Whereas the 
Palermo Protocol has now been signed by almost all 
European countries, only several out of 47 members of the 
Council of Europe have ratified the more binding 
Convention on Action against Trafficking in Human 
Beings. The Republic of Macedonia still has to finally 
ratify this Convention which was formally signed on 
17.11.2005. 

Special emphasis should be placed on training the NGOs 
to easily spot modern tactics and rhetoric in attracting 
potential victims. Non-government organizations should 
be aware that human traffickers are stalking their prey, 
concealed behind business facades that place ads in the 
local media, posing as legitimate enterprises, such as 
agencies for top-models, tourist agencies, overseas 



manpower recruitment firms, hired help abroad, and 
matchmaking. Traffickers can be organized in criminal 
groups but also work as individuals. They lure their 
victims with promises of good working conditions, 
usually with exceptional wages, or wealthy marriage 
partners. Very often the traffickers offer help in the 
acquiring of passports, various work permits and visas, 
and of course, because of the "complexity of the 
services", they offer transportation to the promised lands 
of welfare. They reach their potential clients through half- 
informed relatives, neighbors, acquaintances and friends, 
through informal and less formal reports, offers for 
assistance and fast solutions of certain financial and 
existential problems, sometimes providing even 
professional advice. 



The NGO sector in Macedonia is under the influence of 
the authorities and the "spoils system" also affects them as 
well as the bigger international organizations operating in 
the country. There are numerous examples where the 
assignment of "turf" (local focal points for cooperation 
and liaison with the responsible ministries or institutions) 
is often granted to candidates offered by some high 
ranking officials (who happen to be their relatives) with 
the argument that such propinquity is bound to lead to 



better receptivity and deeper cooperation. That is one of 
the reasons why some of the leading international and NG 
organisations were or are recruiting rather young and 
inexperienced local staff. 

In the last couple of years, a relevant counter-trafficking 
international organization was chaired by really 
unqualified persons, also bestowing on them a diplomatic 
status. Replete with irrelevant military training, 
completely insensitive to the problem of trafficking, those 
people got the Macedonia sinecure as a place to recover 
from career burn-out, or as an award for serving in other 
missions worldwide. Lacking in knowledge, guided by the 
rule of mediocrity, they get on-the-job-training. Often 
indulging themselves in ersatz romantic office affairs, 
they regularly engage in unprofessional, vicious, and 
malicious bullying for revenge, utilising their position and 
influence for self-enrichment. The nation's ability to 
prevent such mismanagement and behaviours committed 
by international staff assigned here is still unarticulated, 
weak and obsequious, and often compounded by eventual 
personal benefits. 



Before the SOP was applied, pre-screening procedures 
and victim interviews were regularly performed according 



to police investigative provisions, set by the police itself, 
usually after a police raid and less frequently following an 
individual's escape or a referral via a different means. In 
addition, many assessments and studies in the region 
persistently demonstrated that the number of victims 
referred in the region solely by the police actually amounts 
to only one third of the victims that might have been 
immediately deported or been bereft of any protection and 
assistance schemes. 

Return 



The Mendicant Journalists 



In October 2008, the car of the outspoken editor of the 
Croat investigative weekly "Nacional", Ivo Pukanic, 
exploded as he tried to remote unlock its doors. Niko 
Franjic, the magazine's marketing director, also perished. 
Pukanic as investigating mob-related murders and 
racketeering. 

This was only the latest in a series of gruesome and 
grizzly assassinations and attempted murders of 
journalists throughout the territories of the former Soviet 
or socialist Bloc. 

Just two years before, in October 2006, Anna 
Politkovskaya, a Russian author, journalist, and human 
rights activist was gunned down at the entrance to her 
home (near the building's elevator). Politkovskaya was 
renowned for her opposition to Vladimir Putin (then, 
Russia's president) and to the Chechen conflict , in which 
fortunes were made by corrupt figures in the military and 
other unsavory characters. 

Aleksandr Plotnikov died in June 2002 in his dacha. He 
was murdered. He has just lost a bid to restore his control 
of a local paper in Tyumen Oblast in Russia. Media 
ownership is frequently a lethal business in eastern 
Europe. The same week, Ukrainian National Television 
deputy chief, Andryi Feshchenko, was found dead in a 
jeep in a deserted street of Kyiv. Prosecutors suspect that 
he was forced to take his life at gunpoint. 



In an interesting variation on this familiar theme, a 
Moldovan parliamentarian accused the editor of the 
government- run newspaper, "Moldova Suverana", of 
collusion in his kidnapping. 

Governments throughout the region make it a point to rein 
in free journalism. Restrictive media statutes are being 
introduced from Russia to Poland. Romania's Senate 
approved, on June 6, 2002, a law granting persons 
offended by a print article the right to have their response 
published in the same media outlet and to seek monetary 
compensation all the same. 

The Romanian president attacked the media and said that 
he is "amazed" at their "talent to distort" his statements. 
He attributed this to a "lack of information, lack of 
culture, or malevolence." In Belarus, journalists are 
standing trial for defaming the president. They face 5 
years incarceration if convicted. 

Early in 2006, Macedonia was poised to pass a long- 
overdue Freedom of Information law even as the 
government attempted to shut down the highly efficient 
and (from repeated personal experience) indispensably 
helpful Agency of Information. Thus, journalists, both 
foreign and domestic, cannot now obtain accreditation 
("press card"). The distinct red card served hitherto as a 
form of much needed protection in these nether regions 
and a prerequisite to securing a mandatory work permit 
and custom clearances for bringing in TV equipment. 
Some say that the ruling party wished to minimize its 
exposure to the foreign media during the forthcoming, 
closely-contested, heated and sensitive parliamentary 
elections. 



The Agency of Information survived as a department, but 
not so the freedom of the press. The media in Macedonia 
has been rendered completely subservient and 
dysfunctional in the last three years, under the 
governments of Nikola Gruevski. 

This is the outcome of the confluence of a few 
developments: 

1 . Increasing involvement of corporate interests. The 
private sector in Macedonia is rent-seeking and the 
owners of the media can't afford to be seen to be "anti"- 
government. They implement self-censorship on a 
ubiquitous and all-pervasive scale (including "black lists" 
of who not to interview). 

2. The government's soaring share of the nation's 
advertising dollar. The media are reluctant to alienate the 
country's largest advertiser: the government. 

3. The fragmentation of the nation's media market (with 
12 daily papers and 10 national TV stations!!). This 
apparent "pluralism" actually allows the government to 
"pick winners" and favorites and to extend its "benevolent 
network of patronage" to hitherto independent media. 
Many papers and electronic media are too small to survive 
on their own. 

4. The government micromanages the media. Government 
officials bombard editors and journalists with complaints, 
accusations, and what can easily be interpreted as veiled 
threats every time the media publish an unflattering bit of 
analysis (or even information that runs counter to the 
official line). Turnover of independent-minded journalists 
has never been higher 



(translation: they are being sacked at record rates). 

Macedonia is not an isolated case. 

In 2002, Putin's Russia introduced a decree regulating the 
licensing of audio and video production duplication rights. 
According to abc.ru, a license from the Media Ministry is 
required to make copies of any multimedia work. The 
Culture Ministry licenses such oeuvres for mass 
audiences. 

The frequency of A1+, Armenia's most vocal independent 
TV station, was auctioned off to politically-sponsored 
business fronts, forcing the hard-hitting station off the air 
on April 3, 2002 - just in time for the following year's 
elections. The new owners - "Sharm" - promised to 
concentrate on "optimistic news". 

The station appealed the tender procedure to the 
Armenian Economic Court and opposition groups took to 
the streets. AFP carried a statement by the self-appointed 
watchdog, Raporteurs Sans Frontieres, that called the 
tender "the muzzling of the country's main news voice ... 
the most serious violation of pluralism in Armenia in 
years". 

Even the US Embassy in Yerevan stirred: 

"A1+ performed a valuable public service in offering 
substantial media access to a broad spectrum of opinion 
makers, political leaders, and those holding differing 
views. " 

The Azerbaijani prime minister promised to allocate $3.5 
million in credits to media outlets - but, tellingly, made 



this announcement exclusively on the state-owned 
channel. The bulk of the television tax in Macedonia ends 
up in the coffers of the somnolent and bloated state 
channel which caters to a mere one quarter of the viewers. 
The independent media - both print and electronic - face 
unfair competition in attracting scarce advertising 
revenues. 

The managers of six Latvian private television and radio 
stations published an open letter to President Vaira Vike- 
Freiberga, Prime Minister Andris Berzins, the 
Competition Council, the National Radio and Television 
Council (NRTC), the State Support Monitoring 
Commission, and political parties. 

They deplored the commercialization of the public media. 
State support - fumed the signatories - allows these outlets 
to undercut the prices of advertising airtime. They urged a 
major revision and modernization of the law. Latvia is 
considering the introduction of a monthly mandatory 
"subscription fee" to finance its state-owned media. 

Media properties are awarded to loyal cronies and 
oligarchs - having been expropriated from tycoons and 
managers who fell from official grace. Such assets are 
often "parked" with safe corporate hands ad interim. 
Russian energy behemoth Gazprom, for instance, acquired 
a media empire overnight by looking after such orphan 
holdings. It is now dismantling these non-core operations. 

In Russia, the tendered broadcasting rights of TV6 were 
allocated to Media-Sotsium, a consortium led by regime 
stalwarts such as Yevgeni Primakov, a former prime 
minister and the current chief of the Chamber of 
Commerce and Industry and Arkadi Volski, head of the 



Union of Industrialists and Entrepreneurs. The group 
included leading managers and active political figures. 
The consortium's general director is none else than 
Yevgeni Kiselev, the erstwhile general manager of TV6. 

TV6 was taken off the air by the Kremlin in 2001 - as was 
Russia's most popular independent station, NTV. Quoted 
by Radio Free Europe Radio Liberty, the Editor in Chief 
of the Ekho Moskvy radio station commented that this 
"completes the redistribution of television property in 
Russia from one oligarch who was not loyal to the 
authorities to others that are". 

Gorbachev, whose group bid for the station, concurred 
wholeheartedly. In a rare show of consonance, so did the 
communist Zyuganov. Muscovites polled in April 2002 
said they hoped TV6 would become a sports-only 
channel. 

In a speech to the National Press Club in Washington on 
April 9, 2002 Russian Media Minister, Mikhail Lesin, 
admitted that "developments surrounding the NTV and 
TV-6 companies certainly had a political background, and 
there is no denying it". He promised to substantially cut 
funding to "politically oriented mass media". 

Russian media, insisted the Minister, is having "growing 
pains". Referring to the older and more mature media in 
America, he asked: "Let us remember how this 100-year- 
old gentleman looked when he was 10 years old. He did 
not have any problems at that time?" 

State interference rarely stops at the ownership level. 
Subtle self-censorship by obsequious or terrorized 
journalists is often coupled with governmental 



micromanagement. The license of NTV, the eponymous 
successor of the shuttered independent Russian TV 
station, was renewed only recently for another five years - 
after many delays and public statements casting doubts on 
the outcome. This form of subtle pressure to self- 
discipline is common. 

The Russian business daily Kommersant commented: 

"(The delays were intended to) stimulate Gazprom to 
more quickly sell its shares in the company and to 
frighten (NTV's General Director) Jordan into being a 
bit more attentive to what NTV puts on the air. " 

Belarusian president, Alaksandr Lukashenka, instructed 
the chief of the Belarusian Television and Radio 
Company to "work around the clock" to improve 
programming. "The Belarusian Television and Radio 
Company works in the same information field with 
powerful foreign broadcasters: ORT, RTR, NTV, Radio 
Rossiya, Radio Mayak, Radio Liberty, Radio Racja, and 
others. It is in a state of ideological competition with them 
and, speaking straightforwardly, sometimes in 
confrontation." 

"Belarusian Television, as before, remains an information 
supplement to foreign television companies." - he was 
quoted as saying by REF/RL. How would such a 
turnaround be achieved with a shoestring budget was left 
unarticulated. Belarus couldn't pay Kirch Media the 
$500,000 it demanded for the World Cup rights. 

The Belarusian Language Society appealed to UNESCO 
and the EU to help launch a Belarusian heritage and 
culture satellite broadcast on the Discovery Channel. 



Russian-language broadcasts, they noted ruefully, account 
for a crippling 97 percent of airtime. 

Lukashenka finished his diatribe with a practical advice: 
"Beginning from tomorrow, every manager in the 
Belarusian Radio and Television Company has to sleep 
with a television set." In a country where disagreeing with 
the president can be the last thing one does, his wish is a 
command. 

The situation is especially egregious in the fiefdoms of 
Central Asia. 

In Georgia, the politically-pliant tax police, often an 
instrument of intimidation of opponents, raided Rustavi-2, 
an independent thorn in the irate government's side. In 
Kazakhstan, in November 2001, all the media properties 
of Alma-Media - including its prized Kazakh Commercial 
TV - were suspended. Malicious rumors were spread by 
the police against the editor of the outspoken newspaper, 
"Karavan". The rumors were promptly denied by the 
Kazakh Minister of Internal Affairs. 

If all else fails, crime does the trick, the independent 
Kazakh paper, "Delovoe-Obozrenie-Respublika", was first 
firebombed and then - five days later - closed by the court 
because it failed to provide a publication schedule. OSCE 
slammed Kazakhstan for its new Administrative Offenses 
Code which is replete with 40 media-related 
transgressions. 

RFE/RL quoted a statement by Rozlana Taukina, head of 
the Independent Media Association of Almaty, in a press 
conference in Moscow. She complained that 22 



independent media outlets have been closed in 
Kazakhstan over the past month. 

Another instrument of suppression are libel suits which 
invariably result in exorbitant and destructive penalties. 

Aleksandr Chernov, a Krasnodar judge, won in February 
2002 $1 million in compensation from "Novaya Gazeta", 
a paper owned by the disgraced and self -exiled oligarch 
Boris Berezovsky. Senior Russian public figures issued a 
passionate plea to reduce the fine and prevent the paper's 
bankruptcy. 

In an unrelated lawsuit, Mezhprombank, alleged by "The 
Moscow Times" to be a money laundering venue, won c. 
$500,000 in damages from the aforementioned besieged 
"Novaya Gazeta". Court bailiffs seem determined to force 
the closure of the paper despite a pending appeal. 

The largest circulation Slovak paper, "Novy cas", was 
ordered to pay a whopping $100,000 in compensation to 
Real Slovak National Party (PSNS) Chairman Jan Slota. 
The paper reported that he had been seen drunk. 

Vladimir Putin, Russia's president, encapsulated the 
philosophy of state interventionism neatly in an interview 
he granted to ITAR-TASS and other Russian news 
agencies: 

"If freedom of the press is understood as the freedom of 
a handful of so-called oligarchs to buy journalists, to 
dictate their will in the interests of their groups, and to 
protect the way of Russia's oligarchic development that 
was thrust on the country over the past decade, then yes, 
it is in danger ... (The authorities should not) allow 



individuals to shape the country 's strategy the way they 
like, (while) filling their pockets with illegally earned 
money ... (Freedom of the press) implies the ability of 
journalists and their groups to freely, openly, and 
fearlessly define their position on key problems of the 
development of the country and society, to criticize 
actions of the authorities (and to make sure that the 
authorities react properly). " 

Putin harked back to the nanny state, calling Russian 
media immature and still in the development stage. They 
need assistance in developing ways to secure their future 
economic independence. The state will create the 
necessary conditions for the "economic freedom of the 
press". 

The president's aide, Aleksei Volin, was quoted by 
REF/RL as having told radio Ekho Moskvy that state- 
ownership of the media is rendered meaningless in an age 
of multiple channels. The state, said the aide, should 
concentrate on programming and thus "ensure its role in 
television media". 

Russia's then Media Minister, Lesin, hastened to make 
clear that the state has no intention of privatizing its 
television media holdings, ORT, the second channel 
(RTR), and Kultura, an educational cum entertainment 
network. The government - a minority shareholder in 
ORT - denies meddling in the editorial affairs and policies 
of either of these federally-funded channels. ORT and 
RTR just paid c. $40 million for the Russia World Cup 
rights. 

A bill, introduced in the Duma by independents, failed to 
pass last week. It would have reduced state ownership of 



mass media outlets to 25 percent within 6 months. Anti- 
government deputies claimed that the state controls 90 
percent of all the media in the vast country. Their 
colleagues from the coalition cited a figure of 10 percent. 

In Moldova, a committee of lawyers, journalists, and 
deputies of parliament issued a report on May 3, 2002 
advocating against privatization of the media. Both radio 
and television, they intoned, must remain in the safe hands 
of the state, though in the form of an "autonomous" public 
broadcasting authority. This flew in the face of 
recommendation issued earlier by the Parliamentary 
Assembly of the Council of Europe (PACE). 

In response, incensed journalists, intellectuals, and 
lawyers established Public Television Company. Modeled 
after the BBC, it will be sponsored by private sector 
donations and advertising revenues - they told Infotag, the 
news agency. The head of an EU visiting delegation went 
as far as warning the Moldovan government that ignoring 
PACE's advice "will have catastrophic consequences both 
for the current government and the citizens". 

The new Hungarian government is considering to shut 
down one or more of the state-owned TV channels and to 
reform the media law. But, EU-orientated statements to 
the contrary - Hungary's state media is still under the 
collective thumb of its politicians. According to the May 
15, 2002 issue of "Nepszabadsag", the Socialist party 
media spokesman publicly "suggested" that the President 
of Hungarian Television should resign due to his bias 
during the elections. 

Journalists on all levels readily collaborate with political 
masters. The staff of Hungarian Pannon Radio took over 



the previous location of the station and are broadcasting 
virulent nationalistic propaganda with the financial and 
political backing of the extremist MIEP - the Hungarian 
Justice and Life Party. 

The ownership of electronic media is the electoral trump 
card in most countries in transition. Papers are little read. 
According to Emil Danielyan in RFE/RL: 

"There are several newspapers that are highly critical of 
the authorities but their impact on public opinion is 
limited, as their combined daily print run does not 
exceed 10,000 copies (Armenia's population is just over 
3 million). " 

In Macedonia, the circulation of "Dnevnik", the country's 
leading paper, is thought to be c. 20,000 copies on a 
weekday (its official figures of triple that notwithstanding) 
- compared to more than 500,000 regular viewers of Al, 
the dominant independent TV station, owned by business 
interests. No weekly sells more than 3000 copies in this 
country of 2 million people. 

Foreign ownership of media is still a rarity. Xenophobia 
and crookedness combine to drive away potential 
investors. Central European Media Enterprise (CME), an 
American holding company for central European media 
properties, endured the most grueling experiences in the 
late 1990's in the Czech Republic and Slovenia. 

Tele5, a new Polish television channel, is owned by 
Fincast, a Polish subsidiary of Italian Eurocast Italia and 
more than 70 percent of Poland's regional media are in the 
hands on two Western companies. The second largest 
paper, Rzeczpospolia, is owned by a Norwegian firm. But 



these are the Polish exceptions that only highlight the 
regional rule. 

Poland is atypical on other fronts as well. Poles are avid 
devourers of broadsheets. More than 20 percent of them 
feast on the Gazeta Wyborcza every day. Amendments to 
the existing law prevent the formation of media 
monopolies by restricting media ownership to one 
nationwide broadcasting license or one nationwide daily. 
The Wyborcza would thus be prevented from taking 
possession of the private Polish TV station, Polsat, one of 
many. 

Adam Michnik, an erstwhile dissident turned influential 
editor, remarked acidulously to "The Economist": 

"Of course (prime minister) Miler (a former senior 
communist) should know how evil a monopoly can be ... 
(The government wants to render Wyborcza) cowardly, 
toothless, and servile. Authoritarian states like such 
papers, but Polish democracy does not need one. " 

Admittedly, Poland is not above harassment and 
intimidation. The managers of Rzeczpospolita - 49 
percent owned by the government - were hounded by tax 
inspectors and their passports were confiscated. "An 
action usually reserved for big-time criminals" - notes 
"The Economist" dryly. 

The board of the state-owned television is packed with 
sycophants and cronies. Now, the widely- held theory 
goes, Miller has his sights on the print media. He wants to 
force the Norwegians to sell to Trybuna, the little-read 
mouthpiece of the ex-Communists. 



But the media in the post-Communist territories may be 
simply reaping what they sowed. 

In an article published by "Central Europe Review" , I 
summed up the state of the media in Central and Eastern 
Europe thus: 

"What sets the media in the countries in transition apart 
from its brethren in the West is its lack of (even feigned) 
professionalism, its venality and its tainted and ulterior 
motives. In these nether regions, journalism amounts to 
influence peddling. Journalists are easily bought and 
sold and their price is ever decreasing. They work in 
mouthpieces of business interests masquerading as 
media. They receive their instructions - to lie, to falsify, 
to ignore, to emphasize, to suppress, to extort, to inform, 
to collaborate with the authorities -from their Editor in 
Chief. They trade news for advertising. 

The commercial media - the likes of 'Nova' TV in the 
Czech Republic - are poor people's imitations of the 
more derided aspects of American mass culture. 
Overflowing with lowbrow talk shows, freaks on display, 
malicious gossip which passes for 'news' and glitzy 
promos and quizzes - these TV stations and print 
magazines derive the bulk of their income from 
advertising. Then there is the mercenary media. These 
are groups of hired pens and keyboards - so called 
journalists - who offer their services to the highest 
bidder. Their price is often pathetic: a lunch a month, 
one hundred euros, a trip abroad and a dingy hotel 
room. They collaborate with their editors and share the 
spoils with them. 



The mercenaries often work in 'business-sponsored 
media outlets'. These are TV stations, daily papers and 
periodicals owned by the oligarchs of malignant 
capitalism and used by them to rubbish their opponents 
and flagrantly and unabashedly further their business 
interests. This phenomenon used to be most pronounced 
in Russia, where virtually all the media was once 
identified with mafia-like interests - before it was taken 
over by the newly authoritarian state. " 

According to a poll conducted in May 2002 by a few 
Russian Web sites in collaboration with radio Ekho 
Moskvy, more than 57 percent of all respondents in all 
age groups supported state censorship. The main concerns 
were overt and excessive violence and pornography. 

Aware of this popular mandate, Putin's alma mater, the 
FSB (formerly known as the KGB) moved to further its 
hijacking of the media. ITAR-TASS reported that FSB 
Lieutenant General Aleksandr Zdanovich, former chief 
spokesman and head of the public relations center of the 
spy organization, was appointed deputy director of the 
VGTRK, the state broadcasting company. 

Return 



Moral Hazard and the Survival Value of Risk 



Risk transfer is the gist of modern economies. Citizens 
pay taxes to ever expanding governments in return for a 
variety of "safety nets" and state- sponsored insurance 
schemes. Taxes can, therefore, be safely described as 
insurance premiums paid by the citizenry. Firms extract 
from consumers a markup above their costs to compensate 
them for their business risks. 

Profits can be easily cast as the premiums a firm charges 
for the risks it assumes on behalf of its customers - i.e., 
risk transfer charges. Depositors charge banks and lenders 
charge borrowers interest, partly to compensate for the 
hazards of lending - such as the default risk. Shareholders 
expect above "normal" - that is, risk-free - returns on their 
investments in stocks. These are supposed to offset 
trading liquidity, issuer insolvency, and market volatility 
risks. 

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

But this is precisely the peril of these new developments. 
They mass manufacture moral hazard. They remove the 
only immutable incentive to succeed - market discipline 



and business failure. They undermine the very fundaments 
of capitalism: prices as signals, transmission channels, 
risk and reward, opportunity cost. Risk reallocation, risk 
transfer, and risk trading create an artificial universe in 
which synthetic contracts replace real ones and third party 
and moral hazards replace business risks. 

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

Governments are willing to act imprudently, safe in the 
knowledge that the IMF is a lender of last resort, which is 
often steered by geopolitical considerations, rather than 
merely economic ones. Creditors are more willing to lend 
and at lower rates, reassured by the IMF's default- staving 
safety net. Conversely, the IMF's refusal to assist Russia 
in 1998 and Argentina in 2002 - should reduce moral 
hazard. 

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

"... In order to make the case for abolishing or 
drastically overhauling the IMF, one must show ... that 
the moral hazard generated by the availability of IMF 
financing overshadows any potentially beneficial effects 
in mitigating crises ... Despite many assertions in policy 
discussions that moral hazard is a major cause of 



financial crises, there has been astonishingly little effort 
to provide empirical support for this belief " 

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

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

In an inflationary turn of phrase, "moral hazard" is now 
taken to encompass anti-cyclical measures, such as 
interest rates cuts. The Fed - and its mythical Chairman, 
Alan Greenspan - stand accused of bailing out the bloated 
stock market by engaging in an uncontrolled spree of 
interest rates reductions. 

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

"The risk premium in the US stock market has fallen far 
below its historic level ... (It may have been) reduced by 
one-sided intervention policy on the part of the Federal 
Reserve which leads investors into the erroneous belief 



that they are insured against downside risk ... This 
insurance - referred to as the Greenspan Put - (involves) 
exaggerated faith in the stabilizing power of Mr. 
Greenspan. " 

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

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

Still, it can be convincingly argued that the problem of 
moral hazard is most acute in the private sector. 
Sovereigns can always inflate their way out of domestic 
debt. Private foreign creditors implicitly assume 
multilateral bailouts and endless rescheduling when 
lending to TBTF or TITF ("too big or too important to 
fail") countries. The debt of many sovereign borrowers, 
therefore, is immune to terminal default. 

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



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

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

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

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

"The ability of regulators to contain moral hazard 
directly is limited. Moral hazard results when economic 
agents do not bear the marginal costs of their actions. 
Regulatory reforms can alter marginal costs but they 
accomplish this task through very crude and often 
exploitable tactics. There should be limited confidence 



that regulation and supervision will lead to bank 
closures before institutions become insolvent. In 
particular, reliance on lagging regulatory measures, 
restrictive regulatory and legal norms, and the ability of 
banks to quickly alter their risk profile have often 
resulted in costly failures. " 

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

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

The defrauded depositors of BCCI are still chasing the 
assets of the defunct bank as well as litigating against the 
Bank of England for allegedly having failed to supervise 
it. Discipline imposed by depositors and creditors often 
results in a "run on the bank" - or in bankruptcy. The 
presumed ability of stakeholders to discipline risky 
enterprises, hazardous financial institutions, and profligate 
sovereigns is fallacious. 

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



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

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

Last but by no means least, as opposed to oft-reiterated 
wisdom - the markets have no memory. Russia has 
egregiously defaulted on its sovereign debt a few times in 
the last 100 years. Only seven years ago - in 1998 - it 
thumbed its nose with relish at tearful foreign funds, 
banks, and investors. Six years later, President Vladimir 
Putin dismantled Yukos, the indigenous oil giant and 
confiscated its assets, in stark contravention of the 
property rights of its shareholders. 

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

In many places, international aid constitutes the bulk of 
foreign currency inflows. It is severely tainted by moral 
hazard. In a paper titled "Aid, Conditionality and Moral 
Hazard", written by Paul Mosley and John Hudson, and 



presented at the Royal Economic Society's 1998 Annual 
Conference, the authors wrote: 

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

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

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

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

"We find that using capital requirements in an economy 
with freely determined deposit rates yields ... inefficient 
outcomes. With deposit insurance, freely determined 
deposit rates undermine prudent bank behavior. To 



induce a bank to choose to make prudent investments, 
the bank must have sufficient franchise value at risk ... 
Capital requirements also have a perverse effect of 
increasing the bank's cost structure, harming the 
franchise value of the bank ... Even in an economy 
where the government can credibly commit not to offer 
deposit insurance, the moral hazard problem still may 
not disappear. " 

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

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

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

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



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

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

Whether regulation and supervision - of firms, banks, 
countries, accountants, and other market players - should 
be privatized or subjected to other market forces - as 
suggested by the likes of Bert Ely of Ely & Company in 
the Fall 1999 issue of "The Independent Review" - is still 
debated and debatable. With governments, central banks, 
or the IMF as lenders and insurer of last resort - there is 
little counterparty risk. Or so investors and bondholders 
believed until Argentina thumbed its nose at them in 
2003-5 and got away with it. 

Private counterparties are a whole different ballgame. 
They are loth and slow to pay. Dismayed creditors have 
learned this lesson in Russia in 1998. Investors in 
derivatives get acquainted with it in the 2001-2 Enron 
affair. Mr. Silverstein was agonizingly introduced to it in 
his dealings with insurance companies over the September 
1 1 World Trade Center terrorist attacks. 



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

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

The insurance industry has developed a myriad ways to 
cope with moral hazard. Co-insurance, investigating 
fraudulent claims, deductibles, and incentives to reduce 
claims are all effective. The residual cost of moral hazard 
is spread among the insured in the form of higher 
premiums. No reason not to emulate these stalwart risk 
traders. They bet their existence of their ability to 
minimize moral hazard - and hitherto, most of them have 
been successful. 

Note on Regulation 

Ultimately, the state is the mother of all insurers, the 
master policy, the supreme underwriter. When markets 
fail, insurance firm recoil, and financial instruments 
disappoint - the government is called in to pick up the 



pieces, restore trust and order and, hopefully, retreat more 
gracefully than it was forced to enter. 

The state would, therefore, do well to regulate all financial 
instruments: deposits, derivatives, contracts, loans, 
mortgages, and all other deeds that are exchanged or 
traded, whether publicly (in an exchange) or privately. 
Trading in a new financial instrument should be allowed 
only after it was submitted for review to the appropriate 
regulatory authority; a specific risk model was 
constructed; and reserve requirements were established 
and applied to all the players in the financial services 
industry, whether they are banks or other types of 
intermediaries. 

Note on Risk Aversion 

Why are the young less risk-averse than the old? 

One standard explanation is that youngsters have less to 
lose. Their elders have accumulated property, raised a 
family, and invested in a career and a home. Hence their 
reluctance to jeopardize it all. 

But, surely, the young have a lot to forfeit: their entire 
future, to start with. Time has money-value, as we all 
know. Why doesn't it factor into the risk calculus of 
young people? 

It does. Young people have more time at their disposal in 
which to learn from their mistakes. In other words, they 
have a longer horizon and, thus, an exponentially 
extended ability to recoup losses and make amends. 



Older people are aware of the handicap of their own 
mortality . They place a higher value on time (their 
temporal utility function is different), which reflects its 
scarcity. They also avoid risk because they may not have 
the time to recover from an erroneous and disastrous 
gamble. 

Return 



Private Armies and Private Military Companies (PMCs) 



In July 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 majority owned by TRW until 2002 and 
by Northrop Grumman since then. 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, 2002 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 the September 1 1 attacks. 

"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 exceeded $50 million in 
2001. 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 17th 
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, 2002 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 11, 2002 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, acting as "advisors", 
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-Protege 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. 

Interview granted to Barry Zellen, INTERSEC (UK), 
February 2008 

1. Since the end of the cold war, what has been the role 
of private contractors in the conduct of war? Has it been 
on the rise? 

A. Private contracting of military functions has been on 
the rise since the first Gulf War (1991). With the collapse 



of the USSR, the militaries of the main Western 
protagonists, the USA and the UK, have been drastically 
scaled back, a process known as the "peace dividend". At 
the same time, economists and politicians throughout the 
world embarked on an ambitious plan involving the 
privatization of state-owned firms and functions. 
Inevitably, the two fads coalesced and huge chunks of 
hitherto state-monopolized warfare were contracted out, 
outsourced, and even offshored. 

2. What have been the primary functions for contractors 
in war zones, and how has this aided the war efforts of 
states? 

A. Third World countries have always leveraged 
mercenaries to subdue adversaries at home and abroad. 
Many armies in Africa and Asia and even in certain parts 
of Europe (such as the Balkans) were or are being run by 
third party contractors who sometimes also actively 
participate in the fighting. 

As far as the USA and UK are concerned, until the Iraq 
war, private contractors were mainly responsible for 
logistics, training, and security tasks. This narrow 
definition of their roles is in flux, though. Private soldiers 
of fortune may yet be hired and rented out even by the 
governments of the West, though I regard this as 
extremely unlikely. 

3. With the demise of the USSR and the end ofbipolarity 
in international affairs, most of the wars have been to 
some degree asymmetrical contests between unequal 
adversaries. Do private contractors help states sustain 
their warfighting efforts during asymmetrical, protracted 
and low -intensity conflicts when a full military 



mobilization is politically and/or economically 
unfeasible? How would you describe the current role of 
private contractors in GWOT (Global War on Terror) 
operations? The numbers appear to be large, perhaps 
over 100,000 contractors in Iraq alone: what does this 
tell us about the transformation of war? 

A. Though it would make eminent sense, I am not aware 
of such a role. Granted, private military companies are 
involved in the provision of logistical, training, and 
security support to forces on the ground and they also 
collaborate with field agents of secret services (such as the 
CIA). But, asymmetrical warfare is still carried out largely 
by regular armies, backed by intelligence gathered by 
state-run agencies. 

Actual combat is not being transformed by the influx of 
private contractors. We are simply reverting to earlier 
times and models when war was a public-private 
partnership and military camps incorporated 
entrepreneurial suppliers, contractors, service providers, 
and hangers-on. The attempt to render modern armies 
self-sufficient and self-sustaining has clearly failed. 

4. Part of Secretary Rumsfeld's Transformation program 
was a trend toward a decreasing size of our armed 
forces, and a continued shift toward superior technology 
to defeat the enemy. Does the increasing role of 
contractors enable defense organizations to shift their 
resources on the higher-tech functions, effectively 
"outsourcing" the lesser skilled functions? Is the 
"privatization " of the warfighting functions consistent 
with the Transformation and the Revolution in Military 
Affairs, as we shift toward leaner, higher-tech, armed 
forces? 



A. Not in my view. Lean, technology-rich armies are an 
inevitable outcome of budgetary constraints and ever 
more sophisticated gadgetry. The Transformation program 
is a response to these trends, not to the changing face of 
war. Truth be told, the USA has always faced low- 
intensity asymmetrical warfare. It rarely found itself 
engaged in conventional battles, mainly in the European 
theatre. 

Private contractors merely substitute for existing 
structures. Their functions are not always low-skilled, 
quite the contrary. Moreover, the army duplicates the 
functions of private contractors. This redundancy may 
appear wasteful but it stems from the deep and justified 
distrust professional soldiers hold towards civilian 
contractors. 

5. Looking ahead to the future, will we see an even more 
prominent role of private companies in future wars? 

A. Quantitatively, yes, but not qualitatively. PMCs and 
private contractors will grow in number, stature, and 
contribution to the war effort. But they are unlikely to 
replace the professional soldier in actual combat or the 
field agent in HUMINT. Their functions will remain 
largely limited to logistical support and training. 

6. What does this private/public partnership mean in 
terms of the ability of states to engage in multiple 
engagements at once without a general mobilization - is 
an 'outsourcing model' smart economics? And what 
about the political and diplomatic implications -- are 
there dangers of the perception of too great a role of 
private contractors in the conduct of war, and potential 
problems with the chain of command? Back to the 



GWOT and its emphasis on low-intensity conflict, 
counter-terrorist and counter-insurgent operations, and 
pre-emptive strikes against rogue states and non-state 
actors, does the role of private contractors complement 
the war aims of the coalition of states aligned in the 
"long war" against terrorism? 

A. Private contractors are not GIs. They provide no 
substitute for the fighting men and women of the armed 
services. I doubt if they ever will. Thus, they do not alter 
the military equation in any meaningful way. Their 
involvement has no bearing on whether to draft and 
mobilize fighting age conscripts. 

Incredibly, there are no serious studies that decide the 
question whether private contracting is a clever move, 
from the pecuniary point of view. Anecdotal evidence 
suggests that it is not and that waste and corruption are as 
rife there as among the traditional state bureaucracy. 

Chain of command issues are inevitable. This is especially 
true when contractors are granted immunity to the 
consequences of their delinquency, crime, waste, and 
venality. There is no love lost between the fighting corps 
and private contractors. As we have seen in Iraq, the 
involvement of PMCs is often resented by host 
governments and leads to diplomatic and other incidents. 

The solution, of course, is to hold private contractors 
accountable for their actions and misdeeds. 

7. J was thinking about how Xenophon and many of the 
battle-hardened Greek warriors hired themselves out to 
the Persians in an effort to foster regime change there 
2.5 millennia ago -- resulting in his infamous "march of 



the 10,000" back to Greece after the effort failed. It 
seems that there has been a very long history of private 
entities participating in warfare -- lots of military 
theorists have examined the topic, Machiavelli comes to 
mind. I am curious your thoughts on this long history -- 
in some ways it seems like an old phenomenon; but then 
again, something seems new as well. With Napoleon 's 
levee-en-masse transforming the conduct of modern 
warfare, resulting in the emergence of total war, and 
later a series of world wars, I am wondering, does the 
recent trend toward "privatization " suggest a return to 
the classical roots of war seen in ancient and early 
modern days, and a shift away from total war toward 
more limited engagements -- or might this be temporary, 
until a new peer adversary such as China rises to shift 
things back toward mass warfare? 

A. The modern armies that emerged after the Crimea War 
are a historic aberration. With the exception of the last 
150 years, armed forces throughout history were 
composed of professional soldiers for hire augmented by 
ad hoc, short-term bodies of conscripted vassals or 
citizenry or militias. The erstwhile fighting corpus in its 
camp incorporated hordes of suppliers of goods and 
services ("private contractors" in today's parlance). 

The attempt to render modern armies self-sufficient and 
self-sustaining by getting rid of these "parasites" has 
clearly failed. We are back to where we started: the 
traditional army. 

It is also completely wrong to postulate that "Total War" 
is a modern phenomenon. It is at least as old as the Bible. 
The ancient Hebrews were instructed by God to eradicate 
their enemies, men, women, and children and to 



confiscate the property of their vanquished foes. How 
more Total can it get? 

Mankind has always cycled between geographically- 
limited, guerrilla type skirmishes and all-out warfare. 
Top-heavy Goliath forces, armed with the latest 
technologies always faced pebble- slinging, nimble, "low 
intensity" Davids. There's nothing new about that. We are 
simply in an interim period between two classical wars. 
Call it a respite. 

Return 



htemoC naM noC 



Swathed in luminosity, we stir with measured competence 
our amber drinks in long-stemmed glasses. You are 
weighing my offer and I am waiting for your answer with 
hushed endurance. The armchairs are soft, the lobby is 
luxurious, as befits five-star hotels. I am not tense. I have 
anticipated your response even before I made my move. 

Soon, temples sheathed in perspiration, you use the 
outfit's thick paper napkins to wipe it off. Loosen your tie. 
Pretend to be immersed in calculations. You express 
strident dissatisfaction and I feign recoil, as though 
intimidated by your loudness. Withdrawing to my second 
line of defense, I surrender to your simulated wrath. 

The signs are here, the gestures, the infinitesimal 
movements that you cannot control. I lurk. I know that 
definite look, that imperceptible twitch, the inevitability of 
your surrender. 

I am a con man and you are my victim. The swindle is 
unfolding here and now, in this very atrium, amid all the 
extravagance. I am selling your soul and collecting the 
change. I am sharpened, like a raw nerve firing impulses 
to you, receiving yours, an electrical-chemical dialog, 
consisting of your smelly sweat, my scented exudation. I 
permeate your cracks. I broker an alliance with your fears, 
your pains, defense compensatory mechanisms. 

I know you. 



I've got to meld us into one. As dusk gives way to night, 
you trust me as you do yourself, for now I am nothing less 
than you. Having adopted your particular gesticulation, I 
nod approvingly with every mention of your family. You 
do not like me. You sense the danger. Your nostrils flare. 
Your eyes amok. Your hands so restless. You know me 
for a bilker, you realize I'll break your heart. I know you 
comprehend we both are choiceless. 

It's not about money. Emotions are at stake. I share your 
depths of loneliness and pain. Sitting opposed, I see the 
child in you, the adolescent. I discern the pleading sparkle 
in your eyes, your shoulders stooping in the very second 
you've decided to succumb. I am hurting for what I do to 
you. My only consolation is the inexorability of nature - 
mine and yours, this world's (in which we find ourselves 
and not of our choice). Still, we are here, you know. 

I empathize with you without speech or motion. Your 
solitary sadness, the anguish, and your fears. I am your 
only friend, monopolist of your invisible cries, your inner 
hemorrhage of salty tears, the tissued scar that has become 
your being. Like me, the product of uncounted blows 
(which you sometimes crave). 

Being abused is being understood, having some meaning, 
forming a narrative. Without it, your life is nothing but an 
anecdotal stream of randomness. I deal the final, 
overwhelming coup-de-grace that will transform the torn 
sheets of your biography into a plot. It isn't everyday one 
meets a cheat. Such confident encounters can render 
everything explained. Don't give it up. It is a gift of life, 
not to be frivolously dispensed with. It is a test of 
worthiness. 



I think you qualify and I am the structure and the target 
you've been searching for and here I am. 

Now we are bound by money and by blood. In our 
common veins flows the same alliance that dilates our 
pupils. We hail from one beginning. We separated only to 
unite, at once, in this hotel, this late, and you exclaim: "I 
need to trust you like I do not trust a soul". You beseech 
me not to betray your faith. Perhaps not so explicitly, but 
both your eyes are moist, reflecting your vulnerability. 

I gravely radiate my utter guarantee of splendid outcomes. 
No hint of treason here. Concurrently I am plotting your 
emotional demise. At your request, not mine. It is an act 
of amity, to rid you of the very cause of your infirmity. I 
am the instrument of your delivery and liberation. I will 
deprive you of your ability to feel, to trust, and to believe. 
When we diverge, I will have molded you anew - much 
less susceptible, much more immune, the essence of 
resilience. 

It is my gift to you and you are surely grateful in advance. 
Thus, when you demand my fealty, you say: "Do not 
forget our verbal understanding". 

And when I vow my loyalty, I answer: "I shall not forget 
to stab you in the back." 

And now, to the transaction. I study you. I train you to 
ignore my presence and argue with yourself with the 
utmost sincerity. I teach you not to resent your 
weaknesses. 

So, you admit to them and I record all your confessions to 
be used against you to your benefit. Denuded of defenses, 



I leave you wounded by embezzlement, a cold, 
contemptible exposure. And, in the meantime, it's only 
warmth and safety, the intimacy of empathy, the 
propinquity of mutual understanding. 

I only ask of you one thing: the fullest trust, a willingness 
to yield. I remember having seen the following in an art 
house movie, it was a test: to fall, spread-eagled from a 
high embankment and to believe that I am there to catch 
you and break your lethal plunge. 

I am telling you I'll be there, yet you know I won't. Your 
caving in is none of my concern. I only undertook to bring 
you to the brink and I fulfilled this promise. It's up to you 
to climb it, it's up to you to tumble. I must not halt your 
crash, you have to recompose. It is my contribution to the 
transformation that metastasized in you long before we 
met. 

But you are not yet at the stage of internalizing these 
veracities. You still naively link feigned geniality to 
constancy, intimacy and confidence in me and in my 
deeds, proximity and full disclosure. You are so terrified 
and mutilated, you come devalued. You cost me merely a 
whiskey tumbler and a compendium of ordinary words. 
One tear enough to alter your allegiances. You are 
malleable to the point of having no identity. 

You crave my touch and my affection. I crave your 
information and unbridled faith. "Here is my friendship 
and my caring, my tenderness and amity, here is a hug. I 
am your parent and your shrink, your buddy and your 
family." - so go the words of this inaudible dialog - "Give 
me your utter, blind, trust but limit it to one point only: 
your money or your life." 



I need to know about your funds, the riddles of your 
boardroom, commercial secrets, your skeletons, some 
intimate detail, a fear, resurgent hatred, the envy that 
consumes. I don't presume to be your confidant. Our 
sharing is confined to the pecuniary. I lull you into the 
relief that comes with much reduced demands. But you 
are an experienced businessman! You surely recognize 
my tactics and employ them, too! 

Still, you are both seduced and tempted, though on 
condition of maintaining "independent thinking". Well, 
almost independent. There is a tiny crack in your cerebral 
armor and I am there to thrust right through it. I am ready 
to habituate you. "I am in full control" - you'd say - "So, 
where's the threat?" And, truly, there is none. 

There's only certainty. The certitude I offer you 
throughout our game. Sometimes I even venture: "I am a 
crook to be avoided". You listen with your occidental 
manners, head tilted obliquely, and when I am finished 
warning you, you say: "But where the danger lies? My 
trust in you is limited!" Indeed - but it is there! 

I lurk, awaiting your capitulation, inhabiting the margins, 
the twilight zone twixt greed and paranoia. I am a viral 
premonition, invading avaricious membranes, preaching a 
gospel of death and resurrection. Your death, your rising 
from the dead. Assuming the contours of my host, I 
abandon you deformed in dissolution. 

There's no respite, not even for a day. You are addicted to 
my nagging, to my penetrating gaze, instinctive sympathy, 
you're haunted. I don't let go. You are engulfed, cocooned, 
I am a soul mate of eerie insight, unselfish acumen. I 
vitiate myself for your minutest needs. I thrive on 



servitude. I leave no doubt that my self-love is exceeded 
only by my love for you. 

I am useful and you are a user. I am available and you 
avail yourself. But haven't you heard that there are no free 
lunches? My restaurant is classy, the prices most 
exorbitant, the invoices accumulate with every smile, with 
every word of reassurance, with every anxious inquiry as 
to your health, with every sacrifice I make, however 
insubstantial. 

I keep accounts in my unstated books and you rely on me 
for every double entry. The voices I instill in you: "He 
gives so of himself though largely unrewarded". You feel 
ashamed, compelled to compensate. A seed of Trojan 
guilt. I harp on it by mentioning others who deprived me. 
I count on you to do the rest. There's nothing more potent 
than egotistic love combined with raging culpability. You 
are mine to do with as I wish, it is your wish that I 
embody and possess. 

The vise is tightened. Now it's time to ponder whether to 
feed on you at once or scavenge. You are already dying 
and in your mental carcass I am grown, an alien. Invoking 
your immunity, as I am wont to do, will further make you 
ill and conflict will erupt between your white cells and 
your black, the twin abodes of your awakened feelings. 

You hope against all odds that I am a soul-mate. How 
does it feel, the solitude? Few days with me - and you 
cannot recall! But I cannot remember how it feels to be 
together. I cannot waive my loneliness, my staunch 
companion. When I am with you, it prospers. And you 
must pay for that. 



I have no choice but to abscond with your possessions, 
lest I remain bereft. With utmost ethics, I keep you well- 
informed of these dynamics and you acknowledge my 
fragility which makes you desirous to salve my wounds. 

But I maintain the benefit of your surprise, the flowing 
motion. Always at an advantage over you, the 
interchangeable. I, on the other hand, cannot be replaced, 
as far as you're concerned. You are a loyal subject of your 
psychic state while I am a denizen of the eternal hunting 
grounds. No limits there, nor boundaries, only the nostrils 
quivering at the game, the surging musculature, the body 
fluids, the scent of decadence. 

Sometime, the prey becomes the predator, but only for a 
while. Admittedly, it's possible and you might turn the 
tables. But you don't want to. You crave so to be hunted. 
The orgiastic moment of my proverbial bullets penetrating 
willing flesh, the rape, the violation, the metaphoric blood 
and love, you are no longer satisfied with compromises. 

You want to die having experienced this eruption once. 
For what is life without such infringement if not mere 
ripening concluding in decay. What sets us, Man, apart 
from beast is our ability to self-deceive and swindle 
others. The rogue's advantage over quarry is his capacity 
to have his lies transmuted till you believe them true. 

I trek the unpaved pathways between my truth and your 
delusions. What am I, fiend or angel? A weak, 
disintegrating apparition - or a triumphant growth? I am 
devoid of conscience in my own reflection. It is a cause 
for mirth. My complex is binary: to fight or flight, I'm 
well or ill, it should have been this way or I was led 
astray. 



I am the blinding murkiness that never sets, not even 
when I sleep. It overwhelms me, too, but also renders me 
farsighted. It taught me my survival: strike ere you are 
struck, abandon ere you're trashed, control ere you are 
subjugated. 

So what do you say to it now? I told you everything and 
haven't said a word. You knew it all before. You grasp 
how dire my need is for your blood, your hurt, the 
traumatic coma that will follow. They say one's death 
bequeaths another's life. It is the most profound 
destination, to will existence to your pining duplicate. 

I am plump and short, my face is uncontrived and smiling. 
When I am serious, I am told, I am like a battered and 
deserted child and this provokes in you an ancient 
cuddling instinct. When I am proximate, your body and 
your soul are unrestrained. I watch you kindly and the 
artificial lighting of this magnific vestibule bounces off 
my glasses. 

My eyes are cradled in blackened pouches of withered 
skin. I draw your gaze by sighing sadly and rubbing them 
with weary hands. You incline our body, gulp the piquant 
libation, and sign the document. Then, leaning back, you 
shut exhausted eyes. There is no doubt: you realize your 
error. 

It's not too late. The document lies there, it's ready for the 
tearing. But you refrain. You will not do it. 

"Another drink?" - You ask 

I smile, my chubby cheeks and wire glasses sparkle. 



"No, thanks" - 1 say. 

Return 



THE A UTHOR 
SHMUEL (SAM) VAKNIN 

Curriculum Vitae 

Click on blue text to access relevant web sites — thank 
you. 



Born in 1961 in Qiryat-Yam, Israel. 

Served in the Israeli Defence Force (1979-1982) in 
training and education units. 

Education 

Completed nine semesters in the Technion - Israel 
Institute of Technology, Haifa. 

Ph.D. in Philosophy (dissertation: "Time Asymmetry 
Revisited" ) - Pacific Western University , California , 
USA. 

Graduate of numerous courses in Finance Theory and 
International Trading. 

Certified E-Commerce Concepts Analyst by Brainbench. 

Certified in Psychological Counselling Techniques by 
Brainbench. 

Certified Financial Analyst by Brainbench . 

Full proficiency in Hebrew and in English. 



Business Experience 

1980 to 1983 

Founder and co-owner of a chain of computerised 
information kiosks in Tel- Aviv, Israel. 

1982 to 1985 

Senior positions with the Nessim D. Gaon Group of 
Companies in Geneva, Paris and New-York (NOGA and 
APROFIM SA): 

- Chief Analyst of Edible Commodities in the Group's 
Headquarters in Switzerland 

- Manager of the Research and Analysis Division 

- Manager of the Data Processing Division 

- Project Manager of the Nigerian Computerised Census 

- Vice President in charge of RND and Advanced 
Technologies 

- Vice President in charge of Sovereign Debt Financing 

1985 to 1986 

Represented Canadian Venture Capital Funds in Israel. 

1986 to 1987 

General Manager of IPE Ltd. in London. The firm 
financed international multi-lateral countertrade and 
leasing transactions. 



1988 to 1990 

Co-founder and Director of "Mikbats-Tesuah", a portfolio 

management firm based in Tel- Aviv. 

Activities included large-scale portfolio management, 

underwriting, forex trading and general financial advisory 

services. 

1990 to Present 

Freelance consultant to many of Israel's Blue-Chip firms, 
mainly on issues related to the capital markets in Israel, 
Canada, the UK and the USA. 

Consultant to foreign RND ventures and to Governments 
on macro-economic matters. 

Freelance journalist in various media in the United States. 

1990 to 1995 

President of the Israel chapter of the Professors World 
Peace Academy (PWPA) and (briefly) Israel 
representative of the "Washington Times". 

1993 to 1994 

Co-owner and Director of many business enterprises: 

- The Omega and Energy Air-Conditioning Concern 

- AVP Financial Consultants 

- Handiman Legal Services 

Total annual turnover of the group: 10 million USD. 



Co-owner, Director and Finance Manager of COSTI Ltd. 
- Israel's largest computerised information vendor and 
developer. Raised funds through a series of private 
placements locally in the USA, Canada and London. 

1993 to 1996 

Publisher and Editor of a Capital Markets Newsletter 
distributed by subscription only to dozens of subscribers 
countrywide. 

In a legal precedent in 1995 - studied in business schools 
and law faculties across Israel - was tried for his role in 
an attempted takeover of Israel's Agriculture Bank. 

Was interned in the State School of Prison Wardens. 

Managed the Central School Library, wrote, published 
and lectured on various occasions. 

Managed the Internet and International News Department 
of an Israeli mass media group, "Ha-Tikshoret and 
Namer". 

Assistant in the Law Faculty in Tel- Aviv University (to 
Prof. S.G. Shoham). 

1996 to 1999 

Financial consultant to leading businesses in Macedonia, 
Russia and the Czech Republic. 

Economic commentator in " Nova Makedonija ", 
"Dneynik", "Makedonija Denes", "Izvestia", "Argumentii 
Fakti", "The Middle East Times", " The New Presence ", 



" Central Europe Review ", and other periodicals, and in 
the economic programs on various channels of 
Macedonian Television. 

Chief Lecturer in courses in Macedonia organised by the 
Agency of Privatization, by the Stock Exchange, and by 
the Ministry of Trade. 

1999 to 2002 

Economic Advisor to the Government of the Republic of 
Macedonia and to the Ministry of Finance. 

2001 to 2003 

Senior Business Correspondent for United Press 
International (UPI) . 

2007- 

Associate Editor, Global Politician 

Founding Analyst, The Analyst Network 

Contributing Writer, The American Chronicle Media 
Group 

Expert, Self-growth.com 

2007-2008 

Columnist and analyst in " Nova Makedonija ", "Fokus", 
and "Kapital" (Macedonian papers and newsweeklies). 



2008- 

Member of the Steering Committee for the Advancement 
of Healthcare in the Republic of Macedonia 

Advisor to the Minister of Health of Macedonia 

Seminars and lectures on economic issues in various 
forums in Macedonia. 

Web and Journalistic Activities 

Author of extensive Web sites in: 

- Psychology ( "Malignant Self Love") - An Open 
Directory Cool Site for 8 years. 

- Philosophy ( "Philosophical Musings" ), 

- Economics and Geopolitics ( "World in Conflict and 
Transition") . 

Owner of the Narcissistic Abuse Study Lists and the 
Abusive Relationships Newsletter (more than 6,000 
members). 

Owner of the Economies in Conflict and Transition Study 
List , the Toxic Relationships Study List , and the Links 
and Factoid Study List . 

Editor of mental health disorders and Central and Eastern 
Europe categories in various Web directories ( Open 
Directory , Search Europe , Mentalhelp.net) . 



Editor of the Personality Disorders, Narcissistic 
Personality Disorder, the Verbal and Emotional Abuse , 
and the Spousal (Domestic) Abuse and Violence topics on 
Suite 101 and Bellaonline . 

Columnist and commentator in "The New Presence", 
United Press International (UPI) , InternetContent, 
eBookWeb, PopMatters , Global Politician , The Analyst 
Network , Conservative Voice, The American Chronicle 
Media Group , eBookNet.org , and " Central Europe 
Review ". 

Publications and Awards 

"Managing Investment Portfolios in States of 
Uncertainty", Limon Publishers, Tel-Aviv, 1988 

"The Gambling Industry", Limon Publishers, Tel-Aviv, 
1990 

" Requesting My Loved One - Short Stories ", Yedioth 
Aharonot, Tel- Aviv, 1997 

" The Suffering of Being Kafka " (electronic book of 
Hebrew and English Short Fiction), Prague, 1998-2004 

"The Macedonian Economy at a Crossroads - On the Way 
to a Healthier Economy" (dialogues with Nikola 
Gruevski ), Skopje, 1998 

" The Exporters' Pocketbook ", Ministry of Trade, Republic 
of Macedonia, Skopje, 1999 



" Malignant Self Love - Narcissism Revisited ", Narcissus 
Publications, Prague, 1999-2007 (Read excerpts - click 
here) 

The Narcissism Series (e-books regarding relationships 
with abusive narcissists), Prague, 1999-2007 

Personality Disorders Revisited (e-book about personality 
disorders), Prague, 2007 

" After the Rain - How the West Lost the East ", Narcissus 
Publications in association with Central Europe 
Review/CEENMI , Prague and Skopje, 2000 

Winner of numerous awards, among them Israel's Council 
of Culture and Art Prize for Maiden Prose (1997), The 
Rotary Club Award for Social Studies (1976), and the 
Bilateral Relations Studies Award of the American 
Embassy in Israel (1978). 

Hundreds of professional articles in all fields of finance 
and economics, and numerous articles dealing with 
geopolitical and political economic issues published in 
both print and Web periodicals in many countries. 

Many appearances in the electronic media on subjects in 
philosophy and the sciences, and concerning economic 
matters. 



Write to Me: 

E-mail: palma@unet.com.mk or narcissisticabuse- 
owner@yahoosroups.com 



Read The Narcissism Book of Quotes (free) - Click 
HERE! 

Read Sample Chapters of "Malignant Self Love - 
Narcissism Revisited" - Click HERE! 

Online Photo Exhibition: The Old-New Face of 
the Narcissist - Click HERE!!! 



Malignant Self Love - Narcissism Revisited 

Frequently Asked Questions regarding Narcissism 

Frequently Asked Questions regarding Personality 
Disorders 

Abusive Relationships Q&A 

Excerpts from the Archives of the Narcissism List 

The Diary of a Narcissist 

Philosophical Musings 

A World in Conflict and Transition 

Economies in Transition 

Internet: A Medium or a Message? 

TrendSiters - Digital Content and Web Technologies 



Poetry of Healing and Abuse: My Poems 

English Fiction at Gorgelink - Click HERE! 

FREE - Read New Short Fiction 

Personality Disorders 

Emotional and Verbal Abuse on Suite 101 

Healthy Place Narcissism and Relationships 

Archives of the Narcissistic Abuse List 

Abusive Relationship Newsletter 

Archives of the Economies in Conflict and Transition 

List 

Buy Handmade Folk Ethnic Embroidery from 
Macedonia 

Return 



After the Rain 



How the West 
Lost the East 



The Book 

This is a series of articles written and published in 1996-2000 in Macedonia, in Russia, 

in Egypt and in the Czech Republic. 

How the West lost the East. The economics, the politics, the geopolitics, the 

conspiracies, the corruption, the old and the new, the plough and the internet - it is all 

here, in colourful and provocative prose. 

From "The Mind of Darkness": 

"The Balkans' - I say - 'is the unconscious of the world'. People stop to digest this 

metaphor and then they nod enthusiastically. It is here that the repressed memories of 

history, its traumas and fears and images reside. It is here that the psychodynamics of 

humanity - the tectonic clash between Rome and Byzantium, West and East, Judeo- 

Christianity and Islam — is still easily discernible. We are seated at a New Year's dining 

table, loaded with a roasted pig and exotic salads. I, the Jew, only half foreign to this 

cradle of Slavonics. Four Serbs, five Macedonians. It is in the Balkans that all ethnic 

distinctions fail and it is here that they prevail anachronistically and atavistically. 

Contradiction and change the only two fixtures of this tormented region. The women of 

the Balkan - buried under provocative mask-like make up, retro hairstyles and too 

narrow dresses. The men, clad in sepia colours, old fashioned suits and turn of the 

century moustaches. In the background there is the crying game that is Balkanian 

music: liturgy and folk and elegy combined. The smells are heavy with muskular 

perfumes. It is like time travel. It is like revisiting one's childhood." 



The Author 

Sam Vaknin is the author of Malignant Self Love - 
Narcissism Revisited and After the Rain - How the West 
Lost the East . He is a columnist for Central Europe 
Review, PopMatters, and eBookWeb , a United Press 
International (UP I) Senior Business Correspondent, and 
the editor of mental health and Central East Europe 
categories in The Open Directory and Suite 101 . 

Until recently, he served as the Economic Advisor to the 
Government of Macedonia. 

Visit Sam 's Web site at http.V/samvak. tripod, com