Volume 1, Issue 5)

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Black Magic, White Magic

Managing our Future

An address given to the Council of the VMRO-DPMNE, Macedonia's ruling party, chaired by Minister of Defence and Former Prime Minister of the Republic of Macedonia, Mr. Nikola Kljusev on July 16, 1999

Germany's economy collapsed following a reparations agreement, which sapped and consumed less than 10% of its GDP. America's economy collapsed, its unemployment soared, its stock exchange vanished and it entered a deflationary cycle, which necessitated the most pervasive federal intervention in its history - mainly because of multilateral trade restrictions.

Macedonia has endured trade embargoes, international isolation, wars, and an influx of refugees - and still survives as an intact, functioning economy. There is no civil war, no hyperinflation, a stable currency and no famine. It is nothing less than a miracle. No textbook economist would have predicted this outcome.

But Macedonia is trying to cope with its predicament in wrong ways. It is trying to change other countries, or to force or convince them to change their policies, or to engage in "Voodoo Economics". An economy cannot be run on the bases of promises, contingencies, gifts, aid and a Lotaria na Makedonija approach. Economic policy must not be based on the usual but rather on the normal. In politics, most magic is black and mostly bad things tend to happen. Macedonia is situated in an accident-prone area. It cannot and need not pretend (as Slovenia more successfully and Croatia with less success do) that it is part of Western Europe. This denial of the painful truth - that we are at the mercy of forces beyond our control in a region resembling a mental asylum - is at the root of our economic malaise. What if Montenegro erupts tomorrow?

Macedonia cannot change other countries, nor can it influence them to change their policies. It is too small and insignificant and it has no policy options. Will it really deny NATO next time around if it does not receive the compensation it requested from it? Will the nature of its relationship with the EU change if the EU will not honour its promises and obligations? Macedonia is constrained to a very limited set of diplomatic and economic choices.

Instead of changing others - we must change ourselves. We must force Macedonians to change and let ourselves be convinced to change our policies. We must, in other words, introduce magic - the magic of trust. Trust in our banks will encourage domestic savings and domestic investments. It will draw out 1-2 billion dollars from under mattresses and into deposits. This amount is equal to 5 years of aid or FDI (foreign direct investment). Trust in our courts will attract foreign investments. Trust in our government will end the current civil disobedience. Our citizens are rebellious. They don't pay their taxes, they do not collaborate with their own government. They don't trust it to do the good and the right thing.

Macedonia is not perceived by the Europeans to be European. It is too poor to become a member of the EU, public relations exercises (the stability and Growth Pact) notwithstanding. It is too needy and donor weariness is setting in. Money will be harder and harder to come by. And our products compete head on with European products protected and promoted by the strongest lobbies in Brussels.

And with these FACTS we have to live. A sound, prosperous economy is the result of minute, mundane, routine and boring activities - not the result of rabbits pulled out of a hat. Even if the rabbits are European.

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The Friendly Club

Cyprus, that beacon of political stability and financial rectitude, was invited to negotiate its membership. Bulgaria, the epitome of good governance and civil society as well as Malta the undisputed friend of the West (remember Qaddafi?) - were among the list of new candidates handed down in the Helsinki meet of the most desired economic club on earth: the EU. To these were added Romania and its collapsing economy. Macedonia was relegated to the "West Balkan" group - a revolutionary re-definition of historical affiliations. In this assemblage, it found itself rubbing shoulders with the disintegrating Albania and the pariah Yugoslavia. Croatia was ejected from this leper colony by virtue of the death of its megalomaniac autocrat and his replacement by ex-communists.

Things have been very different only a few months ago, when the EU and NATO needed the good and naive services of Macedonia. It was a honeyed courtship. Macedonia was then virtually besieged by a flood of world-class politicians, all eager to make the acquaintance of the charming political class of the Balkans. Promises were doled out with abandon. Blair promised tens of millions. Clinton topped this by pledging hundreds of millions. And the grateful West offered billions. In the meantime, Macedonia's infrastructure was pulverized by heavy armour and light-footed refugees - a quarter of a million of them.

The people of the Balkans are the off spring of broken promises. Their village shrewdness (which is not to be confused with worldly sophistication) predisposed them not to trust the kindness of strangers. Their in-bred paranoia led them to attribute prophetic foresight, sharp planning and intricate conspiracy to what were mere stumbling and bumbling on the part of the West and its mighty NATO. The disillusionment came fast and painlessly. To live in fantasy is often more rewarding than to have it fulfilled and many Macedonians were grateful for the intermission in their hundred years of solitude. The hangover, the bitter aftertaste, the sore muscles of the morning after - the Macedonians accepted all these with unusual grace.

But as insults were added to injuries, a sense of betrayal evolved. They felt exploited and discarded, objectified and dehumanised by super-powers of mythical proportions. They felt abused and deceived. Used to getting the short end of every stick - this time there was no stick at all. Having been thus manipulated and largely unable to direct their anger at the veritable sources of their frustration - they turned upon themselves in internecine squabbling, disgraced and flouted. This was further exacerbated by incessant preaching and hectoring of the representatives of those powers, which thus forsake them. By the very people who reneged on promises. By countries and politicians whose own domestic politics and personal conduct were an object and abject lesson not to be emulated. Countries imbued with corruption preached to the Macedonians about good governance. Countries which suppressed their minorities in bloody campaigns reprimanded Macedonia for its treatment of its own minorities. Countries, which sold weapons to every despicable dictator in every corner of the earth - prevented Macedonia from trading with its neighbours.

Of the money promised - very little materialized. The blazing trail of West European and American movie stars and presidents became a trickle of East European politicians and Brussels bureaucrats. Membership became association, association became new association and new association went nowhere as dates were postponed and dates kept were used as photo-opportunities by synthetic Western leaders.

If anyone should have been invited to join the EU it is poor Macedonia. Poor - but not as poor as Romania, for instance. Any comparison of the two bespeaks volumes about the West's betrayal. Romania's official inflation is 40% - Macedonia's is around 1% and has been, on average, less than 3% in the last 3 years. Romania's depleted GDP is collapsing. Macedonia has survived the Kosovo crisis with its GDP intact and is poised to grow by 4-6% in the year 2000 according to the IMF. Romania's average wage is less than 90 dollars a month - Macedonia's is 160 US dollars. The lei is as unstable as Yugoslavia's denar was prior to the Kosovo crisis - Macedonia's currency held stable throughout the external shock-ridden last three years and is trusted by its citizens. Romania's governments change frequently and with little reason, often succumbing to the wishes of an ominously violent street. Macedonia's government has changed once in the last 5 years and that following a fair and democratic election. Admittedly, Romania's market is much bigger than Macedonia's and its location closer to the EU. But Macedonia is an important bridgehead to the Balkans and beyond (Turkey) and its web of trading agreements and arrangements makes it a virtual market of more than 110 million people.

But Macedonia is friendless in the EU. It has no patron saint, no Germany (Croatia, Czech Republic), no France (Romania), no Greece (Cyprus). It is too small to fear and small enough to ignore comfortably. It is a peaceful and docile nation. It is co-operative. It is trustworthy and has proven its devotion to the idea of the West in times good and bad, mainly the latter. Perhaps these qualities disqualified it. Perhaps being taken for granted does not grant being taken. Whatever the explanation, the people of this tiny country grieve this short romance, so fleeting, so sweet, so dreamy and, as they are finding now, so surreal.

(Article written on January 15, 2000 and published February 7, 2000

in "Central Europe Review" volume 2, issue 5)

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The Books of the Damned

"I have gone into the outer darkness of scientific and philosophical transactions and proceedings, ultra-respectable, but covered with the dust of disregard. I have descended into journalism. I have come back with the quasi-souls of lost data."

(Charles Hoy Fort in "The Book of the Damned")

"Let me have the three major American networks and three leading newspapers for a year and I'll bring back public lynchings and racial war in the US."

(Charles Simic quoting a Belgrade journalist)

"We do not have censorship. What we have is a limitation on what newspapers can report."

(Louis Nel, Deputy Minister of Information, South Africa)

In the country of ex-Nazi officer Kurt Waldheim and current Nazi-sympathizer Jorg Haider, the xenophobic and anti-Semitic offering of local media come as little surprise. Austria, after all, contributed disproportionately to the Nazi death machine. But what seems to be a unique Austrian phenomenon is not. The media outlets in Central, Eastern and Southern Europe are easily interchangeable. In the same week of Austrian derision and paranoia, "Start", a trash weekly in Macedonia attacked the British Ambassador and the Americans for conspiring to dismantle Macedonia with the collaboration of its local, disloyal and haughty Albanian minority.

The media in the countries in transition is taxonomically not dissimilar to its brethren in the West. It, too, can be divided to five categories of ownership and agenda. What sets it apart, though, is its lack of (even feigned) professionalism, its venality and its tainted ulterior motives. I wrote about it elsewhere, in "The Rip van Winkle Institutions":

"And then there is the media - the waste basket of post communist societies, the cesspool of influence peddling and calumny. Journalists are easily bought and sold and their price is ever decreasing. They work in mouthpieces of business interests masquerading as newspapers or electronic 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. Some of them are involved in all manner of criminal activities, others are simply unethical in the extreme. They all have pacts with Mammon. People do not believe a word these contortionists of language and torturers of meaning write or say. It is by comparing these tampered and biased sources that people reach their own conclusions within their private medium."

The commercial media - the likes on "Nova" TV in the Czech Republic - are poor people's imitations of the more visible 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. While ostensibly politically innocuous, they exert a subtle and cumulative influence on the numbed and dwindling minds of their spectators and readers. By conditioning their consumers to ever lower fare of pulp common denominators, they set a standard of no holds barred and no standards observed. They are the opium for the masses that religion once was, diverting potentially dangerous attention from real events and personalities to the staged alarms of public enemies and the artificial crises of bingo lotteries. No less persecutory than any totalitarian regime, these mass media are ominous symptoms of the social malaise of disillusionment with the realities of life and with more institutionalized modes of expression. They are escapism embodied, a dreamland, a scape of fantasy, the vale of telenovellas. Whole nations are in thrall. In Macedonia, the protagonist of a servant's saga, "Kassandra", was given a hero's welcome upon her visit to this impoverished and bitter land. Whole families consume hours of this visual Ritalin, hypnotized by cheap scenery built to resemble unattainable riches.

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 deutschmarks, a trip abroad and a dingy hotel room. They collaborate with their editors and share the spoils with them. They are the whores of the profession, ever the hungry look, ever the hat in hand, ever the submissive and furtive glances of the serfs of capital. They often publish other people's self-serving communiqués without altering a word. I, myself, provided them with "interviews" which I, solely, have authored, questions and all. Too lazy to or embittered to invest in their profession, consumed by self-loathing and by general disdain - they let themselves be passively abused in the dirty intercourse of money and of influence.

The mercenaries often work in brothels known as "business-backed media". 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 is most pronounced in this land of depredation and depravity, in Russia, where virtually all the media is now identified with and digested by business, mafia-like interests. Despite their infamous one-sidedness, they still claim neutrality and objectivity but these spurious claims are met with revolt by a hostile population, long trained to distrust the printed word and even the broadcast image. Thus the art of "reading between the lines" is flourishing again and the very language is distorted by its media rapists (see: "The Magla Vocables"). This - the abyss opening between the people and their language, the demise of true communication and the ensuing rupture in the social fabric - are the veritable damages of enlisted journalism.

Political vehicles are less pernicious in that their masters are well known and their itinerary clear. Always one sided, always half truthed, forever the righteous - these rags produce no riches and they preach to the converted, serving as bulletins and message boards rather than as media in any known sense. A rallying point, a flag, an emblem, a collective memory, the group's unconscious and conscience - these papers and TV channels are often widely read, even by rivals and adversaries. They are so self-absorbed, so narcissistic, so sickeningly partial that they make for fine amusement in dreary times. There are the coalition papers and the opposition papers, the left wing and the right wing and the centre ones. It is a colourful admixture of indignation and triumphalism, veiled threats and promises, trial balloons and drama, the daily equivalent of the romance.

Thus, Central, Eastern and Southern Europe do have daily papers and magazines and periodicals and television. What they do not have is media even remotely resembling the Western ideal. In some countries, this ideal is disparaged as a Western manipulative ploy or, worse, naive idealism. In others, it is a kind of holy grail to be pursued only in myths and narratives. Yet others view it with envy and aspire to it, but without much hope. To them, it is an ever-receding mirage. Perhaps that other phantasmagoria, the Internet, is the solution. In it, budding, fresh beginnings of irreverence and courage seem to coalesce into recognizable - though virtual - media. The small number of web surfers currently limits both their outreach and their survivability. But if Western trends are anything to go by, this is a temporary state of affairs. The Internet, this immaterial and ethereal medium might yet spawn the first real media and a return to reality. It might yet liberate the prisoners of all the telenovellas, foreign and domestic. It might yet win.

(Article written on February 5, 2000 and published February 21, 2000

in "Central Europe Review" volume 2, issue 7)

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The PCM Trail

It is a typical bar in a typical Balkan or East European country in a typical yellow haze, air-polluted, very late evening. The din of raucous and numbingly repetitive music reverberates through the smoke-enshrouded joint. It is an external pandemonium intended to silence internal ones and to obviate the silences of solitude. Sofas with shabby, mutilated upholstery in bordello scarlet. A dim, bawdy luminescence. Huntresses and prey study each other wearily over oily drinks. The former scantily clad in cheap imitations of haute couture, lips enclosed in heart shaped, provocative, lipstick, their make up invitingly gross. The latter - foreigners, owners of coveted passports, cars and money (PCM), a ticket out of hell, a path to paradise, a promise.

In the near and paranoiac past of most countries in transition, terror-filled xenophobia was both a wise survival tactic and an indoctrinated instinct. Self-insulated and psychotically suspicious regimes quarantined their populations and portrayed all foreigners as carriers of the malaise of social disintegration and the perpetrators of espionage and sabotage. In a classic cognitive dissonance, foreigners were denounced by the people and women who befriended them were pronounced whores. Only a select few could interact with the capitalistic plague and these were especially trained to prevent contagion.

These prejudices and perceptions changed fast with the dawn of the post transition purgatory. Economic collapse, massive unemployment, social dislocation, growing disparities between rich and poor, the educated and the unskilled - led to societies increasingly permeated by crime, drugs and prostitution. A grey cloud of hopelessness and neglect descended upon vast territories populated by zombie-like herds of people, eyes with extinguished light, adrift in the uncharted waters of a new, ominous reality. The physical deterioration of infrastructure and public services reflected the inner state of its ever more desparate consumers. Venality erupted like a giant suppuration. Everything was on sale, especially one's self.

In this increasingly whorish atmosphere, the perception of foreigners was dramatically re-cast. With more of them around and with most of them on generous income - they constituted a tempting target, a prize, salvation embodied. Women everywhere made it a point to meet them, to work with them, to associate with them, to know them biblically and - above all other goals - to marry them and leave their country. All means justified these ends. Women studied foreign languages, applied to work for non-government organizations, hung out in the appropriate watering holes, learned to dress and talk assertively and to make their availability - their complete obtainability and accessibility - beyond doubt.

Some set about securing the desired trophy methodically and scientifically, calculating each step in a tortuous and highly competitive environment. They invested years in graduating from the right faculties and in mastering the right languages. They watched films intently, read books, clipped magazine articles, surfed the internet, questioned well-travelled relatives and acquaintances, emulated more senior and more seasoned stalkers. Others relied on their good looks, their make up, their ruthlessness, their promiscuousness, their connections, or the exotic allure of their very differentness.

But all of them pursued their prey doggedly and commitedly, with the quite perseverance and patience of the dejected, with the unflagging determination of the terminally ill in tracking a wonder drug. Often, they got pregnant, which in many local cultures would have brought on a marriage. Sometimes, they got raped, or dumped, or worse. But none of these dissuaded them - such was the ejecting power of the wretchedness of their lives. They knew that the foreigner they aspire to acquire will finally go away and carry them with him, a (sometimes white) knight on a shining vehicle. Vehemently committed to securing the future of their children and the present of their extended family - they ploughed on, ignoring diversions, never digressing, never wavering in the face of setbacks and defeats.

Some of them grew old and bitter in their refusal to countenance a local, inferior, brand of husband. It time they so identified with their purported quarry - that they held their own kind in contempt. They disdained their kin, derided their customs, haughtily dismissed their own culture as backward and oppressive, worthy only of discarding. In their unmitigated effort to be worthy of their future saviours, they disowned their very selves, their society, their upbringing, their mores and their relations. Thus uprooted, they lost both worlds - rejected by those they rejected so condescendingly as well as by foreign men who found them to be embarrassing, clunky imitations of B-movie characters.

But others went on to marry foreigners, to give birth to their children and, in time, to travel to far, affluent lands. They keep in touch, sending home photographs of sumptuous houses and shiny cars and of suburban lawns. From time to time, they wire some money or deliver gifts. They visit once or twice a year, clad in new, faddish clothes, their accents strangely inflected, their speech suffused by foreign words. They made it, the envy of their sisters, the objects of much adulation and emulation, lean and lustrous proofs that dreams come true. A sigh and then the chase goes on. Meticulous dressing, hours of make up, the right shine but not too vulgar, the flesh exposed but not repulsively, both offered and withdrawn, a little exercise of English and to the bar. The hunting grounds where smoke and alcohol and the occasional lascivious look or comment should do the trick. And often do.

(Article written on February 8, 2000 and published February 28, 2000

in "Central Europe Review" volume 2, issue 8)

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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 and 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 musk-ular perfumes. It is like time travel. It is like revisiting one's childhood.

The Serbs - a family - are tall and ruggedly handsome. He was a soldier in the para-military Serb militias that sprang from the ashes of the JNA (Yugoslav National Army) in 1991. As the disintegration of the uneasy co-existence that once was Yugoslavia became more painfully evident, he and others seized the weapons in the depots of the JNA. In the administrative twilight zone that ensued they fought in JNA uniforms against a growing army of Croats (wearing initially the same uniforms) and Moslem Bosniaks. It was surrealistic, a Bosch nightmare. "We were near victory in Bihac" - he says, his voice a wistful admixture of melancholy and anger. "Politics" - an old spark in his eyes and, for a moment, I can see the erstwhile fighter - "All politics. We lost the war because of politics, because our leaders sold themselves to the West." This myth has a familiar ring to it, the ring of knife-stabbed backs and war. It is the ground being prepared for the next round - the war was nearly won had it not been for the traitors and their Western masters. The sound of clicking heels and marches and creaking gates of concentration camps.

And so? "Milosevic should go" - he is adamant - "we paid enough." He leans back and lets fatigue take over. His wife interjects: "He drives a milk truck. He collects milk from the villages and delivers it to Nis. The company he works for makes 1000 DM daily - and his salary is 80 DM monthly. How can you survive on 80 DM? I don't work. So, one has to steal." "There is nowhere to steal from" - I say. A moment of comic relief, bringing identical sad smiles to their faces. "During the war (he means the Kosovo conflict), I drove the truck - it is a big truck, you see - and was bombed from behind by NATO planes. It was like that every day, for more than three months but I had to deliver the milk to town." Matter of factly, he lights a cigarette, his hand unshaken.

"All the politicians benefited from these wars, except Arkan (the infamous militia military commander - SV). His son joined us and fought with us as our commander..." - the sentence tapers off among blue clouds of cheap smoke. "And what did NATO achieve?" - his brother in law (who is married to a Macedonian and lives in Skopje) asks. "NATO went in for a year and is stuck for a decade in Bosnia." "And that is the way it is going to be in Kosovo." "They (the West - SV) don't know what they want and they don't know how to achieve it, they have no plans, they stumble, only making matters worse among us. They are ignorant and ill-prepared."

I sound incredulous: "Do you seriously think that there would have been no wars without NATO? After all, when Yugoslavia started falling apart, the West (with the exception of Germany) tried to preserve its unity. America was very unhappy and discouraged the independence of the constituent states." "Don't you believe it" - he is livid but not aggressive, there is more pain in his voice than threat - "Croatia would have never embarked on its war against us had it not been for the West. I was there, I know. And we were winning the war there when suddenly Belgrade ordered us to stop. The commander in chief of the whole front came to us, tears in his eyes, and said: I didn't give this order, I want you to know. It comes from above, from Belgrade, not from me."

"But couldn't all this have been settled differently, without bloodshed?" - I wonder. "Of course it could, without the meddling of the West and its two puppets in the region (Milosevic and Tudjman - SV)." And then, somewhat incoherently - "They (the world - SV) should have let us fight it out. Winner takes all the territory, that's the only way to settle it. But Serbia has no friends anywhere in the world and we trust no one." "And Kosovo?" "Maybe that could not have been prevented" - he concedes - "because Milosevic regarded Kosovo as the cornerstone of his regime."

We talk about nothing else. The wounds are too fresh and too prominent to politely ignore. We enter the New Millennium with the blood dripping baggage of the old one. He fought three years in Bosnia, in Sarajevo, near Banja Luka. He is a war criminal, wanted by the international tribunal in The Hague. "Milosevic determined our ultimate borders in Dayton" - he spits the words bitterly, a look of bewilderment in his eyes - "Who gave him the mandate to represent us? Someone else should have gone there, like Karadzic, maybe..." "But Milosevic gave you weapons and food and supplies. Without him surely you could not have survived as long as you did?" "No weapons" - he protests - "Weapons we appropriated, we took them ourselves, from the JNA depots, he deserves no credit for that. Food, maybe... But this does not give him the right to determine our borders and our future without as much as consulting us. He sold us to the West. Now look at the situation. I can't go back to my home in a town that was 100% Serb and now is 100% Moslem and the Moslems can't go back to their towns who are now 100% Serb. And all towns - Serb and Moslem alike - are deserted ghost towns, where no one lives and nothing grows. Now I have to live in Serbia."

I don't ask him what he did to become wanted and hunted by the Hague tribunal. I can't imagine him murdering cold bloodedly or raping. He has a good face, the wrinkles of many smiles and kindly eyes. When he laughs softly, they light up in black fire and his handshake is warm and firm. Instead I say: "And now it's Montenegro's turn should they declare independence?"

There is uneasy silence. The Serbs among us move in their chairs, glance warily at each other, as though co-ordinating an as yet unspoken answer. Finally: "There will be no war in Montenegro. The Serbs will not attack the Montenegrins - but there will be a civil war among the Montenegrins themselves, if they declare independence."

"Today" - says the ex militiaman - "they are all better off than the Serbs in Serbia. The Slovenes, the Croats. Look what we achieved in a decade of 'Great Serbia' - shortly, only Belgrade will remain in the Federation, even Sandjak and Vojvodina will leave." "The problem is that we have no leadership. There is no one to replace Milosevic. Avramovic is way too old. Dzindzic and Draskovic we cannot trust..." "Political whores" - says someone - "Once with Milosevic, once without..." "...and who else is there? All the young, capable people are out and away, far far away as they can get..."

Like in all the other countries of transition, they are adherents of the cult of youth. The belief that the old - old people, old culture, old institutions - have been so heavily corrupted that they must be discarded thoroughly and mercilessly. That all has to start over again. That only the young can cope with the timeless riddles that Balkanian sphinxes are in the habit of posing. That the young are the only bridge to the promised land of the zeitgeist of capitalism.

"And Macedonia?" - I ask.

"Macedonia" - a Serb chorus around the dinner table - "Every village wants to become a country. Macedonia cannot survive on its own, it is too dependent on Serbia, it is too tiny."

"But only 17% of its trade is with Serbia" - I correct them, as gently as I can. "Including Kosovo?" - says one in great astonishment - "I see only Macedonian trucks in Serbia, it cannot be..."

"It cannot be" - they all conclude - "Macedonia is nothing without Serbia."

As the clock strikes midnight, we kiss each other on wine flushed cheeks and shake hands solemnly. In the rest of the world, a new millennium may have dawned. But in the Balkans it is perhaps the end of the beginning - but hardly the beginning of the end.

(Article written on January 8, 2000 and published January 17, 2000

in "Central Europe Review" volume 2, issue 2)

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After the Rain

How the West

Lost the East

The ECONOMY

Central Europe

The New Colonies

Mercantilism was the intellectual correlate of colonialism. The idea, roughly, was to physically conquer territories (colonies), subjugate their people, transform them into cheap labour, get hold of all the raw materials and ship them to the colonizer's territory, there to be processed to yield finished products. The beauty in the concept was the "closed circuit" logic. The inhabitants of the colonies (also known as "natives") had to consume finished goods and products. The colonial power forced upon them (through tariff and quota regimes or violence when needed) the finished products produced from their very own raw materials! Thus, the colonies were prevailed upon to sell cheap raw materials and to buy expensive finished goods.

If it sounds like colonialism and has the same economic effects - it is colonialism. The relationship between the European Union and Central Europe is colonialism. Central Europe provides the European Union with raw materials and cheap labour. It buys from the European Union finished goods, products and services. In the process, it incurs enormous trade and balance of payments deficits. Incidentally, it also serves as the EU's dumping grounds for anything from toxic waste to shoddy or outmoded products.

Let us examine the case of the Czech Republic. It is the assembly plant of Volkswagen and the export launching pad of other multinationals. And the workers are supposed to consume heavily subsidized agricultural produce (such as pork).

For this the Czech Republic is to blame. The previous government did everything it could to alienate its natural allies in the Vysehrad Triangle. It did a good job of it. Instead of negotiating with the EU as a bloc of c. 70 million consumers - it ended up representing an ever-diminishing number of Czecho-Slovaks. Its haughty and corruption-laden behaviour did not acquire too many friends in the West, either.

The approach should have been different. In the West, the client is always right. The Czechs are CONSUMERS. They are the clients of the huge corporation called EU. As a consumer club or group, they could have dictated terms, rather than be subjected to them. The current Hungarian government understands this. Consumers have a single, irresistible power: they can stop consuming. Imagine if 30-40 billion USD were to be deleted from the EU's books by angry consumers - it would have come begging and negotiating, instead of dictating and condescending. The EU does not hesitate to pull every lever - however illegitimate, ridiculous, or downright dangerous - in its negotiations with the new applicants. The new applicants did not assimilate yet their dual role as applicants (an inferior position) and as markets (a very superior position).

This inferiority complex has to do with history. The Hussite Wars were perhaps glorious - but they were also irrevocably destructive. Not only were the Czech Lands physically demolished - they were also cut from the rest of Europe for centuries to come. The only times they were reincorporated into it were traumatic (the Nazi occupation, for instance). Having glimpsed the first real opportunity to become a part of the big west dream (and to be redeemed from the clutches of the wounded Russian bear to the East) - the Czechs lost all judgement, self-esteem, self-confidence and negotiating skills. So did all the other Central and Eastern (and Southern) European nations. It was security and safety they were after - not prosperity.

This basic misunderstanding underlies the great European project. The EU's thinking was mainly economic and marginally geopolitical (though it was presented differently). The Czech's motivation was mainly geopolitical and marginally economic (though it was presented differently). The resulting malentendues are worthy of Moliere's pen.

Moreover, the Czechs have always been a religious breed. True, they are the most vehement atheists in Europe - but this is because they adopted other deities. They have always been zealous, intellectual fanatics. One of my Czech friends calls many periods in his nation's history "intellectual terrorism". The swings some people made lately from being youthful communists to being vengeful ultra-capitalists are indeed breathtaking. Personality cults are supplanted only by fanatic ideologies, which are replaced only by religious zeal. This, of course, does not tend to enhance the realpolitik instincts of the nation. Czechs have always been a few years too early. They had their own reformation long before Luther. They had the Spring of 68 long before Gorbachev. Every such intellectual transition was followed by a Jacobin disposal and by purges of whole classes and elites. These "new religion-personality cult-purges" cycles were not absent from the Velvet Revolution.

Simply, the EU got frightened. Excessive zeal can give anyone - let alone the Brussels amphibian bureaucrats - cold feet. Dates are being pushed back. Commitments hushed or rehashed. Now the Czechs "enjoy" the worst of both worlds: they are being treated as a colony and their date of entry is ceaselessly postponed.

This should and could have been different. The Czechs should not have shown any enthusiasm or anxiety. These are bad negotiating tactics. They should have negotiated with the EU as consumers (markets) do with producers elsewhere in the world. They should have extracted at least a commitment regarding the date of accession and detailed timetables. And they should have kept these timetables.

(Article published December 14, 1998 in "The New Presence")

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New Paradigms, Old Cycles

New paradigms die hard. It took a looming global recession to convince wild-eyed optimists that old cycles are more reliable guides than new paradigms.

Business cycles - from the smallest to the biggest - go through seven phases. Centuries of cumulative economic experience allow us to identify these stages more accurately than ever before.

An economic cycle invariably starts with inflation. The previous cycle having ended - and the new one just began - the economic environment is as uncertain as can be. The fundamental component is the scarcity of goods and services (following recession or deflation) and the maladapted money supply. Too much money chases fewer commodities. The general price level rises. But this constant, ubiquitous, all pervasive rise (known as "inflation") is also the result of mass psychology. Households and firms compensate for the growing uncertainty (=growing risk) by raising prices. They have no idea what should the appropriate or optimal equilibrium price level be. Market signals are garbled by psychological noise. Everyone is trying to stay ahead of perceived economic threats and instabilities by raising the risk premiums that they demand from their clients. Consumers, on the other hand, are willing to pay more today because they are convinced that the price trend is unidirectional and irreversible: up. The psychological underpinnings and bearings of inflation have been studied deeply in the last few decades. It is the source of the uncertainty that remained obscure. My hypothesis is that the end of every economic cycle fosters this panicky uncertainty, which is monetarily reflected as inflation. In more technical terms, inflation is a market pathology, a market failure.

Inflation disguises bad economic performance of firms and of the economy as a whole. "Paper" profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks get distorted and do not allow for meaningful analysis of the performance of the economy. Inflation leads to technological and economic stagnation. Plants do not modernize, the financial aspects of the firm's operations are emphasized, the industrial and operational aspects de-emphasized and neglected. Economies are seized by the pathological economic condition known as "stagflation" - zero or negative growth, coupled with inflation. A sense of urgency and crisis sets in and clears the path towards the next, second phase.

In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. Firms innovate and streamline. Efficiency, productivity and competitiveness are the buzzwords of this phase. As trade barriers fall, cross border capital flows (=investment) increase, productivity gains and new products are introduced - the upward price spiral is halted and contained. The same money buys better products (more reliable, more functions, more powerful). The same wages generate more products. This is technological deflation. It is beneficial to the economy in that it frees economic resources and encourages their efficient allocation. Real incomes rise and generate increased demand and production.

Inevitably, technical deflation leads to a restraint in the general price level. Increased consumption (both public and private) coupled with moderate asset price inflation prevents an outright monetary deflation (=a downward spiral in the general price level). Inflation is kept to sustainable levels. This phase is known as "disinflation". It is a transitory phase. The transition from hyperinflation or high inflation to a supportable level of inflation is a matter of one or two decades. This period is bound to be shortened by the revolutions in information, communications and transportation technologies. In fact, the whole cycle is hastened due to the more rapid dissemination of information. It is the availability and accessibility of information, which determines the values of important parameters such as the equilibrium general price level and other parameters of expectations (such as equity prices). The more information is available more readily - the more efficient the markets and the shorter the cycles. This enhances the false perception of instability inherent in modern markets. But speed does not necessarily a imply lack of stability. On the contrary, the faster and more violent the adjustments in the market mechanism - the more efficient it is.

The psychological well-being and assurance brought on by disinflation generate demand for assets, especially yielding assets (such as real estate or financial assets). The more certain the future value of streams of income, the more open the economic environment, the shorter the economic cycle, the more frequent and rapid the economic interactions - the more valuable assets become. Assets are mainly stores of expectations regarding future values. An assets bubble is created when the current value (=price) of money is low and the future value of money is certain and likely to grow through stable or decreasing prices. Stock exchanges, real estate, and financial transactions - all balloon out of proportion in a kind of irrational exuberance.

All bubbles burst in the end - and so do these assets bubbles. This is the fifth phase. It is crucial because it signifies the termination of the bull part of the cycle. The prices of assets collapse precipitously. There are no buyers - only sellers. Firms find it impossible to raise money because their obligations (commercial paper and bonds) are rendered valueless. A credit crunch ensues. Investment halts.

The collapse of assets bubbles generates asset price deflation. The psychological counterpart of this deflation is the disappearance of the "wealth effect" and its replacement by a "thrift effect". This influences consumption, inventories, sales, employment and other important angles of the real economy. If not countered by monetary and fiscal means - a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets - a monetary deflation might set in. Admittedly, a full-fledged deflation is rare. More frequent are a recession, a slump, a credit crunch, a slowdown, a growth recession and other less exotic variants. It is also possible to have differentiated or discriminatory deflation. This is a deflation in certain sectors of the economy or in certain territories of the globe - but not in others. In any case, a monetary deflation is a monstrous, venomous economic beast. Due to reversed expectations (that prices will continue to go down), people postpone their consumption and spending. Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. Investment and production slump - inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases. Coupled with declining prices of assets, it leads to bank failures as a result of debts gone sour. It is a self-perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle.

This is the phase of reflation. The market failure, at this stage, is so pervasive that all the self-balancing and allocation mechanisms are rendered dysfunctional. State intervention is needed in order to restart the economy. An injection of money through a fiscal stimulus, a monetary expansion, a lowering of interest rates, firm support of the financial system, tax and other incentives to consume and to import. Unfortunately, all these goals are best achieved by engaging in warfare. It is often the case: a convenient war reflates the economy, re-ignites the economic engine, generates employment, and increases consumption, innovation and modernization. But with or without war - people sense the demise of an old cycle and the imminent birth of a new one, fraught with uncertainty and ignorance. They rush to buy things. Because the economy is just recovering from deflation - there aren't usually many things to buy. A lot of money chasing few goods - this is a recipe for inflation. Back to phase one.

But the various phases of the cycle are not only affected by psychology - they affect it. During periods of inflation people are willing to take on risk. The risk of inflation is clear to them and the only compensation is through higher yields (returns, profits) on financial instruments. Yet, higher returns inevitably and invariably imply higher risks. Thus, people are forced to offset or mitigate one type of risk (inflation) with another (credit or investment risk). Paradoxically, an inflationary period is a period of certainty. Inflation is certain. People tend to develop an ideological type of economics. Based on the underlying and undeniable certainty of ever-worsening conditions, the intellectual elite and decision-makers resort to peremptory, radical, rigid and sometimes coercive solutions backed by an ideology disguised as "scientific knowledge". Communism is a prime example, of course - but so is the "Free Marketry" variant of capitalism, as practised by the IMF and by central bankers.

Deflation, on the other hand, is usually a much shorter period. People do not expect it to last. They fully expect it to be followed by inflation - they just do not know when. Thus, its nature is more transitory. Assured of low prices and preoccupied with economic survival - people become strongly risk averse. While in times of inflation people are seeking to protect the value of their money - in times of deflation people are in pursuit of sheer livelihood. A dangerous "stability" sets in. People invest in land, cash and, the more daring, in bonds. Banks do the same. In such times, ideologies are the first victims. They are replaced by philosophies and worldviews. People become much more pragmatic. They look to the possible rather than to the ideal. Communism is replaced by Socialism, Capitalism replaces Free Marketry. Perhaps this is the only good outcome of deflation.

(Article published November 9, 1998 in "The New Presence")

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Lessons in Transition

Question: What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?

Answer: Empirical research has demonstrated that investors are not lured by tax breaks and monetary or fiscal investment incentives. They will take advantage of existing schemes (and ask for more, pitting one country against another). But these will never be the determining factors in their decision-making. They are much more likely to be swayed by the level of protection of property rights, degree of corruption, transparency, state of the physical infrastructure, education and knowledge of foreign languages and "mission critical skills", geographical position and proximity to markets and culture and mentality.

Question: What have been successful techniques for countries to improve their previously negative investment image?

Answer: The politicians of the country need to be seen to be transparently, non-corruptly encouraging business, liberalizing and protecting the property rights of investors. One real, transparent (for instance through international tender) privatisation; one case where the government supported a foreigner against a local; one politician severely punished for corruption and nepotism; one fearless news medium - change a country's image.

Question: Should there be restrictions on repatriation of foreign investment capital (such restrictions could prevent an investment panic, but at the same time they negatively affect investor's confidence)?

Answer: Short term and long term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) - and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries - it can be destructive in less liquid, immature economies or in economies in transition. The two phenomena should be accorded a different treatment. While long-term capital flows should be completely liberalized, encouraged and welcomed - the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long-term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever-higher yields. There is nothing inherently wrong with high yields - but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.

Question: What approach has been most useful in best serving the needs of small businesses: through private business support firms, business associations, or by government agencies?

Answer: It depends where. In Israel (until the beginning of the 90s), South Korea and Japan (until 1997) - the state provided the necessary direction and support. In the USA - the private sector invented its own enormously successful support structures (such as venture capital funds). The right approach depends on the characteristics of the country in question: how entrepreneurial are its citizens, how accessible are credits and microcredits to SMEs, how benign are the bankruptcy laws (which always reflect a social ethos), how good is its physical infrastructure, how educated are its citizens and so on.

Question: How might collective action problems among numerous and dispersed small and medium entrepreneurs best be dealt with?

Answer: It is a strange question to ask in the age of cross-Atlantic transportation, telecommunication and computer networks (such as the Internet). Geographical dispersion is absolutely irrelevant. The problem is in the diverging self-interests of the various players. The more numerous they are, the more niche-orientated, the smaller - the lesser the common denominator. A proof of this fragmentation is the declining power of cartels - trade unions, on the one hand and business trusts, monopolies and cartels, on the other hand. The question is not whether this can be overcome but whether it SHOULD be overcome. Such diversity of interests is the lifeblood of the modern market economy, which is based on conflicts and disagreements as much as it is based on the ability to ultimately compromise and reach a consensus. What needs to be done centrally is public relations and education. People, politicians, big corporations need to be taught the value and advantages of small business, of entrepreneurship and intrapreneurship. And new ways to support this sector need to be constantly devised.

Question: How might access of small business to start-up capital and other resources best be facilitated?

Answer: The traditional banks all over the world failed at maintaining the balancing act between risk and reward. The result was a mega shift to the capital markets. Stock exchanges for trading the shares of small and technology companies sprang all over the world (NASDAQ in the USA, the former USM in London, the Neuemarkt in Germany and so on). Investment and venture capital funds became the second most important source quantitatively. They not only funded budding entrepreneurs but also coached them and saw them through the excruciating and dangerous research and development phases. But these are rich world solutions. An important development is the invention of "third world solutions" such as microcredits granted to the agrarian or textile sectors, mainly to women and which involve the whole community.

Question: Women start one-third of new businesses in the region: now can this contribution to economic growth be further stimulated?

Answer: By providing them with the conditions to work and exercise their entrepreneurial skills. By establishing day care centres for their children. By providing microcredits (women have proven to be inordinately reliable borrowers). By giving them tax credits. By allowing or encouraging flexitime or part time work or work from home. By recognizing the home as the domicile of business (especially through the appropriate tax laws). By equalizing their legal rights and their pay. By protecting them from sexual or gender harassment.

(Article written on October 15, 1999 and published November 22, 1999

in "Central Europe Review" volume 1, issue 22)

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Lucky Russia

As early as August 17th, a few minutes following the devaluation, the financial markets predicted that the Rouble would stabilize around 18-20 Roubles to the US dollar. This was the price quoted for CME forward Rouble contracts. Moreover, not everyone think that hyperinflation is imminent. Simply, there is not enough purchasing power to generate this kind of surge in prices.

Russia is lucky. I am not being cute: this crisis could not have come at a more opportune time. Russians have witnessed (if not actively enjoyed) the advantages of a consumer capitalist economy. For one thing, most of them have some kind of private property and the abundance of all types of products together with the elimination of queues and shortages served to provide a foretaste of the "capitalist heaven". They are not likely to go back, politically or economically. That capitalism is not well entrenched is a blessing in no disguise: this crisis does not deprive people sufficiently to foster a revolution. Social unrest, a dramatic rise in crime rates, more crony capitalism and other malignant forms of "get rich quick" schemes - perhaps. But not another revolution.

Russia and Russians are prone to dramatic extremes. Russia is simply going through a crisis which will ultimately engulf all of Eastern, Central and Southern Europe and, more generally, all the protective, etatist economies. From Macedonia to the Czech Republic, from Kazakhstan to China, from Slovenia to Bulgaria - all are likely to experience a similar shock. This is because none has really reformed. Under the banner of "capitalism" a small, corrupt elite of oligarchs and politicians robbed the assets of the state. Industry is still protected against outside competition, tax collection is a farce, the banking system a shambles, Western handouts the only pillar of the economy. This cannot and will not go on. The invisible hand of the market will devalue overvalued currencies, force industry to restructure, force the banking system to amalgamate, force inept and corrupt politicians out. The Day of Judgement is here. Russia is lucky to go through all this now - because it will be uniquely positioned, as a result.

The Russian banking system will be forced to restructure. Hundreds of banks will go insolvent and bankrupt. The rest will consolidate. But this will only result in the formation of a few "bad banks". The next stages will involve the formation of healthy retail activities, where none exist today. Banks will begin to compete for savings. They will diversify their portfolio and, as a result, their exposure (risk) will diminish. Then they will have to invest this money to generate the kind of returns that will attract the savers. They will not risk another asset bubble. They will not invest in brokerage operations, speculate, or bet against the Rouble anymore. Their future profits will be the result of investments in real assets: industry, the services sector, new and small businesses. These are very good news: the banks have been taught a lesson they will not easily forget. It is: paper profits and paper assets are on paper only. Here today, gone tomorrow.

A devalued Rouble will enhance the competitiveness of the Russian industrial and commodity production sectors. Rouble inflation will not fully reflect the devaluation for a long time. This difference will allow Russian manufacturers and commodity producers to compete vigorously.

Russia was long subjected to the quack "medical experiments" of the IMF. It was led down the path of deflation, which the IMF has plunged half the world into. It needed to reflate urgently. It could not have "chosen" a better way to do so. The devaluation will reflate the economy. It is equivalent to the infusion of new blood to a body dilapidated by endless austerity and economic bloodletting.

It might sound outlandish - but Russia is showing the way to other countries in the Third World as it has so often done in the past. It, in effect, has acted against the IMF dictates and by devaluing its currency it has readopted the path of John Maynard Keynes. It was about time.

(Article published August, 1998 in "The New Presence"

and October 28, 1998 in "Argumenti i fakti")

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Russian Roulette

The more involved the IMF gets in the Russian economy - the more controversy surrounds it. True, economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are loudly complaining. Some economists regard this as a sign of the proper functioning of the IMF - others spot some justice in some of the complaints. The IMF is supposed to promote international monetary cooperation, establish a multilateral system of payments, assist countries with Balance of Payments (BOP) difficulties under adequate safeguards, lessen the duration and the degree of disequilibrium in the international BOPS of member countries and promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.

It tries to juggle all these goals in the thinning air of the global capital markets. There is little dispute that the IMF is indispensable. Without it, the world monetary system would have contracted more readily and many countries would be worse off. It imposes monetary and fiscal discipline, forces governments to plan, and introduces painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters endure. Lately, it began to lend credibility to countries and to manage crisis situations. But, this scapegoat role allows politicians in Russia to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a reformed market economy could have provided a swifter and more resolute adjustment - the diversion of scarce human and financial resources to negotiating with the IMF seems to have prolonged the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful - the credit goes to the politicians, if not - the IMF is always to blame. Negative feelings, which would have normally brought about a real, transparent, corruption-free, efficient market economy are vented and deflected.

The IMF money in Russia encourages corrupt and inefficient spending because it cannot really be controlled and monitored. The rule is: the more resources the Federal and regional governments have - the more will be lost to corruption and inefficiency. The IMF cannot rationalize spending in Russia because its control mechanisms are flawed: they rely too heavily on local, official input and they are remote (from Washington). They are also underfunded.

Despite these shortcomings, the IMF assumed - and not only in the case of Russia - two roles which were not historically allocated to it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could - and usually does - mean financial suffocation. Russia experienced it last month. No banks or donor countries extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) shifted - so did responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments ("why worry, the IMF will bail me out in case of default"). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler - the losses to the IMF. This does not encourage prudence or discipline. There is no better example than the bloated and wrongly priced Russian market for short-term government obligations, the GKOs.

The IMF is too restricted in both its ability to operate and in its ability to conceptualise and to innovate. It, therefore, resorts to prescribing the same medicine of austerity to all the sovereign patients, which are suffering from a myriad of economic diseases. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (the daily turnover in the foreign exchange markets alone is 6 times the total resources of the IMF). The result is fiascos like South Korea and Indonesia where 40-60 billion USD aid packages was consumed by sick economies in days to no avail. More and more, the IMF looks anachronistic and its goals untenable. The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico, which shares a border with the USA and not Bulgaria, which doesn't?), politicisation (South Korean and Indonesian officials complained that the IMF officials tried to surreptitiously introduce trade concessions to the USA into an otherwise financial package of measures) and too much red tape.

The problem is that the IMF forces governments to restrict flows of capital and goods, and to reduce budget and balance of payments deficits. Consequently, governments find themselves caught between non-compliance with the IMF performance criteria - and addiction to its assistance. The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". This looks a trifle overblown. But the process that he describes is, to some extent, true and fully applicable to Russia.

The inevitable devaluation of the Rouble (supposed to encourage exports and stabilize the currency) will lead to increased inflation. The higher prices will burden businesses and increase their default rates. The banks will increase their interest rates to compensate for higher risks and for inflation. Wages in Russia are never fully indexed or paid timely so the purchasing power of households will be further eroded. Despite recent posturing, tax revenues will fall as a result of a decrease in wages and the collapse of many businesses. Thus, the budget will be either cruelly cut or the budget deficit will increase. The options of raising taxes or improving the collection methods are fantastic in the chaotic environment euphemistically known as the Russian Economy. The Rising costs of manufacturing (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) will lead to the pricing out of the local markets of many local firms. A flood of cheaper imports will ensue. The comparative advantages of Russia will disappear as it slides into ever growing trade deficits. Finally, The Russians believe, Western creditors will take over the national economic policy. Communism will be replaced by IMF-ism. No country is independent if the strings of its purse are held by others. Russians, too nationalistic to acquiesce, will rebel. The price will be partly paid by the likes of the Prague Stock Exchange.

(Article published October 2, 1998 in "The New Presence")

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Foreigners do not Like Russia

Russia's New Economy

With no Russian in sight, foreigners like to belittle and mock Russia. "It is a criminal gangland" (an American term which better fits Italy), "corrupt" (Belgium is more corrupt), "bureaucratic" (try Germany). They point to its 160 billion USD in foreign debt. But this is one of the lowest rates in the world (c. 40% of GDP). The USA owes almost twice as much per its GDP.

Foreigners do not like Russia. Russia should stop relying on them so heavily. Not because of nationalistic reasons. Because of realistic ones. It is not realistic to expect foreign institutions and lenders (such as the IMF) to provide Russia with another 45 billion roubles. It was the IMF that de-monetised the Russian economy. Its outlandish demands to limit the money supply reduced the amount of roubles in circulation to a dangerous, life-threatening, level (15% of GDP). The result was an unprecedented barter economy (more than 75% of all transactions) and a collapse of the popular trust in the rouble.

There has never been a post-communist "Russian Economy". There was a "Moscow Economy" and a "Rest of Russia Economy". The first was a bubble of consumption, novelty seeking, vanity and financial assets. The "crisis" in August was merely the bursting of the MUSCOVITE bubble. How come I consider this to be good for Russia?

First, it will weed out the weak economic players. Shady companies, the manufacturers of shoddy goods, financial leeches and parasites - all will vanish together with easy, corrupt and criminal money. Foreign firms, which came over to ride the wave of unbridled consumerism and to make a quick buck, will go home. The export revenues of oligarchs and robber barons will revert back to the nation. In time, their inefficient and corrupt fiefdoms and monopolies will crumble. They may even begin to pay taxes.

Multinationals committed to the still promising Russian market will not go away. They will invest more and provide even more credits to local suppliers and partners. They will hire good staff, reduce costs and finally acknowledge the existence of life (and markets) outside Moscow. The crisis in Moscow is blessing for the rest of Russia, as has often been the case in history.

This is also the chance of domestic industry and services. With unemployment up, wage costs are down by half. So are rent and security costs and other overhead. Many good people are available today at a reasonable price. Companies have rationalized, cut the fat, sacked unneeded people, become lean and mean. They are fast becoming competitive in their own markets and, later on, perhaps, in export markets.

Additionally, imports are down by 45%. Domestic firms face much less competition, on the one hand, and less choosy clients, on the other hand. This is their chance to capture market share. Russian businesses are used to operating without a banking system, or in hyperinflation. Foreigners are not. Shops will prefer to stock cheaper domestically produced goods. Both product quality and the attention to the consumer's needs and demands need to improve. But the prize is enormous: control of the Russian market.

But is there a Russian market? This is the only cloud in the silver lining. Russia is being regionalized, broken down. The movement of both people and goods is gradually restricted. The fragmentation of a hitherto unified market is detrimental. This is the real risk facing Russia. Whatever the POLITICAL arrangements - the economy must remain united. The various oblasts, mini-states and fiefdoms are simply not economically viable on their own.

(Article published November 23, 1998 in "The New Presence")

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IMF - Kill or Cure

This was the title of the cover page of the prestigious magazine, "The Economist" in its issue of 10/1/98. The more involved the IMF gets in the world economy - the more controversy surrounds it. Economies in transition, emerging economies, developing countries and, lately, even Asian Tigers all feel the brunt of the IMF recipes. All are not too happy with it, all are loudly complaining. Some economists regard this as a sign of the proper functioning of the International Monetary Fund (IMF) - others spot some justice in some of the complaints.

The IMF was established in 1944 as part of the Bretton Woods agreement. Originally, it was conceived as the monetary arm of the UN, an agency. It encompassed 29 countries but excluded the losers in World War II, Germany and Japan. The exclusion of the losers in the Cold war from the WTO is reminiscent of what happened then: in both cases, the USA called the shots and dictated the composition of the membership of international organization in accordance with its predilections.

Today, the IMF numbers 182 member-countries and boasts "equity" (own financial means) of 200 billion USD (measured by Special Drawing Rights, SDR, pegged at 1.35 USD each). It employs 2600 workers from 110 countries. It is truly international.

The IMF has a few statutory purposes. They are splashed across its Statute and its official publications. The criticism relates to the implementation - not to the noble goals. It also relates to turf occupied by the IMF without any mandate to do so.

The IMF is supposed to:

A. Promote international monetary cooperation;

B. Expand international trade (a role which reverted now to the WTO);

C. Establish a multilateral system of payments;

D. Assist countries with Balance of Payments (BOP) difficulties under adequate safeguards;

E. Lessen the duration and the degree of disequilibrium in the international BOPS of member countries;

F. Promote exchange rate stability, the signing of orderly exchange agreements and the avoidance of competitive exchange depreciation.

The IMF tries to juggle all these goals in the thinning air of the global capital markets. It does so through three types of activities:

Surveillance

The IMF regularly monitors exchange rate policies, the general economic situation and other economic policies. It does so through the (to some countries, ominous) mechanism of "consultation" (with the countries' monetary and fiscal authorities). The famed (and dreaded) World Economic Outlook (WEO) report amalgamates the individual country results into a coherent picture of multilateral surveillance.

Sometimes, countries, which have no on-going interaction with the IMF and do not use its assistance do ask it to intervene, at least by way of grading and evaluating their economies. The last decade saw the transformation of the IMF into an unofficial (and, incidentally, non-mandated) country credit rating agency. Its stamp of approval can mean the difference between the availability of credits to a given country - or its absence. At best, a bad review by the IMF imposes financial penalties on the delinquent country in the form of higher interest rates and charges payable on its international borrowings.

The Precautionary Agreement is one such rating device. It serves to boost international confidence in an economy. Another contraption is the Monitoring Agreement, which sets economic benchmarks (some say, hurdles) under a shadow economic program designed by the IMF. Attaining these benchmarks confers reliability upon the economic policies of the country monitored.

Financial Assistance

Where surveillance ends, financial assistance begins. It is extended to members with BOP difficulties to support adjustment and reform policies and economic agendas. Through 31/7/97, for instance, the IMF extended 23 billion USD of such help to more than 50 countries and the outstanding credit portfolio stood at 60 billion USD. The surprising thing is that 90% of these amounts were borrowed by relatively well-off countries in the West, contrary to the image of the IMF as a lender of last resort to shabby countries in despair.

Hidden behind a jungle of acronyms, an unprecedented system of international finance evolves relentlessly. They will be reviewed in detail later.

Technical Assistance

The last type of activity of the IMF is Technical Assistance, mainly in the design and implementation of fiscal and monetary policy and in building the institutions to see them through successfully (e.g., Central Banks). The IMF also teaches the uninitiated how to handle and account for transactions that they are doing with the IMF. Another branch of this activity is the collection of statistical data - where the IMF is forced to rely on mostly inadequate and antiquated systems of data collection and analysis. Lately, the IMF stepped up its activities in the training of government and non-government (NGO) officials. This is in line with the new credo of the World Bank: without the right, functioning, less corrupt institutions - no policy will succeed, no matter how right.

From the narrow point of view of its financial mechanisms (as distinct from its policies) - the IMF is an intriguing and hitherto successful example of international collaboration and crisis prevention or amelioration (=crisis management). The principle is deceptively simple: member countries purchase the currencies of other member countries (USA, Germany, the UK, etc.). Alternatively, the draw SDRs and convert them to the aforementioned "hard" currencies. They pay for all this with their own, local and humble currencies. The catch is that they have to buy their own currencies back from the IMF after a prescribed period of time. As with every bank, they also have to pay charges and commissions related to the withdrawal.

A country can draw up to its "Reserve Tranche Position". This is the unused part of its quota (every country has a quota which is based on its participation in the equity of the IMF and on its needs). The quota is supposed to be used only in extreme BOP distress. Credits that the country received from the IMF are not deducted from its quota (because, ostensibly, they will be paid back by it to the IMF). But the IMF holds the local currency of the country (given to it in exchange for hard currency or SDRs). These holdings are deducted from the quota because they are not credit to be repaid but the result of an exchange transaction.

A country can draw no more than 25% of its quota in the first tranche of a loan that it receives from the IMF. The first tranche is available to any country, which demonstrates efforts to overcome its BOP problems. The language of this requirement is so vague that it renders virtually all the members eligible to receive the first instalment.

Other tranches are more difficult to obtain (as Russia and Zimbabwe can testify): the country must show successful compliance with agreed economic plans and meet performance criteria regarding its budget deficit and monetary gauges (for instance credit ceilings in the economy as a whole). The tranches that follow the first one are also phased. All this (welcome and indispensable) disciplining is waived in case of Emergency Assistance - BOP needs which arise due to natural disasters or as the result of an armed conflict. In such cases, the country can immediately draw up to 25% of its quota subject only to "cooperation" with the IMF - but not subject to meeting performance criteria. The IMF also does not shy away from helping countries meet their debt service obligations. Countries can draw money to retire and reduce burdening old debts or merely to service it.

It is not easy to find a path in the jungle of acronyms, which sprouted in the wake of the formation of the IMF. It imposes tough guidelines on those unfortunate enough to require its help: a drastic reduction in inflation, cutting back imports and enhancing exports. The IMF is funded by the rich industrialized countries: the USA alone contributes close to 18% to its resources annually. Following the 1994-5 crisis in Mexico (in which the IMF a crucial healing role) - the USA led a round of increases in the contributions of the well-to-do members (G7) to its coffers. This became known as the Halifax-I round. Halifax-II looks all but inevitable, following the costly turmoil in Southeast Asia. The latter dilapidated the IMF's resources more than all the previous crises combined.

At first, the Stand By Arrangement (SBA) was set up. It still operates as a short-term BOP assistance financing facility designed to offset temporary or cyclical BOP deficits. It is typically available for periods of between 12 to 18 months and released gradually, on a quarterly basis to the recipient member. Its availability depends heavily on the fulfilment of performance conditions and on periodic program reviews. The country must pay back (=repurchase its own currency and pay for it with hard currencies) in 3.25 to 5 years after each original purchase.

This was followed by the General Agreement to Borrow (GAB) - a framework reference for all future facilities and by the CFF (Compensatory Financing Facility). The latter was augmented by loans available to countries to defray the rising costs of basic edibles and foodstuffs (cereals). The two merged to become CCFF (Compensatory and Contingency Financing Facility) - intended to compensate members with shortfalls in export earnings attributable to circumstances beyond their control and to help them to maintain adjustment programs in the face of external shocks. It also helps them to meet the rising costs of cereal imports and other external contingencies (some of them arising from previous IMF lending!). This credit is also available for a period of 3.25 to 5 years.

1971 was an important year in the history of the world's financial markets. The Bretton Woods Agreements were cancelled but instead of pulling the carpet under the proverbial legs of the IMF - it served to strengthen its position. Under the Smithsonian Agreement, it was put in charge of maintaining the central exchange rates (though inside much wider bands). A committee of 20 members was set up to agree on a new world monetary system (known by its unfortunate acronym, CRIMS). Its recommendations led to the creation of the EFF (extended Financing Facility), which provided, for the first time, MEDIUM term assistance to members with BOP difficulties, which resulted from structural or macro-economic (rather than conjectural) economic changes. It served to support medium term (3 years) programs. In other respects, it is a replica of the SBA, except that that the repayment (=the repurchase, in IMF jargon) is in 4.5-10 years.

The 70s witnessed a proliferation of multilateral assistance programs. The IMF set up the SA (Subsidy Account), which assisted members to overcome the two destructive oil price shocks. An oil facility was formed to ameliorate the reverberating economic shock waves. A Trust Fund (TF) extended BOP assistance to developing member countries, utilizing the profits from gold sales. To top all these, an SFF (Supplementary Financing Facility) was established.

During the 1980s, the IMF had a growing role in various adjustment processes and in the financing of payments imbalances. It began to use a basket of 5 major currencies. It began to borrow funds for its purposes - the contributions did not meet its expanding roles.

It got involved in the Latin American Debt Crisis - namely, in problems of debt servicing. It is to this period that we can trace the emergence of the New IMF: invigorated, powerful, omnipresent, omniscient, mildly threatening - the monetary police of the global economic scene.

The SAF (Structural Adjustment Facility) was created. Its role was to provide BOP assistance on concessional terms to low income, developing countries (Macedonia benefited from its successor, ESAF). Five years later, following the now unjustly infamous Louvre Accord, which dealt with the stabilization of exchange rates), it was extended to become ESAF (Extended Structural Adjustment Facility). The idea was to support low-income members, which undertake a strong 3-year macroeconomic and structural program intended to improve their BOP and to foster growth - providing that they are enduring protracted BOP problems. ESAF loans finance 3-year programs with a subsidized symbolic interest rate of 0.5% per annum. The country has 5 years grace and the loan matures in 10 years. The economic assessment of the country is assessed quarterly and biannually. Macedonia is only one of 79 countries eligible to receive ESAF funds.

In 1989, the IMF started linking support for debt reduction strategies of member countries to sustained medium term adjustment programs with strong elements of structural reforms and with access to IMF resources for the express purposes of retiring old debts, reducing outstanding borrowing from foreign sources or otherwise servicing debt without resorting to rescheduling it. To these ends, the IMF created the STF (Systemic Transformation Facility - also used by Macedonia). It was a temporary outfit, which expired in April 1995. It provided financial assistance to countries, which faced BOP difficulties, which arose from a transformation (transition) from planned economies to market ones. Only countries with what were judged by the IMF to have been severe disruptions in trade and payments arrangements benefited from it. It had to be repaid in 4.5-10 years.

In 1994, the Madrid Declaration set different goals for different varieties of economies. Industrial economies were supposed to emphasize sustained growth, reduction in unemployment and the prevention of a resurgence of by now subdued inflation. Developing countries were allocated the role of extending their growth. Countries in transition had to engage in bold stabilization and reform to win the Fund's approval. A new category was created, in the best of acronym tradition: HIPCs (Heavily Indebted Poor Countries). In 1997 New Arrangements to Borrow (NAB) were set in motion. They became the first and principal recourse in case that IMF supplementary resources were needed. No one imagined how quickly these would be exhausted and how far sighted these arrangement have proven to be. No one predicted the area either: Southeast Asia.

Despite these momentous structural changes in the ways in which the IMF extends its assistance, the details of the decision-making processes have not been altered for more than half a century. The IMF has a Board of Governors. It includes 1 Governor (plus 1 Alternative Governor) from every member country (normally, the Minister of Finance or the Governor of the Central Bank of that member). They meet annually (in the autumn) and coordinate their meeting with that of the World Bank.

The Board of Governors oversees the operation of a Board of Executive Directors, which looks after the mundane, daily business. It is composed of the Managing Director (Michel Camdessus from 1987 till 2000) as the Chairman of the Board and 24 Executive Directors appointed or elected by big members or groups of members. There is also an Interim Committee of the International Monetary System.

The members' voting rights are determined by their quota which (as we said) is determined by their contributions and by their needs. The USA is the biggest gun, followed by Germany, Japan, France and the UK.

There is little dispute that the IMF is a big, indispensable, success. Without it the world monetary system would have entered phases of contraction much more readily. Without the assistance that it extends and the bitter medicines that it administers - many countries would have been in an even worse predicament than they are already. It imposes monetary and fiscal discipline, it forces governments to plan and think, it imposes painful adjustments and reforms. It serves as a convenient scapegoat: the politicians can blame it for the economic woes that their voters (or citizens) endure. It is very useful. Lately, it lends credibility to countries and manages crisis situations (though still not very skilfully).

This scapegoat role constitutes the basis for the first criticism. People the world over tend to hide behind the IMF leaf and blame the results of their incompetence and corruption on it. Where a market economy could have provided a swifter and more resolute adjustment - the diversion of scarce human and financial resources to negotiating with the IMF seems to prolong the agony. The abrogation of responsibility by decision makers poses a moral hazard: if successful - the credit goes to the politicians, if failing - the IMF is always to blame. Rage and other negative feeling, which would have normally brought about real, transparent, corruption-free, efficient market economy are vented and deflected. The IMF money encourages corrupt and inefficient spending because it cannot really be controlled and monitored (at least not on a real time basis). Also, the more resources governments have - the more will be lost to corruption and inefficiency. Zimbabwe is a case in point: following a dispute regarding an austerity package dictated by the IMF (the government did not feel like cutting government spending to that extent) - the country was cut off from IMF funding. The results were surprising: with less financing from the IMF (and as a result - from donor countries, as well) - the government was forced to rationalize and to restrict its spending. The IMF would not have achieved these results because its control mechanisms are flawed: they rely to heavily on local, official input and they are remote (from Washington). They are also underfunded.

Despite these shortcomings, the IMF assumed two roles, which were not historically identified with it. It became a country credit risk-rating agency. The absence of an IMF seal of approval could - and usually does - mean financial suffocation. No banks or donor countries will extend credit to a country lacking the IMF's endorsement. On the other hand, as authority (to rate) is shifted - so does responsibility. The IMF became a super-guarantor of the debts of both the public and private sectors. This encourages irresponsible lending and investments (why worry, the IMF will bail me out in case of default). This is the "Moral Hazard": the safety net is fast being transformed into a licence to gamble. The profits accrue to the gambler - the losses to the IMF. This does not encourage prudence or discipline.

The IMF is too restricted both in its ability to operate and in its ability to conceptualise and to innovate. It is too stale: a scroll in the age of the video clip. It, therefore, resorts to prescribing the same medicine of austerity to all the country patients, which are suffering from a myriad of economic diseases. No one would call a doctor who uniformly administers penicillin - a good doctor and, yet, this, exactly is what the IMF is doing. And it is doing so with utter disregard and ignorance of the local social, cultural (even economic) realities. Add to this the fact that the IMF's ability to influence the financial markets in an age of globalisation is dubious (to use a gross understatement - the daily turnover in the foreign exchange markets alone is 6 times the total equity of this organization). The result is fiascos like South Korea where a 60 billion USD aid package was consumed in days without providing any discernible betterment of the economic situation. More and more, the IMF looks anachronistic (not to say archaic) and its goals untenable.

The IMF also displays the whole gamut of problems which plague every bureaucratic institution: discrimination (why help Mexico and not Bulgaria - is it because it shares no border with the USA), politicisation (South Korean officials complained that the IMF officials were trying to smuggle trade concessions to the USA in an otherwise totally financial package of measures) and too much red tape. But this was to be expected of an organization this size and with so much power.

The medicine is no better than the doctor or, for that matter, than the disease that it is intended to cure.

The IMF forces governments to restrict flows of capital and goods. Reducing budget deficits belongs to the former - reducing balance of payments deficits, to the latter. Consequently, government find themselves between the hard rock of not complying with the IMF performance demands (and criteria) - and the hammer of needing its assistance more and more often, getting hooked on it.

The crusader-economist Michel Chossudowski wrote once that the IMF's adjustment policies "trigger the destruction of whole economies". With all due respect (Chossudowski conducted research in 100 countries regarding this issue), this looks a trifle overblown. Overall, the IMF has beneficial accounts, which cannot be discounted so off-handedly. But the process that he describes is, to some extent, true:

Devaluation (forced on the country by the IMF in order to encourage its exports and to stabilize its currency) leads to an increase in the general price level (also known as inflation). In other words: immediately after a devaluation, the prices go up (this happened in Macedonia and led to a doubling of the inflation which persisted before the 16% devaluation in July 1997). High prices burden businesses and increase their default rates. The banks increase their interest rates to compensate for the higher risk (=higher default rate) and to claw back part of the inflation (=to maintain the same REAL interest rates as before the increase in inflation). Wages are never fully indexed. The salaries lag after the cost of living and the purchasing power of households is eroded. Taxes fall as a result of a decrease in wages and the collapse of many businesses and either the budget is cruelly cut (austerity and scaling back of social services) or the budget deficit increases (because the government spends more than it collects in taxes). Another bad option (though rarely used) is to raise taxes or improve the collection mechanisms. Rising manufacturing costs (fuel and freight are denominated in foreign currencies and so do many of the tradable inputs) lead to pricing out of many of the local firms (their prices become too high for the local markets to afford). A flood of cheaper imports ensues and the comparative advantages of the country suffer. Finally, the creditors take over the national economic policy (which is reminiscent of darker, colonial times).

And if this sounds familiar it is because this is exactly what is happening in Macedonia today. Communism to some extent was replaced by IMF-ism. In an age of the death of ideologies, this is a poor - and dangerous - choice. The country spends 500 million USD annually on totally unnecessary consumption (cars, jam, detergents). It gets this money from the IMF and from donor countries but an awful price: the loss of its hard earned autonomy and freedom. No country is independent if the strings of its purse are held by others.

(Article written in January, 1998)

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The IMF Deconstructed

A Dialogue with Mr. Tom Rodwell

The following is a standard IMF document, taken from its own website. Underlined phrases are related to categories A and/or B (see below). The phrases here are general examples as part of general criticism of the ideological tone and "aesthetic" of the IMF. This dialogue is a combination of philosophy and economics: does/can the IMF (or any organization) "facilitate the expansion and balanced growth of international trade?"

The IMF is the cornerstone and centrepiece of the financial architecture of the world. Long a sacred cow, it has lately become the eye of a controversy. Its prescriptions to ailing countries as diverse as Zimbabwe and Russia have, at times, proven to be inadequate, some say: ruinous. The IMF is a result of an ideology and its instrument. This is clearly revealed in its intentionally vaguely phrased documents. Tom and Sam, a philosopher/journalist/composer and a philosopher and physicist turned economist, try to read between the lines (in the best of East European traditions...).

The IMF:

Statutory Purposes

The IMF was created to promote international monetary co-operation; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

Areas of Activity

Surveillance is the process by which the IMF appraises its members' exchange rate policies within the framework of a comprehensive analysis of the general economic situation and the policy strategy of each member. The IMF fulfils its surveillance responsibilities through: annual bilateral Article IV consultations with individual countries; multilateral surveillance twice a year in the context of its World Economic Outlook (WEO) exercise; and precautionary arrangements, enhanced surveillance, and program monitoring, which provide a member with close monitoring from the IMF in the absence of the use of IMF resources. (Precautionary arrangements serve to boost international confidence in a member's policies. Program monitoring may include the setting of benchmarks under a shadow program, but it does not constitute a formal IMF endorsement.)

IMF IDEOLOGICAL TONE

Tom:

The nature of the IMF is inextricably linked with its controlling member state and staff's economic and political viewpoints. The IMF talks about itself, and about economic/political phenomena generally, in precisely the same terms. The kind of economics it discusses is one of authority, monitoring, and, dare I say it, intervention. While the IMF allegedly intends to promote "international monetary co-operation" and to "facilitate the expansion and balanced growth of international trade" (standard free-market shibboleths), it consistently refers to "enhanced surveillance", "close monitoring", and "precautionary arrangements". Orwellian undertones are hardly muffled.

Sam:

The IMF has yet to adopt the "client-orientated" approach. It harbours deep (and oft-justified) distrust of the willingness of governments to blindly follow its dictates. It is a paranoid organization, based on authoritarian techniques of "negotiations" and "agreement". Euphemisms rule. Normally, the IMF holds "consultations" with the host governments. These are rather one-sided affairs. The governments are needy and impoverished ones. They lack the cadre of educated people needed in order to truly engage the IMF in constructive discourse. They are intimidated by the bullying tactics of the IMF and of its emissaries. The tone is imperial and impatient.

Tom:

The IMF clearly sees itself as the authority on international development ideology. International development becomes an ideological construction, with subsets of subjective terms: free trade, financial contact, and economic vision. Many of these terms are defined in such a way that they enframe that which they discuss. The ideological position of the influential members is often significantly different from the developing countries. Sadly, the ideology only becomes reality when it is part of every day life in the developing nations.

Sam:

Worse still, the IMF's language is riddled with contradictions in terms and logical fallacies. Let us review a few: International monetary co-operation in IMF lingo means exchange (rate) stability. But with such stability the expansion and balanced growth of international trade is not achievable. Trade is based on dynamic exchange rate disparities. Moreover, there is nothing inherently wrong in such dynamism. The changing disparities reflect the relative advantages of the countries involved. In a world of fixed exchange rates - trade stagnates. And what is "balanced" growth anyhow? Trade has been growing at 3-5% annually for a few years now. Is this balanced, overdone or insufficient, as some free trade zealots cry out?

Additionally, a regime of stable exchange rates won't go far towards facilitating the second result: to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. If a country runs a gigantic balance of payments deficit but is not permitted by the IMF to devalue its currency, in the name of exchange rate stability - its balance of payments is only likely to worsen. Take Macedonia: with a 14% of GDP deficit in its BOP - it MUST devalue and URGENTLY. Its currency is HEAVILY overvalued and the whole economy is deflating. Yet, the IMF is about to repeat there the same grave error it committed in Russia: to protect the currency, the whole system is drained of liquidity (demonetised), interest rates are kept insanely high and the balance of payments deficit skyrockets, until the inevitable collapse. If the IMF is interested in self-perpetuating crisis situations in order to preserve its clout - it is doing a fine job indeed.

The IMF was never authorized to rate the creditworthiness of its shareholders (=the countries). It is acting ultra vires in providing clean or soiled bills of financial health. Its ability to strangle a country financially if it does not comply with its programmes - no matter what the social or economic costs are - is very worrying.

LANGUAGE

Tom:

The language in the IMF document can be roughly divided into two sections.

A Phrases concerning the-history-role/activities-nature of the IMF B Phrases concerning - subjective economic and political concepts - local policy - international policy.

Here's my summary of the kind of language used:

1. Quasi-intellectual terms ("big words for a dismal science"), e.g. disequilibrium, comprehensive analysis, policy strategy;

2. Spin-doctoring euphemisms, e.g. promote, facilitate, balance, co-operation, safeguards, monitoring, responsibilities, precautionary arrangements, endorsement, benchmarks. This also includes intimidating terms such as "surveillance";

3. Distancing terms, e.g. members, general economic situation, policy strategy.

(1) Is simply pretension. The average "comprehensive analysis" undertaken by the IMF is often curiously selective and self-serving.

Sam:

Not to mention cursory "kangaroo-court" economic judgements replete with clear contempt and disregard for the "natives". The latter are held to be cheats who are merely trying to extort as much money as they can and probably stash it in Swiss bank accounts (private ones, needless to say).

Tom:

(2) Is the most obnoxious section. These phrases mislead. They paint a picture of the stability and democracy that supposedly is Western capitalism. They paint an image of the IMF as a fair, unbiased, caring, and democratic organisation. These phrases also confuse in that they connect "nice terms" (like balance, co-operation and safeguards) with complicated and subjective economic terms. Thus the language often functions as a "pacifier", or perhaps as a "chaser", softening the blow of the "hard stuff".

(3) Indicates the insular attitude of the IMF. Their "grand scheme" is apparently removed from localised activities and concerns.

Sam:

There is one place, which absolutely complies with the IMF utopia. There is no inflation there. People do not particularly care if the exchange rate never changes or what is the outlandish level of interest rates needed to ensure this eerie stability. It is the cemetery.

The IMF's deadly sin, yet to yield its grapes of wrath, is not to understand that economics is a branch of psychology and should be at the service of humans and society. When setting economic goals one must always act with pragmatism and compassion. In the realm of humans, to be compassionate IS to be pragmatic. Otherwise, reality is bound to frustrate the most rigorous planning. If social costs are not accounted for - unemployment will bring about crime and a black market, which will render the official market and its statistics meaningless, for instance. If exchange rate stability supported by inanely high interest rates prevails over the goals of industrial reconstruction and export-enhancement, the result is erosion of the very fabric of society. Lack of liquidity translates into a lack of trust in fellow citizens and in institutions. If public expenditures are harnessed too strenuously - corruption will flourish. The IMF's propensity to provide a "catchall" one-measure-fits-all panacea is nothing short of shortsighted and disastrous. It cannot be that the same financial recipe will apply to Pakistan, Macedonia, Estonia and Russia. Yet, a close scrutiny of the four IMF programmes imposed upon these countries (Estonia wriggled out) - demonstrates striking similarities. It is a fact that there are conflicting CAPITALIST economic models. Not because human nature is so diverse - and it is - but because different people have different preferences. Americans prefer profits and self-reliance to social justice. Not so the French. Paradoxically, this is exactly why markets exist: to trade in disparate preferences. The IMF is a central planning agency but as opposed to previous models it believes that it is omniscient - and knows that it is omnipotent.

Tom:

The IMF's desire to paint a kind of stasis on the world economy is, as you have said, a kind of religious-ideological defence mechanism. The language employed by the IMF is an attempt to give form to the haphazard and contradictory nature of international trade and development. This language functions in a similar way to their policies, in that both seek to describe and promote a uniform concept/practice of international economics.

The reference to economics as a branch of psychology is spot-on. It is ignorant, unethical and unworkable to attempt to impose or promote any kind of exclusive and conformist concept of "the economy". Indeed, the IMF's bizarre language and policies reveal a mistaken view (commonly held) that there is such a single practice or entity called "The Economy", or "International Trade". Absolutist and limiting concepts of economy (communism, now capitalism) are increasingly being shown to be unworkable. The language used by the IMF is evidence of the impractical, restrictive and unethical nature of an elitist concept/practice of economics.

FINAL STATEMENT

Tom:

The IMF is a part of the industry of "trade", "development", and "economics" in general. This criticism of the language found in their promotional documents is, in some ways, a criticism of the aforementioned "economics industry" in general. When I first read the IMF's comments/reports, I was struck by the combination of arrogance and defensiveness (in a tone of barely muted desperation). I now believe that these documents were written with the first whiff of fear in the NYC air-conditioned office ambience. No doubt that those miners, steel workers, farmers, and manufacturers whose own industries were flattened by free trade hysteria will feel a tiny degree of satisfaction, if we really are seeing the decline of the "economics industry".

The IMF is unethical because it espouses an abstract concept "free trade" that influences the complex process of "development" (too often defined with insufficient complexity) while being unconcerned with specific and local realities and interactions. It is simply too abstract: international development is not assisted on a truly local level by investment in the military, state, or heavy industry. It is ridiculous for a third world country to build massive steel-plants, or allow foreign companies to extract vast amounts of timber or oil, when local people are concerned with finding clean drinking water. This abstraction criticism stands for the entire "economics industry", and will continue to do so while it has an insufficiently perceptive and complex understanding of localised realities.

The language of economics is murky, and our criticism of it will remain justified as long as the IMF (et al) produce officious and misleading documents. The practice of economics is also murky, and our criticism of it too will remain justified as long as policies that are illogical, impractical and unethical are produced and enforced.

Sam:

The IMF is an essential institution. There must exist a multilateral organization geared towards the maintenance of the marketplace itself. But the IMF should get rid of its Multiple Personality Disorder. It must first decide WHAT is it: a lender of last resort? A creditworthiness-rating agency, sort of an ominous Moody's? A missionary organization, preaching a particular brand of the religion known as capitalism? A commercially-orientated, return-on-investment based financial organization? Dumping grounds for aging politicians and third-rate bankers doing the USA's bidding? Whatever the definition, it is bound to be far superior to the current muddled state of affairs.

Second, the IMF must maintain transparency. It controls vast resources. It is prone to be inefficient (not to say corrupt). Transparency humbles, ensures the injection of fresh intellectual blood, improves performance, and gives taxpayers a good feeling. The IMF needs to be humbled. Its actions have been politicised lately. It intervenes in the internal affairs of dozens of sovereign, reasonably managed countries - and its intervention is not confined to matters economic. It develops an internal "Organizational cult" (we know best and always). It is one of the most rigid and intellectually handicapped organizations in the world, yet it considers itself a bastion of economic ingenuity and righteousness. Delusions of grandeur are dangerous on such a scale.

Third, the revamped, no-longer-haughty, IMF must be able to fine tune to different social and cultural constraints in different spots of the world. It must strive at least to BE SEEN to be trying to minimize the social costs of its often-botched plans. It must not behave as a colonial power, which it often does. It must establish trust rather than impose discipline. Otherwise, it stands no chance to laugh last. Actually, it stands no chance even to survive.

(Article published January 4, 1999 in "The New Presence")

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Financial Crisis, Global Capital Flows and the International Financial Architecture

The recent upheavals in the world financial markets were quelled by the immediate intervention of both international financial institutions such as the IMF and of domestic ones in the developed countries, such as the Federal Reserve in the USA. The danger seems to have passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well. We may face yet another crisis of the same or a larger magnitude momentarily.

What are the lessons that we can derive from the last crisis to avoid the next?

The first lesson, it would seem, is that short term and long-term capital flows are two disparate phenomena with very little in common. The former is speculative and technical in nature and has very little to do with fundamental realities. The latter is investment oriented and committed to the increasing of the welfare and wealth of its new domicile. It is, therefore, wrong to talk about "global capital flows". There are investments (including even long term portfolio investments and venture capital) - and there is speculative, "hot" money. While "hot money" is very useful as a lubricant on the wheels of liquid capital markets in rich countries - it can be destructive in less liquid, immature economies or in economies in transition.

The two phenomena should be accorded a different treatment. While long-term capital flows should be completely liberalized, encouraged and welcomed - the short term, "hot money" type should be controlled and even discouraged. The introduction of fiscally oriented capital controls (as Chile has implemented) is one possibility. The less attractive Malaysian model springs to mind. It is less attractive because it penalizes both the short term and the long-term financial players. But it is clear that an important and integral part of the new International Financial Architecture MUST be the control of speculative money in pursuit of ever-higher yields. There is nothing inherently wrong with high yields - but the capital markets provide yields connected to economic depression and to price collapses through the mechanism of short selling and through the usage of certain derivatives. This aspect of things must be neutered or at least countered.

The second lesson is the important role that central banks and other financial authorities play in the precipitation of financial crises - or in their prolongation. Financial bubbles and asset price inflation are the result of euphoric and irrational exuberance - said the Chairman of the Federal Reserve Bank of the United States, the legendary Mr. Greenspan and who can dispute this? But the question that was delicately sidestepped was: WHO is responsible for financial bubbles? Expansive monetary policies, well-timed signals in the interest rates markets, liquidity injections, currency interventions, and international salvage operations - are all co-ordinated by central banks and by other central or international institutions. Official INACTION is as conducive to the inflation of financial bubbles as is official ACTION. By refusing to restructure the banking system, to introduce appropriate bankruptcy procedures, corporate transparency and good corporate governance, by engaging in protectionism and isolationism, by avoiding the implementation of anti competition legislation - many countries have fostered the vacuum within which financial crises breed.

The third lesson is that international financial institutions can be of some help - when not driven by political or geopolitical considerations and when not married to a dogma. Unfortunately, these are the rare cases. Most IFIs - notably the IMF and, to a lesser extent, the World Bank - are both politicised and doctrinaire. It is only lately and following the recent mega-crisis in Asia, that IFIs began to "reinvent" themselves, their doctrines and their recipes. This added conceptual and theoretical flexibility led to better results. It is always better to tailor a solution to the needs of the client. Perhaps this should be the biggest evolutionary step:

That IFIs will cease to regard the countries and governments within their remit as inefficient and corrupt beggars, in constant need of financial infusions. Rather they should regard these countries as CLIENTS, customers in need of service. After all, this, exactly, is the essence of the free market - and it is from IFIs that such countries should learn the ways of the free market.

In broad outline, there are two types of emerging solutions. One type is market oriented - and the other, interventionist. The first type calls for free markets, specially designed financial instruments (see the example of the Brady bonds) and a global "laissez faire" environment to solve the issue of financial crises. The second approach regards the free markets as the SOURCE of the problem, rather than its solution. It calls for domestic and where necessary international intervention and assistance in resolving financial crises.

Both approaches have their merits and both should be applied in varying combinations on a case by case basis.

Indeed, this is the greatest lesson of all:

There are NO magic bullets, final solutions, right ways and only recipes. This is a trial and error process and in war one should not limit one's arsenal. Let us employ all the weapons at our disposal to achieve the best results for everyone involved.

(Article written on August 18, 1999)

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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 transaction,s 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. These 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.

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The Typology of Financial Scandals

Tulipmania - this is the name coined for the first pyramid investment scheme in history.

In 1634, tulip bulbs were traded in a special exchange in Amsterdam. People used these bulbs as means of exchange and value store. They traded them and speculated in them. The rare black tulip bulbs were as valuable as a big mansion house. The craze lasted four years and it seemed that it would last forever. But this was not to be.

The bubble burst in 1637. In a matter of a few days, the price of tulip bulbs was slashed by 96%!

This specific pyramid investment scheme was somewhat different from the ones, which were to follow it in human financial history elsewhere in the world. It had no "organizing committee", no identifiable group of movers and shakers, which controlled and directed it. Also, no explicit promises were ever made concerning the profits, which the investors could expect from participating in the scheme - or even that profits were forthcoming to them.

Since then, pyramid schemes have evolved into intricate psychological ploys.

Modern ones have a few characteristics in common:

First, they involve ever growing numbers of people. They mushroom exponentially into proportions that usually threaten the national economy and the very fabric of society. All of them have grave political and social implications.

Hundreds of thousands of investors (in a population of less than 3.5 million souls) were deeply enmeshed in the 1983 banking crisis in Israel.

This was a classic pyramid scheme: the banks offered their own shares for sale, promising investors that the price of the shares will only go up (sometimes by 2% daily). The banks used depositors' money, their capital, their profits and money that they borrowed abroad to keep this impossible and unhealthy promise. Everyone knew what was going on and everyone was involved.

The Ministers of Finance, the Governors of the Central Bank assisted the banks in these criminal pursuits. This specific pyramid scheme - arguably, the longest in history - lasted 7 years.

On one day in October 1983, ALL the banks in Israel collapsed. The government faced such civil unrest that it was forced to compensate shareholders through an elaborate share buyback plan, which lasted 9 years. The total indirect damage is hard to evaluate, but the direct damage amounted to 6 billion USD.

This specific incident highlights another important attribute of pyramid schemes: investors are promised impossibly high yields, either by way of profits or by way of interest paid. Such yields cannot be derived from the proper investment of the funds - so, the organizers resort to dirty tricks.

They use new money, invested by new investors - to pay off the old investors.

The religion of Islam forbids lenders to charge interest on the credits that they provide. This prohibition is problematic in modern day life and could bring modern finance to a complete halt.

It was against this backdrop, that a few entrepreneurs and religious figures in Egypt and in Pakistan established what they called: "Islamic banks". These banks refrained from either paying interest to depositors - or from charging their clients interest on the loans that they doled out. Instead, they have made their depositors partners in fictitious profits - and have charged their clients for fictitious losses. All would have been well had the Islamic banks stuck to healthier business practices.

But they offer impossibly high "profits" and ended the way every pyramid ends: they collapsed and dragged economies and political establishments with them.

The latest example of the price paid by whole nations due to failed pyramid schemes is, of course, Albania 1997. One third of the population was heavily involved in a series of heavily leveraged investment plans, which collapsed almost simultaneously. Inept political and financial crisis management led Albania to the verge of disintegration into civil war.

But why must pyramid schemes fail? Why can't they continue forever, riding on the back of new money and keeping every investor happy, new and old?

The reason is that the number of new investors - and, therefore, the amount of new money available to the pyramid's organizers - is limited. There are just so many risk takers. The day of judgement is heralded by an ominous mismatch between overblown obligations and the trickling down of new money. When there is no more money available to pay off the old investors, panic ensues. Everyone wants to draw money at the same time. This, evidently, is never possible - some of the money is usually invested in real estate or was provided as a loan. Even the most stable and healthiest financial institutions never put aside more than 10% of the money deposited with them.

Thus, pyramids are doomed to collapse.

But, then, most of the investors in pyramids know that pyramids are scams, not schemes. They stand warned by the collapse of other pyramid schemes, sometimes in the same place and at the same time. Still, they are attracted again and again as butterflies are to the fire and with the same results.

The reason is as old as human psychology: greed, avarice. The organizers promise the investors two things: (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 capital generated in the "black economy", namely: the income not reported to the tax authorities. Such money passes through banking channels, changes ownership a few times, so that its track is covered and the identities of the owners of the money are concealed. Money generated by drug dealings, illicit arm trade and the less exotic form of tax evasion is thus "laundered".

The financial institutions, which participate in laundering operations, maintain double accounting books. One book is for the purposes of the official authorities. Those agencies and authorities that deal with taxation, bank supervision, deposit insurance and financial liquidity are given access to this set of "engineered" books. The true record is kept hidden in another set of books. These accounts reflect the real situation of the financial institution: who deposited how much, when and under which conditions - and who borrowed what, when and under which conditions.

This double standard blurs the true situation of the institution to the point of no return. Even the owners of the institution begin to lose track of its activities and misapprehend its real standing.

Is it stable? Is it liquid? Is the asset portfolio diversified enough? No one knows. The fog enshrouds even those who created it in the first place. No proper financial control and audit is possible under such circumstances.

Less scrupulous members of the management and the staff of such financial bodies usually take advantage of the situation. Embezzlements are very widespread, abuse of authority, misuse or misplacement of funds. Where no light shines, a lot of creepy creatures tend to develop.

The most famous - and biggest - financial scandal of this type in human history was the collapse of the Bank for Credit and Commerce International LTD. (BCCI) in London in 1991. For almost a decade, the management and employees of this shady bank engaged in stealing and misappropriating 10 billion (!!!) USD. The supervision department of the Bank of England, under whose scrutinizing eyes this bank was supposed to have been - was proven to be impotent and incompetent. The owners of the bank - some Arab Sheikhs - had to invest billions of dollars in compensating its depositors.

The combination of black money, shoddy financial controls, shady bank accounts and shredded documents proves to be quite elusive. It is impossible to evaluate the total damage in such cases.

The third type is the most elusive, the hardest to discover. It is very common and scandal may erupt - or never occur, depending on chance, cash flows and the intellects of those involved.

Financial institutions are subject to political pressures, forcing them to give credits to the unworthy - or to forgo diversification (to give too much credit to a single borrower). Only lately in South Korea, such politically motivated loans were discovered to have been given to the failing Hanbo conglomerate by virtually every bank in the country. The same may safely be said about banks in Japan and almost everywhere else. Very few banks would dare to refuse the Finance Minister's cronies, for instance.

Some banks would subject the review of credit applications to social considerations. They would lend to certain sectors of the economy, regardless of their financial viability. They would lend to the needy, to the affluent, to urban renewal programs, to small businesses - and all in the name of social causes, which, however justified - cannot justify giving loans.

This is a private case in a more widespread phenomenon: the assets (=loan portfolios) of many a financial institution are not diversified enough. Their loans are concentrated in a single sector of the economy (agriculture, industry, construction), in a given country, or geographical region. Such exposure is detrimental to the financial health of the lending institution. Economic trends tend to develop in unison in the same sector, country, or region. When real estate in the West Coast of the USA plummets - it does so indiscriminately. A bank, whose total portfolio is composed of mortgages to West Coast Realtors, would be demolished.

In 1982, Mexico defaulted on the interest payments of its international debts. Its arrears grew enormously and threatened the stability of the entire Western financial system. USA banks - which were the most exposed to the Latin American debt crisis - had to foot the bulk of the bill, which amounted to tens of billions of USD. They had almost all their capital tied up in loans to Latin American countries. Financial institutions bow to fads and fashions. They are amenable to "lending trends" and display a herd-like mentality. They tend to concentrate their assets where they believe that they could get the highest yields in the shortest possible periods of time. In this sense, they are not very different from investors in pyramid investment schemes.

Financial mismanagement can also be the result of lax or flawed financial controls. The internal audit department in every financing institution - and the external audit exercised by the appropriate supervision authorities are responsible to counter the natural human propensity for gambling. The must help the financial organization re-orient itself in accordance with objective and objectively analysed data. If they fail to do this - the financial institution would tend to behave like a ship without navigation tools. Financial audit regulations (the most famous of which are the American FASBs) trail way behind the development of the modern financial marketplace. Still, their judicious and careful implementation could be of invaluable assistance in steering away from financial scandals.

Taking human psychology into account - coupled with the complexity of the modern world of finances - it is nothing less than a miracle that financial scandals are as few and far between as they are.

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The Revolt of the Poor

The Demise of Intellectual Property

A year ago I 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, 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 the 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 its intellectual property rights will be emphasized. 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 minimum of 100 DM to recoup only the direct costs. If illegally copied (thereby shrinking the potential market - some people will prefer to buy the cheaper illegal copies) - its price would have to go up prohibitively, 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) will in this case have been 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 the 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 huge, the costs of production and 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 "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 massified 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 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 selling 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 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 pricing. A Macedonian with an average monthly income of 160 USD clearly cannot afford to buy the Encyclopaedia Encarta Deluxe. In America, 100 USD is the income generated in average day's work. 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 there 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. There are electronic magazines, trade journals, billboards, professional publications, thousand of books are available full text. 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 in the Internet, the barriers to entry are virtually nil, pardon the pun. Web addresses are provided free of charge, 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 predicted the doubling of computer memory capacity every 18 months. But memory is only one aspect. Another is the rapid simultaneous advance on all technological fronts. Miniaturization and concurrent empowerment of the tools available has 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 software. This will lead to personal publishing, personal music recording and the digitisation of plastic art. But this is only one side of the story.

The relative advantage of the intellectual property corporation was not to be found exclusively in its technological prowess. Rather it was in its vast pool of capital and its marketing clout, market positioning, sales and distribution. Nowadays, anyone can print a visually impressive book, using the above-mentioned cheap equipment. But in an age of an information glut, it is the marketing, the media campaigns, the distribution and the sales that used to determine the economic outcome.

This advantage, however, is also being eroded. First, there is a psychological shift, a reaction to the commercialisation of intellect and spirit. Creative people are repelled by what they regard as an oligarchic establishment of institutionalised, 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 30 months, I have received 2500 written responses regarding my electronic book. This means that well over 75,000 people read it (the industry average is a 3% response rate and my Link Exchange meter indicates that 160,000 people visited the site by February 2000, with well over 630,000 impressions in the last 15 months alone). It is a textbook (in psychopathology) - and 75,000 people (let alone 160,000) 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 next book is being 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 subsidized content (sold for a token amount) and subsidizing 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 contents.

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.

Thus, content creators will benefit only by sharing in the advertising cake. They will find it increasingly difficult to implement the old model of royalties paid for access or ownership of intellectual property. The venerable (and expensive) "Encyclopaedia Britannica" is now fully available on-line, free of charge. Its largesse is supported by advertising.

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 MP3 files, which the consumer can download 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. Everyone will seek to distinguish oneself, to "brand" himself and to auction her 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. Narrow casting replaces broadcasting, mass customisation 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.

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Scavenger Economies, Predator Economies

The national economies of the world can be divided to the scavenger and the predator types. The former are parasitic economies, which feed off the latter. The relationship is often not that of symbiosis, where two parties maintain a mutually beneficial co-existence. Here, one economy feeds off others in a way, which is harmful, even detrimental to the hosts. But this interaction - however undesirable - is the region's only hope.

The typology of scavenger economies reveals their sources of sustenance:

Conjunctural - These economies feed off historical or economic conjunctures or crises. They position themselves as a bridge between warring or conflicting parties. Switzerland rendered this service to Nazi Germany (1933-1945), Macedonia and Greece to Serbia (1992 to the present), Cyprus aided and abetted Russia (1987 to the present), Jordan for Iraq (1991 to the present), and now, Montenegro acts the part for both Serbia and Kosovo. These economies consist of smuggling, siege breaking, contraband, arms trade and illegal immigration. They benefit economically by violating both international and domestic laws and by providing international outcasts and rogues with alternative routes of supply, and with goods and services.

Criminal - These economies are infiltrated by criminal gangs or suffused with criminal behaviour. Such infiltration is two phased: the properly criminal phase and the money laundering one. In the first phase, criminal activities yield income and result in wealth accumulation. In the second one, the money thus generated is laundered and legitimised. It is invested in legal, above-board activities. The economy of the USA during the 19th century and in the years of prohibition was partly criminal. It is reminiscent of the Russian economy in the 1990s, permeated by criminal conduct as it is. Russians often compare their stage of capitalist evolution to the American "Wild West".

Piggyback Service economies - These are economies, which provide predator economies with services. These services are aimed at re-establishing economic equilibrium in the host (predator) economies. Tax shelters are a fine example of this variety. In many countries taxes are way too high and result in the misallocation of economic resources. Tax shelters offer a way of re-establishing the economic balance and re-instating a regime of efficient allocation of resources. These economies could be regarded as external appendages, shock absorbers and regulators of their host economies. They feed off market failures, market imbalances, arbitrage opportunities, shortages and inefficiencies. Many post-Communist countries have either made the provision of such services a part of their economic life or are about to do so. Free zones, off shore havens, off shore banking and transhipment ports proliferate, from Macedonia to Archangelsk.

Aid economies - Economies that derive most of their vitality from aid granted them by donor countries, multilateral aid agencies and NGOs. Many of the economies in transition belong to this class. Up to 15% of their GDP is in the form of handouts, soft loans and technical assistance. Rescheduling is another species of financial subsidy and virtually all CEE countries have benefited from it. The dependence thus formed can easily deteriorate into addiction. The economic players in such economies engage mostly in lobbying and in political manoeuvring - rather than in production.

Derivative or Satellite economies - These are economies, which are absolutely dependent upon or very closely correlated with other economies. This is either because they conduct most of their trade with these economies, or because they are a (marginal) member of a powerful regional club (or aspire to become one), or because they are under the economic (or geopolitical or military) umbrella of a regional power or a superpower. Another variant is the single-commodity or single-goods or single-service economies. Many countries in Africa and many members of the OPEC oil cartel rely on a single product for their livelihood. Russia, for instance, is heavily dependent on proceeds from the sale of its energy products. Most Montenegrins derive their livelihood, directly or indirectly, from smuggling, bootlegging and illegal immigration. Drugs are a major "export" earner in Macedonia and Albania.

Copycat economies - These are economies that are based on legal or (more often) illegal copying and emulation of intellectual property: patents, brand names, designs, industrial processes, other forms of innovation, copyrighted material, etc. The prime example is Japan, which constructed its whole mega-economy on these bases. Both Bulgaria and Russia are Meccas of piracy. Though prosperous for a time, these economies are dependent on and subject to the vicissitudes of business cycles. They are capital sensitive, inherently unstable and with no real long term prospects if they fail to generate their own intellectual property. They reflect the volatility of the markets for their goods and are overly exposed to trade risks, international legislation and imports. Usually, they specialize in narrow segments of manufacturing which only increases the precariousness of their situation.

The Predator Economies can also be classified:

Generators of Intellectual Property - These are economies that encourage and emphasize innovation and progress. They reward innovators, entrepreneurs, non-conformism and conflict. They spew out patents, designs, brands, copyrighted material and other forms of packaged human creativity. They derive most of their income from licensing and royalties and constitute one of the engines driving globalisation. Still, these economies are too poor to support the complementary manufacturing and marketing activities. Their natural counterparts are the "Industrial Bases". Within the former Eastern Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent, such generators. Israel is such an economy in the Middle East.

Industrial Bases - These are economies that make use of the intellectual property generated by the former type within industrial processes. They do not copy the intellectual property as it is. Rather, they add to it important elements of adaptation to niche markets, image creation, market positioning, packaging, technical literature, combining it with other products or services, designing and implementing the whole production process, market (demand) creation, improvement upon the originals and value added services. These contributions are so extensive that the end products, or services can no longer to be identified with the originals, which serve as mere triggers. Again, Poland, Hungary, Slovenia (and to a lesser extent, Croatia) come to mind.

Consumer Oriented economies - These are Third Wave (Alvin Toffler's term), services, information and knowledge driven economies. The over-riding set of values is consumer oriented. Wealth formation and accumulation are secondary. The primary activities are concerned with fostering markets and maintaining them. These "weightless" economies concentrate on intangibles: advertising, packaging, marketing, sales promotion, education, entertainment, servicing, dissemination of information, knowledge formation, trading, trading in symbolic assets (mainly financial), spiritual pursuits, and other economic activities which enhance the consumer's welfare (pharmaceuticals, for instance). These economies are also likely to sport a largish public sector, most of it service oriented. No national economy in CEE qualifies as "Consumer Oriented", though there are pockets of consumer-oriented entrepreneurship within each one.

The Trader economies - These economies are equivalent to the cardiovascular system. They provide the channels through which goods and services are exchanged. They do this by trading or assuming risks, by providing physical transportation and telecommunications, and by maintaining an appropriately educated manpower to support all these activities. These economies are highly dependent on the general health of international trade. Many of the CEE economies are Trader economies. The openness ratio (trade divided by GDP) of most CEE countries is higher than the G7 countries'. Macedonia, for instance, has a GDP of 3.6 Billion US dollars and exports and imports of c. 2 billion US dollars. These are the official figures. Probably, another 0.5 billion US dollars in trade go unreported. Additionally, it has one of the lowest weighted customs rate in the world. Openness to trade is an official policy, actively pursued.

These economies are predatory in the sense that they engage in zero-sum games. A contract gained by a Slovenian company - is a contract lost by a Croatian one. Luckily, in this last decade, the economic cake tended to grow and the sum of zero sum games was more welfare to all involved. These vibrant economies - the hope of benighted and blighted regions - are justly described as "engines" because they pull all other (scavenger) economies with them. They are not likely to do so forever. But their governments have assimilated the lessons of the 1930s. Protectionism is bad for everyone involved - especially for economic engines. Openness to trade, protection of property rights and functioning institutions increase both the number and the scope of markets.

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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 subtractors 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".)

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. 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 20th 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 maximisers). 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.

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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 attaché 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, prioritising. 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 policy 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, non-cash, 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 institution is 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. In parallel, 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 has 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 affect 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.

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Liquidity or Liquidation

Large parts of the world today suffer from a severe liquidity crisis. The famed globalisation of the capital markets seems to confine itself, ever more, to the richer parts, the more liquid exchanges, and the more affluent geopolitical neighbourhoods. The fad of "emerging economies" has all but died out. Try telling the Macedonians about global capital markets: last year, the whole world invested 8 million USD in their poor country. Breadwinners earn 300 DM a month on average. Officially, in excess of one third of the workforce is unemployed. Small wonder that people do not pay their bills, employers do not pay salaries, the banking system has a marked tendency to crash every now and then and the average real default rate is 50%.

Illiquidity erodes the trust between the economic players. Such trust is a precondition to the existence of a thriving, modern economy. We all postpone the gratification of our desires: we save now and consume later, for instance or we sell goods or services and get paid a month later. Such postponement of gratification is at the heart of the economic machine of the new age. It cannot be achieved, however, if the players do not trust each other to fulfil their promises (to pay, for example). Alternatively, the state can instate an efficient court system, aided by active law enforcement agencies. Keeping promises can be imposed to counter the natural tendency to ignore them.

The countries in transition lack both: liquidity necessary to keep one's monetary word and the legal system to force him to do so if he reneges. Small wonder that solutions are actively being sought by all involved: the business community, the state, the courts and even by consumers.

In this article, we will describe a few of the global trends. The trends are global, the reaction is world-wide because the problem is global. Bouncing checks have become a household reality in places as rich as Israel, for instance. The mounting crisis in Southeast Asia foreshadows bankruptcies and delinquencies on a chilling scale.

The simplest method is to revert to a cash economy. Payments are accepted only in cash. This, naturally, slows the velocity of money-like products and diminishes their preponderance, obstructing the expansion of economic activity. An even more malignant variant is the barter economy. Goods and services are swapped on a no-cash basis. It is money that generates new value added (by facilitating the introduction of new technology, to mention but one function). In the absence of money, the economy stagnates, degenerates and, finally, collapses because of massive mismatches of supply and demand aggregates and of the types of goods and services on offer and demanded. Still, this system has the advantages of keeping the economic patient alive even following a massive liquidity haemorrhage. In the absence of barter economy, the economy might have ground to a complete halt and deteriorated to subsistence agriculture. But barter is like chemotherapy: it is good for a limited period of time and the side effects are, at times, worse than the disease.

In many countries (Georgia, to mention one) defaults are prevented by demanding prepayment for projected consumption. Let us take the consumption of electricity as an example: many heavy users and numerous households do not pay their bills at all. To disconnect the electricity is an effective punitive measure but it costs the electricity company a lot of money. The solution? Programmable Electronic Meters. The consumers buy a smart card (very similar to phone-cards). The card allows the buyer to use a certain amount of prepaid electricity and is rechargeable. The consumer pays in advance, electricity is not wasted, the electricity company is happy, the tariffs go down for all the users. Prepayment does have a contracting effect on the demand and usage of electricity - but this is welcome. It just means that people use electricity more efficiently.

A totally different tack is the verification approach. The person making the payment carries with him a card that confirms that he is creditworthy and will honour his obligations. Otherwise, the card also serves as an insurance policy: an entity, not connected to the transaction, guarantees the payment for a fee. This entity is financially viable and strong enough to be fully trusted by the recipient of the payment.

This market in credit guarantees is more developed in the USA (where credit cards have overtaken cash and personal checks as a mode of payment) than in Western Europe. But even in Europe there are credit card equivalents which are very widespread: the Eurocheck card, for instance, is really a credit card, though it usually comes with physical checks and guarantees only a limited amount. One must differentiate the functions of a debit card (with direct and immediate billing of a bank account following a transaction) from those of a credit card. The latter allows for the billing of the account to take place in a given day during the month following the month in which the transaction was effected or converts the payment into a series of instalments (within the credit limits of the cardholder as approved by his bank). But in both cases, the guarantee is there and is the most predominant feature of the system. Such cards seem like a perfect solution but they are not: the commissions charged by the card issuers are outrageous. Between 2 and 10 percent of the payment made go to the pockets of the card issuers. Cards get stolen, forged, lost, abused by their owners, expire. But with the advent of new technologies all these problems should be solved. Electronic POS (point of sale) cash registers, connected through networks of communication, check the card and verify its data: is it valid, is it presented by the lawful owner, was it stolen or lost, is the purchase within the limits of the approved credit and so on. Then, the billing proceeds automatically. Such devices will virtually eliminate fraud. The credit card companies will guarantee the payments, which will be subject to residual crime.

Another fast developing solution is the smart card. These are cards similar to phone cards and they can be charged with money in the bank or through automatic teller machines. These cards (in wide use in Belgium, Austria, Germany and many other countries) contain an amount of money, which is deducted from the cardholders account. The account is billed for every recharge. The card is the electronic (and smart) equivalent of cash and it can be read (=debited) by special teller machines in numerous businesses. When payment is made, the money stored in the card is reduced and the recipient of the payment stores the payment on magnetic media for later delivery to his bank (and crediting of his account).

A more primitive version exists in many countries in Eastern Europe: depositors receive checks exactly corresponding to the amount of money deposited in their account. These checks are as safe as the banks that issued them because they are fully convertible to cash. They are, really, paper "smart cards".

Credit cards and (more cheaply) smart cards are a way to restore confidence to a shattered, illiquid economy. Macedonia should consider them both seriously and encourage them through the appropriate legislation and assistance of the state. For Macedonia, the choice is to be liquid or, God forbid, to economically self-liquidate.

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The Predicament of the Newly Rich

They are the objects of thinly disguised envy. They are the raw materials of vulgar jokes and the targets of popular aggression. They are the Newly Rich. Perhaps they should be dealt with more appropriately within the academic discipline of psychology, but then economics in a branch of psychology. To many, they represent a psychopathology or a sociopathology.

The Newly Rich are not a new phenomenon. Every generation has them. They are the upstarts, those who seek to undermine the existing elite, to replace it and, ultimately to join it. Indeed, the Newly Rich can be classified in accordance with their relations with the well-entrenched Old Rich. Every society has its veteran, venerable and aristocratic social classes. In most cases, there was a strong correlation between wealth and social standing. Until the beginning of this century, only property owners could vote and thus participate in the political process. The land gentry secured military and political positions for its off spring, no matter how ill equipped they were to deal with the responsibilities thrust upon them. The privileged access and the insider's mentality ("old boys network" to use a famous British expression) made sure that economic benefits were not spread evenly. This skewed distribution, in turn, served to perpetuate the advantages of the ruling classes.

Only when wealth was detached from the land, was this solidarity broken. Land - being a scarce, non-reproducible resource - fostered a scarce, non-reproducible social elite. Money, on the other hand, could be multiplied, replicated, redistributed, reshuffled, made and lost. It was democratic in the truest sense of a word, otherwise worn thin. With meritocracy in the ascendance, aristocracy was in descent. People made money because they were clever, daring, fortunate, and visionary - but not because they were born to the right family or married into one. Money, the greatest of social equalizers, wedded the old elite. Blood mixed and social classes were thus blurred. The aristocracy of capital (and, later, of entrepreneurship) - to which anyone with the right qualifications could belong - trounced the aristocracy of blood and heritage. For some, this was a sad moment. For others, a triumphant one.

The New Rich chose one of three paths: subversion, revolution and emulation. All three modes of reaction were the results of envy, a sense of inferiority and rage at being discriminated against and humiliated.

Some New Rich chose to undermine the existing order. This was perceived by them to be an inevitable, gradual, slow and "historically sanctioned" process. The transfer of wealth (and the power associated with it) from one elite to another constituted the subversive element. The ideological shift (to meritocracy and democracy or to mass-democracy as y Gasset would have put it) served to justify the historical process and put it in context. The successes of the new elite, as a class, and of its members, individually, served to prove the "justice" behind the tectonic shift. Social institutions and mores were adapted to reflect the preferences, inclinations, values, goals and worldview of the new elite. This approach - infinitesimal, graduated, cautious, all accommodating but also inexorable and all pervasive - characterizes Capitalism. The Capitalist Religion, with its temples (shopping malls and banks), clergy (bankers, financiers, bureaucrats) and rituals - was created by the New Rich. It had multiple aims: to bestow some divine or historic importance and meaning upon processes, which might have otherwise been perceived as chaotic or threatening. To serve as an ideology in the Althusserian sense (hiding the discordant, the disagreeable and the ugly while accentuating the concordant, conformist and appealing). To provide a historical process framework, to prevent feelings of aimlessness and vacuity, to motivate its adherents and to perpetuate itself and so on.

The second type of New Rich (also known as "Nomenclature" in certain regions of the world) chose to violently and irreversibly uproot and then eradicate the old elite. This was usually done by use of brute force coated with a thin layer of incongruent ideology. The aim was to immediately inherit the wealth and power accumulated by generations of elitist rule. There was a declared intention of an egalitarian redistribution of wealth and assets. But reality was different: a small group - the new elite - scooped up most of the spoils. It amounted to a surgical replacement of one hermetic elite by another. Nothing changed, just the personal identities. A curious dichotomy has formed between the part of the ideology, which dealt with the historical process - and the other part, which elucidated the methods to be employed to facilitate the transfer of wealth and its redistribution. While the first was deterministic, long-term and irreversible (and, therefore, not very pragmatic) - the second was an almost undisguised recipe for pillage and looting of other people' property. Communism and the Eastern European (and, to a lesser extent, the Central European) versions of Socialism suffered from this inherent poisonous seed of deceit. So did Fascism. It is no wonder that these two sister ideologies fought it out in the first half of the twentieth century. Both prescribed the unabashed, unmitigated, unrestrained, forced transfer of wealth from one elite to another. The proletariat enjoyed almost none of the loot.

The third way was that of emulation. The Newly Rich, who chose to adopt it, tried to assimilate the worldview, the values and the behaviour patterns of their predecessors. They walked the same, talked the same, clad themselves in the same fashion, bought the same status symbols, and ate the same food. In general, they looked as pale imitations of the real thing. In the process, they became more catholic than the Pope, more Old Rich than the Old Rich. They exaggerated gestures and mannerisms, they transformed refined and delicate art to kitsch, their speech became hyperbole, their social associations dictated by ridiculously rigid codes of propriety and conduct. As in similar psychological situations, patricide and matricide followed. The Newly Rich rebelled against what they perceived to be the tyranny of a dying class. They butchered their objects of emulation - sometimes, physically. Realizing their inability to be what they always aspired to be, the Newly Rich switched from frustration and permanent humiliation to aggression, violence and abuse. These new converts turned against the founders of their newly found religion with the rage and conviction reserved to true but disappointed believers.

Regardless of the method of inheritance adopted by the New Rich, all of them share some common characteristics. Psychologists know that money is a love substitute. People accumulate it as a way to compensate themselves for past hurts and deficiencies. They attach great emotional significance to the amount and availability of their money. They regress: they play with toys (fancy cars, watches, laptops). They fight over property, territory and privileges in a Jungian archetypal manner. Perhaps this is the most important lesson of all: the New Rich are children, aspiring to become adults. Having been deprived of love and possessions in their childhood - they turn to money and to what it can buy as a (albeit poor because never fulfilling) substitute. And as children are - they can be cruel, insensitive, and unable to delay the satisfaction of their urges and desires. In many countries (the emerging markets) they are the only capitalists to be found. There, they spun off a malignant, pathological, form of crony capitalism. As time passes, these immature New Rich will become tomorrow's Old Rich and a new class will emerge, the New Rich of the future. This is the only hope - however inadequate and meagre - that developing countries have.

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The Solow Paradox

The Productive Hardware

The world is debating the Solow Paradox. Named after the Nobel laureate in economics, it was stated by him thus: "You can see the computer age everywhere these days, except in the productivity statistics." The venerable economic magazine, "The Economist" in its issue dated July 24th, quotes the no less venerable Professor Robert Gordon ("one of America's leading authorities on productivity") - p.20: "...the productivity performance of the manufacturing sector of the United States economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-9 compared to 1972-95, but productivity growth in durable manufacturing stripped of computers has decelerated even more."

What should be held true - the hype or the dismal statistics? The answer to this question is of crucial importance to economies in transition. If investment in IT (information technology) actually RETARDS growth - then it should be avoided, at least until a functioning marketplace is there to counter its growth suppressing effects.

The notion that IT retards growth is counter-intuitive. It would seem that, at the least, computers allow us to do more of the same things faster. Typing, order processing, inventory management, production processes, number crunching are all managed more efficiently by computers. Added efficiency should translate into enhanced productivity. Put simply, the same number of people can do more, faster, more cheaply with computers than they can without them. Yet reality begs to differ.

Two elements are often neglected in considering the beneficial effects of IT.

The first is that the concept of information technology comprises two very distinct economic activities: an all-purpose machine (the PC) and its enabling applications and a medium (the internet). Capital assets as distinct from media assets are governed by different economic principles, should be managed differently and be the subject of different philosophical points of view.

Massive, double digit increases in productivity are feasible in the manufacturing of computer hardware. The inevitable outcome is an exponential explosion in computing and networking power. The dual rules which govern IT - Moore's (a doubling of chip capacity and computing prowess every 18 months) and Metcalf's (the exponential increase in a network's processing ability as more computers connect to it) - also dictate a breathtaking pace of increased productivity in the hardware cum software aspect of IT. This has been duly detected by Robert Gordon in his "Has the 'New Economy' rendered the productivity slowdown obsolete?"

But for this increased productivity to trickle down to the rest of the economy a few conditions have to be met.

The transition from old technologies to a new one (the computer renders many a technology obsolete) must not involve too much "creative destruction". The costs of getting rid of old hardware, software, of altering management techniques or adopting new ones, of shedding redundant manpower, of searching for new employees to replace the unqualified or unqualifiable, of installing new hardware, software and of training new people in all levels of the corporation are enormous. They must never exceed the added benefits of the newly introduced technology in the long run. Hence the crux of the debate. Is IT more expensive to introduce, run and maintain than the technologies that it so confidently aims to replace? Will new technologies be spun off the core IT in a pace sufficient to compensate for the disappearance of old ones? As the technology mature, will it overcome its childhood maladies (lack of operational reliability, bad design, non-specificity, immaturity of the first generation of computer users, absence of user friendliness and so on)?

Moreover, is IT an evolution or a veritable revolution? Does it merely allow us to do more of the same only in a different way - or does it open up hitherto unheard of vistas for human imagination and creativity? The signals are mixed. IT did NOT succeed to do to human endeavour what electricity, the internal combustion engine or even the telegraph have done. It is also not clear at all that IT is a UNIVERSAL phenomenon suitable to all climes and mentalities. The penetration of both IT and the medium it gave rise to (the internet) is not uniform throughout the world even where the purchasing power is similar and even among the corporate class. Countries post communism should take all this into consideration. Their economies may be too obsolete and hidebound, poor and badly managed to absorb yet another critical change in the form of IT. The introduction of IT into an ill-prepared market or corporation can be and often is counter-productive and growth-retarding.

The Cycle of the Internet

Then, of course, there is the Internet.

The Internet runs on computers but it is related to them in the same way that a TV show is related to a TV set. To bundle to two, as is often done today, obscures the true picture and can often be very misleading. For instance: it is close to impossible to measure productivity in the services sector, let alone is something as wildly informal and dynamic as the internet. It is clear by now that the Internet is a medium and, as such, is subject to the evolutionary cycle of its predecessors. Central and Eastern Europe has just entered this cycle while the USA is the most advanced.

The Internet is simply the latest in a series of networks, which revolutionized our lives. A century before the Internet, the telegraph and the telephone have been similarly heralded as "global" and transforming.

So, what should the CEE countries expect to happen to the Internet globally and, later, within their own territories? The issue here cannot be cast in terms of productivity. It is better to apply to it the imagery of the business cycle.

As we said, every medium of communications goes through the same evolutionary cycle:

It starts with Anarchy - or The Public Phase.

At this stage, the medium and the resources attached to it are very cheap, accessible, under no regulatory constraints. The public sector steps in: higher education institutions, religious institutions, government, not for profit organizations, non-governmental organizations (NGOs), trade unions, etc. Bedevilled by limited financial resources, they regard the new medium as a cost effective way of disseminating their messages.

The Internet was not exempt from this phase, which is at its death throes. It started with a complete computer anarchy manifested in ad hoc networks, local networks, networks of organizations (mainly universities and organs of the government such as DARPA, a part of the defence establishment, in the USA). Non-commercial entities jumped on the bandwagon and started sewing these networks together (an activity fully subsidized by government funds). The result was a globe-encompassing network of academic institutions. The American Pentagon established the network of all networks, the ARPANET. Other government departments joined the fray, headed by the National Science Foundation (NSF) which withdrew only lately from the Internet.

The Internet (with a different name) became public property - with access granted to the chosen few.

Radio took precisely this course. Radio transmissions started in the USA in 1920. Those were anarchic broadcasts with no discernible regularity. Non commercial organizations and not for profit organizations began their own broadcasts and even created radio broadcasting infrastructure (albeit of the cheap and local kind) dedicated to their audiences. Trade unions, certain educational institutions and religious groups commenced "public radio" broadcasts.

This is followed by the Commercial Phase.

When the users (e.g., listeners in the case of the radio, or owners of PCs and modems in the example of the Internet) reach a critical mass - the business sector is alerted. In the name of capitalist ideology (another religion, really) it demands "privatisation" of the medium. This harps on very sensitive strings in every Western soul: the efficient allocation of resources which is the result of competition; corruption and inefficiency which are naturally associated with the public sector ("Other People's Money" - OPM); the ulterior motives of members of the ruling political echelons (the infamous American Paranoia); a lack of variety and of catering to the tastes and interests of certain audiences; the equation private enterprise = democracy and more.

The end result is the same: the private sector takes over the medium from "below" (makes offers to the owners or operators of the medium - that they cannot possibly refuse) - or from "above" (successful lobbying in the corridors of power leads to the appropriate legislation and the medium is "privatised").

Every privatisation - especially that of a medium - provokes public opposition. There are (usually founded) suspicions that the interests of the public were compromised and sacrificed on the altar of commercialisation and rating. Fears of monopolization and cartelisation of the medium are evoked - and justified, in due time. Otherwise, there is fear of the concentration of control of the medium in a few hands. All these things do happen - but the pace is so slow that the initial fears are forgotten and public attention reverts to fresher issues.

A new Communications Act was legislated in the USA in 1934. It was meant to transform radio frequencies into a national resource to be sold to the private sector, which will use it to transmit radio signals to receivers. In other words: the radio was passed on to private and commercial hands. Public radio was doomed to be marginalized.

The American administration withdrew from its last major involvement in the Internet in April 1995, when the NSF ceased to finance some of the networks and, thus, privatised its hitherto heavy involvement in the net.

A new Communications Act was legislated in 1996. It permitted "organized anarchy". It allowed media operators to invade each other's territories.

Phone companies will be allowed to transmit video and cable companies will be allowed to transmit telephony, for instance. This is all phased over a long period of time - still, it is a revolution whose magnitude is difficult to gauge and whose consequences defy imagination. It carries an equally momentous price tag - official censorship. "Voluntary censorship", to be sure, somewhat toothless standardization and enforcement authorities, to be sure - still, a censorship with its own institutions to boot. The private sector reacted by threatening litigation - but, beneath the surface it is caving in to pressure and temptation, constructing its own censorship codes both in the cable and in the internet media.

The third phase is Institutionalisation.

It is characterized by enhanced activities of legislation. Legislators, on all levels, discover the medium and lurch at it passionately. Resources, which were considered "free", suddenly are transformed to "national treasures not to be dispensed with cheaply, casually and with frivolity".

It is conceivable that certain parts of the Internet will be "nationalized" (for instance, in the form of a licensing requirement) and tendered to the private sector. Legislation will be enacted which will deal with permitted and disallowed content (obscenity? incitement? racial or gender bias?).

No medium in the USA (not to mention the wide world) has eschewed such legislation. There are sure to be demands to allocate time (or space, or software, or content, or hardware, or bandwidth) to "minorities", to "public affairs", to "community business". This is a tax that the business sector will have to pay to fend off the eager legislator and his nuisance value.

All this is bound to lead to a monopolization of hosts and servers. The important broadcast channels will diminish in number and be subjected to severe content restrictions. Sites, which will not succumb to these requirements - will be deleted or neutralized. Content guidelines (euphemism for censorship) exist, even as we write, in all major content providers (CompuServe, AOL, Prodigy).

The last, determining, phase is The Bloodbath.

This is the phase of consolidation. The number of players is severely reduced. The number of browser types will be limited to 2-3 (Netscape, Microsoft and which else?). Networks will merge to form privately owned mega-networks. Servers will merge to form hyper-servers run on supercomputers. The number of ISPs will be considerably diminished.

50 companies ruled the greater part of the media markets in the USA in 1983. The number in 1995 was 18. At the end of the century they will number 6.

This is the stage when companies - fighting for financial survival - strive to acquire as many users/listeners/viewers as possible. The programming is shallowed to the lowest (and widest) common denominator. Shallow programming dominates as long as the bloodbath proceeds.

In hindsight, 20 years hence, we might come to understand that computers improved our capacity to do things differently and more productively. But one thing is fast becoming clear. The added benefits of IT are highly sensitive to and dependent upon historical, psychosocial and economic parameters outside the perimeter of the technology itself. When it is introduced, how it is introduced, for which purposes is it put to use and even by who it was introduced - largely determine the costs of its introduction and, therefore, its feasibility and contribution to the enhancement of productivity. The CEE countries better take note.

(Article written on July 26, 1999 and published August 9, 1999

in "Central Europe Review" volume 1, issue 7)

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E P I L O G U E

The Balkans, an eternal crossroad of different civilizations and cultures even today, is considered to be the "navel of the world" or as Sam Vaknin puts it in his erratic, eruptive, intellectual volcano of a book, "After the Rain - How the West Lost the East" - "is the unconscious of the world" ("The Mind of Darkness") or worse, probably a navel, but "the Balkan is a body without a brain" ("Homo Balkanus").

There are a few other, similarly neuralgic points on Earth, but what distinguishes the Balkans from the rest is that it is precisely via its central part - Macedonia - that Christianity and modern literacy invaded Europe. The Byzantine civilization - traceable in today's Balkans as a junction of the Hellenic spirit and the wisdom of Byzantium, deeply rooted in the cultures of Babylon and the old Mesopotamian civilizations - is still of high interest to modern scholars of the Balkans.

Dr. Sam Vaknin is one of these contemporary detectors of the "transitions" in the East, who is trying to discover, understand and direct the Balkans and the East through his publicist work. In his book "After the Rain - How the West Lost the East", Dr. Sam Vaknin is a sincere investigator of the "Homo Balkanus", of the Easterner, his mind, culture and way of living, defining him "a full fledges narcissist". Immediately after that, in "The Magla Vocables" he says that even linguistically "it is impossible to really understand an Easterner", mocking or more precisely reaching the level of real offence in portraying the image of the intellectuals of the East ("The Poets and Eclipse").

Reading this large book of essays, however, one should bear in mind that the author is limited by the clichés of his framework of values and thinking given to him by the culture and system of rules from which he originated. Thus, his articles are provocative, turbulent, irritating, revolting. The impact of his writing is terrible with the strength of hurricane. His word often kill, his defeatism nullifies. Sometimes pretentious, still "After the Rain" represents a serious, lucid and transcendent effort to make the Balkan closer, to introduce the East to the West, ignoring for a moment the pessimistic assertion that the West already lost the East.

But if this were right, it would have meant that the West is lost, had disappeared in the East. The truth is completely the opposite: The West has yet to find the East. The East, which provided the foundation of contemporary Western civilization, literacy and Christianity, still hibernates within its traditional values as an essential element of the endurance of the people and perhaps as the unique salvation of mankind. The West has to burst into the wisdom of the East to keep the very roots of life, the wisdom to live in peace and in harmony with God and with nature. If this should not happen, we will all finish like in Aldous Huxley's "Brave New World".

Consequently, when reading these essays, it will not be asking for much to have a dose of restraint towards Dr. Vaknin's sometimes lethal "absolute truths" regarding the Balkans and the East. After you finish reading this book, you can find out not only what the East is - but also what the East is, indeed, not. This is because Dr. Vaknin observes the Balkan and the East only from the dark side, regarding its people as zombies who do not have any idea at all why they are walking on this Earth. Unfortunately for him, life, neither in the Balkans in particular, nor in the East in general, is a pathology as he enjoys saying. That is why some of his articles contain an overly heavy-handed personal touch, momentary sensations and impressions too strong, amounting to exaggeration, or, in other words, he puts things headlong.

In "The MinMaj Rule" his paranoiac fear of the "nation-state" can be felt. His perversity reaches a climax when he finds a justification for the West and its three months long NATO bombing of Yugoslavia (an act without precedent in modern history, which indeed resulted in the same pitiless kind of bombing in Chechnya) and in the acknowledgment that for the Albanian residents of Kosovo "it has not protected their right to self-determination".

Dr. Vaknin likes to see the state as "a community, a majority of minorities united by common rules, beliefs and aspirations ... no longer utopian, it is a realistic model to emulate". In "Herzl's Butlers", he even goes further and in the modern nation state he sees "a reflection of something more primordial, of human nature itself as it resonated in the national founding myths (most of them fictitious or contrived)". Still, he is sufficiently honest to admit that "the Jews (and Germans) came up with the 'objective', 'genetic', 'racial' and 'organic' nation". Indeed, through the periodically harsh critique of the West's actions in the East, transferring into its body Western malignant cells of mafia, drugs, organized crime, corruption etc., the careful reader will discover the glorification of the subjugation of the East by the West.

Dr. Sam Vaknin is not the first one to try to put all the books which deal with the so called "world conspiracy" in the domain of illusion or man's gullibility ("The Elders of Zion"). That was done before in a fine literary manner mixed with factography by another Jew (by father), the writer Danilo Kish from ex-Yugoslavia, in his novel "A Book about Kings and Fools". But if Danilo Kish was exploring the world archives to prove that it is only by coincidence or through an accidental knot of circumstance that "the book of Nillus" about a "world conspiracy" was created, thus far Dr. Vaknin is not only mocking the intellectuals and ordinary mortals of the East, but he humiliatingly attributes the existence of that "conspiracy" to the "paranoiac and schizoid nature" of their minds.

It is interesting that the author uses a tour of the abundant history of the region just to explain the "darkness" of today's. Or, without necessity and astonishingly, he is giving a huge treatment only to the idea of the - in essence illusory and never existing - "Great Albania", adapting history for his own needs. He even smoothly, in only few lines, gives "the definite historical truths" about the Illyrians and their descendents, a subject on which historians composed large tomes and which they investigated all their lives and about which they still have dilemmas.

Finally, where does Dr. Vaknin think that the West lost the East? Is it on its way from Babylon towards some new "promised lands"? Or, is it maybe - After the Rain - in a Biblical flood?

Although both in the West as well as in the East, it is precisely the Jewish version of the Bible out of the thirteen existing ones that is the dominant (a version which is rather a copy of the prehistoric Bible text of the Sumerians from Mesopotamia) - nevertheless God promised himself: "Never again will I curse the ground because of man, however evil his inclinations may be from his youth upwards" and God said: "This is the sign of the covenant which I establish between myself and you and every living creature with you, to endless generations:

My bow I set in the cloud,

Sign of the covenant

Between myself and earth.

When I cloud the sky over the earth,

The bow shall be seen in the cloud.

Then will I remember the covenant which I have made between myself and you and living things of every kind. Never again shall the waters become a flood to destroy all living creatures. The bow shall be in the cloud; when I see it, it will remind me of the everlasting covenant between God and living things on earth of every kind."

In the Balkans, all things aside, this blessing of God - the bow - can be often felt and enjoyed. Or as one of our proverbs says - After the Rain always cometh the Sun!

Emilija Geleva

Skopje, February 2000

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T H E A U T H O R

SHMUEL (SAM) VAKNIN

Curriculum Vitae

Born in 1961 in Qiryat-Yam, Israel.

Education

Graduated a few semesters in the Technion - Israel Institute of Technology, Haifa.

Ph.D. in Philosophy (major: Philosophy of Physics) - Pacific Western University, California, USA.

Graduate of numerous courses in Finance Theory and International Trading.

Certified E-Commerce Concepts Analyst.

Certified in Psychological Counselling Techniques.

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 counter-trade 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

Free-lance 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.

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.

1995 on

Publisher and Editor of a Capital Markets Newsletter distributed by subscription only to dozens of subscribers countrywide.

In a legal precedent - studied in business schools and law faculties across Israel - was tried for his role in an attempted take-over 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.

Collaborated with the Agency of Transformation of Business with Social Capital.

Economic commentator in "Nova Makedonija", "Dnevnik", "Makedonija Denes", "Izvestia", "Argumenti i Fakti", "The Middle East Times", "The New Presence", "Central Europe Review", other periodicals and in the economic programs on various channels of Macedonian Television.

Chief Lecturer in courses organised by the Agency of Transformation, by the Macedonian Stock Exchange and Ministry of Trade.

1999 to Present

Economic Advisor to the Government of the Republic of Macedonia.

Web Activities

Author of extensive web sites in:

Psychology ("Malignant Self Love") - An Open Directory Cool Site, Philosophy ("Philosophical Musings"), Economics and Geopolitics ("After the Rain").

Owner of the Narcissism Revisited Announcement and Study List (more than 830 members) and the After the Rain CEE and Balkans Announcement and Study List.

Editor of mental health disorders and Central and Eastern Europe categories in web directories (Open Directory, Suite 101, Go.com, Search Europe).

Weekly columnist in "The New Presence" and "Central Europe Review".

Publications and Awards

"Managing Investment Portfolios in States of Uncertainty", Limon Publishers, 1988;

"The Gambling Industry", Limon Publishers, 1990;

"Requesting my Loved One - Short Stories", Yedioth Aharonot, 1997;

"The Macedonian Economy at a Crossroads - On the Way to a Healthier Economy", (Dialogues with Mr. Nikola Gruevski), 1998;

"Malignant Self Love - Narcissism Revisited", Narcissus Publications, 1999;

"The Exporters' Pocketbook", Ministry of Trade, Republic of Macedonia, 1999;

"The Suffering of Being Kafka" (electronic book of Hebrew Short Fiction);

"After the Rain - How the West Lost the East", Narcissus Publications in association with Central Europe Review / CEENMI, 2000.

Winner of numerous awards, among them the Israeli Education Ministry Prize (Literature) - 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 finances and the economy.

Numerous articles dealing with geopolitical and political economic issues.

Many appearances in the electronic media on subjects in philosophy and the sciences and concerning economic matters.

Write to Me:

palma@unet.com.mk

samvak@briefcase.com

My Web Sites:

Economy / Politics:

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

Psychology:

http://samvak.tripod.com/index.html

Philosophy:

http://samvak.tripod.com/culture.html

Poetry:

http://samvak.tripod.com/contents.html

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 was born in Israel in 1961. A financial consultant and columnist, he lived and published in 11 countries. An author of short stories, the winner of many literary awards, an amateur philosopher - he is a controversial figure. This is his tenth book.