KWR INTERNATIONAL ADVISOR
2002 Volume 4 Edition 3
In this issue:
Advisor below, or click on title for single article window)
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Corporate Bond Market Uncertain Times
Scott B. MacDonald
remain constructive about the rest of the year for the corporate
bond market, though there are many uncertainties - the possibility
of another terrorist attack, the potential for a U.S. war against
Iraq, and a double-dip recession. Another al-Qaeda terrorist attack
on U.S. soil would be a blow to confidence, while it is difficult
to quantify the impact of a U.S. war against Iraq. A double-dip
recession would obviously be a big negative. Although we do not
rule out a double dip recession, we expect the U.S. economy to
muddle through. The combination of auto sales, mortgage refinancing,
and housing, plus one more Fed interest rate cut, will allow the
economy to slide by at around 2.5% for 2002. That stated, we still
expect investors to remain very sensitive to any negative news
on the economy and to remain focused on corporate earnings (in
late September and October for Q3). The equity market will continue
to be exceedingly volatile, with seismic-like daily shifts.
Much depends on restoring investor confidence. In August, when
we enjoyed a short-lived equity market rally, the corporate bond
market saw spread tightening and new issuance. During the third
week of August, 28 issuers came forward and brought $16.36 billion
in bonds to market, the largest weekly number since March 2002's
$26.9 billion. While some economic numbers helped nudge the rally,
there was also a sense of relief that most major companies made
it through the August 14th CEO and CFO earnings accountability
signings without major problems. Indeed, the corporate governance
issue, barring any new scandals, is likely to fade as a concern.
It is estimated that potential new investment grade corporate
bond issuance for the remaining months of 2002 could be between
$90-$100 billion, at least part of which comes from the need to
refinance as debt comes due. The next major trigger for the corporate
bond market is likely to be Q3 corporate earnings, which start
in late September. As corporate governance issues fade, attention
will return to more fundamental credit concerns about profitability,
debt management, and liquidity. Related to this is the pace of
the economy. Most economists are looking for real GDP growth in
Q3 in excess of 3%, followed a slower pace in Q4. That could help
provide some traction for better corporate earnings through the
end of the year. However, there remains considerable nervousness
in corporate America and most managers are still looking to trim
capital spending -- not increase it. The earnings announcements
of the large brokerages, such as Morgan Stanley, thus far have
not set a positive tone. JPMorgan Chase's problems, including
ratings downgrades, have not helped.
It should also be understood that the drop in U.S. unemployment
from 5.9% to 5.7% was largely due to job creation in government,
while manufacturing actual had a drop in employment. As we see
consumer demand remaining in positive territory, the most likely
outcome is that the economy on a whole will not get much worse,
but it will not get much better. The same can be said for the
corporate bond market.
with Korea's Leading Venture Capitalist:
Mr. Ki-Woong Baek, CEO of KTBnetwork
the Interview IN
By Keith W. Rabin
this issue the KWR International Advisor interviews Mr. Ki-Woong
Baek, CEO of KTBnetwork (KTB), Korea's oldest and largest
venture capital firm. KTB possesses a twenty-year history, 20%
market share and a record of about 1,000 investments and 170 public
offerings on the KSE, KOSDAQ and NASDAQ stock exchanges.
Mr. Baek is a leading figure in the Korean venture industry, having
engineered many substantial transactions since joining KTB in
1999. This includes eBay's majority investment in Korea's
leading cyber-auction house Internet Auction Co. Ltd. in a deal
valued at approximately $120 million . Rising to the CEO position
in only two and a half years, Mr. Baek joined KTB after a distinguished
career as a senior manager at the Hyundai Group and SK Telecom.
In this capacity he developed the marketing, planning, financing,
and other management skills that have helped him gain one of the
most enviable investment records in this emerging sector. Mr.
Baek holds a Bachelor of Science degree in Mechanical Engineering
from Hanyang University in Seoul, Korea.
Mr. Baek has graciously agreed to the following interview with
Mr. Keith W. Rabin, publisher of the KWR
||KTBnetwork is Korea's
largest Venture Capital company. Can you tell us more about
your organization and personnel as well as the emerging venture
phenomenon in Korea? How has your organization and venture
investment in Korea evolved over the past two decades?
||Most venture companies
have suffered over the past two years and we are no exception.
Given our financial strength, however, we are using this time
to refocus and renew our competitiveness. To facilitate this
process, we began working with Bain & Company, a renowned
management-consulting firm, last year. The vision that we
developed will help KTB to diversify its investment focus
and to advance our operations beyond Korea. Our goal is to
establish a leading global investment firm by the end of this
decade. To achieve this vision, we are actively improving
our core capabilities in venture capital and corporate restructuring,
while expanding the entertainment and overseas facets of our
As a result, KTB registered to become the first Corporate
Restructuring Company (CRC) in Korea. We are currently the
most robust company domestic or foreign -- in this
sector with a number one market position. Since entering this
field as a pioneer in 1999, we have assembled a team of top-tier
experts, building an excellent market reputation and abundant
capital -- totaling 43% of total corporate restructuring funds
in Korea. As the undisputed leader, we have, as of the end
of last year, invested 336 billion won in 34 companies. This
includes positions in StarCo, Wise Control, Samhan and Kumkang
Industrial, which emerged from bankruptcy or court receivership
status and Curitel, Korea PTG, Dongshin Pharmacy and Samsung
Pharmacy, which are rapidly moving to normalize their operations.
While the Korean restructuring business is at most three years
old, we have made substantial progress and look forward to
realizing considerable profits in this sector during the latter
half of this year.
By introducing this value-oriented and restructuring component
to our business we seek to differentiate ourselves from firms
such as Softbank and CMGI who retain their primary focus on
technology. This will help to stabilize our profitability
and revenue flow.
I would add, however, that venture capital is a business that
bets on the future. Therefore, there will always be an element
of uncertainty in what we do. The current market environment
exacerbates these inherent difficulties yet I am certain we
will overcome these problems and emerge even stronger in the
REST OF THE INTERVIEW
Buyside Magazine reaches active institutional investors monthly with news and analysis of the equities markets. Buyside takes readers beyond news of the current business climate to report industry and market trends that are crucial for investors to understand -- not simply the latest business trends or product releases. Buyside and BuysideCanada are available in print, and online at www.buyside.com. Subscriber information is available on Buyside's home page.
The U.S. Economy: A Few Bad Apples or Tip of the Iceberg?
Keith W. Rabin & Scott B. MacDonald
In the face of massive stock
market volatility, wealth erosion and concern over almost accounting
and corporate governance scandals, there is considerable discussion
about the need to cull the few "bad apples" that are
giving U.S. business a bad name.
Many analysts and television talking heads note that Main Street
is demanding the culprits be apprehended and made to do hard time.
Congress has been busy passing legislation to deal with corporate
sleaze. This thinking reflects the common perception that most
corporations are managed by honest people and that the main task
at hand is to root out the egregious examples of fraud that are
shattering investor confidence. Then, it is believed, market concern
can be alleviated and U.S. firms can return to what they do best
- make profits. With U.S. business refocused on profits (as well
as better corporate governance), the economic recovery will be
assured, the stock market will go back up, and the American public
will regain lost confidence in buying securities.
While it is true that most managers are honest and indeed critical
to make examples of executives who commit criminal fraud, this
type of thinking misses the boat. Yes, the outright deception
that characterized the Enron, WorldCom, Tyco and other debacles
are special cases, but the late 1990s tendency to engage in highly
aggressive accounting practices was highly pervasive -- even though
most firms remained within the lines of ethical corporate behavior.
It should be remembered that following the Arthur Andersen debacle,
there are now 2,400 ex-Andersen accounts forced to reexamine everything
that was reported over the last several years. This will have
a negative effect on earnings moving forward. It is probable that
at the very least a number of firms will have to restate earnings
- not a good signal to an already highly sensitive bear market.
Therefore, one might view the current paradigm as more similar
to exposing the tip of the iceberg than the need to clean out
a few bad apples.
As the late 1990s Internet boom accelerated, traditional rules
of business behavior and corporate valuation were eroded. In the
land grab that characterized this era, growth of market share
was seen by many to be more important than profitability. Many
concluded it was better to invest in new, speculative firms who
had little more than a business plan and venture capital funding.
These enterprises enjoyed massive capital inflows without the
need to endure the analytical rigors and performance expectations
imposed upon companies with real revenues and operating histories.
Emerging firms such as Amazon, eBay and eToys quickly amassed
market capitalizations that were larger than many Fortune 50 corporations.
To remain competitive, established firms turned to high-octane
financial engineers. As if by magic, they transformed balance
sheets and income statements in a manner that delivered the progressively
improving performance demanded by the financial community. Two
exemplars of this trend, Andrew Fastow of Enron and Scott Sullivan
of WorldCom, were lionized for their achievements and recognized
as being in the forefront of business finance. Each received "Best
CFOs" ratings in annual competitions by CFO Magazine. Corporate
finance managers recognized this change in sentiment and adapted
their institutional values accordingly. The message was clear.
CFOs and controllers who wanted to get ahead adopted an aggressive
stance. Those that maintained a conservative posture were viewed
as old-fashioned relics of the past.
Today, we are presented with a very different dynamic. Many of
the practices seen as highly clever and cutting edge only a year
or two ago are now viewed as scandalous. Good, conservative accounting
practices, which could likely have been grounds for dismissal
in 1997-2000, are now seen as desirable virtues. Corporate behavior
is beginning to reflect this new reality. This in essence is what
is so troubling about the current "bad apple" debate,
which maintains that once the few fragrantly fraudulent offenders
are rooted out, the "silent majority" of good, honorable
companies can regain the valuations they deserve. Matters are
not so black and white nor is it a case of good versus evil.
Accounting is far more art than science. As anyone who has engaged
in the preparation of complex financial statements can observe,
numerous subjective judgements are required as to how to classify
and treat each and every item. President Bush acknowledged this
phenomenon in a press conference. When asked about Harken Energy,
he noted something to the effect "in the corporate world,
not everything is black and white and sometimes there are honest
disagreements on how to account for complex transactions."
As the smell test of what is normal and ethical shifts from overly
aggressive to even mildly conservative, it will have profound
implications on the standards that govern audits and the behavior
of corporate finance professionals. Most corporations - whether
or not they have engaged in any fraudulent behavior -- will be
far more reserved in their accounting and corporate profitability
will inevitably suffer as a result. This represents an obstacle
that has not been sufficiently recognized or factored into the
expectations of many analysts and investors.
It therefore does not seem realistic to imagine that even if the
U.S. could show dramatic 2002 GDP growth beyond the 2-3% anticipated
by most economists, that we will see the earnings revisions that
will lead to the rapid upwards valuations needed to lift share
Far more likely is a continuation of the current scenario, in
which we continue to slowly work off the excesses of the dot.com
era. Real growth and achievements will be masked by a continual
procession of announcements concerning accounting and other irregularities
- not to mention the major uncertainties caused by the continuing
war on terrorism. In the end corporate America will emerge all
the stronger. However, a belief that we simply have to uncover
all the "bad apples" to rectify all that is wrong with
the current market environment will only delay the ultimate resolution
of these important issues.
Hasn't China's Income Grown as
Fast as its Output?
C.H. Kwan, Senior Fellow, Research Institute of Economy, Trade
and Industry (RIETI), Tokyo
innovation in recent years in the form of modularization has brought
drastic changes to the pattern of division of labor among companies,
as well as among nations. Multinationals have been relocating
their low value-added production processes to developing countries
in pursuit of lower cost. China has taken this opportunity to
establish itself as a major production base for multinationals.
The fast pace of industrialization, however, has not been accompanied
by a rapid increase in China's national income in dollar
terms, as it have been forced to sell at lower and lower prices
in international markets.
Modularization is to decompose industrial processes into segments,
or modules. In the case of personal computers, for instance, respective
modules such as a hard disk and a display are first produced separately,
and then integrated into a complete system. In an industry where
this modularity concept is widely applied, there exist established
design rules and standards concerning the construction of respective
modules. At the same time, modularization also provides flexibility
to accommodate new methods of production within these rules. Processes
within each module are independent from each other, neither affecting
nor being affected by processes in other modules. This makes it
far easier to place orders with different companies to undertake
different production processes, or to become specialized in the
production of a specific module.
Thanks to modularization of production, in many industries, the
profitability at various stages of production has come to follow
a U-shaped curve high at the upstream and downstream processes
and low at the midstream processes (Figure 1). Stan Shih, Chairman
of Taiwan-based Acer Inc., is said to have first coined the term
"smiling curve" to describe this phenomenon. Regarding
personal computers, for example, value added is high at the upstream,
which includes the development of operating systems (OS) and central
processing units (CPU), and at the downstream, which includes
maintenance services. Profitability is lowest in the midstream
process, which involves such labor-intensive processes as assembly.
Modularization eliminates the need for a company to keep all the
production processes in a single place or within the same company.
Today, it is far more efficient to decompose production into a
number of processes linked through a network of suppliers. Indeed,
corporate and industrial reorganization has been taking place
in a way that shifts away from the conventional integrated production
system typically from raw materials to finished products
to one concentrating resources on a specific area of strength.
Likewise, business relations between companies are no longer limited
to trade and capital participation, but also include such diversified
forms as technology tie-ups and original equipment manufacturer
Along with the progress in trade and investment liberalization
in developing countries, inter- as well as intra-company production
networks have become increasingly globalized. In accordance with
respective countries' comparative advantages, labor-intensive
processes tend to concentrate in developing countries that offer
low wages, whereas high-tech processes, such as research and development
(R&D), are undertaken by developed countries. As a result,
there have been growing flows of trade in manufactured goods
especially of parts and intermediate goods between developed
and developing countries. This phenomenon has been called the
"horizontal division of labor," as such exchanges are
being made within the same industry. It had better be termed "vertical
division of labor," however, given the way that processes
are being divided between developed and developing countries respectively,
with the former concentrating on high value-added and the latter
on low value-added processes.
Against this backdrop, China has been taking advantage of its
cheap and abundant labor to attract direct investment by multinationals,
thereby accelerating the pace of industrial development. Exports
of manufactured goods have increased sharply in recent years to
account for 90 percent of China's overall exports in 2001.
Processing trade, which represents roughly half the overall trade
of China, has come to play a more important role in the Chinese
economy. With its share of the world's manufactured exports
rising, China has been widely recognized as the "factory
of the world."
In terms of the smiling curve, however, the segment accessible
to China (as well as other developing countries) is largely limited
to the part around the tip of the chin, i.e., fields where value
added is the lowest. Until the 1970s, as a newly industrializing
country, Japan was fortunate that it did not have to compete with
low-wage countries because manufacturing was highly concentrated
in the industrial countries. Following the end of the Cold War
and the integration of the former socialist countries into the
global economy, however, cheap labor has become more readily available,
and developing countries have been watching their profits fall
amid intensifying competition. The smiling curve is thus getting
steeper and steeper. For China, this means a decrease in the relative
price of the labor services it provides against advanced technologies
imported from developed countries, and a worsening of its terms
of trade. In the sense that an increase in production has not
necessarily led to an increase in real income, China is trapped
in a grave situation of immiserizing growth. To set itself free
from this trap to become a developed country, China must promote
development focusing on the two ends of the smiling curve. But
for this, improving the stock of human capital is vital, and China
has a long way to go.
1. The Smiling Curve
Aoki Masahiko and Ando Haruhiko. Mojuruka: Atarashii Sangyo Akitekucha
no Honshitsu (Modularity: The Nature of New Industrial Architecture),
RIETI Economic Policy Review 4, Toyo-Keizai Shimposha 2002
Related story: "Don't Confuse Made in China'
with Made by China,'" C.H. Kwan, China in Transition,
April 26, 2002 http://www.rieti.go.jp/en/china/index.html
The Best Comeback Story in Asia
Since the "Asian Financial Crisis"
of 1997-98, South Korea has made the greatest tangible effort
to restructure its financial services industry, reform its Chaebols,
and improve public policy making. The leading international
credit rating agencies have taken notice, and have raised the
nation's sovereign credit rating to A3 (Moody's) and
A- (Standard and Poor's). This is the highest rating of
any of the Asian nations most affected by the financial crisis
four years ago. It also reflects the fact that Korea has now
graduated from the ranks of the "emerging markets"
to "developed" economy status. This is not to suggest
that there is not more work to be done. Inefficiencies remain
in the financial, economic and political system. But the progress
made thus far has been admirable.
Looking forward to the final months of 2002, we expect Korean
economic growth to slow but to remain fundamentally healthy.
Exports are poised to continue demonstrating strength, having
increased by 19.9% year-on-year in July and August 2002. Furthermore,
Korea's solid external balance sheet is reinforced by its
strong net foreign asset position of US $44.3 billion in July.
Government finances are stable and in balance. The annualized
fiscal surplus is currently at about 2% of GDP, and surveys
of leading financial economists reveal that the Korean budget
surplus is likely to be in the 1.4% range in FY 2002. At this
time, inflation is not a serious worry. The core CPI was up
by 2.8% in August 2002, and has been consistent throughout the
To the extent that there is reduced economic activity in 2003,
it will likely be due to global weakness rather than any general
stagnation in the Korean economy. Domestic demand was down from
the torrid pace of the first quarter of 2002. We expect Korean
growth of about 6% in FY 2002 and 5.6% in FY 2003. It was 6.3%
in August. Under current economic circumstances, this is quite
robust for an industrialized nation.
Furthermore, the government is cutting back on its economy-boosting
infrastructure spending, such as for roads and other civil engineering
projects, as the economy improves. Government spending rose
4.9% in the second quarter of 2002, compared with 5.5% in the
There are obvious challenges to the Korean economy of course.
On the political front, the December presidential election is
too close to call between three viable candidates. Furthermore,
relations between North Korea and South Korea, although much
warmer of late, will remain unpredictable for the foreseeable
It should also be noted that some analysts have suggested that
if oil prices spike up due to a potential invasion of Iraq and
the consequent turmoil that might follow, a big "if",
then Korea's current account could be pushed into a deficit
of 1.0% of GDP in 2003. This is because as oil imports
increase and exports weaken, global growth could soften. Higher
oil prices would effect Korean domestic consumption, production
costs, and net exports such that GDP growth in 2003 could deteriorate
by 0.8% in 2003. In addition, the balance of payments surplus
that allowed Korea to accumulate $116 billion in foreign exchange
reserves could fall. But we are not forecasting dramatic increases
in oil prices for the foreseeable future. This is because it
is most unclear at this time that there will be an invasion
and, even if there is, it is also the case that Iraq exports
only a fraction of the oil that it did before sanctions were
So Korea remains one of the best economic stories in Asia. Unemployment
remains relatively low at 3.0%. Also, Korea has developed a
consumer culture that was absent before the crisis. Credit cards
are used everywhere and consumer debt is increasing at a pace
typical of OECD levels. But Korea's high savings rate (32.4%
in 2000), its strong household balance sheets, and the resilient
underlying economy suggest little reason for concern about the
sustainability of the debt.
In addition, the nations' financial institutions continue
to improve their balance sheets, although much work remains
to be done in this regard. Non-performing assets have been substantially
reduced though sales, write-downs and restructurings. Overall,
capital at the nation's banks has risen 22% since 1998
and non-performing loans have dropped to just 4.1% of total
loans (down from an "official" peak of 18% of loans
in 1998 and an "estimated" peak of 25%).
We are confident that barring global calamity, Korea will remain
an economic powerhouse in Asia. In fact, since the end of the
financial crisis, investors have been amply rewarded for their
confidence in the Korean credit.
TRIALS: Supachai Panitchpakdi and the new WTO
When former deputy prime
minister of Thailand Supachai Panitchpakdi succeeded Mike Moore
as the director-general of the World Trade Organization (WTO)
in September, he carried the hopes of much of the developed world
with him. As the organization's first leader from Asia and
from a developing country, many non-industrialized nations are
confident that Panitchpakdi will ensure their interests are better
represented on the global stage.
Judging from Panitchpakdi's conduct so far, these hopes seem
well founded. Both before and after assuming his new post, the
director-general has continuously emphasized the need for the
WTO to be more responsive to the demands of its poorer members.
At a conference on global trade held at the United Nations'
regional headquarters in Bangkok in mid-July, he warned that the
failure of past global trade rounds to address the issues crucial
to developing countries such as the continued refusal of
wealthier members to open up their markets to agricultural and
textile imports risked alienating many Asian and African
nations. He called on the world's economic powers to bring
"much-needed concessions to the negotiating table" at
future trade meetings. In addition, he has publicly mulled the
idea of establishing a WTO representative office in the heart
of the developing world, most likely Africa, as many WTO countries
lack the resources to operate permanent missions in the organization's
current headquarters of Geneva. This severely dampens their ability
to participate fully in everyday trade negotiations.
Conscious of the WTO's image as a force that seems answerable
to no one, Panitchpakdi has pledged to increase the organization's
accountability by boosting its cooperation with local governments,
non-governmental organizations and the public. This, he stated
at the conference, would "create more understanding"
regarding the WTO and its raison d'etre. He has also expressed
a determination to overhaul the WTO's complex and
frequently bogged-down dispute resolution processes, by
making litigation more difficult for members to initiate. "We
need to emphasize that developing countries should be helped more
than in the past and that the process of dispute settlement is
conducted in such a way to postpone litigation as long as possible
litigation is too costly. We must find other options,"
he told participants in the Bangkok conference.
While Panitchpakdi's sentiments are clearly noble
and provide good reason for developing nations to celebrate
the realities of his new position are somewhat less encouraging.
The foremost pressure on the new director-general is time; bickering
over who would take the WTO's top post led members in 1999
to split the six-year term between Panitchpakdi and his predecessor,
Moore. This gives him only three years to bring much-needed change
to the corridors of power in Geneva.
Even before his three years are up, Panitchpakdi faces a more
pressing deadline. At talks in Doha, Quatar, last November, WTO
members agreed to conclude the next round of trade negotiations
by 2004. As the organization's leader, Pantichpakdi's
primary task is to push the WTO countries to wrap up these talks
ahead of the deadline, a task that is almost certain to be an
uphill battle. The negotiations span an unprecedented range of
topics and issues. Nearly all of them are contentious, including
the liberalization of trade in services and the establishment
of international rules governing intellectual property, competition,
and countries' biological resources.
Recent unilateral moves by the WTO's more powerful members
will likely make future trade talks even more trying. The US has
demonstrated its resistance to compromise by passing a bill that
grants massive subsidies to domestic farmers and imposing tariffs
on a variety of imported steel products, angering many developing
countries in the process. In addition, the various members of
the WTO can by no means be grouped into clear-cut "developed"
and "developing" camps. Even nations of similar economic
status often find themselves at loggerheads, as demonstrated by
the European Union's WTO-sanctioned decision in September
to levy $4 billion of tariffs against American products as retribution
for a US foreign-sales tax break. Despite the WTO's promise
to focus the next round of trade talks on poor countries, high-profile
cases like these show it is economically powerful nations that
are once again poised to top the agenda. Though he appears to
be facing formidable obstacles, Panitchpakdi has spared no effort
to emphasize his confidence that the talks will proceed on schedule.
"It is sometimes arduous in pursuing negotiations, but we'll
meet the deadline as best as possible," he said in Bangkok.
"I'm optimistic we'll be on track."
Crucially, Panitchpakdi seems to have realized that his position
itself is a delicate balancing act. His leadership has been championed
for so long by developing countries, it is only natural that the
WTO's industrialized members would view him with some degree
of suspicion, a fact that he seems to have taken into account.
Though he has called for developed nations to make room for further
imports in their markets, he has been equally critical of poorer
nations, many of which have established protectionist barriers
of their own. And his views that the WTO needs to streamline some
of its inner processes could hardly be contested by members on
any side of the political divide.
Thus far, Panitchpakdi has demonstrated foresight, a keen perception
and diplomatic savvy. Though it remains to be seen if his tenure
will bring about the much-needed change so many voices
from both within and outside the WTO are calling for, the
proposals he has put forward seem to bode well for the future.
Even the implementation of one of the initiatives he has discussed
the establishment of a WTO office in Africa, for example
would go a long way toward convincing the WTO's critics
that it has taken their concerns into account.
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on the Mind: Foreign Investment Hurdles
Scott B. MacDonald
has long held an attraction for U.S. business. Indeed, there is
now an intense debate in the U.S. Congress over whether to abandon
the U.S. economic embargo on the country, with the U.S. agricultural
lobby pushing hard for the right to sell its goods to Cuba. Well
before the break between the United States and Cuba following
Fidel Castro's coming to power in 1959, American businessmen were
highly active in the island-state. Since the 1960s, U.S. business
has been almost entirely absent, forced to leave the field to
the Europeans, Canadians, Japanese and other Caribbean and Latin
American economies. Yet, for all the criticism U.S. policy toward
Cuba has received, especially over the boycott on investing in
the Caribbean nation, it is not been smooth sailing for the Europeans,
Canadians and others. Indeed, Cuba has been a difficult business
Foreign companies operating in Cuba contend with excessive red
tape, lengthy negotiations with the government, and sometimes
a lack of skilled talent. The European Union, the largest foreign
investor, recently complained to the Cuban government about a
lack of information on business laws and regulations as well as
their discriminatory application vis-à-vis foreign firms.
In addition, the EU indicated that its country's businesses operating
in Cuba were forced to repeatedly renew visas and work permits,
eating up valuable time.
Although the Cuban government became more flexible in terms of
allowing foreign investment into the country during the crisis
years of the 1980s, it remains opposed to the idea of privatization
nor will it provide foreign investors access to much of the economy.
Tourism, once a shining new sector that helped to generate badly
needed foreign exchange, has slumped and investment which averaged
$268 million over the last five years, trickled to a meager $38.9
million in 2001.
The E.U.'s official complaint was acknowledged by the Cuban government,
which indicated it would seek to reduce red tape and shorten the
length of negotiations between the local bureaucracy and foreign
companies. These negotiations currently take about a year.
The Cuban government has another incentive for easing foreign
business regulations. Considering that Cuba is largely dependent
on external energy sources, it is actively courting foreign companies
to invest more in offshore oil exploration. Some 59 exploration
contracts in Cuba's 112,000-sq km section of the Gulf of Mexico
have been put up for auction. As the London-based Latin American
Caribbean & Central America Report (August 2002) commented:
"By opening up its oil sector to joint ventures with foreign
companies, Cuba has increased its oil production sixfold over
the last decade, to the 3.4 m tones (27 m barrels) recorded last
year. It is understandably keen to increase foreign investment."
Two other reasons for greater flexibility from Cuba exist
it badly needs foreign investment to diversify away from sugar
and investment prospects would be enhanced if the U.S. ever ends
the economic embargo. Economic diversification is critical considering
that sugar prices have languished throughout 2002 and that Cuba's
industry is not cost efficient. The government has embarked upon
a plan to restructure the sugar industry by closing plants and
cutting jobs. It is also promoting other forms of agriculture,
both for export and domestic use. This too requires foreign investment.
Greatly complicating matters for Cuba's economic transformation,
the Caribbean nation has a debt problem. Many of the same governments
that have been willing to let their nationals trade and invest
in Cuba have also provided trade finance. Most have found themselves
out of pocket. Cuba earlier in the 1980s defaulted on its external
debt. As Moody's noted in August 2002: "Faced with major
financial difficulties, the government has fallen behind on its
external financial obligations and has defaulted on short-term
debts and supplier payments. The situation has forced several
foreign creditors to roll over short-term debts or to reschedule
financial obligations." The rating agency also commented
that the attitudes of European governments and investors toward
Cuba have "soured in recent years leading to a significant
decline in foreign investment inflows, which fell to $39 million
in 2001, compared with an annual average of $280 million during
the previous five years."
In September, it was announced that the French government froze
$175 million in short-term credit to Cuba after the Caribbean
nation failed to repay an earlier loan. Other countries have indicated
that Cuba is in arrears, including Japan (which it owes $1.7 billion),
Argentina, Spain, and South Africa. Any new move to provide U.S.
credit to finance trade to Cuba should consider the Cuban track
record in repayment Consequently, while many U.S. companies look
with envy upon their European, Japanese and Canadian counterparts
conducting business in Cuba, they should be aware that the grass
is not always greener on the other side.
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Africa's Privatization Program: A Parting of the Ways?
Scott B. MacDonald
is always a potentially contentious political issue. Any decision
to sell state assets carries with it concerns over how such assets
and the services they provide will be used. What kind of balance
will be made between the public good and profits? This is clearly
one of the key issues facing the government of President Thabo
Mbeki of South Africa.
Since the apartheid era ended in the early 1990s, first the Mandela
and then Mbeki government have followed prudent economic policies,
including tight fiscal policies. As a result, the fiscal situation
is well under control, stronger economic growth appears to be
taking root, and inflation is low. Despite some tough challenges,
the South African economy remains one of the powerhouses in Africa,
with the best industrial infrastructure, most skilled work force
and most sophisticated financial systems.
The soft underbelly for the South African economy is high unemployment
(28.8% according to the IMF for 2001). Together with still considerable
discrepancies between rich and poor, partially along racial lines,
the issue of privatization is highly emotional in national politics.
At the core of this issue is the question will privatization
entail greater unemployment as the private sector ownership seeks
greater cost efficiency in a former public enterprise? The answer
to this question has become a divisive issue between the ruling
African National Congress (ANC) and two of its long-term allies
in the struggle against apartheid the South African Communist
Party (SACP) and Cosatu, the country's largest labor federation.
The government's challenge is to maintain and strengthen economic
growth, improve the standard of living and address social inequalities.
To do this, it requires some degree of foreign investment. To
attract foreign investment, the ANC has stepped away from its
neo-Marxist roots and adopted a more pragmatic approach, part
of which embraces privatization. Last year the government budgeted
for $1.8 billion in privatization revenues, a clear sign that
it expects to move forward on this issue. Although the process
has been slow, the restructuring of public enterprises that was
launched in 2000 is gaining momentum. Telkom, the state telecommunications
company, is now expected to be divested by March 2003 and the
restructuring of Denel, the state defense corporation, is well
ahead of schedule.
Along side with the restructuring and sale of state enterprises
(also referred to in South Africa as parastatals), amendments
to the country's labor legislation are about to come into law.
These entail more flexible work practices and streamlined arbitration
and conciliation procedures. While such advances may win accolades
from foreign investors, South Africa's private sector and the
International Monetary Fund, they are becoming a bone of contention
with the SACP and Cosatu, the latter of which has members in the
For the SACP and Cosatu, state-owned enterprises should be used
to reverse the effects of apartheid by delivering affordable services
to poor people. As a spokesman for the SACP stated in July: "The
SACP calls for the retention of public ownership over parastatals
and for them to be strongly aligned with functional government
departments." The SACP is basically calling for the government
to maintain control of large public corporations in order to redistribute
the national wealth or at least part of it. The Mbeki government
raises the not inconsiderable issue of who will pay for it. The
last thing South Africa needs is a substantial increase in state
spending. Indeed, prudent fiscal policy has been a landmark of
the two ANC administrations.
Cosatu is now threatening a two-day national strike in October
to protest against possible job losses from privatization. In
particular, the union accuses the government of having implemented
macroeconomic policies that had destroyed employment and deepened
poverty since 1994.
President Mbeki has responded to the attacks from SACP and Cosatu
by maintaining his government's policies and in late July by pulling
out of the opening address of the SACP annual conference. The
snub was intentional and related to the growing contention over
The privatization issue is a clear reflection that South African
politics are entering a new era. The old parties of apartheid
have largely been dismantled, while the opposition parties operate
on the margin, appealing to a limited segment of the white, colored
and Asian populations. In contrast, the ANC has largely represented
the majority black population. Although the ANC's roots were neo-Marxist,
the party has steered a moderate and pragmatic course through
difficult waters of the post-apartheid world. Despite many predictions
that an ANC would be a disaster for the South African economy,
the party of Mandela and Mbeki has pursued policies that are largely
Now, ideological differences are resurfacing within the ruling
coalition, which could give rebirth to a right-left divide in
South Africa, placing the majority of the ANC leadership on the
center-right. The SACP and Cosatu are gradually evolving into
a center-left opposition. The difficult task ahead is how the
country's political elite will manage those differences ahead
of the next elections in 2004. In the year ahead, there will be
ongoing pressure to move back from privatization. This will be
a critical test for the Mbeki government. If Mbeki postpones the
Telekom privatization, the center-left will be emboldened to go
for greater clout in economic policymaking and that in turn could
jeopardize the ability of South Africa to continue along a moderate
and prudent path to sustainable economic growth, aided in part
by foreign investment.
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over Russia's New Rapprochement with the West
In the wake of September
11, the US-Russian reinvented partnership has been heralded as
an end to the Cold War Era. However, Moscow's recent overtures
towards the "axis of evil" serves as an indication that
Russia still faces immense challenges on the path toward integration
with the West.
In recent years, the concept of "multi-polar world"
has been Moscow's favorite mantra, designed to argue that
the US should not be allowed to dominate the world as a single
super power. However, in the wake of September 11 the Kremlin
presumably came to realize that building a multi-polar world as
a counterweight to US dominance has not really worked, while Iraqi
or North Korean endorsements did little to sustain Russia's role
as a world power.
In the wake of September 11 Russia has undertaken a series of
friendly gestures towards the US. Last October, the Kremlin announced
a shut down of its Cold War era military facilities, a spy radar
station in Lourdes, Cuba and a naval base in Cam Ranh Bay, Vietnam
to spare more money for the Russian armed forces.
Russia's initial opposition to the stationing of American military
forces close to its borders in Central Asia made its neighboring
Central Asian states reject the idea of letting American forces
use their territories for their operation in Afghanistan. However,
Russia eventually changed its position due to its interest in
seeing the Taliban regime fall, as well as in expanding its ties
with the US.
Russia's pro-Western course after September 11 quickly reaped
major benefits for Russia. Notably, last May Russia and the US
signed a legally binding treaty to reduce the two countries' long-range
nuclear weapons by two-thirds and "liquidate the legacy of
the Cold War." In recognition of Putin's help in the war
on terror, the new NATO-Russia Council gave Moscow a role in drafting
and implementing a number of joint policies.
Russia's new cooperative face secured U.S. backing for Moscow's
efforts to join the World Trade Organization. Russia also received
full membership in the G8 group of the most industrialized countries.
The US administration has visibly toned down its criticism of
Russia's use of force in Chechnya. There has also been a talk
of revoking the main economic sanction against Russia remaining
from the cold war, the 1974 Jackson-Vanik Amendment.
Therefore the Kremlin's recent series of advances toward
Iraq, Iran and North Korea, could be interpreted as an indication
that Russia's perceived drift towards the West is far from
For instance, on Sep.2 Russian Foreign Minister Igor Ivanov, after
conferring with his Iraqi counterpart Naji Sabri, warned that
military action by the United States could entail further troubles
in the volatile Middle East.
Moscow's involvement in Iraq dates back to the Cold War era, when
the Soviet Union cultivated client states in the Middle East.
Thousands of Soviet experts worked in Iraq, and Moscow used to
be Baghdad's top arms supplier. Russia is still the largest
trading partner of Iraq, which owes Moscow $7 billion in Soviet-era
debt. Some inflation-adjusted estimates put the figure at $11-12
billion. Russian oil companies are doing business in Iraq and
expect more lucrative deals in the future.
Moreover, Russia and Iraq are now negotiating a 10-year trade
agreement, including 67 cooperation agreements in oil, agriculture,
transportation, railroads and energy. Iraq's ambassador to Russia,
Abbas Khalaf, has said the deal is worth $40 billion. However,
neither Sabri nor Ivanov mentioned the proposed agreement, which
was seen by analysts as a "Potyomkin deal." Presumably,
Baghdad attempted to use the $40 billion figure as a bite to press
for more Russian support, while Moscow - by publicizing the figure
- might be indicating that it wants to be compensated for lost
profits following Saddam's demise.
Obviously, Russia is keen to safeguard its economic interests.
Russia is Iraq's largest supplier in the UN oil-for-food program.
Of the $18.3 billion in oil-for-food contracts approved by the
Security Council since the program began in late 1996, some $4.2
billion went to Russia.
Iraq possesses the world's second largest proven oil reserves,
currently estimated at 112.5 billion barrels or 11% of the world's
total. It is seen as the ultimate bounty by Russia's oil
firms. Baghdad offered Russian oil companies billions of dollars
in concessions during the 1990s as it sought to build support
in the United Nations. LUKoil, Russia's biggest oil company, signed
a 23-year $20 billion contract in 1997 to develop part of the
West Qurna field in southern Iraq with estimated reserves of some
700 million metric tons. However, the project has remained frozen
under U.N. sanctions, and subsequently ties between Iraq and LUKoil
deteriorated because the Russian firm was reluctant to begin work
at West Qurna despite the sanctions. As a result, LUKoil was excluded
from the oil-for-food schemes.
These days Zarubezhneft, a state-owned oil company that has worked
in the Middle East since the 1970s, has emerged as Russia's
leading oil player in Iraq. Zarubezhneft has received UN permission
to drill 45 exploratory wells in northern Iraq's Kirkuk oil field.
Zarubezhneft also had a contract to drill some 100 wells in the
North Rumaila field. Now Iraq is reportedly mulling plans to grant
Zarubezhneft the rights to develop the Bin Umar oil field with
estimated reserves of 3.3 billion barrels. Another Russian company,
Tatneft, is to drill on behalf of Zarubezhneft at West Qurna after
sanctions are lifted. Additionally, in 2001, state-controlled
Slavneft clinched a deal to develop the Luhais oilfield in southern
Iraq with estimated reserves of some 500 million barrels.
Moreover, Russia is understood not only to fear losses of the
oil concessions that have been signed off by Saddam. Analysts
argue that although threats of the US military action against
Iraq has kept crude oil prices high -- a victorious US war could
presumably entail skyrocketing Iraqi crude exports, pushing oil
prices down. Such a scenario could entail annual losses of billions
of dollars in Russian oil-export revenues.
It is understood that by flirting with Saddam's regime and
other "rough states," Russia has probably aimed to signal
to the West that its post-September 11 policy of backing the US
has certain limits, notably when Russia's vital oil interests
As recently as July 2002, Russia announced that it intended to
build five more nuclear power reactors in Iran over the next decade,
which was, indeed, a pointed broadening of the scope of its persistent
cooperation with Tehran, in defiance of US pressure to the contrary.
Last August, Putin agreed to a trip by President Kim Jong-il of
North Korea. Officially, the visit of North Korea's "Dear
Leader" was supposed to boost sluggish bilateral trade as
well as to discuss Pyongyang's plans to opens its part of
the railway as a means to funnel South Korean goods into Europe
These actions, combined with long-standing Russian fears and suspicions
over Western intentions, demonstrate that Moscow still faces a
long path towards full-scale partnership with its Cold War Era
Takin' It to the Streets
Over the past few weeks, political
tensions in Ukraine have escalated to troubling heights. Despite
court orders to ban them, several nationwide protests by tens
of thousands over the past two weeks have called for President
Leonid Kuchma's resignation. With Kuchma recently away in Austria
in an endeavor to convince political and business leaders to support
Ukraine's struggling efforts to join the EU, protests began around
the second anniversary of the disappearance of investigative journalist
Heorhiy Gongadze. Opposition groups hold Kuchma responsible for
his murder, along with the economy's chronic malaise, and alleged
fraudulent activities during the March parliamentary elections.
The present political situation has left the Ukrainian parliament
in a state of paralysis. Although a recent poll revealed more
than 70 percent of the people support Kuchma's removal, the popular
former Prime Minister Viktor Yushchenko and other opposition leaders
assert strong pro-Kuchma forces have continued to pressure legislators
to support the beleaguered president. While opposition parties
won the majority of the popular vote in the spring, they have
since failed to control parliament, making it very tough to remove
the Kuchma regime. Nevertheless, following Yushchenko's participation
this past Monday with socialist, communist, and capitalist party
leaders at a Kiev rally that reportedly drew more than 20,000,
he returned to parliament to negotiate a new coalition, resigned
to the premise that no real mechanism exists to force Kuchma to
resign. However, it remains to be seen how successful such negotiations
Despite his popularity, Yushchenko has frustrated the hopes of
many who seek immediate and radical solutions to the nation's
troubles, as he reportedly prefers calculated negotiations to
achieve solutions. With the presidential election two years away,
Yushchenko and his supports will arguably have plenty of time
to unseat Kuchma. However, given the circumstances surrounding
the present heated political environment, it should not be ruled-out
that a snap parliamentary election could be called before 2004
that might then possibly lead to some dilution of Kuchma's parliamentary
power. Given Yushchenko's history of messy disputes with the president's
affiliated parties, at present, we believe he will continue to
endeavor to work on a new potential coalition; however, his efforts
are probably more suited toward the 2004 election.
A spate of unfortunate events during the past year including the
unintentional downing of a Russian passenger jet by a missile,
a military air show crash, and a coal mine explosion have continued
to expose the Kuchma government's apathy and ineffectiveness.
While Russia has moved closer to the west during the past year,
Ukraine continues to lag far behind. Much is at stake for both
sides. Ukraine, a nation of 50 million with important natural
resources, represents a strategic bridge between east and west.
Aligning it to the west also would no doubt influence Russia to
remain in Europe, as well. In addition, on the heels of reports
that Iraq may have recently acquired military surveillance equipment
from Ukraine in its supposed efforts to prepare for a potential
conflict with the west, developments in Ukraine will continue
to attract attention.
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Taffy: Update On the Turkish Political Scene
Over the past few months, the Turkish
political scene, like that famous candy from yesteryear, has been
quite sticky and has given the nation's political and military leaders
and citizens plenty to chew on. Prime Minister Bulent Ecevit's chronic
illness, which has left him increasingly politically ineffective
to see through the many necessary economic and political reform
measures under last year's IMF $16 billion rescue package, led to
mass resignations from his cabinet and defections from the ruling
Democratic Left Party (DSP) this past July. This was not much of
a surprise as many observers had long predicted the eventual collapse
of the ruling three party coalition. Despite numerous pleas from
his original supporters and the opposition parties, Ecevit originally
stubbornly refused to step down or agree to early parliamentary
elections. He feared that early elections would further jeopardize
Turkey's hopes for EU entry and plunge the economy back into chaos.
However, with dwindling options, especially following the quick
formation of new political parties by his cabinet defectors, he
finally agreed to an election date of November 3rd.
Soon after Ecevit's decision, a few politicians further complicated
matters by challenging that date claiming it would not allow enough
time for the nation to prepare for the elections. In addition, just
last week, an electoral board announced that the head of the Justice
and Development Party (AKP), Recep Tayyip Erdogan (the former mayor
of Istanbul), would be banned from running in the election because
of his past conviction for Islamic sedition. Despite the military
and urban middle class' deep suspicions of Erdogan's reported disavowal
of political Islam and adoption of secular principles, he vows to
fight on, as the AKP arguably remains the most popular political
party. Nevertheless, as of this writing, the elections are still
scheduled for November and the volatile campaign season is in full
No less than 20 political parties will be vying for seats in the
new parliament. The most prominent include the following: Democratic
Left Party (DSP), headed by Ecevit, has suffered the loss of more
than half its deputies since July and, in turn, fell from second
place in the opinion polls to fourth. Nationalist Action Party (MHP),
built on rigid nationalist policies, including a tough stance against
the Kurds and aversions toward planned reforms to fulfill EU membership,
is now the largest party; yet, current polls suggest it may not
meet the required 10% quota to retain seats in parliament. Motherland
Party (Anap), the junior conservative member of the government coalition,
is badly lagging in the polls. Justice and Development Party (AKP),
formed last year by moderate members of the outlawed pro-Islamic
Virtue Party, at present, stands potentially to gain the most seats
leading to worries for the secular establishment. New Turkey Party
(YTP), formed by defectors from Ecevit's cabinet, Ismail Cem and
Husamettin Ozkan, has become the fifth largest party and reportedly
enjoys the support of former revered Minister of the Economy, Kemal
Dervis. True Path (DYP), led by former Prime Minister, Tansu Ciller,
the main conservative opposition party, holds a powerful nationalist
base in rural Anatolia. Republican People's Party (CHP), the main
center-leftist rival to DSP which could regain seats in light of
DSP's desperate state. Peoples Democracy Party (Hadep), accused
by Ecevit of links to the rebels within the Kurdistan Workers Party
(PKK), could reach the 10% quota; however, local analysts doubt
if the party would be invited to join the future governing coalition.
Given the capricious nature of Turkish politics, we believe it is
too soon to predict an election outcome. However, of more importance
is to watch the lame duck coalition's actions during its last weeks
in power following the recently approved legislation to abolish
the death penalty and to establish language rights for the Kurds,
bold moves designed to continue to support hopes for EU membership.
Yet, we believe that interested observes should keep tabs on developments
surrounding Erdogan's fight for recognition and the New Turkey Party's
potential to gain more votes than expected.
According to latest reports, the economy rebounded from its recent
crisis, as GDP rose by an annual 8.2% during the second quarter
(4.7% for the first 6 months). While such a gain may be temporary,
it is seen as significant given the 7.4% decline in GDP for all
of 2001. However, business and consumer confidence remain low and
with the escalating prospects for the west's military actions against
Iraq, along with the uncertain political environment, growth may
stagnate over the near term. In addition, two major conditions act
as roadblocks for sustainable economic prospects: the slow pace
of necessary banking industry reforms and insufficient flows of
direct foreign investment. While the scale of such investment will
largely hang on the prospects for a regional military conflict,
outside influences should not delay the continued and overdue redesign
of the banking industry.
India Heading Into Another Debt Crisis?
international analysts usually focus on external debt as a key
factor of a country's creditworthiness, domestic debt must also
be considered. This is an issue for Brazil, Latin America's
largest debtor. Increasingly it is an issue for one of the Asia's
largest economies - India. Public sector debt (domestic debt)
to GDP is currently at its highest ever level of 70.5% of GDP
in FY2002. This is from a recent low of 56.5% in F1997. There
is a good chance that the debt level could climb even higher,
to around 75% by FY end 2003. What is alarming about the rise
in domestic debt in India is that both state and central governments
do not appear to be unduly concerned about the trend and there
is little sign of any relief in the medium term.
The ongoing threat of war with Pakistan, the interrelated security
concern with terrorism, the ongoing turmoil in Kashmir, and
the larger game of geo-political manuevering vis-a-vis China
all appear to be overriding considerations to trimming the budget
and bringing public debt under control. Although it is too early
to proclaim that India is heading into another debt crisis,
it does not take a great leap of the imagination to see that
if current trends continue, the South Asian country will have
substantial debt management problems.
India's has had problems with its debt burden before. In the
late 1980s domestic debt rose substantially, This proved to
be a major problem when the international environment turned
highly negative in 1991, ultimately causing a balance of payments
crisis. In the aftermath of the 1991 crisis, the Indian government
worked hard to reduce the onerous debt burden. Public sector
spending was controlled and new economic reforms helped bolster
growth, which brought in greater revenues. Despite security
concerns, Indian finances improved through the first half of
the 1990s. However, there was considerable policy erosion in
the late 1990s as coalition governments led by the Hindu nationalist-Bharatiya
Janata Party (BJP) were forced to strike deals with regional
parties to maintain parliamentary majorities. Having a coalition
of two dozen parties did not help the policy process. In particular,
it weakened debt management.
While central government finances worsened, state governments
were allowed to spend in a relatively unconstrained fashion.
The end result was that internal debt rose to an all-time high
of 70.5% of GDP in FY2002. Prime Minister Atal Bihari Vapayee
has remained in office for two terms, but his government is
paying the price. Consequently, three key trends mark India's
finances - the consolidated fiscal deficit is on the rise, state
finances are eroding at a faster pace than before, and off-balance-sheets
liabilities are climbing. According to Standard & Poor's,
India's budget deficit is expected to reach 6% of GDP in the
current fiscal year (ending March 31, 2003). Counting state
finances it could be higher, closer to 10% of GDP.
Standard & Poor's is forecasting that the consolidated debt
of the central and state governments could exceed 80% of GDP
this year, while the public-sector borrowing requirement, including
all levels of government and the enterprises they control, may
exceed 12% of GDP. Interest payments alone are likely to consume
nearly half the central government's revenue. S&P also noted:
"Its largely unreformed public sector, whose inefficient
operations constrain prospects for economic growth and pose
a contingent liability to the sovereign. For example, the cost
of bailing out government-owned financial institutions (including
the Unit Trust of India, the country's largest mutual fund,
which had been bailed out once before in 1998 but not restructured)
may exceed 1.5% of GDP. At the state level, the annual losses
of electricity boards exceed 1% of GDP, weakening already-poor
India is not sitting on the brink of another debt crisis - so
far. However, the trends are worrying. Unlike in the late 1980s
and early 1990s, India has seen strong inflows of foreign exchange
over the last few years, with reserves reaching $29.4 billion
(5.1% of GDP). In the balance of payments, India's growing flow
of "invisibles".i.e., remittances, sofware exports
and tourism has helped to reduce pressure. In fiscal year 2002,
invisibles accounted for close to $36 billion, equal to 5% of
GDP. At the same time, interest rates have declined - always
a help for large-scale debtors.
Yet, prospects for resolving the looming debt crisis are mixed
at best. The political situation remains complicated, security
concerns command policymakers attention and the ability of the
government to forge ahead with privatization sales that could
help reduce fiscal pressure are bogged down in nationalist and
coalition politics. In its most recent Article IV report on
the Indian economy, the International Monetary Fund clearly
stated its concerns, that "recent trends-large primary
deficits, growing debt, and the sharp narrowing of the growth
rate-interest rate differential-are creating conditions for
potentially unsustainable debt dynamics. The weak fiscal situation
leaves little room for maneuver in macroeconomic policies and
could entrench the cycle of decelerating growth and deteriorating
The IMFis not alone in these sentiments. On September 8, 2002,
Moody's Investors Service commented: "The government's
rising debt service burden is consuming an overwhelming share
of its limited financial resources, leaving the authorities
with little fiscal room to redress the country's infrastructure
and social problems, much less business cycle slowdowns. The
fiscal dilemma also constrains monetary policy, dampening longer-term
investment and growth prospects. Even with growth at 5%-6%,
average living standards are stagnating. The dependence upon
non-resident capital to finance the current account gap is also
not sustainable, particularly in view of the volatile political
Reflecting many of the same concerns, S&P downgraded India's
ratings on September 18, 2002. Maintaining a negative outlook,
the rating agency stated: "Continued large fiscal deficits,
along with a languid pace of economic reform, would lead to
a further ratings downgrade."
Although the government is aware of the issue, there are so
many other major issues clamoring for attention. Consequently,
the domestic debt problem represents a slow-moving, yet still
very real, potential crisis for the government. Unable to push
reforms at a faster pace, its privatization program off track,
and increasing problems with its power sector (slowing prospects
for growth), the BJP government will eventually be forced to
return to the domestic agenda.
Prospects for a new Gulf War, with the potential for another
spike in oil prices, should worry New Delhi. While it is not
likely to provoke another crisis as in 1991, it will push India's
finances into a much tighter situation. If unchecked, India
will find itself in more dire straits as the decade continues.
CAN ANYONE TELL US WHY JAPAN'S TECH ECONOMY IS BROKEN? Is Japan's high-tech economy broken? We don't think so. Derailed perhaps. But if you understand the mechanics, you can gain access to amazing opportunities for business and technology in Japan. Nobody else knows Japan like we do. Find out what's going on, direct from Tokyo, weekly and free. Four great newsletters at http://www.japaninc.com.
Japan: Interview with Keith W. Rabin
month's interview is with Keith Rabin, president
of KWR International, a consulting firm specializing in
the delivery of research, communications and advisory
services with a particular emphasis on public/investor
relations, business development, public affairs, cross
border transactions and market entry programs. Keith frequently
speaks on trade, investment and economic issues and has
authored numerous articles for publications including
Bridge News, Journal of Commerce, Market: Asia Pacific,
Korea Herald, and Asia Pacific Economic Review. KWR hosted
the Japan Small Company Investment Conference in March,
when over 200 investors, venture capitalists, corporate
and technology executives, analysts, government officials,
journalists and other targeted individuals met with eight
promising Japanese companies in New York to explore mutually
beneficial investment and business transactions and partnerships.
Why did you start the Japan Small Company Investment conference?
Rabin: Over the past few years there has been a lot of
attention paid to the economic, regulatory and technological
changes that are beginning to reshape Japan's business environment
-- trends that promise to accelerate in coming years. This is
creating many interesting opportunities both in the export-oriented
industries that Japan is renowned for as well as those with
a domestic focus. While many foreign investors are coming to
understand the potential, they remain largely unaware of the
specific companies benefiting from this
transformation and how to pursue these opportunities. At the
same time, Japanese firms are finding they can no longer rely
upon commercial bank loans as their primary source of capital.
This creates a greater need for private equity, M&A and
other financial engineering techniques, yet most Japanese firms
lack the experience and resources needed to attract and effectively
deal with foreign investors. To facilitate interactions, transactions
and relationships between Japanese firms and foreign investors,
we developed a conference
and support structure to satisfy this demand.
eBJ: Economically speaking, what positive developments
do you see in Japan recently?
Rabin: Whereas the U.S. has been actively engaging in
deregulation and restructuring and reorganization for two decades,
Japan has all or most of its gains before it. While it may be
early to allocate capital to the macro indices, there are many
micro opportunities emerging. In many cases, it is the problems
themselves that are leading to the opportunities.
eBJ: Can you give an example?
Rabin: For example, pessimism about the future has resulted
in a delay in marriage and birth rates in Japan. This has troubling
implications over the long term, yet it has led to a rapid rise
in disposable income among Japanese singles, many who still
live at home and young couples, who fit the DINK (Double Income,
No Kids) profile desired by so many purveyors of upscale products.
eBJ: Any other demographic trends that are important?
Rabin: Japan's aging population is also giving rise to
amazing opportunities in medical equipment and technologies
and geriatric care. Women are also taking on an increasingly
important role in the workplace.
eBJ: What is your take on the state of IT in Japan?
Rabin: Japan was late to embrace the tech boom that engulfed
the U.S. in the late 90s. It just started to take off when the
U.S. tech bubble burst about two years ago. The introduction
of low-cost ADSL access is leading to high growth in broadband
penetration and time spent online. The demand for web services,
e-commerce and other technologies and applications is accelerating
at a time when they are maturing in the U.S. There are also
opportunities to replicate business models and to employ restructuring
techniques that have proven successful in the U.S. They can
be used to achieve greater economies of scale, profitability
and additional revenue sources in Japan, where a ready market
of high-income consumers awaits them. Japan also produces many
attractive technologies, applications and products. Wireless
is one area where Japan remains far ahead of the U.S. and we
are only just beginning to enter into the age of convergence
and birth of Internet appliances.
eBJ: What kind of help do smaller firms need in pursuing
investment opportunities in Japan?
Rabin: Cross-border deals can be complex and costly,
both in terms of managing the due diligence, time and other
issues and commitments that are part of the transaction process
-- not to mention the ongoing communication and interaction
that is part of any successful investment. This is especially
problematic as smaller firms and investors are often not as
sophisticated as larger companies and financial institutions
and therefore need more hand-holding and support. The costs
are often difficult to amortize within small- to mid-sized transactions,
preventing both interested firms and investors from gaining
the preparation, counsel and follow-up needed to achieve successful
eBJ: How did the Japan Small Company Investment Conference
address these issues?
Rabin: We utilized a portfolio approach for our investment
conference. It provided a cost-efficient vehicle that facilitated
the initial preparation, screening and introductions needed
to establish priorities and a more rational allocation of resources
to deliver necessary follow-up. Within this mix we were able
to showcase two exciting specialty retailers, one that focused
on natural foods and another on gardening products. We also
featured three firms with specialized software applications
oriented toward improving procurement systems, factory automation,
graphics technology and document management as well as three
others that focused on the semiconductor industry. Through this
cross-marketing and promotional effort we were able to gain
synergies and an economy of scale that would not have been otherwise
possible. It allowed us to attract over 200 investors and other
targeted individuals as well thousands of visitors to the site
that was developed. We continue to receive numerous ongoing
inquiries about this event and our plans for the future.
eBJ: Is Japan moving towards a U.S. style economic
Rabin: It is moving in that direction. Japanese firms
have traditionally focused more on market share, operational
efficiency and product development than profitability and the
more intangible financial, marketing and other concerns that
tend to preoccupy U.S. managers. Additionally, bank lending
tended to be made more on relationships and collateral than
the credit- and risk-based approaches used by U.S. financial
institutions. As Japan moves away from a main-bank and lifetime
employment system to one that is more focused on equity investment
and merit-based performance it will inevitably require a shift
toward a U.S.-style model.
eBJ: How can Japanese firms benefit from investment by
foreign firms in this new environment?
Rabin: Foreign investors can help Japanese firms to better
understand and adopt these practices and to build stronger,
more competitive companies that are able to adapt to the new
environment. They are also not subject to the same cultural
and social constraints as Japanese managers. The point here
is that this is not rocket science. Many Japanese firms are
fundamentally sound but have never had to employ the controls
and systems that are used to manage and evaluate U.S. and many
eBJ: Could you give an example of this?
Rabin: Nissan is one high-profile example. By employing
relatively standard corporate reorganization techniques Carlos
Ghosn was able to restore the company to profitability. Wilbur
Ross and his team at Kansai Sawayaka Bank have also made significant
progress, working to introduce a credit- and merit-based culture
as well as a wider array of financial services and products.
This has helped to significantly expand its loan portfolio and
raise profitability in a troubled banking environment.
eBJ: Do you feel Japan has done enough to make it easier
for foreign firms to make investments in Japan?
Rabin: While it is not a linear path, Japan is certainly
doing more than ever before to make it easier for foreign investors
to enter the Japanese market. Much more needs to be done but
in my eyes the major obstacles today are more on the cultural
and personal than the regulatory level, where most barriers
can now be addressed with the help of experienced legal counsel
and other support. Part of the problem is that while Japan remains
the world's second largest economy, with a well-educated and
affluent consumer and industrial base that is increasingly receptive
to new ways of doing business, Americans do not sense the opportunity
eBJ: And why is that?
Rabin: They tend to focus on other markets that are growing
at a more rapid rate -- but which are not even forecast to possess
the same underlying stability or market characteristics as Japan
for many decades. For example, per capita income in China ranged
from $2,253 (rural) to $6,280 (urban) in 2000 compared to over
$34,000 in Japan. If you are a U.S. company seeking a market
for your goods or services which offers the better option? This
is not to suggest, however, that this is simply a case of neglect
by U.S. firms and investors. Even when there is interest, investors
have a hard time obtaining the specific information and contacts
they need to make rational investment decisions. For an economy
as large as Japan it maintains a remarkably low profile in the
U.S., and Japanese firms need to do much more to reach out to
American executives or investors to both raise their interest
and to make it easier for them to identify and access investment
opportunities that meet their interest and requirements.
eBJ: What are the main changes in Japan's business
environment that potential investors would like to know?
Rabin: Since the adoption of Japan's "Action Plan
for Economic and Structural Reform" in 1997 there has been
a steady movement toward deregulation and reform in the Japanese
economy. The most recent achievements include revisions to Japan's
commercial code to allow adoption of a U.S.-style corporate
governance system, new mark to market accounting standards and
measures to enhance labor flexibility and pension portability.
Many other measures have been adopted in recent years. To enhance
corporate competitiveness and
flexibility, steps have been taken to end the prohibition on
holding companies, facilitate corporate divestitures without
negative tax consequences and to revise the civil rehabilitation
law to simplify restructuring and bankruptcy. To promote the
development of small and medium enterprises and start-ups, steps
have been taken to allow the use of stock options in compensation
packages, create a Limited Partnership Act to facilitate the
use of venture funding and establish technology licensing organizations
to encourage the transfer of university research to the private
sector. Many other steps have been taken to promote the use
of information technology and e-services, to enhance labor flexibility
and to reduce the high cost of doing business in Japan. While
one can argue over the pace of progress and the need for more
rapid reform, it is also important to recognize the tremendous
shift of sentiment within Japanese businesses and consumers.
There is far more openness than
ever before to the entry of foreign firms and investors. Only
ten or even five years ago, Japan remained eager to go it alone.
They are now keenly aware of the need for change if they are
to maintain and expand their economic viability.
eBJ: And What are the key issues to keep in mind when
attempting to enter into investment transactions with Japanese
Rabin: Americans and other foreign investors need to
keep in mind that Japan is not the U.S. While that is part of
the attraction and many of the obstacles that were faced in
the past are now being addressed, it requires numerous adjustments
to allow for cultural, social, legal and regulatory differences.
This is not to suggest that U.S. firms need to sacrifice their
normal profitability and other objectives when entering into
Japan but rather that they must take time to understand the
real differences and adjust their expectations so that they
a sustainable plan of action, investment model and time frame
that will allow them to achieve the results they are looking
for. Support by experienced service professionals and other
people who know the environment is usually advised.
eBJ: Do you have plans to organize additional investment
conferences in the future?
Rabin: Based upon our first success we are now in the
midst of talking with many companies, investment promotion agencies
and intermediaries such as venture capital and investment management
firms, investment banks, service firms and securities exchanges
who are seeking to showcase clients or portfolio companies.
Interestingly, these inquiries are coming not only from Japan
-- but all over the world. We are now in the midst of planning
and hope to organize an expanded initiative of this kind early
next year. If any of your readers have an interest or would
like additional information, please have them contact our offices
at email@example.com .
the Bush Administration is NOT talking about......
David Fuhrmann, Partner, Glenwood LLC
now there should be no question in anyone's mind that
the U.S. will attack Iraq with the intent of overthrowing
Saddam Hussein. In truth, I don't have a problem with the
idea of removing Saddam Hussein and doing it sooner rather
than later. I'm not bothered by what the administration
has been proposing, but I am concerned over what they aren't
talking about. What isn't the administration talking
about? They aren't talking about what happens after the
military assault on Baghdad.
U.S. forces will undoubtedly occupy Baghdad in short order.
Then what? They aren't talking about it. In fact, the
silence from the White House regarding the next step has been
conspicuous. The administration has focused exclusively on
the need to attack Iraq while studiously avoiding public discussion
of what happens when the shooting is over. That's because
they themselves don't have a clear idea of what happens
next. The subtle but implicit impression being fostered in
the public mind is that it's a cake-walk into Baghdad, knock
over Saddam, the Iraqis hold elections, we leave, the entire
Arab world rallies to our cause, and everyone is happy. In
reality, there are any number of unanswered concerns that
ought to be considered before the White House has its war,
and they aren't talking about those issues.
The same geo-strategic concerns that restrained the first
Bush administration from toppling Saddam still apply. The
danger of Iraq breaking into pieces, and the potential for
civil war and strife among Iraq's disparate ethnic groups
remains significant. Why isn't the break-up of Iraq still
a concern, how will it be prevented, and who will be preventing
it? They aren't talking about it.
What will the cost of war against Iraq be? The number $100
billion has been floated by the administration, but that's
just the cost of immediate military operations to topple Saddam.
What will be the cost of a protracted American occupation
in Iraq, especially one that continues for years? They aren't
talking about it.
Might a difficult or protracted engagement in Iraq impact
negatively on the willingness and ability of other governments
to cooperate with us in the war on terrorism? Will a war in
Iraq divert attention and resources from the threat posed
by Al Qaeda? They aren't talking about it.
This administration has a visceral antipathy toward "peace-keeping"
and "nation-building." There's no hint from
the White House that "nation-building" or "peace-keeping"
might be needed to return Iraq to the family of "civilized,"
pro-American, nations. But if it is necessary, the unspoken
assumption seems to be that others will step forward to take
on that task and help pay for it. Who? They aren't talking
How does one bring "democracy" to a country with
neither the social institutions, political experience, or
legal systems necessary for such a system to survive and flourish?
They aren't talking about it.
Does the existing situation in Afghanistan offer any warnings?
We quickly toppled the Taliban and routed Al Qaeda. But Afghanistan
today is hardly a model of democracy or a stable and secure
country. The regime put in power by force of American arms
exists mostly in the minds of Washington policy makers and
wishful thinkers. It's authority and control do not extend
beyond the city limits of Kabul, and Hamid Karsai, nominal
"leader" of Afghanistan, requires American bodyguards.
Recent reports indicate the Taliban and Al Qaeda are re-grouping
in Afghanistan, and that their ability to launch attacks there,
as well as elsewhere in the world, remains undiminished. Why
would it be easier to accomplish successful regime change
in Iraq than it's been in Afghanistan? They aren't
talking about it.
Think about it. We've had a presence in Bosnia for nearly
seven years. We've been in Kosovo for four years. We've
been in Afghanistan for almost a year. In none of those places
has a truly stable, secure government and environment been
created, and no one would argue that western forces could
be withdrawn any time soon without risking renewed warfare
in every instance. Why will Iraq be different? They aren't
talking about it.
Indeed, the very notion we can bring "democracy"
to Iraq simply by removing Saddam Hussein ignores the socio-political
realities of the Arab world. Anyone who assumes that creating
a stable post-war environment in Iraq, much less a democratic
system, will be easy or quick is guilty of wishful thinking
at best and self-delusion at worst. And the administration
isn't talking about it.
The political risk for President Bush is substantial. If the
administration fails to prepare the public for a long, possibly
dangerous, occupation of Iraq, and such a situation comes
to pass, as it likely will, then George Bush will find himself
entering the 2004 election cycle saddled with a messy, open-ended
commitment in a region intensely antipathetic toward the United
States. That could easily spell electoral trouble here at
home. Given how closely divided the nation was in the last
presidential election, his re-election under such conditions
would hardly be assured. The domestic political backlash will
be far worse if the administration has failed to prepare the
public for the potential problems in advance.
The White House should be honest and up-front about the dangers,
the difficulty, and the reality that even a protracted US
occupation is not likely to lead to a modern, democratic,
"westernized" Iraq any time soon. Of course, that
could make going to war in the first place a more difficult
sell. And, as White House Chief of Staff Andrew Card might
say, one wouldn't want to market the product (i.e. war
in Iraq) in a bad light. But if the Bush administration fears
it can only obtain public support for a pre-emptive war against
Iraq by avoiding discussion of hard truths and potential pitfalls,
then their real worry should be over how an unprepared public
is going to react when some of those things become reality.
Trade Act of 2002 and the Americas: Be Thankful for Small
Russell Smith, Willkie, Farr and Gallagher
Trade Act of 2002, encompassing both renewal of the Andean
Trade Preference Act (ATPA) and a grant of new trade promotion
authority to the President, is arguably filled with country
and region-specific benefits for the Americas. But unfortunately
the Act is not a blueprint or even a real impetus for the
successful negotiation of a Free Trade Agreement for the Americas
(FTAA). U.S. and foreign politics have and will continue to
be a substantial roadblock to FTAA negotiations, and the Act
itself reflects this reality.
As to benefits, not only was the ATPA renewed, but that renewal
was broadened. The Act extends duty-free treatment to textile
products, with certain caps for goods produced from regional
fabric and yarn. For goods produced from U.S. fabric and yarn,
all limits have been removed. Beyond its immediate economic
impact, this change represents a dramatic shift in the politics
of textile and apparel issues. Historically, the U.S. textile
industry and labor unions have succeeded in excluding most
textile and apparel imports from trade negotiating authority
legislation and to a great extent from agreements concluded
under those authorities. This influence began to erode with
the textile provisions of the African Growth and Opportunity
Act in 2000, but the ATPA provisions are far more generous
than those in that previous legislation. The Trade Act expansions
were passed over the objections of the U.S. textile industry,
but for the first time those objections did not prevail. Such
a change indicates that in future, textiles will not control
the debate over trade agreements, and probably will not even
influence it heavily.
Many other previously excluded products will now be eligible
for duty-free treatment under ATPA, including footwear, petroleum
and petroleum products, watches and watch parts, handbags,
luggage, gloves, and leather apparel. In another important
decision that was quite controversial, but ultimately resolved
favorably for Ecuador, tuna in airtight pouches will receive
immediate duty-free treatment if caught from U.S. or Andean-flagged
Although there are also new provisions concerning transshipment
and criteria for beneficiary status that may require additional
actions by individual nations, on the whole the positive outcomes
for ATPA beneficiary countries are far greater than any of
the requirements imposed on achieving eligibility.
The same may be true of individual countries outside the ATPA,
especially Chile. The Act puts the U.S. in a position to be
able to conclude balanced FTAs with Chile and Central American
countries, and for those agreements to be approved by Congress
without amendment. Although difficulties remain in the negotiations
regarding various issues, both the U.S. and Chile appear committed
to bring an agreement to conclusion after many years of frustration
on both sides.
However, the largest "prize" that should result
from the Trade Act of 2002--a Free Trade Agreement of the
Americas--seems no closer to being achieved now, even with
Presidential trade promotion authority. The Act does nothing
to resolve those major issues that are preventing progress
on an FTAA--the U.S. trade barriers to key exports from major
South American nations. One need only listen to statements
made at recent U.S. conferences at which the FTAA was discussed.
The key sectors involved, including agriculture (citrus and
sugar) and industry (steel) have made it clear that they wish
to be excluded from any such agreement. Even the U.S. auto
industry seeks not market opening, but the protection of their
investment from inroads by other countries. This is, of course,
not free trade as we know it in NAFTA, and it almost certainly
cannot serve as the basis for the successful conclusion of
The FTAA negotiations may begin with much fanfare, and ostensibly
with commitments from both sides to serious negotiations.
As long as the South American perception is that the U.S.
seeks more leverage the Americas, but is unwilling or unable
to provide new and vital market access to the key products
of its neighbors, on a collective basis, however, the promise
of the fanfare and commitments will not be realized. Perhaps
some of the mutual benefits that might come from an FTAA will
be achieved from the WTO Doha Development Agenda negotiations,
where many of the same issues will arise. By this route, the
Americas may benefit from global trade concessions in ways
that even the Trade Act of 2002 cannot "deliver"
in regard to the FTAA.
Scott B. MacDonald
Bond Issue: Belize has now followed the Bahamas, Barbados,
Trinidad & Tobago, Jamaica and the Dominican Republic in launching
an international bond issue. In August, Belize issued a $125 million
bond, which was largely bought by U.S. investors. The government
will use the proceeds to retire short-term debt and other higher
interest rate debt, helping to clean up the nation's financial
ledger and reduce foreign exchange outflow. Belize is rated Ba2/BB.
Brazil - Waiting for Lula: On October 6, Brazilians go
to the polls to election their next president, congress and governors.
The real focus is on the presidential contest that pits Luiz Inacio
Lula de Silva against Jose Serra. Lula currently leads in the
polls and there is now considerable speculation that he could
win in the first round, negating the need for a second round on
October 27. Lula is a center-left candidate from the Workers Party
(PT), has run for four times, and represents a potential new policy
direction for Brazil. Serra is the government candidate and a
former health minister, who has trailed throughout the contest.
Markets clearly favor Serra and the growing probability of a Lula
victory has roiled financial and currency markets in Brazil. While
there is concern that a Lula presidency would lead to poor economic
policy decisions leading to a default on the country's debt, it
must also be taken into consideration that Lula has little desire
to preside over a severe economic crisis. Moreover, he has only
to look south to Argentina to see what happens to a national leader
- former President de la Rue - when there is a lack of clear and
forceful policies in managing the economy. While a Serra victory
cannot be entirely dismissed, most pundits look to Lula as the
most probable man to fill Brazil's presidency.
Dominican Republic Strong growth, but possible worries:
The Dominican Republic appears to be well on its way to leading
Latin America in terms of economic growth for 2002. Initial forecasts
for real GDP growth were in the 3-4% range. However, the pace
of growth was 6% for the first half of the year. Even if growth
tapers from the blistering average real GDP growth rate of 7%
in July, year-end growth will exceed earlier targets, probably
coming in around 5-6%. The main drivers for economic activity
have been communications, construction and local manufacturing.
The main foreign exchange earners, mining, free-zone manufacturing
and tourism all fared poorly. The combination of government spending
and domestic demand are the major causes behind growth. Although
inflation is under 3%, concerns are rising that government spending
could be "excessive" and that there is too much reliance
on external borrowing. Partially responding to these criticisms,
the government of President Mejia has announced a freeze on public
spending and curbs on borrowing offshore.
Indonesia Ratings Upgrade: On September 5, 2002,
Standard & Poor's raised Indonesia's sovereign currency rating
from 'selective default' to 'CCC+'. The outlook was changed to
stable. The upgrade was prompted by Jakarta's earlier announcement
that it had successfully rescheduled the repayment of $1.3 billion
of debt with the London Club of international commercial banks.
Moody's rates Indonesia a notch higher at B3, with a positive
Philippines - Sadly in
the Wrong Direction: At the beginning of the year, the government
of President Arroyo promised to turn the economy in the right
direction. For many investors and business people in the Philippines
this was a breath of fresh. However, things have not gone according
to plan and after a period of improvement, economic conditions
are gradually eroding. Public sector finances have been disappointing
and the country's debt burden is actually growing. Total public
debt rose to 83% of GDP in July, up 13% year-on-year. Total public
debt was 79% at the end of 2001. Public sector foreign debt is
$34 billion, equal to 56% of total public debt. In addition, it
is expected that the Philippines will return to international
bond markets later in 2002 to help finance its deficit. The Southeast
Asian nation is rated Ba1/BB+, with a stable outlook from both
Moody's and Standard & Poor's. If the trends of fiscal weakness
and growing indebtness continue, we would not be surprised to
see the outlooks change back to negative - just where they were
when President Arroyo took office.
Trinidad & Tobago New Refinery: The government
of Trinidad & Tobago has given a green light for the construction
of a new oil refinery that will more than double Trinidad's
current oil production. Already a major Caribbean oil producer,
Trinidad's oil production averages around 224,000 barrels
per day. When the refinery opens for operations in 2005, an additional
224,000 barrels will come on stream. The government has also recently
proposed the construction of a $500 million undersea natural gas
pipeline, running from Trinidad to the French Overseas Departments
of Martinique and Guadeloupe, with branches extending to Antigua,
Barbados, Puerto Rico and the Dominican Republic.
Venezuela Bad News on Economic and Political Fronts:
President Hugo Chavez's efforts to make Venezuela into a
country of greater economic equality and less dependent on oil
are faltering before the stark reality that populist rhetoric
and economic mismanagement do not easily translate into desired
objectives. Blaming outside forces, like U.S. imperialists, does
not necessarily help either. Despite the relatively buoyant nature
of international oil prices, Venezuela is having an exceedingly
bad year. Real GDP contracted by 4.2% in the first quarter of
the year, followed by an even more biting 9.9% contraction in
the second quarter. The currency has depreciated by 46% this year.
Prospects for the rest of the year are not exactly robust. Certainly
much of the blame rests on Chavez's shoulders. Although conservative
elements of Venezuelan political spectrum (the old political parties
and big business) have been confrontational since his election,
the president has stimulated widespread middle class antagonism
and alienated big labor. In April, elements within the armed forces
and a large segment of the public supported a coup attempt that
ousted Chavez, before loyalist officers rallied and reinstated
the constitutionally-elected president. The abortive coup d'etat
left $800 million in damages from looting and lost work. It also
left an undisclosed number of dead.
In the aftermath of the April coup, Venezuelan society has remained
highly polarized. The army has largely remained behind Chavez
as have members of the poorer segments of the population. At the
same time, the country's police and National Guard are regarded
with some degree of suspicion by Chavez loyalists. The country's
largest business association, Fedecamaras, remains staunchly anti-Chavez.
Fedecamaras chairman, Carlos Fernandez, recently stated in an
interview over public radio: "The president is off his rocker.
Only with him leaving power can Venezuela cure itself of the cancer
it now has."
For his part, Chavez has been equally diplomatic, stating that
his opponents were "the extreme right, religious extremists
and racists." To this, he added that he had fought "battles
with against a thousand demons" during his three and a half
years in office.
Chastening: Inside the Crisis that Rocked the Global Financial
System and Humbled the IMF (New York: Public Affairs, 2001).
431 pages. $30.00
by Scott B. MacDonald
here to purchase "The
Chastening: Inside the Crisis that Rocked the Global Financial
System and Humbled the IMF "
directly from Amazon.com
Post journalist Paul Blustein has written a well-thought and engrossing
account of the International Monetary Fund's role during the Asian
financial crisis of 1997-99 and the ensuing contagion that hit
Russia and threatened Latin America. He notes that the "Electronic
Herd" ("whose ranks included mutual funds, pension funds,
commercial banks, insurance companies, and other professional
money managers") played a major role in stampeding Asian
markets. However, he is careful not to apportion all the blame
here - greed, corruption and poor regulation in Asia also played
their role in setting the stage for Asia's financial crisis. As
the crisis began in Thailand and spread to Indonesia and Korea,
Blustein focuses on the IMF's response. The bottom line is that
the IMF's approach of large bailout packages, combined with monetary
tightening and the closure of banks was the wrong approach. As
he states: "Time and again, panics in financial markets proved
impervious to the ministrations of the people responsible for
global economic policymaking. IMF bailouts fell flat in one crisis-stricken
country after another, with announcements of anormous international
loan packages followed by crashes in currencies and severe economic
setbacks that the rescues were supposed to avert."
One of the major culprits in the failure of the IMF to effectively
deal with the Asian contagion, was that the High Command (the
IMF, World Bank, and major G-7 countries) had successfully presided
over the dismantling of capital controls in much of the emerging
markets, a development that was to be seriously undermined by
the lag in proper institutions in those countries to deal with
volatility, concerns about the creditworthiness of banking institutions
and corporate governance. The globalization of capital was "expected
to help create a more efficient world economy, raising living
standards in rich and poor countries alike. A further justification
was that developing countries would reap enormous benefits by
establishing modern stock and bond markets to finance their industries
instead of relying heavily on traditional (and often corrupt)
banking systems." Blustein also points out: "The advocates
of globalized capital were by no means unconcerned about the dangers
of international crises, and they hedged their recommendations
by urging countries to develop proper legal instutitions and improve
supervision of their banks before allowing the Electronic Herd
to invest large amounts of money in their markets." The message
is that globalization is not bad, but without proper institutions
to manage the flow of capital it can be a disaster - i.e. Thailand,
Indonesia, Korea and Russia.
Blustein provides a good hard look at how the IMF seeks to maintain
an image of omniscience as it provides aid and advice. Yet, he
concludes: "Peering behind the IMF's facade provides a less
confidence-inspiring picture, even to those who broadly share
the Fund's views about how to handle countries in economic difficulty."
His final advice: "Rather, the main point to bear in mind
- is that the current institutions and mechanisms safeguarding
the global financial system are dangerously weak, and that boldness
is warranted in shoring up the system's defenses before catastrophe
strikes anew." Considering that Brazil is likely to threaten
another contagion in Latin America, this is sound advice. Yet,
at the same time, there must be greater boldness in particular
countries in dealing with their own structural and transparency
problems that allow leading figures in the government to opaquely
move funds out of the country. Still, Blustein is a good read,
providing interesting portraits of many of the key players and
how they interacted.
Reckoning: Iraq and the Legacy of Saddam Hussein, by Sandra
Mackey, W.W. Norton & Co., New York and London, 2002), 415
by Robert Windorf
here to purchase "The
Reckoning: Iraq and the Legacy of Saddam Hussein"
directly from Amazon.com
early this year, the Bush administration has dramatically increased
its barrage of accusations of Iraq's reported violations of UN
sanctions. Furthermore, in the annual State of the Union address,
President George Bush identified Iraq as one of the three rogue
states, comprising the 'axis of evil,' that have the capacity
for nuclear weapons. In addition, as the months have flown by,
and the allied forces' daily patrolling of the Iraqi no-fly zones
have continued, those accusations have steamrolled into threats
of a direct military campaign with the support of the United Kingdom
to topple the regime, culminating in Bush's recent UN General
Assembly speech in which he called on the member nations to support
such a challenging necessary endeavor. In response to this wave
of accusations and threats, Saddam Hussein has defiantly responded
and sternly warned the west that it would lose the 'mother of
all battles' and suffer great agony in its vain attempts to remove
him from power. In turn, the global reaction toward the Bush administration's
call to arms, despite Saddam's recent acceptance to allow UN nuclear
facility inspectors to return to Iraq to carryout their duties,
has run the gamut of emotions from strong adherence to strong
disagreement and has gone so far to sour the U.S. and U.K.'s diplomatic
relations with several of its closest allies, especially Germany
With the global media's up-to-the-minute, over-the-top coverage
of this fluid story, it has become very easy for one to lose track
of what the clear reasons would be for a potential military strike
against Iraq, the numerous consequences thereof, and the prospects
for the Iraqi and other Middle Eastern nations in a post-Saddam
world, etc. However, for those interested to seek an understanding
of and to formulate answers to the many questions surrounding
the present Iraqi situation, Sandra Mackey's very timely new book,
The Reckoning: Iraq and the Legacy of Saddam Hussein, offers an
excellent, very insightful and detailed read. Ms. Mackey, a veteran
Middle Eastern journalist, whose previous noteworthy books have
examined Iran, Saudi Arabia, and Lebanon, has written a comprehensive
account of Iraq's modern history beginning with its developments
as a kingdom during the two world wars, the various challenges
of its former rulers, the importance and influence of Shiite and
Sunni Islam, all of which led to the rise of the Baath Party and
Saddam's oppressive regime, and its numerous instabilities and
struggles since, including the bloody and senseless war with Iran,
the onslaughts against the Kurds, the invasion and surrender of
Kuwait, and the chilling consequences of those events. As the
book's dust jacket states, it poses a central question: whether
a future Iraq without Saddam will be even more unstable and more
problematic to the security of the U.S.
Interwoven throughout Mackey's book is the fact that Iraq is not
comprised of one people, but many, especially non-Arabs, with
the south mainly populated by the Shia and the north, the 'homeland'
of the Kurds. Such a reminder lends strong support to discredit
the belief that the west's removal of Saddam would ultimately
solve Iraq's numerous challenges and many of those within the
Middle East and for the west in achieving stability in a region
never known for such a luxury. Naturally of concern is what a
post-Saddam Iraq would represent and how it would be ruled. Such
a monumental challenge arguably eluded the senior Bush and Clinton
administrations, as they each had different (and arguably easier)
goals within the region following the rebuilding of Kuwait. Now,
in the wake of the 9/11 tragedy, the successful removal of the
ruling Taliban in Afghanistan, and reported continued Iraqi violations
of UN conditions, leading to estimates about Iraq's nuclear capabilities,
the U.S. administration now has prepared the world for military
actions with the ultimate goal of toppling Saddam. However, as
the final chapter of Mackey's book challenges, obviously written
prior to the recent heated political debates, if a concerted focus
is not undertaken by the west to determine and plan for what a
post-Saddam Iraq will be, then Iraq's future disintegration of
a country will turn into a nightmare for its peoples and the west.
While reports from Iraqi dissidents reveal growing signs of anxiety
among Saddam loyalists who realize they will become targets once
he would fall, they more importantly suggest that the U.S. administration's
expected campaign, now revealed as an action to 'liberate' the
Iraqi people, is not seen as one by many. The majority of the
population has suffered the harsh consequences of Saddam's abuse
of the oil-for-food program, leading many to question the future
warm welcomes for their 'liberators.' Aside from the interested
observer, Mackey's book should be required reading for the U.S.
administration, as the old adage, "you cannot understand
your friend or your enemy unless you understand his history,"
now loudly rings true.
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