Market Outlook Uncertainty and the Market
with Dr. Marc Faber, lnvestment Advisor, Fund Manager and Author
Needs to Address the Growing Uncertainty of International Investors
on Japanese M&A Environment with Mr. Kiyoshi Goto, Director
General, Department of Business Development, Development Bank
in Japan Via Tax Efficient Silent Partnerships
History?: Thailand and Cambodia make peace but for how
Global War on Poverty: An American Foreign Aid Revolution
Progress: How September 11 Affected U.S. Trade Policy
Trade After September 11 - Port Security Initiatives and International
Canadian Tiger is Still Roaring
Roaring Private Sector
Political Economy of a Stronger Yuan
Other Economic Agenda: Priorities, Progress, and Policies
Property Rights, Pharmaceuticals, and East Asia: Turning Gold
and Slovenia A Growth of European Momentum?
Return of Spheres of Influence?
Foreign Policy: A Perspective from History
Emerging Market Briefs: Brazil, Colombia, Israel, Malaysia, Peru
Review: Al-Queda: In Search of The Terror Network that Threatens
Review: Saddam King of Terror
Review: The Railway King: A Biography of George Hudson, Rail Pioneer
Advisor below, or click on title for single article window)
A. Kabak, C.
Market Outlook Uncertainty and the Market
Scott B. MacDonald
The U.S. stock market remains in
a stage of high volatility, reflecting a deep-seated degree of
uncertainty over the future direction of global politics and the
anemic nature of the U.S. economic recovery. While the prospects
are good for a short-term equity rally based on the view that
the war with Iraq will be short, there remain many dark clouds
on the horizon. This threatens to bring dark days in the form
of a plunging stock market, new terrorist attacks on U.S. soil,
and the much-talked about double dip recession. With the Dow marching
back and forth over the 8,000 mark, there is a good case to make
that it could dip further, possibly below 7,000 before the end
of the year.
Why all the gloom? At the end of the day, the fundamental issue
is uncertainty. Markets hate uncertainty and we have plenty of
it. Although we do not see a double dip recession and believe
the U.S. economy is in a recovery mode, the pace and scope of
that recovery is not strong nor is it convincing. As we have stated
before, the U.S. economy is functioning like it did in the early
1990s. The actual recession, based on a contraction in GDP, is
over, but there was a lag before sentiment changed for the better
and recovery gained momentum. In 1991, the U.S. economy had a
mild contraction, but expanded moderately in 1992 and 1993. The
problem was that unemployment was high and for sectors of the
economy, recessionary tendencies lagged.
We see the same pattern at work now, though corporate debt is
higher. Although the U.S. technically did not have a recession
(as there was not a back-to-back quarterly contraction in GDP),
it has certainly felt like one and indeed the vast majority of
Americans regard 2001 (and early 2002) as a recessionary period,.
The problem is that the weak recovery is going to continue. The
danger is that the U.S. economic expansion could glide lower,
possibly stalling. The February uptick in U.S. unemployment from
5.7% in January to 5.8% should serve as a reminder that a very
real downside scenario continues to sit on the horizon.
Our major worries are ongoing concerns about the Middle East and
North Korea, the impact of higher oil prices (making itself felt
at the gas pumps and in home heating bills), and the weakening
consumer. Higher energy costs are certainly a negative for the
already battered airline and auto companies. Added to that is
the corporate sectors reluctance to raise capital expenditures
until there is greater clarity vis-à-vis the economy and
geopolitical risks. Feeding on the uncertainty, banks and other
financial institutions are nervously looking over their loan and
credit card portfolios, though there has of yet been no major
spike in non-performing assets. [In fact, many regional banks
have reported non-performing assets of less than 1% of their loans
in Q4 2002.]
Yet, for all the potential negatives in the market, not all is
lost. Resolution of some of the geopolitical issues would go a
long way in reducing uncertainty. With a few exceptions, corporate
governance is improving. Sarbanes-Oxley is having a positive impact
in making management clean up balance sheets. Although the problems
at Ahold, the Dutch-owned supermarket giant were bad, it was the
company that approached the Securities Exchange Commission to
notify that agency that it had accounting problems. More significantly,
the large debt overhang from the 1990s boom is being pared to
more manageable levels and U.S. companies are much more cost-efficient
than before. Finally, technical factors in the U.S. corporate
bond market are strong there is little new supply and a
lot of money sitting on the sidelines wanting for the war scare
to end and for companies to take advantage of very low interest
rates to refinance. The few deals that came in February and early
March were usually oversubscribed.
While we can be cautiously optimistic about the U.S. corporate
bond market, we cannot say the same about the stock market. Equities
have a long road ahead of them before we see another bull market.
Some of these speed bumps include:
Equity markets are no
longer the source of cheap capital for industry as they were
in the 1990s;
Corporate problems will
continue to have a quick and brutal echo in the stock market.
Companies that get into trouble, be it with accounting or corporate
governance issues, will be punished as investors will first
flee the name and then shun it;
Ongoing weakness in
the U.S. and global economies undermines any extended rally.
While the U.S. at least has a weak economy, with real GDP growth
in excess of 2%, the same cannot be said of the worlds
second largest economy, Japan, which is looking at 0.5-1.0%
growth in 2003 and Germany, the worlds number three economy,
which could slip back into recession.
The tech sector continues
to struggle, caught between the stark financial and economic
realities and the need to push ahead for new innovations. Venture
capital is hardly what it was in the 1990s and in most cases
is being treated like spare silver bullets;
While an Iraqi war may
play out quickly, geopolitical issues are not going to be entirely
eclipsed. North Korea remains an ongoing risk and al-Qaeda is
hardly been eliminated; and
- It will take a long time for small
investors to feel comfortable in investing in the stock market
in a major fashion due to the billions of wealth lost in the market
crash in 2001.
Consequently, we see the
Dow as having another bear year in 2003, probably falling below
7,000 at some point, before recovering. The following year could
see a recovery in stock prices, but that will depend on the ability
of the economy to move at a faster pace than the 2.4-2.6% range
and a decline in geopolitical uncertainties. Eventually the bulls
will return, but at this juncture they remain out in the pasture,
leaving the bears in charge of the street.
with Dr. Marc Faber, lnvestment Advisor, Fund Manager and Author
Keith W. Rabin
Faber was born in Zurich, Switzerland. He went to school in Geneva
and Zurich and finished high school with the Matura. He studied
Economics at the University of Zurich and, at the age of 24, obtained
a Ph.D. in Economics magna cum laude. Between 1970 and 1978,
Dr Faber worked for White Weld & Company Limited in New York,
Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From
1978 to February 1990, he was the Managing Director of Drexel
Burnham Lambert (HK) Ltd. In June 1990, he set up his own business,
Marc Faber Limited, which acts as an investment advisor, fund
manager and broker/dealer. Dr Faber publishes a widely read monthly
investment newsletter "The Gloom, Boom & Doom" report
which highlights unusual investment opportunities, and is the
author of the recently released book "Tomorrow's
Gold" and "The Great Money Illusion - The Confusions
of the Confusions" which was on the best-seller list for
several weeks in 1988 and has been translated into Chinese and
Japanese. A book on Dr Faber, "Riding the Millennial Storm",
by Nury Vittachi, was published in 1998. A regular
speaker at various investment seminars, Dr Faber is well known
for his "contrarian" investment approach. He is also
associated with a variety of funds including the Iconoclastic
International Fund, The Baring Chrysalis Fund, The Baring Taiwan
Fund, The Income Partners Global Strategy Fund, The Framlington
Eastern Europe Fund, The Buchanan Special Emerging Markets Fund,
The Hendale Asia Fund, The Indian Smaller Companies Fund, The
Central and Southern Asian Fund and The Regent Magna Europa Fund
plc and Tellus Advisors LLC.
Thank you Marc, for agreeing to speak with our readers. Can
you tell us a little about your background and current activities?
I am Swiss and have worked in the investment field since 1970,
first with White Weld & Co., later with Drexel Burnham Lambert
Inc. I have lived since 1973 in Hong Kong and formed my own investment
management and advisory company in 1990. I publish the Gloom Boom
& Doom Report (www.gloomboomdoom.com ) and have written several
books including the latest one entitled “Tomorrow’s
Gold”, which is available through Amazon.com.
Until recently the U.S. was perceived as a safe haven and in
many ways a beneficiary of global turmoil. This has been changing
due to U.S. economic and corporate excesses and the 9/11 tragedy.
As a result, investors have been enduring dramatic losses in dollar-denominated
assets. This would seem to argue for greater international exposure,
yet economists such as Joseph Quinlan argue that investor fear
exceeds their desire for greater diversification and outflows
from the U.S. -- have to date been minimal. Can you give your
thoughts on this and whether this trend will be sustained?
Most investors seem to be brain-damaged. They buy high and sell
low. They buy what is perceived to be safe or promising big returns,
not what will provide big returns in future. In the late 1980s,
they bought Japan and Asia and were negative about the US. In
the late 1990s right up to now, they bought the US and shunned
Asia, although Asia is following the crisis of 1997 relatively
Alan Greenspan and many analysts have expressed the view that
current economic difficulties in the U.S. are largely the result
of "global uncertainty" and that once problems with
Iraq and other issues are resolved, positive growth and momentum
will be restored in the U.S. Do you believe that is the case what
is your outlook for the U.S. economy?
The problems of the US economy have nothing to do with “global
uncertainty”. Greenspan messed it up so royally that he
now has to find an excuse for his disastrous handling of the economy
over the last 10 years or so. Now, we are paying the price for
the ill-fated US belief that all problems can simply be solved
by easing, printing money and expanding credit. Mr. Greenspan
should never have been a Fed Chairman and future historians will
judge him very negatively.
Throughout much of the 1990s, there was a lot of discussion
about the "East Asian Miracle" and the coming "Pacific
Century". This talk largely evaporated during the 1997 Asian
financial crisis. Do you believe we were too quick to write off
the "East Asian Miracle" and does the "Asian Way"
represent a real alternative to Anglo-Saxon business and financial
I do not believe so much in stereotype phrases like Asian miracle,
the Asian way, etc. When it comes to money all people are of the
same religion. In Asia, we have in theory looser controls over
the economy than in the West, but recent events in the US and
other western countries with respect to the terrible abuses that
occurred throughout the economy, the business sector and the governments
suggest that the Asian are small town thieves when it comes to
plundering companies and ripping off shareholders.
During the Asian financial crisis, the U.S. was viewed by many
as a "global economic locomotive" that needed to maintain
its performance until Asia and/or Europe could regain its economic
footing. Now the U.S. engine appears to have run out of steam
and Europe or Japan do not seem ready to take on the load. Can
the world regain positive momentum without a locomotive and what
are the ramifications of continuing weakness in the U.S., Europe
We have to distinguish between markets in terms of dollar sales
and in terms of units. Today, many physical markets are already
larger in China than in the US. I am thinking of steel, where
the Chinese production is larger than the one of the US and Japan
combined, with China still importing steel. Also the markets for
refrigerators, TVs Radios, motorcycles, cellular phones are larger
in China than in the US. Now add the markets of India, Japan,
Indonesia, etc to the Chinese market and you actually see that
Asia by itself is a huge economy in terms of units. I am a believer
in a secular economic military and political decline of the US
and a rise of China and other Asian countries. I think the US
is today where the UK was at the beginning of the 20th century
and that global growth in future will be driven by Asia.
For hundreds of years arguments have been made as to the
potential of emerging markets and the potential they offer. What
we have seen, however, is higher volatility and what you have
termed "gloom boom doom" than one generally finds in
more mature markets, especially over the long term. Would it then
be fair to say that investing in emerging markets is more cyclically-oriented
and a trading opportunity than a long term investment? What should
investors who lack the resources of large institutions and ability
to buy foreign listed securities watch out for?
I think this is a good point. However, I suppose that in many
countries such as China and Russia, there will also be long-term
opportunities. I am not sure that these companies already exist,
but it is clear to me that China will also one day have a GE,
an IBM, MMM, Coca Cola, etc. It is important to understand that
rapidly growing economies have wild business fluctuations. In
my book “Tomorrow’s Gold” I describe the life
cycle of emerging economies and for an investor it is obviously
important to time his purchases well. I may add that I include
in “emerging markets” also “emerging economies”
such as the Internet, the PC, and cellular phones. People who
bought stocks in the TMT sector at the wrong time will probably
never see their money back, as new players will displace the early
leaders of these industries.
is continually hearing now about the danger of deflation yet gold,
oil and many other commodities are at, or approaching multi-year
highs. Can you explain this phenomenon and its implications for
investors? Are we beginning to see both forces exist simultaneously
in a manner last seen during the "stagflation" years
of the Carter administration?
Very few people understand the phenomena of inflation and deflation
– both of which can occur at the same time. We have in many
industries over-capacities and the opening of China and so many
other countries is putting terrific pressure on the prices of
manufactured goods. At the same time, these new countries will
have a strong demand for commodities –especially oil and
food products. Therefore, although prices of manufactured goods
could continue to decline, prices of commodities may rise much
further. In addition with Mr. Greenspan not hesitating to print
money and expand credit and the prospect of Mr. Bernanke becoming
Fed Chairman, and the possibility of a War, you have a favorable
environment for commodities.
Technology and the Internet have had tremendous implications
on our lifestyle and the way business is conducted around the
world. After several bad years we are beginning to see investor
interest in smaller Asian Internet companies such as SINA, PCNTF,
REDF, SIFY, etc. and other such as IGLD in Israel. Is this a meaningful
trend and what are your thoughts on technology in general?
I think that out of the ruins there will be some winners. I just
don’t know which ones will really make a lot of money.
The Dollar has been weakening and most U.S. investors
are unaware that even investments that have broken even are down
double digits when measured against the Euro and many other currencies.
Do you think this trend will continue and what are the trends
that will arise as a result? Which currencies other than the Euro
will be beneficiaries of this trend?
dollar has been far too high considering the economic fundamentals
of the US and considering the policies of its economic decision
makers who don’t care at all about “sound money”.
Therefore, I believe that the dollar has entered again a secular
bear market, whereby it will lose in due course once again 90%
of its value. The question, however, is against what the US dollar
will lose value. Probably it will still decline against the Euro,
as European fundamentals will improve with the inclusion of so
many new countries into Euroland. However, I think the real weakness
will occur against a basket of commodities and against hard assets.
Many of our readers represent corporations and governments
in Asia and other markets that are seeking to position themselves
to appeal to the international financial community. Do you have
any thoughts or words of wisdom on steps they might take to make
themselves more attractive in this regard?
The best way to get exposure to investors is to perform well and
not to constantly lie to the investment community. Companies should
spend more time running their businesses than talking to investors,
while the executives would do better to read once a while something
else than Newsweek and spend their time on the golf course.
For over a decade there has been a lot of talk about globalization
and the integration of world financial markets. While this has
perhaps slowed down in recent years, we are seeing increased after
hours trading and firms seeking dual listings or even bypassing
their national markets to list on foreign exchanges that they
believe will deliver more attractive valuations. Can you comment
on these developments and their implications for investors and
We are moving towards a global market place where financial assets
will be traded 24 hours a day. With this development it is clear
that some shares will be more actively traded during European
or NY hours than in Asia. After all, whereas the physical markets
in Asia are huge, the financial markets are disproportionately
large in the US compared to real economic activity. Thus, the
high trading volume in the US compared to other countries.
The events of 9/11 have had a dramatic effect on corporate
and political behavior. What are your thoughts on the implications
of the "global war on terrorism"?
I am not so sure this statement is correct. 9/11 has given companies
an excuse for poor performance and to cut travel and entertainment
budgets. It has also given every dumb and totally uninterested
expatriate wife, whose life consists of patronizing the local
American Club, to force the husband to move back to the US for
fear that he might find “something” more attractive
in a foreign country.
Even before 9/11 we began to see a more vocal backlash against
globalization, as seen in the disruption of the Seattle WTO meeting
and the IMF/World Bank deciding to reschedule and scale down their
annual meetings. Now we are beginning to see large-scale demonstrations
around the world against U.S. policy toward Iraq and other international
initiatives, which in many ways are similar to those we last saw
during the Vietnam-war era. Do you think these are related and
can you comment on this trend?
In the sixties, there was the saying about the “ugly American”
because the world was afraid that America would take over the
world economically. Now, we have anti American sentiment for the
US arrogance and lack of sensitivity towards other views and customs.
I admire in many ways the American way of life, but unfortunately
American leaders know and understand what is going on in the world
no better than my four Rottweiler dogs. Moreover, whereas my dogs
only have one standard – to eat – the US has many
different standards depending on their economic interests.
One economy that continues to defy gravity is China, and there
seems to be a growing anxiety all over the world about its continuing
strong growth and the displacement it is causing, particularly
in the manufacturing sector. Can you talk a little about China,
the role it will play in the world economy and what it means for
investors, the U.S. and other countries in the region.
China today, is where the US was in the second half of the 19th
century. At the time it became extremely competitive on world
markets and its entry into the global economy led to a significant
price fall between 1873 and 1900. The opening of China will depress
prices for manufactured goods for a long time. At the same time
China will become Asia’s largest customer for commodities
and its tourists will be the largest group.
Businessweek recently wrote an article comparing the movement
of manufacturing jobs from the U.S. in the 1970-80s to a current
displacement among service workers today. Given the improved communication
and infrastructure that allows one to base an operation almost
anywhere in the world, how will higher-wage and cost economies
sustain their competitive advantage?
I don’t see how in the long run the US and Europe will be
able to compete with tradable services from Asia. India will dominate
the software industry and China the way China will dominate manufacturing.
Research labs will also move to Asia as we have an endless supply
of highly qualified and motivated people who can innovate and
I notice you are more positive on Southeast Asian countries
such as Indonesia, Thailand and the Philippines as opposed to
markets such as Korea, Taiwan and Japan which possess superior
infrastructure, more educated workforces, higher percapita consumption
and a greater corporate and technological base. Can you tell us
why this is the case?
I think that Korea, Taiwan and Japan will suffer to some extend
from the competition of China. The resource based Asian economies
will on the other hand benefit from the rise of China. This does
not mean that stocks in Korea, Taiwan and Japan will not perform
well, as companies can shift their production to China and, therefore,
cut their costs.
What are your thoughts on Japan? What do you make of the
debate between promoting inflation and demand vs. structural reform
and industrial revitalization? Do you think we are at or near
the bottom? Finally, do you think the best opportunities are with
the export-oriented success stories such as Toyota or Hitachi
or more the domestically-focused and/or distressed companies that
will benefit from an economic turnaround?
I believe that in 2003, the Japanese stock market will bottom
out and that good opportunities will arise. I am negative about
Japanese bonds because I see a weaker Yen ahead and also the aggressive
monetizing of the debt is likely to lead to higher inflation and
Korea is viewed as one of the great "post IMF crisis"
success stories. The country has shown a rapid willingness to
reform and investor interest has grown to the point that companies
such as Samsung now enjoy a larger market capitalization than
Sony. It has also a rapid adapter of new technologies and leader
in areas such as online trading, broadband and mobile telephony.
At the same time, consumer debt is rising, unemployment is beginning
to increase and troubles with the North are becoming a growing
international concern. What are your views on Korea and it s economic
I think Korea will do just ok. I am not such a great believer
in the success story of the last few years, which was built on
excessive consumer debt. The stock market is somewhat over-sold
and could rally from the present level by 20% to 30% this year.
Any thoughts on the emerging markets of Latin America, Central
and Eastern Europe and the Newly Independent States and Africa
you can leave with us?
I like some Latin American countries, because they are resource
rich and will benefit in the environment I outlined. The price
level of Argentina and Brazil is low and stocks may actually surprise
on the up-side.
You recently authored a book named "Tomorrow's Gold"
that has been attracting a lot of attention. Can you tell us about
Yes, it is doing very well and it will be translated into several
foreign languages. Many people have written to me that the book
is one of the most readable and interesting investment books.
In my introduction to the book, I wrote that I owe all my knowledge
to people from whom I learned a lot including Henry Kaufman. Sydney
Homer, Charles Kindleberger, and all the classical and Austrian
economists. I also learned a lot from Alan Greenspan, so if I
am one day the head of the Zimbabwe Central Bank, I won’t
repeat the same mistakes….
Thank you, Marc for a most informative discussion. Do you have
any closing remarks for our readers.
"Follow the course opposite to custom and you will almost
always do well"
here to purchase "Tomorrow's Gold" directly from Amazon.com
Needs to Address the Growing Uncertainty of International Investors
Keith W. Rabin
Many analysts predicted a
weakening Korean economy last year in the face of an emerging
China, a slow growing Japan and continuing market turmoil in the
United States. To the contrary, a revitalized Korea exhibited
a strong performance. It attracted substantial investor interest
-- and the Korean stock market registered one of the world’s
strongest performances during the first six months of 2002.
This achievement began to erode, however, during the latter half
of the year and has accelerated in recent months. The simple truth
is that Korea -- no matter how competitive its economy, and how
rapidly it implements reforms and expands its corporate capabilities
-- is not large enough to act as an engine of world growth by
In a nation seeking to establish itself as the "Dynamic Hub
of Asia", the perceptions of foreign investors and business
executives matter more than ever before. Without them, Korea cannot
attract the physical, human and financial resources needed to
position itself as a global technology and financial center or
to enable its companies to develop the value-added strategies
that are essential to maintaining the rapid development Korea
has exhibited in the past.
Rising tensions in the North, increased media focus on Anti-Americanism,
burgeoning consumer debt and this week's downgrade of Moody's
outlook for Korea's sovereign credit rating all contribute to
a growing discomfort among international investors and executives.
Their uneasiness is compounded by the recent election of Korean
President Roh Moo-hyun, who ran on a populist platform and is
largely unknown -- not only outside of Korea -- but also among
many Korean business leaders. The world therefore nervously watches
to see whether Korea will continue to deserve its hard-earned
reputation as the Asian country most eager to embrace reform after
the IMF crisis and as a result offered some of the world's most
attractive investment and business opportunities.
While Koreans tend to hunker down and turn inward when faced with
adversity that is precisely the opposite of what is necessary
at the present moment. Korean business and government leaders
– if they are to maintain the good will and positive perception
they been gained in recent years – must reach out and confront
the problems they are facing. Investors are not seeking to punish
Korea or to retreat from the peninsula. Like everyone else they
are simply seeking the reassurances they need to justify their
For example, rising tensions in the North lead Moody's this week
to change its outlook for Korea's sovereign credit rating from
positive to negative. Their belief is based on the assumption
that increased provocation by the North, which has resulted in
an open resumption of its nuclear effort, heightens South Korea's
security risk and the possibility of a military response from
the United States.
This development surprised many investors and business and government
leaders. It has raised their anxiety level, particularly after
several months of media coverage depicting a growing "Anti-Americanism"in
Korea. Several U.S. government leaders have even gone so far as
to question whether it is wise to maintain American security forces
in the nation. One might rightly ask if Moody's actions and the
resulting uncertainty it created were a key factor leading to
an intra-day decline of over 6% earlier this week off the five
day KOPSI index average and whether this is a portent of things
The answer largely depends on the actions of Korea's new government
and its corporate community. The U.S. until recently was perceived
as a safe haven and in many ways a beneficiary of global turmoil.
This has been changing due to U.S. economic and corporate excesses
as well as the loss of innocence following the 9/11 tragedy. As
a result, international investors and executives, who have been
enduring dramatic losses in dollar denominated assets, have by
necessity begun to regain their appreciation for greater international
This theoretically creates a great opportunity for Korea-related
projects and Korean companies who can position themselves as globally
attractive investment opportunities -- yet it will not happen
by itself. Rather than reach inward, Korea-related entities must
reach out and explain current dynamics from their own perspective
in a way that makes sense and which increases their attractiveness
to the international investment community.
Korean opinion leaders need to emphasize while recent actions
by the North are certainly important and need to be addressed,
they do not represent a fundamental change from the security dynamics
of the past fifty years. They might also point out the low historical
correlation between economic growth in South Korea and changes
in South-North relations. Furthermore, the rise in what is seen
as Anti-American sentiment in the South might be interpreted more
as the inevitable result of a young, maturing, empowered, growing
democratic economy. Korea’s rising stature and educated
workforce is giving rise to a truly dynamic human resource pool.
It is seeking greater self expression – not only in its
delivery of cutting edge products, technologies, corporate structures
and a growing range of cultural exports – but also as a
nation that seeks to independently determine its national destiny.
It is also worth noting that Korea represents an increasingly
attractive consumer market in an of itself. This has helped to
give additional depth and strength to its economy. While representing
a highly positive and important trend over the long term, Korean
leaders need to acknowledge investor concern over the rapid rise
of consumer debt. Foreign media reports highlight alarming statistics
such as the record 7% rise in the average credit card default
ratio during the third quarter of 2002. Steps that the Financial
Supervisory Service has taken to curb defaults, including the
imposition of limits on cash advances and higher reserve ratios
on lending institutions receive far less attention and need to
To maintain Korea’s continuing integration as a vital link
in the global chain of commerce and finance, efforts must be made
to communicate both the evolving growth of the Korean nation as
well as the workings of individual entities on the firm level.
By providing well thought out reasons why foreign investors and
business partners would be wise -- not only to maintain -- but
to expand their involvement with Korean enterprises; in addition
to explaining the factors that drive their behavior, investors
will be far more likely to understand that volatility moves in
This will help to lead them to the conclusion that current tensions
with the North and other economic problems in the face of a global
slowdown are only temporary interruptions in the long-term growth
pattern that Korea has consistently exhibited for over half a
century. Therefore, they will come to understand that any present
trend downward, which may continue in the current incendiary environment,
represents nothing more than a long term buying opportunity.
on Japanese M&A Environment with Mr. Kiyoshi Goto, Director-General,
Department of Business Development, Development Bank of Japan
Kiyoshi Goto joined the Development Bank of Japan (DBJ) in 1978.
His overseas experience and successful assignments in internationally
related work are extensive, totaling fifteen of his 25-year experience
at DBJ. He received his MBA from the Amos Tuck School at Dartmouth
College in 1984. In 1987 he was dispatched to the International
Energy Agency in Paris, the energy forum of the OECD, and worked
as an energy economics analyst for three years. From 1995 to 1997
he was in DBJ’s International Department, in charge of extending
loans to foreign companies investing in Japan. Then Mr. Goto was
named Chief Representative of DBJ's Washington D.C. office, where
he worked hard to provide a better understanding of DBJ's activities
as well as the Japanese economy and society through thirty plus
presentations and lectures in three years. Last April he was given
a new mission, to lead a team providing M&A advisory service,
a new business for DBJ.
Hello Goto-san, it is a pleasure to speak with you again. Can
you tell our readers something about the Development Bank of Japan,
its role and mission, as well as your own background and activities
The Development Bank of Japan (DBJ) is a governmental financial
institution established in 1951. DBJ's mission is to contribute
to the development of the Japanese economy and society via the
provision of “quality” financial services that usually
cannot be accommodated by private financial institutions. DBJ's
contribution to Japan's wealth, I believe, has been widely acclaimed.
Since readers of this newsletter mostly work outside Japan, I
should emphasize that DBJ has made strenuous efforts to assist
foreign firms wanting to enter the Japanese market. In 1984, DBJ
crafted loan programs specifically designed for foreign companies
investing in Japan, and those programs have been well received.
In fact, the 1996 Economic Report of the President noted our efforts
in this area. I have never heard of any Japanese institution other
than DBJ being named in the Report.
I have devoted more than half of my career at DBJ to international-related
business. After having assisted foreign companies for two years
through the loan programs I mentioned, I went to Washington, D.C.
and worked as a public relations officer for DBJ—and even
for the Government of Japan—giving talks on a wide variety
of issues including DBJ's loan programs and the state of the Japanese
economy. You may recall that in the Business Opportunities in
Japan symposium organized by the Japan External Trade Organization
(JETRO) in November 1997, I gave a presentation titled, “Investing
in Japan: A New Trend”, which pointed out the growing importance
of M&A in Japan. Last April I was assigned to lead the newly
established department in charge of M&A advisory services.
development of M&A deals is a new area for DBJ. Can you tell
us why DBJ is moving in this direction and how the "culture"
of the institution is changing as you move to initiate this type
Yes, we are a Johnny-come-lately in this field. But we already
realized how important M&A was for the Japanese economy a
decade ago and carefully studied how DBJ, as a policy-implementing
body, could supplement the market. We started this new service
mainly for two reasons. First, M&A, once regarded in Japan
as a malicious business conduct, is gradually becoming accepted
as a useful business tool, but some distaste for M&A remains.
We thought that an advisor whose mindset differed from that of
private advisors was needed in order for M&A to become rooted
in Japan, that is, an advisor who seeks a triple equilibrium.
You may have heard talk of “win-win” deals, deals
in which both the sellers and the buyers get fair shares of the
value from the transactions. That, however, is easier said than
done. The reality is that one side usually wins more than the
other, sometimes unjustly. Being a governmental institution, we
thought we should aim to assure that nobody goes overboard in
an M&A transaction, and we do this by taking into account
not only the benefits to the sellers and to the buyers, but also
to the economy as a whole. I call this the “triple-win”
approach. The second reason we started an M&A advisory service
is that even though M&A has gradually become a business tool
in Japan, only blue-chip companies have had the luxury to use
it. Many small-to-medium-sized firms are ignored in this market
because the deal size cannot generally justify the costs for professional
services. We thought that we should give a helping hand to such
companies to support the healthy development of the M&A market.
Thus, we decided to jump into this new area.
This movement, adding M&A advisory services to DBJ's menu,
meets the diversifying needs of corporate clients and increases
the value of DBJ's financial services. This move also has a positive
impact internally at DBJ in the sense that a solution-oriented
approach is setting in; we should provide not only funds but also
knowledge. Also this service offers DBJ a new avenue to a fee-based
Can you give us some specific examples of M&A deals you
have completed or been working on and the type of deals you are
targeting in the future?
Because we are a latecomer in this field, we do not yet have many
completed deals to prove the effectiveness of DBJ's “triple-win”
approach to M&A advisory services. However, a deal we completed
last November may illustrate DBJ's approach. We served as an advisor
for Meidensha Corporation, a heavy electric machinery manufacturer,
on a deal between its affiliate, Meiden Hoist System, and KCI
Konecranes, a world leader in the crane market. Meiden Hoist System
had been struggling in the depressed and over-crowded market,
and KCI Konecranes, though long aspiring to enter Japan, had not
found a suitable arrangement. This strategic alliance not only
benefited Meidensha and KCI Konecranes, both of whom received
a fair share of the value, but also achieved national policy objectives,
namely, business restructuring and promotion of foreign direct
investment, thus significantly contributing to the Japanese economy.
KCI Konecranes included DBJ's name in its press release on this
alliance, which, I believe, is quite remarkable since an advisor
is not usually mentioned in this kind of release and furthermore
we served as an advisor for Meidensha -- not for KCI Konecranes.
This deal clearly demonstrates that our aim is truly for “win-win”
transactions. Perhaps one might wonder if KCI’s praise was
earned at Meidensha’s expense—that is, some might
think that Meidensha was underrepresented and the notion of triple
equilibrium is a joke. One thing is evident: Meidensha could have
terminated the contract with us anytime they wanted and would
have done so if they had not been satisfied with our services.
me tell you how I understand M&A. M&A is an economic transaction
that really does create value that did not formerly exist. The
seller provides a platform for value creation and the buyer offers
managerial, technical and other expertise. Unless the buyer and
seller get fair shares of value created, the deal won’t
close and nobody will gain. Yes, an advisor works for a client,
either the buyer or the seller, and gets fees. However, if you
regard M&A as a game of win or lose, you are quite likely
to lose fees you could otherwise have earned. The fact that more
than half of M&A deals end up as failures, according to various
surveys and studies, may back up my notion. We at DBJ have a mindset
to make a project as feasible as possible in the long run, which
we have done through our financings since the bank’s establishment.
As part of our implementing policy, we have to make sure that
the projects we finance will have positive impacts on the Japanese
economy and society. This approach is also the backbone of our
M&A activities. On the other hand, take an example whereby
a client comes to us and says that it is looking for an M&A
opportunity simply to boost its earnings per share by acquiring
a company with a low price-earnings ratio. We do not provide advisory
service for such clients. I hope this will help explain our M&A
advisory policy. We are targeting deals that will contribute to
corporate/business restructuring, revitalization of local economies,
and promotion of foreign direct investment.
Substantial wealth has been created in the U.S. by investor
groups who assume possession of distressed or underperforming
assets and then move to reduce costs and introduce other "re-engineering"
techniques to restore profitability. One might imagine there are
many opportunities of this kind in Japan given the depressed economic
environment it has experienced over the past decade, yet we have
yet to see this become a defining trend. Can you give us some
of the reasons why and whether this might change in the future?
Additionally, what is the likelihood that virtually bankrupt corporates
or financial institutions will be allowed to fail?
An active market for distressed assets in Japan cannot be created
overnight. But one is developing. Evidence is that the number
of MBOs increased significantly in Japan, from thirteen transactions
in 2000 to forty-two in 2002. Recently, UK-based 3i withdrew from
the market. However, major foreign funds are still in Japan and
Japanese players are becoming active in the distressed-asset market.
Unison Capital, Advantage Partners and MKS Partners have been
quite visible. DBJ also plays an important role in this regard.
DBJ put equity into Nippon Mirai Capital, a new entrant in this
field and we have been investors in several corporate restructuring
and turnaround funds. Our loan function also supports the activities
of turnaround private equity. For example, Unison Capital made
equity investment in ASCII, a publisher of PC-related magazines
and books, which had been in serious trouble for so many years
despite twice changing management. DBJ appreciated Unison’s
turnaround scheme and, together with other commercial banks, provided
funds necessary for its smooth turnaround. ASCII made a surprisingly
speedy and dramatic comeback. In Japan I expect those “hands-on”
style investors—in your words, those introducing “re-engineering”
techniques—to be the key for Japan’s recovery.
About the George Romero question, by that I mean the question
about “zombie” companies, I would like to respond
with a quote from Charles Darwin’s The Origin of Species:
“It is not the strongest of the species that survives, nor
the most intelligent that survives. It is the one that is the
most adaptable to change.” This is the philosophy behind
Unison Capital, which I heard from its founder, Ehara-san. According
to Darwin’s law, the answer is crystal clear.
the Nikkei at twenty year lows, many investors have been ignoring
Japan in favor of China and other Asian markets that they believe
offer more dramatic growth and potential. Can you tell us why
they should devote more attention to Japan and about some of the
opportunities they may be missing?
China is regarded as the country of the future by many. China’s
entry into the WTO indicates that an immense market is finally
opening. But I think there is still a rocky road ahead. Risks
in China’s financial sector alone could ruin the economic
potential. Since the stakes for prosperity coming from China are
so huge, every multilateral and bilateral effort should be made
to ensure her healthy growth. Still you should keep in mind that
your love for China might sometimes blind you to her faults. Talking
about Japan, it is, no doubt, saddled with numerous problems.
However, according to World Economic Forum's Global Competitiveness
Report 2002, Japan's position improved considerably, from 21st
in 2001 to 13th in 2002. Technology represents the key driver
for this improvement. The report points out that the country’s
innovative power has remained very strong, which compensates for
drops in the macroeconomic index and public institutions index.
This implies that once the macroeconomic situation improves and
the governance problems can be addressed properly, which admittedly
are not easy tasks, “the sun should also rise.” Investors
should follow Japan carefully, that’s for sure; I see no
reason to ignore Japan.
Many analysts view the primary economic problem in Japan
as being the need to deal with non-performing loans, and they
maintain that little can be done until this problem is addressed
in a definitive manner. Furthermore there is also a common perception
that there is little or no demand for commercial loans among borrowers.
Do you share the view that no progress can be achieved in Japan
without resolving the NPL issue? Furthermore do you believe that
there is little or no demand for new commercial loans?
Oh, boy! This has been extensively discussed among high-profile
economists and I may not be the right person to answer this. My
opinion is that the NPL problem should be properly addressed.
However, I think we should distinguish between two types of NPLs:
NPLs stemming from the burst of the bubble and NPLs stemming from
the deepening deflation. The former had long been left disregarded
partly because banks thought they could be disposed anytime as
unrealized gains on securities but most of them have been written
off. The latter is a new pile of bad loans springing up like mushrooms
due to worsening deflation. Since the problem we now face is the
latter, what is most needed, I think, is comprehensive counter-deflationary
measures. I will leave what the measures should be to policy-makers
and economists, though. A lot should be done to address the NPL
Regarding the demand for commercial loans, if you look at some
macro statistics on liquidity or free cash flow of non-financial
firms, you see that in aggregate firms have excess cash. Demand
for commercial bank loans has been weak because of the slack economy.
Banks themselves have changed their lending policies, leaning
toward charging premiums applicable to the risks involved, which
I think is the right direction. These two factors have caused
the decrease in commercial bank loans.
talking about direct investment in Japan, much of the emphasis
has been on greenfield rather than M&A projects. Part of the
problem has been the dichotomy between, one, domestic constituencies
and management who want to maximize valuations and/or are resistant
to change and, two, foreign investors who seek to introduce efficiencies
and achieve maximum gain. This adversarial relationship is standard
practice in the U.S., but is often perceived to cause excessive
tension in a consensus-driven Japan. Is it simply a matter of
time before Japan takes more fully to U.S.-style M&A as a
corporate finance tool?
I do not fully share your view. First, even the Japanese government
(the Japan Investment Council headed by the prime minister) a
long time ago realized the importance of promoting foreign direct
investment via M&A and in 1996 made an official statement
“On the Preparation of an M&A Environment in Japan.”
It was so epoch-making that the media bashed it, claiming the
government was selling off Japanese firms. Secondly, although
Japanese have been highly allergic to M&As because of negative
aspects such as greenmailers and hostile takeovers in the U.S.
in the 1980's, their attitude has been changing. Carlos Ghosn
of the French company Renault successfully revived Nissan Motor
and French coach Philippe Troussier energized the Japanese soccer
team. Is Mr. Ghosn still a public enemy in Japan? Definitely,
not. We all know that we need foreign management know-how to rejuvenate
the Japanese economy. When I was studying at Amos Tuck in 1982–1984,
the U.S. was eager to learn from Japan, and you guys did it right.
You benchmarked Japan and adjusted the Japanese model to meet
the U.S. context. It’s our turn, isn’t it? M&A
has become recognized in Japan as a common corporate finance tool;
there is no doubt about it. Looking from North America, it may
seem a snail's pace. But our team has been working hard to assist
Japanese firms to benefit from M&A, especially cross-border
M&A, and hope to change that perception.
In the U.S., many business owners and entrepreneurs look
to sell all or part of their companies for the right price, even
when they are doing well, for either strategic reasons or to realize
some of the underlying equity, and these transactions when properly
executed are perceived as positive achievements. In Japan, however,
they are often viewed as failure. For that reason, it has been
rare to see healthy Japanese firms turn to M&A as a means
to realize value or to enhance their competitiveness. Do you think
this is a fair statement, and, if so, what can be done to change
this perception in Japan?
since corporate/business restructuring has been the single most
important issue in Corporate Japan recently and M&A has been
used as a restructuring tool, you might have such an impression.
But Japanese blue-chip companies have become focused on corporate
value creation and have used M&A to increase the value-based
metric, best known as “economic profit” or “economic
value added.” In short, we are too busy restructuring. But
you should note that restructuring also increases corporate value
and that, usually, the more ambitious the restructuring the more
the growth. You may have in mind something like Jack Welch's 1987
swap of GE's consumer electronics business for the medical systems
interests of Thomson of France. If that's the case, I admit it
may take a decade for Japanese to see such a deal. But didn’t
the GE-Thomson deal frighten even the U.S. people to death?
Even though one can make a good argument as to why Japan
offers an attractive investment opportunity, many companies and
investors we deal with find it extremely difficult to identify
attractive companies that possess a sufficient understanding and
appreciation of the investment process -- despite a professed
desire to attract foreign investment. Furthermore, business practices
and sensibilities can be very different. As an ivy-league MBA
graduate, can you give any advice to foreign investors on how
they might identify specific investment opportunities in Japan
and not only go about facilitating transactions but also to maintain
good relations with their Japanese counterparts after they are
To expedite successful M&A in Japan, I would advise them to
choose an advisor who has expertise in cross-border transactions
as well as a good understanding of Japanese corporate culture.
Marriage between two different parts of the world can never be
easy and there are a lot of difficulties to overcome. An advisor
who is well-versed in cultural differences could successfully
build a bridge between the two. Our team has strong competence
in cross-border deals since DBJ has for almost twenty years accumulated
vast know-how in cross-border transactions through its financial
assistance to foreign firms entering the Japanese market. The
Meidensha–KCI Konecranes deal I introduced earlier demonstrates
of the problem in initiating M&A deals is the complexity of,
and large amount of time that must be devoted to, individual transactions.
Many people point to the scarcity of qualified service professionals
in Japan, even in large-scale transactions. This can be even more
problematic within the smaller scale transactions you are focusing
on as they lack the scale needed to amortize the costs needed
to allow successful closure. Can you comment on this problem and
how if might be addressed?
Japan’s M&A market is very young, relative to that in
the U.S., and an overemphasis on lending activities by Japanese
banks accounts for the lack of qualified M&A advisors here.
However, competence in this business is quite different from the
one in the derivatives house. You do not have to know the Black
and Scholes model to be a good advisor. The weapons you should
have are basic tools in valuation and some of the buzzwords in
this world. What makes you an excellent advisor are an analytical
capability to formulate corporate strategy and communication skills,
which can be cultivated through work experience. Therefore, Japanese
advisors could sooner or later be parallel to their U.S. counterparts.
Regarding the cost recovery issue in smaller deals, a clear-cut
answer cannot be expected. The amount of work required for an
M&A transaction, unfortunately, hardly changes with deal size.
Therefore, an institution like us should contribute for the time
being, subsidizing smaller deals. Since DBJ alone cannot support
smaller M&A deals, a more comprehensive approach should be
devised: by giving technical assistance to the M&A sections
of local banks, for example.
foreign investors talk about investing in Japan, they are largely
talking about Tokyo and perhaps Osaka. Can you talk a little about
other geographic areas of Japan and the potential that they offer?
Yes, the only city in Japan that many foreign investors can name
may be Tokyo—outside of, perhaps, Osaka, because of its
international airport and Universal Studios Japan—so, it’s
no wonder that most foreign direct investment and M&A has
focused there. However, this should not be construed to mean there
is a lack of opportunities in other parts of Japan. It is just
difficult for foreign investors to find the hidden jewels in areas
other than Tokyo. I can name some of the areas which may appeal
to foreign investors: Sapporo City in Hokkaido, where high technology
companies cluster together; the northern Kyushu area, as a gateway
to East Asian countries; and the Nagano area, where Japan’s
manufacturing prowess can be found. As for how to mine these mother
lodes, DBJ can assist in many ways. As I mentioned, DBJ has assisted
foreign companies investing in Japan for more than twenty years
using our network all around Japan: our branch offices, local
governments and other related institutions, such as JETRO and
the Japan Industrial Location Center. In terms of M&A, we
have a network with forty local banks and regularly exchange information.
We think it would be prudent for your readers to keep us in mind.
Thank you Goto-san for sharing your thoughts with our readers.
Do you have any closing thoughts or comments you would like to
leave with us?
Let me close by borrowing from the final scene of the 1985 movie
Rambo: First Blood II:
"Kiyoshi, non-performing loans, deflation, everything that
happened here may have been wrong. But, damn it, Kiyoshi, you
can't hate your country for it."
"Hate? I'll die for it."
Yes, our team will serve the country via M&A to the death.
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.
in Japan via Tax Efficient Silent Partnerships
Andrew H. Thorson
Partner, Dorsey & Whitney LLP (Tokyo)
Companies investing, acquiring or operating
subsidiaries in Japan should consider using the silent
partnership or TK (known in Japan as a Commercial
Code tokumei kumiaia) as a tax efficient vehicle for
their transactions. By using the TK vehicle, in certain circumstances
investors can realize substantially reduced Japan-side tax burdens
which would otherwise set up a road block to viable returns
on an investment.
In the typical scenario, the sole-shareholder of a Japanese
company might fund the company solely via additional share purchases.
In such cases, the shareholder could be paying an effective
tax rate of up to 47.8% including combined Japanese local and
national taxes plus the 10% withholding tax on dividends paid
to the U.S. shareholder. What if the shareholder could reduce
the tax burden in Japan to 20%? Depending upon the circumstances,
financing the Japanese company via a TK could result in such
What is a TK? A TK is not a business entity. TKs are
contracts between silent investors and business
operators. The investor contracts to provide an
asset (cash or other property) for use by the operator in its
business. In exchange, the operator pays the investor an agreed
percentage of the businesss pre-tax profits.
Under the TK contract, the investor receives no ownership right
in the business. The investor receives only a right to profits.
Furthermore, while the TK contract may provide the investor
with certain investigatory and informational rights, the investor
receives no management rights. TK contracts are simple and often
require little more than an agreement upon scope of the subject
business, the allocation of profits and losses, and terms relating
A TK is not a loan agreement or a leasing agreement. However,
the operator deducts payments to the investor on a pre-tax basis.
Usury limitations do not apply on payments of profits to the
investor. This is one advantage of the TK when contrasted to
inter-company loan financing.
Potential Tax Efficiencies. As indicated above, if properly
established and monitored, use of a TK structure for a Japan
investment could reduce the effective Japanese tax rates for
certain Japan investments.
Take the simple example of financing a wholly-owned subsidiary.
When a U.S. investor purchases or establishes a wholly-owned
corporation in Tokyo the effective tax rate on profits can be
estimated at 47.8% (approximate combined corporate tax rate
of 42% plus a 10% withholding on dividends to U.S. companies
under the Japan United States tax treaty).
If properly structured, the tax burden in Japan could be reduced
to a 20% withholding tax on TK profits paid to the U.S. investor.
TK structures have been used in more complicated structures
as well, for example in aircraft and other asset leasing arrangements
wherein they lawfully reduce tax burdens in Japan.
Freedom of Contract and Limitations on TK Uses. The Commercial
Code of Japan prescribes the fundamental legal foundation of
the TK structure but TK structures are generally subject to
the principle of freedom of contract.
The TK structure is, however, not without limitations. An investor
is at risk and does not receive fixed payments as a lender might.
The investor also has no right to payment when the business
has no profits. If the asset is fully consumed by the business,
then the investor receives nothing upon termination or expiration
of the TK.
Furthermore, a silent investor may enjoy certain contractual
rights of investigation and access to information, but participation
in the management of the entrepreneurs business could
result in the silent investor being treated as an ordinary shareholder
for tax purposes. Such participation could also result in joint
and several liability, or the nullification of the legal validity
of the TK. For this reason, the TK investor should not be a
shareholder of the TK business, but could be an affiliate of
the TK businesss shareholder and could be an affiliate
domiciled in a tax haven.
Potential scrutiny by Japanese tax authorities is perhaps the
material concern in structuring a TK. Generally speaking, however,
the material concern of tax authorities relates to treaty shopping.
Consider, for example, the case in which US Parent Inc., a U.S.
corporation, establishes an entity, X Inc., in country X where
the tax treaty between country X and Japan provides that TK
profit distributions to companies of X are entirely free from
Japanese taxation. If X Inc. was established for the sole purpose
of taking profits from Japan Sub K.K. via a TK to avoid Japanese
taxes, then this is the type of case wherein Japanese tax authorities
might consider issuing an assessment notice. Under such circumstances,
X Inc. lacks real substance and could be considered a treaty
shopping vehicle established to avoid Japanese taxes otherwise
payable by a U.S. corporation. Some commentators indicate generally
the importance of being able to demonstrate to Japanese tax
authorities a rational basis for entering into a TK before taking
into account associated tax benefits.
Scrutiny of TKs. The TK is a typified form of commercial
code contract, which is used by some well-known Japanese corporations
in various capacities. Use of a TK in and of itself is not generally
considered suspect activity or harmful to the reputation of
In recent years the tax authorities have found TKs widely used
in business practice, yet until somewhat recently, aircraft
leasing has been perhaps the only major transaction in which
TKs were regularly utilized. We understand that rumors of a
disallowance of TK tax benefits have been surfacing annually
for several years now, but based upon informal discussions with
officers of related authorities, believe there is no impending
move within the tax authorities to eliminate such benefits.
There have been quasi-governmental study groups formed to research
the current uses of the TK structure in Japan, however, a change
in law to prohibit the use of TKs could be difficult for the
government. Tax authorities are perhaps more likely to crack
down on misuses of the form (such as in treaty shopping) rather
than abolish it.
As discussed above, a TK must be used appropriately. In structuring
a TK for a Japan investment, particular care must be taken to
ensure that the intended benefits are supported by sound commercial
rationale and will achieve the intended benefits. The ultimate
decision of whether or not a TK is suitable for a Japan investment
will rest upon the results of a comprehensive review of all
of the relevant facts and associated tax concerns.
HISTORY: Thailand and Cambodia make peace but for how long?
While the war on Iraq is
in the early stages, another, a less prominent conflict drew to
a close March 22, when checkpoints on the Thai-Cambodia border
were officially reopened after remaining shut for nearly three
months in response to the torching of the Thai embassy in Phnom
The Thai-Cambodia dispute registered as little more than a blip
on the global radar, but despite both governments insistence
that they consider the matter resolved, could yet have serious
implications for relations between the two countries and the fragile
unity of the 10-member Association of Southeast Asian Nations
The conflict was also a potent reminder that in Southeast Asia,
ancient history continues to exert a forceful, if often unnoticed,
influence on present events. The furor was sparked when a Thai
actress popular in both her native country and Cambodia, Suwanan
Khonying, allegedly commented that she would not visit Cambodia
until it returned the 1100 year-old Angkor temple complex to Thailand.
While Khonying insisted she uttered these lines in a role on a
soap opera that aired in Thailand two years ago, her words appeared
in the Khmer press early this year, prompting Cambodian Prime
Minister Hun Sen to comment at a rally in January that Khonying
was not worth a blade of the grass that surrounds Angkor.
What happened next stunned even those well accustomed to Cambodias
political instability. On January 29, bands of protesters that
had gathered in front of the Thai embassy in Phnom Penh broke
into the compound and set the building alight. Having exhausted
government targets they next turned their attention to the private
sector, burning and looting Thai-owned businesses throughout the
capital. By the time order was restored over 30 firms, including
hotels, restaurants and airline offices, were damaged or destroyed;
Thai Prime Minister Thaksin Shinawatra had sent five planes to
the capital to evacuate Thai nationals and the Cambodian ambassador
to Bangkok was expelled. Future tallies estimated the riots cost
Thai companies at over 2 billion baht, but it is more difficult
to gauge the fiascos effect on the already tenuous relations
between the two nations.
Theories as to the true causes of the incident abound; Thai Ambassador
to Phnom Penh Chatchawed Chartsuwan implied upon his return to
Bangkok that the riots were not spontaneous and that the Cambodian
police were slow to respond to his requests for assistance. Many
observers accused Hun Sen of deliberately whipping up nationalist
sentiment ahead of nationwide elections in July; a time-honored
tactic of Cambodias current administration. The Cambodian
government itself accused opposition leader Sam Rainsy of fomenting
disorder to discredit Hun Sen and his party; a charge Rainsy has
More insightful analysts have suggested that the Cambodian unrest
had been brewing for some time. Thailand and Cambodia have been
trading salvos for years over two other temple complexes on the
Thai-Cambodian border that both countries lay claim to. More of
a factor may have been Cambodians increasing resentment
over what they see as Thailands economic colonization of
their country; trade along the border reached 18.7 billion baht
(US$420 million) last year, with Thailand recording a surplus
of a whopping 17.76 billion (US$396 million). Much of Cambodias
nascent infrastructure, including its mobile phone network, is
wholly or partially owned by Thai firms. Even tourism, which the
Cambodian government has upheld as a key engine to the countrys
development, has grown under Thai auspices; three of the largest
hotels in Phnom Penh are Thai-owned and Bangkok Airways enjoys
a virtual monopoly on the lucrative route from Bangkok to Siem
Reap and the temples of Angkor. Thai music and television is so
favored among Cambodian youth that Senior Minister Sok An last
May asked local television producers to impose a moratorium on
Thai films, soap operas and game shows.
The aftermath of the riots only highlighted to many Cambodians
the extent to which they are dependent on their wealthier neighbor.
As border posts closed, the economies of towns in Cambodia that
rely heavily on cross-border trade and traffic such as Poipet
With the border situation returning to normal on March 21 after
Hun Sen paid 252 million baht (US$5.8 million) in compensation
to Thailand for the destruction of the embassy, relations between
the two countries look set to steadily improve. But several thorny
issues remain unresolved. Though the Cambodian government has
agreed in principle to pay an additional 2 billion baht (US$46.6
million) to businesses affected by the incident, trust between
Phnom Penh and Bangkok remains at an all-time low, as evidenced
by Shinawatras insistence that Cambodia compensate at least
one business before the checkpoints were opened. Hun Sen may also
have some difficulty persuading his largely impoverished people
many of whom, correctly or not, believe too much Cambodian
money already ends up in Thai coffers that settling the
outstanding bill is in the nations best interests.
This is to say nothing of the conflicts wider implications,
especially for the investment climate of Cambodia itself and ASEAN
as a whole. Many of the groupings nations are locked in
an uneasy coexistence. Disputed areas exist between Thailand and
Myanmar, Thailand and Laos, and the Philippines and Vietnam; Singapore
and Malaysia frequently lock horns over issues such as waste and
water supply, and Malaysia regularly accuses Indonesia of failing
to control illegal logging and immigration along their border
on the island of Borneo. The shared history of Thailand, Myanmar,
Laos, Cambodia and Vietnam is one of war and conquest; foreign
investors may rightly wonder now whether the nationalist tendencies
that crop up in all these countries could once again give rise
to events like those that took place in Phnom Penh. Business and
trade will soon recover, but the real casualty of the Thai-Cambodia
spat may be the image of stability and unity that ASEAN has been
struggling to project to investors in the face of increasing competition
from China. At the very least the incident is a powerful reminder
that in Asia, old habits die hard.
Global War on Poverty: An American Foreign Aid Revolution
Barry Metzger, Senior Partner, Coudert Brothers, LLP
The 1990s were marked by
growing domestic and international criticism of American foreign
aid to the developing world. While the largest donor at approximately
$10 billion per annum, the United States contributed the smallest
proportion of its national wealth to such assistance (approximately
0.1% of Americas Gross National Product). It has also been
chronically delinquent in Congressional funding of commitments
to the soft loan windows at the multinational development banks
which aid the poorest nations. In the buoyant optimism of Americas
boom economy through most of the decade, Americas wealth
stood in dramatic contrast to poverty and human suffering in the
developing world. The unrestrained devastation of the AIDS pandemic
in parts of Africa painted most starkly that contrast between
the wealth and poverty of nations.
With the inauguration of the George W. Bush in 2001, there seemed
little objective reason for optimism about the emergence of enhanced
development assistance as a major theme of the Bush Administrations
foreign policy. Senior members of the Administration, most notably
Treasury Secretary Paul ONeill, were openly critical of
what they termed to be a long history of ineffective foreign aid.
Criticism of United Nations organizations and the World Bank were
common. The Administrations discomfort with multilateral
approaches to international issues seemed unlikely to yield strong
support for programs to achieve the United Nations-sponsored Millennium
Development Goals or to implement the World Banks Comprehensive
Development Framework in its developing member countries.
Yet within the past year the Bush Administration has undertaken
two bold initiatives that promise dramatically to increase Americas
foreign aid for development and which embody a new paradigm for
America's development assistance.
In March of last year, immediately prior to the United Nations-sponsored
International Conference on Financing for Development in Monterey,
Mexico, President Bush made an American commitment to a 50% increase
in its development assistance over the next three years
to $15 billion a year. The incremental funds would be channeled
through a Millennium Challenge Account to those
developing countries which, in President Bush's words:
root out corruption, respect human rights, and adhere
to the rule of law
invest in better health care, better
schools and broader immunization
[and] have more open markets
and sustainable budget policies
The eligibility of countries
for funds from the Millennium Challenge Account is to be determined
through a remarkably "metric" approach. To determine
eligibility, a country must score above the medium on sixteen
indicators or indexes that measure the extent to which a country
"governs justly, invests in its people, and encourages economic
freedom." The indicators include the: Freedom House indexes
of Civil Liberties and Political Rights, Rule of Law index created
by the World Bank Institute, a country's credit rating, various
measures of public expenditures on primary education and healthcare,
Heritage Foundation's Trade Policy index, IMF's statistics on
a country's inflation rate and its government's budget deficit.
The Millennium Challenge Account is to be administered by a small,
new government corporation, the Millennium Challenge Corporation.
Countries determined by their "metric" scores and by
the Corporation's board of directors to be eligible, are to submit
proposals for assistance to the Corporation. If approved, the
programs funded will be administered directly by such governments
or by such governments in cooperation with non-governmental organizations,
with a minimum of prudential oversight by the Corporation. None
of such assistance is to be channeled through the traditional
screening and administrative processes of the United States Agency
for International Development (USAID) or made available through
increased American contributions to multilateral organizations
such as the United Nations Development Programme or the World
A similarly bold initiative was recently promised by President
Bush in his 2003 State of the Union Message, in which he announced
a $15 billion American commitment -- including $10 billion of
new funds -- to fight AIDS in Africa and the Caribbean over a
five year period. The Emergency Plan for AIDS Relief is
intended to prevent seven million new AIDS infections, to treat
at least two million people with life-extending drugs, and to
provide humane care for millions of people suffering from AIDS
and for children orphaned by AIDS. The Emergency Plan will be
based on a "network model" being employed in countries
such as Uganda. This involves a layered network of central medical
centers that support satellite centers and mobile units, with
varying levels of medical expertise as treatment moves from urban
to rural communities. It will build directly on clinics, sites
and programs established through USAID, the U.S. Department of
Health and Human Services, non-governmental organizations, faith-based
groups, and the host governments. Only a small portion of the
funds will be channeled through the multilateral Global Fund to
Fight HIV, Tuberculosis and Malaria recently established as a
Swiss foundation. This is so despite the fact that the Secretary
of the U.S. Department of Health and Human Services is being appointed
chairperson of the Global Fund and that the Global Fund takes
a comparable approach to that of the Emergency Plan (in supporting
proposals from both governments and from partnerships between
governments and non-governmental organizations and in operating
outside of traditional development assistance delivery channels).
The dramatic increase in development assistance embodied in the
Millennium Challenge Account and the Emergency Plan reflects a
new domestic political consensus or, maybe more accurately, a
new political coalition in the United States supporting development
assistance. These new initiatives have not had their origin in
the traditional support for expanded development assistance from
within the liberal community or from U.S. businesses that are
internationally active. These new initiatives reflect powerful
support from the conservative community and, in particular, from
the Christian right. Such support is largely based on the religious
and moral case for assisting the poor and on the view that such
righteous assistance also serves the U. S. national interest.
This new consensus or coalition was first seen in the Jubilee
2000 Campaign for debt relief. Foreign aid activists such as the
rock star Bono and health activists such as Professor Jeffrey
Sachs have played an important role, probably more so than professional
politicians. Yet the role of professional politicians should not
be underestimated, since the Republican majorities in Congress
ultimately will reinforce Presidential leadership and should ensure
Congressional endorsement of these initiatives.
The Millennium Challenge Account and the Emergency Plan are far
more than mere money; they also represent a dramatic departure
from traditional development assistance. Their approach is more
unilateralist than multilateral, with a very sharp focus on development
effectiveness. Millennium Challenge Account funds are not to go
automatically to allies of strategic importance to the United
States, but only to those countries with "passing grades"
on governance, economic freedom, and investments in education
and healthcare. There is a dramatic turning away from development
assistance viewed as a country's "entitlement" as a
poor nation. Instead, these initiatives are intended to provide
assistance only for those countries that demonstrate a willingness
to help themselves. In the case of the Millennium Challenge Account
this will be achieved through open markets, open political dialogue
and human capital investments -- and in the case of the Emergency
Plan through credible and accountable project proposals.
The unilateralism of these initiatives is, to an extent, a reflection
of the Bush Administration's discomfort with multilateral institutions
and multilateral solutions. It is also, however, a reflection
of more broadly based domestic and international criticism of
the failings of traditional foreign aid and development assistance
agencies. Such criticism has targeted the United Nations, the
World Bank as well as USAID and its sister, bilateral donor institutions
in other countries. Such criticism takes these institutions to
particular task for the slowness of their own movement from an
"entitlement" perspective to more performance-based
grounds for the award of their largess. Too many projects at these
institutions are viewed as having been unsuccessful, and the weight
of their own bureaucracies is viewed as placing too heavy a burden
on program administration. The Global Fund -- a non-American initiative
-- evidences a comparable preference to that of the Millennium
Challenge Account in its desire to work outside of the traditional
foreign aid agencies (both multilateral and bilateral). Troubling
and ironic is the Emergency Plan's preference to work largely
outside the framework which the Global Fund has itself established
outside the traditional multilateral and bilateral healthcare
The path ahead is uncertain. Congressional approval of the Millennium
Challenge Account and the Emergency Plan seems assured. Yet budget
appropriations could be scaled back in light of Americas
worsening budget deficit, the persistent weakness in its domestic
economy and the costs of America's defense. Geopolitical factors
could also skew development assistance priorities in favor of
allies rather than those countries that can demonstrate their
ability to use such money best as development capital.
Another uncertainty, particularly in relation to the Millennium
Challenge Account, is the nature of the proposals which eligible
countries will submit for funding. Since great weight is to be
placed upon responding to the priorities of emerging democracies
with market economies, it may be that the funded proposals have
less of a focus on poverty reduction, environmental protection
and the other priorities that currently animate Americas
and multilateral development programs. Such countries may well
place greater weight on programs for purely economic development.
Most likely, both the Millennium Challenge Account and the Emergency
Plan will be implemented largely as they have been proposed. They
can be expected to have a significant influence in reshaping the
paradigm for development assistance. That influence will not be
limited to Americas development assistance programs, but
can be expected over time to spread to the program design and
priorities of other bilateral donors and of the multilateral development
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Progress: How September 11 Affected U.S. Trade Policy
Russell L. Smith, Willkie Farr & Gallagher
Once the shock and sadness
of the September 11, 2001 attacks had subsided, Americans, and
particularly decision makers and opinion leaders in Washington,
began to try to understand the profound ramifications of a foreign
terrorist attack on American soil. Trade and global economic policy
emerged very quickly as a vitally important area. USTR Zoellick
almost immediately made it clear that there was a direct link
between trade, economic development, and the circumstances responsible
for the frustration and hoplessness, and extremism that breed
terrorism. Initially, Zoellick's point was to emphasize the need
to pass Trade Promotion Authority legislation. While there were
those in Congress and the press who criticized Zoellick strongly
for allegedly using a national tragedy for political purposes,
events belied that accusation. First, Congress passed TPA relatively
quickly, and second, the Doha Ministerial that launched a new
round of global trade negotiations was marked by a unity and determination
to reach consensus on an agenda that could not have been more
different from that of the disaster in Seattle two years before.
Zoellick was proven both correct and pragmatic--events provided
him with a principled goal, and he used the opportunity to achieve
an agenda that ultimately help realize those goals.
The ultimate realization of a balanced multilateral agenda that
encourages global economic growth and especially benefits the
poorest nations is, however, encountering the practical hurdles
of national self-interest. Differences over every substantive
area of the Doha Agenda are for the time standing in the way of
progress at the multilateral level. The knowledge this would happen
and the understanding it was vital to continue to link economic
development to the struggle against terrorism at all levels, has
led to the other major trade policy initiative generated by the
September 11 attacks--the U.S. effort to achieve a wide range
of bilateral and regional trade agreements. One need simply review
the list of nations and regions with whom the United States has
or seeks to conclude agreements to understand the strategic and
political motives of Ambassador Zoellick in undertaking this initiative.
Again, Zoellick is being criticized this effort. The criticism
is especially harsh from WTO officials, who see bilateral negoations
as a threat to the Doha Agenda and the WTO itself. This allegation
is basically not justified. While bilateral and regional negotiations
have their own problems, if conducted with a measure of sensitivity
to mulitlateral impacts, they can make a positive contribution
to WTO-related objectives. Certainly, to give just one example,
breakthroughs on agriculture issues at the bilateral level can
only be helpful to the Doha negotiations on that issue, which
are essentially at a standstill. Just as importantly, bilateral
and regional negotiations are clearly vital to post-September
11 U.S. geopolitical interests. There is no need to detail the
very obvious reasons for many of the nations chosen to receive
the benefit of U.S. bilateral and regional attention, from key
allies like Australia, to key targets like Morocco. Singapore
and Chile were ripe for quick success and thereby established
precedents for more difficult, but ultimately more deeply beneficial
The progress that has been made in all trade negotiating fora,
given the meager prospects post-Seattle, is in large part attributable
to U.S. initiatives driven by the understanding that the September
11 attacks and the abiding presence of global terrorism demand
a dramatic, long-term, and positive economic response. This will
help to rebuild confidence in international relationships and
to diminish the opportunities for such tragedies in the future.
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Trade After September 11 - Port Security Initiatives and International
Russell L. Smith and Ilissa A. Kabak of Willkie Farr & Gallagher
The terrorist attacks of
September 11, 2001 have changed the way Americans live and work.
Security measures that were unheard of just over one year ago
are now commonplace as Congress and the Bush Administration strive
to prevent future terrorist attacks. This trend is especially
true for the transportation sector. While we are familiar with
the security measures implemented at U.S. airports, many of us
are unaware of the profound changes affecting U.S. maritime ports
and foreign ports of origin as well as the manner in which companies
conduct international trade. All of this will ultimately have
a significant impact on the U.S. economy.
Since the September 11 attacks, U.S. ports have been operating
under heightened security to prevent the smuggling of weapons
of mass destruction into the United States. The Bush Administration
has been working to develop a more far-reaching, permanent security
plan to deter such potentially disastrous activity. As part of
this effort, the U.S. Customs Service has developed new programs
to address the threat that terrorism poses to U.S. ports. These
programs have forced companies with imports at any point in their
supply chain to understand the ramifications of the various Customs
programs, changes to import processing activities, and ongoing
efforts to increase potential port security, and to align their
While Customs has developed, and is in the process of implementing,
various security-related programs, this article discusses one
program, the Container Security Initiative (CSI),
and regulations developed under CSI that have a profound effect
on how U.S.-based businesses reliant upon imports operate in this
CSI and the 24-Hour Rule
As part of the effort to address the threat of terrorism to U.S.
ports, Customs launched the CSI in January 2002. CSI is designed
to deter terrorists from utilizing international shipping lines
to smuggle weapons of mass destruction. According to Customs,
the key elements of CSI are to establish security criteria for
identifying high-risk containers based on advance information,
prescreen containerized cargo at the earliest possible point in
the shipping process, use technology to quickly prescreen containers
deemed to be high-risk, and develop secure shipping containers.
Under CSI, upon agreement with foreign governments, U.S. Customs
agents will be stationed at foreign ports to identify and inspect
high-risk shipments for smuggled goods or weapons at those ports
of lading. To date, the governments of Canada, Singapore, the
Netherlands, Belgium, France, Germany, Sweden, Italy, United Kingdom,
Spain, China, Hong Kong, Japan, and South Korea have agreed to
participate in CSI. As of this writing, the CSI program is already
operational at the ports of Antwerp, Bremerhaven, Hamburg, Rotterdam,
LeHavre, Montreal, Halifax, and Vancouver.
To enhance the effectiveness of CSI, Customs developed the 24-hour
Advance Vessel Manifest Rule (24-hour Rule). The Rule,
which Customs began to enforce on February 2, 2003, requires parties
to transmit to Customs specific and detailed cargo declarations
for ocean freight on vessels that call on U.S. ports at least
24 hours prior to lading at the foreign port. Carriers and eligible
Non-Vessel Operating Common Carriers (NVOCCs) must
submit such information to Customs either electronically through
the vessel Automated Manifest System (AMS) or in paper
form. If Customs does not receive the required manifest information
24 hours prior to lading, Customs will instruct a shipping line
not to load the cargo on the intended vessel, thus stopping the
shipment at the foreign port. Customs has already issued such
No Load directives to various shipping companies since
the agency began enforcing the rule.
Customs 24-hour Rule exempts bulk cargo (homogenous cargo
that is stowed in bulk, is loose in the vessel hold, and is not
enclosed in any container such as boxes, bales, bags, cases, etc.)
and break bulk cargo (cargo that is not containerized but is otherwise
packaged or bundled ) on a case by case basis. To apply for an
exemption, carriers must submit a written request to Customs.
Unless and until an application for exemption is granted, companies
are required to comply with the 24-hour Rule. Companies that are
exempt from the 24-hour Rule must submit cargo declaration information
to Customs 24 hours prior to arrival in the United States if they
participate in the vessel AMS, or upon arrival if they are non-automated
Implications of 24-Hour Rule
Prior to the implementation of the 24-hour Rule, Customs Regulations
stipulated only that parties have a cargo manifest available upon
entry into the United States and upon request by a Customs agent.
By requiring the presentation of vessel manifest information 24
hours prior to the loading of cargo onto the vessel at the foreign
port, Customs is insisting that such information be transmitted
days, or in some cases weeks, earlier than what had been required
of carriers under prior Customs Regulations. Thus, exporting companies
will be required to provide their carriers with detailed shipment
information at an even earlier stage in the shipping process to
ensure that the carriers can properly, and promptly, submit the
manifest information to Customs according to the requirements
set forth in the 24-hour Rule. This, in turn, will likely force
U.S. importers, especially those that maintain facilities dependent
upon just-in-time deliveries, to implement a system that will
allow for the early identification of their need for imported
Given the necessary changes companies must make to comply with
these new regulations, Customs 24-hour Rule is changing
significantly the manner in which importing parties, their suppliers,
and their ocean carriers, arrange and account for ocean shipments.
This has the potential to place substantial burdens on parties
who must comply with the Rule.
The Canadian Tiger
is Still Roaring
In 2002, the Canadian economy
was the best performer within the G-7 group of industrialized
nations. Despite the global downturn, Canada was the only major
industrialized nation with a budget surplus, and it registered
a decent GDP growth level of 3.3%. In 2003, the Canadian dollar
has improved relative to its US counterpart from 63 cents in
January 2002 to 67 cents in March 2003, a 30 month high. In
fact, Canadas GDP growth will again average over 3% to
outperform its rivals.
The reasons for this success are easily identified. Canadas
industrial structure has been less exposed to the bursting of
the technology bubble. Also, Canada has benefited from its status
as a net exporter of energy. In addition, the 67-cent dollar
(in US terms) is still attractive to international investors
and tourists alike. In addition, there is some evidence to suggest
that Canadian productivity levels have improved. Policy makers
have also played an important positive role in addressing Canadas
fiscal and monetary policy challenges.
In February 2003, the Canadian Federal government introduced
its 2003 fiscal budget, which calls again for a balanced budget.
There will be increased spending on health care, defense and
other items, but the ethic of fiscal prudence has taken firm
hold. Also, the balanced budget is backed by a Can $3 billion
contingency reserve. The fiscal consolidation and debt reduction
undertaken since the mid-1990s have provided room to further
ease tax burdens and introduce modest discretionary spending
stimulus. We think that tax cuts should be a priority, for the
array of taxes imposed on Canadians, which despite the health
and social services that are available to them as a consequence,
is far greater than those imposed on their US counterparts.
Tax cuts could be a vehicle to boost employment and economic
Canadas flexible exchange rate regime has served the country
well, as it has been effective in cushioning the economy from
external shocks. Also, since the early 1990s, Canada has been
one of the worlds strongest advocates for liberalized
trade. Canada has been a substantial economic beneficiary of
the North American Free Trade Agreement and its predecessor,
the Canada-US Free Trade Agreement. The agreements have resulted
in investment and job creation and have contributed to a falling
national unemployment rate from 9.6% in 1996 to 7.4% in February
2003. This compares favorably to the United States where unemployment
is increasing. Further, Canada is virtually unique among industrialized
nations with a 2002 current account surplus of 2.8%.
On the monetary policy side, the Bank of Canada has implemented
a successful inflation-targeting framework that has anchored
expectations and permitted timely monetary policy responses.
Going forward, we expect the Central Bank to increase interest
rates in 2003 to reduce the inflation risk, which was 4.5% in
January 2003. Thus far in 2003, Canada is the only G-7 nations
to increase borrowing costs at all -- by 25 basis points in
There are built-in constraints on this success story however.
The most important of these are the uncertainties associated
with the strength of the US economic recovery. Over 85% of Canadas
trade is with the United States, and its financial and economic
health is intimately tied to the prospects of the US. In addition,
uncertainty associated with a potential war in Iraq could reduce
investment and diminish national growth prospects.
But we think these risks will be outweighed by the fundamental
strengths of the economy. In March 2004, Prime Minister Jean
Chretien will retire and federal elections will be held. At
the moment, former Finance Minister Paul Martin is the strong
favorite to be elected Prime Minister. Should that occur, investors
should expect continued market-friendly policies from the government
Vietnams Roaring Private Sector
One of the more hackneyed laments of recent years has focused
on the moribund state of Vietnams economy, and the absence
of a serious private sector. A closer look is merited, however,
not least since Vietnam is now established as Asias second
fastest economy. The following comments address the power of
the private sector; its problems; and a confident prognosis
for the future.
First, the last few years have established a firm, and uncontested
legal basis for private business: the landmark Enterprise law
of 1999, the countrys first Banking law in 2000, Decree
48 on the stockmarket, and upgraded privatization legislation
last year. The Constitution, reviewed in 2001, unambiguously
leveled the playing field with the State-owned economy.
The effect has been dramatic: 55,000 new businesses have been
registered, including more than 20,000 in 2002 alone. There
now more than 1,000 privatized companies; 21 listed companies;
and 40 private sector banks. This does not include more than
2,000 foreign businesses.
The private sector is the principal source of new job creation
(at 1.4m school leavers per year, this dwarfs the total state-enterprise
workforce of 1.8m); and is responsible for more than half of
non-oil exports including world-beating performers rice,
cashews, coffee, and pepper; garments, footwear, and housewares.
The private sector invests more than either the state, state
enterprises, or foreign investors, equivalent to more than 6%
of GDP per year; and churns out a quarter of industrial production.
The private sector is the principal motor behind a doubling
of bank deposits and 50% increase in bank credit in the last
three years. There can be little doubt who is the pied piper
in this robust economy.
But there are issues, principally as a result of growing pains.
First among these is modest scale: few businesses are more than
first generation, and family ownership is the norm. This leads
to inexperienced management, most visible in an unwillingness
to plan for the long term, and a ruthless focus on near-term
profitability. Partly due to this, businesses suffer from a
lack of transparency, though much of this reflects an outdated
allergy to tax payment. Clearly this, in turn, impacts on the
valuations that such companies attract and almost all business
sales are transacted at close to book value. And lastly, all
of the above lead to much distorted capital structures, over-high
real interest rates, and a dysfunctional financial system: the
largest listed company has not one dong of medium term debt,
while half the deposits of the banking system are kept in dollars,
and lent offshore at minimal margins. Vietnam is not the poor
country that many believe rather it suffers from a misallocation
They say that nothing is impossible in Vietnam, but anything
can happen. Heres a few cheerful, and entirely achievable
predictions for the future:
The number of privatizations will treble in three years; the
number of listed companies will double in each of the next five
years; both money supply and bank credit will double in the
next three years; real interest rates will halve; and asset
markets will boom.
Dominic Scriven is a director and co-founder of Dragon Capital,
and manager of Vietnams largest investment fund, Vietnam
Enterprise Investments Limited.
The Political Economy of a Stronger Yuan
C. H. Kwan, Senior Fellow, Research Institute of Economy, Trade
As symbolized by the rapid
rise in China's foreign exchange reserves, the yuan is facing
upward pressure. Although a gradual appreciation of the yuan
both greatly benefits China itself and responds to the wishes
of the international community, there are many political hurdles
to be cleared both at home and abroad before this can be realized.
Led by rising inflow of foreign direct investment and exports,
China's balance of payments surplus has widened further following
WTO entry in late 2001. As a result, the county's foreign exchange
reserves rose by $74.2 billion (equivalent to 6% of GDP) in
2002 to reach $286.4 billion by the end of the year. This figure
ranks second in the world behind Japan, and is equivalent to
roughly one year's worth of China's imports.
Officially, China has a managed floating system, but ever since
the Asian financial crisis of 1997, the yuan has remained stable
against the dollar, and is virtually pegged to the greenback.
If, as is the case now, the yuan's value is set at a level that
is too low compared to its actual strength, dollar supply exceeds
demand. When monetary authorities absorb excess dollars from
the market, the nation's foreign exchange reserves increase
as a result. If China were to adopt a floating system and authorities
did not intervene at all in currency markets, its foreign exchange
reserves would not have grown and the yuan would have appreciated
If the authorities continue to keep the yuan at its prevailing
level, China's trade imbalance and foreign exchange reserves
will further increase, causing much harm to the Chinese economy.
First, the surge in foreign exchange reserves will make it difficult
to control money supply, and exacerbate the real estate bubble.
In addition, China has already surpassed Japan as the country
with which the United States has the largest trade deficit,
and should the deficit widen further, it could lead to trade
frictions. Finally, most of China's foreign exchange reserves
have been invested in US Treasuries, and since the return on
those investments is much lower than that of investments made
at home, it is clear that the savings of Chinese citizens are
not being effectively invested. The yuan should appreciate in
order to correct such distortions.
In addition to adjusting exchange rates, reforms are also needed
in the exchange system itself. First, against the backdrop of
the sharp fluctuations in the yen-dollar rate and the fact that
most Asian nations have shifted to a managed floating system,
the yuan's stability vis-a-vis the dollar under the peg system
causes large fluctuations in the exchange rate between the yuan
and the currencies of its trading partners. This is a destabilizing
factor for China's trade and its economy as a whole. At the
same time, rising mobility of capital is making it more difficult
to control money supply and interest rates, and the current
de facto fixed exchange rate system should also be abandoned
from the viewpoint of maintaining the independence of monetary
Exiting from the dollar peg system is preferably done at a time
when economic fundamentals including external balances are good,
and when there is some upward pressure on the yuan. The stage
is almost set, as these preconditions have practically been
met. When doing so, it is probably more realistic to condone
a gradual appreciation spreading over a few years rather than
implementing a steep appreciation in one step. Yet, authorities
so far have remained cautious over a yuan appreciation partly
because the leaders newly appointed during the latest Communist
Party Congress and National Peoples Congress will take
time to consolidate their power.
Meanwhile, major industrial countries like Japan are calling
for the yuan's appreciation, saying it would help combat global
deflation and correct their trade imbalances with China. While
it is true that there is room for the yuan to rise, given the
reasons cited above, it is likely that the new Chinese leadership
would want to avoid by all means possible a scenario in which
it allows the yuan to appreciate due to external pressure. In
this sense, recent remarks by Japanese financial authorities
calling for a stronger yuan, such as the opinion piece that
Haruhiko Kuroda and Masahiro Kawai, the vice minister and deputy
vice minister of finance for international affairs, jointly
penned in the Dec. 2 edition of The Financial Times, can only
delay, rather than accelerate, the yuan's appreciation. Their
hopes for a sharp rise in the yuan, similar to that of the yen
in the wake of the Plaza Accord, must be viewed as unrealistic.
As this shows, the appreciation of the yuan is both desirable
for China itself, and can also meet the demand of the international
community. Nevertheless, the dilemma is that there is little
prospect of this materializing because of a lack of trust among
the countries concerned. In terms of its GDP and trade volume,
China is now on a par with Britain, and as can be seen in the
current calls for a stronger yuan, it can no longer be ignored
when discussing such issues as industrial adjustments, deflation,
and trade imbalances in major industrialized countries. There
are limits to the extent to which current international economic
policies can be effectively harmonized so long as China is left
out in the cold. The time may have arrived to construct a system
under which mutual trust can be further developed, such as considering
China's entry into the Group of Seven.
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Chinas Other Economic Agenda: Priorities, Progress, and
Jean-Marc F. Blanchard, Ph.D.
troubled state-owned enterprises (SOEs) and state banks, its
unemployment woes, and the pressures unleashed by its World
Trade Organization (WTO) accession tend to dominate conversation
when Chinas economic difficulties are discussed. These
problems present genuine threats to the countrys economic
prosperity and political stability. They are, however, only
three of the many economic challenges that China confronts as
it moves to a market-based and globally integrated urban economy.
The interlinked nature of Chinas economic problems means
that the leadership cannot deal with the more visible economic
threats in isolation from lesser-known problems. A recapitalization
of the banking system, for instance, will not spur growth unless
the government succeeds in fostering a more favorable business
environment for private firms. Chinas less familiar economic
difficulties include private sector constraints, rural underdevelopment,
and public finance problems.
The private sector is a ray of light on Chinas contemporary
economic landscape. It produces about one-third of Chinas
GDP, dominates the service sector, and, more importantly, is
a major source of job creation. Yet private enterprises operating
in China face substantial obstacles. These include a lack of
access to capital, underdeveloped markets, too little or too
much market supervision and regulation, restrictions on market
entry and access to government resources, inadequate infrastructure,
and corrupt officials. Currently, many SOEs that are trying
to become normally functioning private businesses cannot get
the investment they need, the managerial training they require,
or the asset divestment powers they seek.
In rural areas, underdevelopment has many facets: poverty, high
levels of income inequality, inadequate health and education,
energy shortages, and ecological crises. If rural areas cannot
provide adequate opportunities, rural residents will migrate
to urban areas. This places great strains on local governments,
job markets, and the urban infrastructure. Additionally, rural
underdevelopment implies a lack of money to support education,
health care, and environmental programs. Either this money will
come from higher government levels or these programs will remain
underfunded. This will make it extremely difficult to create
an educated workforce, to deal with costly health problems like
HIV/AIDS, and to reduce air pollution, water shortages and farmland
We should not forget that rural underdevelopment has provoked
political unrest in recent years. This is one reason decision
makers gave it great attention in the 10th Five-Year Plan (2001-2006)
and last Novembers 16th Party Congress, and repeatedly
mentioned it at the ongoing National Peoples Congress.
It would be farfetched to assume that just because rural areas
served as the base for the 1949 Revolution that rural problems
will once again become the wellspring of another revolution.
Many of the conditions present in 1949 are simply are not there
today. Nevertheless, severe problems exist. Ironically, development
programs may fuel the fire if they cause rural inhabitants to
feel they are entitled to more, but fail to deliver and do not
furnish political channels for them to pursue any resulting
It is not well known that government units beneath the national
level account for almost three-quarters of public expenditures
in China. Furthermore, government units below the provincial
level account for more than half of all public spending. Unfortunately,
these sub-national units are spending far in excess of their
resources. To restore balance, they need to cut spending, raise
taxes/fees, or draw more money from an already hard-pressed
central government. Aside from their adverse consequences in
terms of social spending, cuts could diminish spending on the
infrastructure that promotes growth and sustains the creation
of a national market. Moreover, tax and fee hikes may stifle
business creation, causing corruption, and encouraging wasteful
efforts to evade taxes and fees.
Cognizant of these problems and the risks of inaction, Chinese
leaders have embraced numerous initiatives. They have worked
to establish a functioning legal and judicial system, to create
additional financing options for small and medium enterprises,
to open previously closed sectors like energy, and to improve
transportation and logistics. They also have striven to increase
access to education, to encourage the production of higher-value
crops, to produce better socio-economic indicators, and to protect
natural resources. Finally, they have endeavored to stabilize
the financial situation of the countrys subnational units
through increases in general and project specific transfers,
new revenue sharing arrangements, and shifts in expenditure
Going forward, the economic agenda remains packed. The government
needs to improve the business environment by eliminating internal
trade barriers, reducing government monopolies, and increasing
import and export privileges. On the public finance front, policymakers
must balance subnational spending obligations with subnational
resources, improve information and management systems, and establish
more effective tax systems. In the realm of rural underdevelopment,
officials need to do more with respect to health and education
spending, the creation of non-farm employment opportunities,
and the protection of individual property rights.
To address these outstanding items, the government is pursuing
various options. For instance, it is giving space to private
financial institutions in the insurance, banking, and securities
industries and considering reforms in the tax laws applied to
financial institutions. It also is reducing the footprint of
SOEs in many markets. It is also accepting market prices for
energy and transport, which reduces government subsidy burdens
and creates new opportunities for private entrepreneurs. Furthermore,
it is curbing special fees and user charges and strengthening
land-use rights. Moreover, it is dramatically streamlining the
bureaucracy and allocating more resources to infrastructure,
environmental, and education. Finally, it is enacting additional
business and environmental laws and creating more transparent
regulations and guidelines.
There is no reason to doubt the new Communist Party leaderships
commitment to these and other reform initiatives. Past economic
crises have discredited administrative economic solutions. The
internal and external pressures for continued economic reforms
are great. The new leadership and Chinas power brokers
are pragmatic and uniformly support a reformist agenda. And
these elites have the support of powerful patrons including
Jiang Zemin and Zhu Rongji. Nevertheless, their reformist zeal
will be tempered by government fiscal constraints and their
wariness of potentially destabilizing change.
Successful progress on Chinas other economic issues could
offer many opportunities to businesses that operate in, or want
to conduct business with, China. First, it should create new
buyers and suppliers. Second, it should increase investment
opportunities, either individually or in partnership with domestic
companies. Third, it should increase the countrys overall
rate of economic growth. Fourth, it should stabilize the rural,
ecological, and government fiscal situation. Fifth, it should
allow progress on the countrys more visible economic problems.
Where China is concerned, then, 2+2 indeed may make 5.
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Property Rights, Pharmaceuticals, and East Asia: Turning Gold
Jean-Marc F. Blanchard, Ph.D.
The Trade-Related Aspects of Intellectual Property Rights Agreement
(TRIPS), one of the many agreements that established
the World Trade Organization (WTO), sets forth international
norms and legal standards with respect a variety of intellectual
property rights (IPR) such as copyrights, trademarks, and trade
secrets. In recent years, government budgetary woes and endemics
and epidemics such as the HIV/AIDS crisis have put severe pressures
on countries to violate or tepidly support the provisions of
TRIPS relating to drug patents. Drug patents are important because
they limit the sale, use, and manufacture of patented products,
and, where appropriate, the use of patented drug manufacturing
East Asia is no stranger to the aforementioned pressures. Furthermore,
the national development objectives of East Asian governments
provide them with incentives to interpret TRIPS in a self-serving
Last April, the Office of the United States Trade Representative
(USTR) issued its annual Special 301 Report on global IPR protection.
The report shows that East Asian countries do not always protect
drug patents. Taiwan suffers from some trademark counterfeiting
while South Korea does not take adequate steps to prevent patent-infringing
products from obtaining marketing approval. Furthermore, certain
U.S. pharmaceuticals continue to experience difficulties in
obtaining administrative protection for their products in China.
Although the situation with respect to drug patents in East
Asia is not dire, there are a number of trends that threaten
it. The first trend is the deteriorating public finance situation
in East Asia. Relatively slow economic growth is producing pressure
on many governments to tighten their budgets, which have been
in deficit as a result of fiscal stimulus programs undertaken
to stabilize or increase economic growth over the past few years.
A second is the growing number of infectious diseases needing
attention. These diseases raise not only budgetary issues, but
also huge politico-economic issues because of their effect on
family structures and the workforce. A third trend is the need
for countries to find new sources of economic development. One
noteworthy source that East Asian governments are currently
emphasizing is the biotech sector.
Despite their acknowledgement that patent rights can provide
an incentive for drug research and development, the preceding
trends are leading East Asian countries to adopt a variety of
ameliorative tactics vis-à-vis their pharmaceutical burdens.
These tactics include price controls, cuts in drug reimbursement
rates, and parallel importation. Moreover, East Asian and other
countries are lobbying for the ability to use confidential drug
test data, for the transfer of technology to support the development
of domestic pharmaceuticals, and for more time to comply with
To the pharmaceutical industrys dismay, these pressures
are also leading East Asian countries (as well as other developing
countries) to use compulsory licensing in a liberal fashion,
to authorize compulsory licensing for production abroad, and
to move slowly in establishing the enforcement systems that
TRIPS requires. Although the specific justifications advanced
by governments for such measures are often questionable, their
general right to authorize compulsory licensing for domestic
production is not. Article 31 of TRIPS specifically allows compulsory
licensing for government use, or in a national emergency
or circumstance of extreme urgency.
Looking ahead, the East Asian environment for IPR will worsen
the greater the benefit that each country derives from exploiting
drug patents and the lower the cost that it will incur from
exploiting them. Benefit is a function of each countrys
health care requirements, its drug manufacturing capabilities,
its economic development needs, and its financial situation.
Cost is a function of each countrys bargaining power versus
patent holders. Factors increasing a countrys bargaining
power include abundant financial and political resources, allies
with financial and political clout, and a friendly normative
environment. Factors increasing the patent holders position
include financial and political might and powerful allies. Its
power also is enhanced to the extent that an adversary country
has its own medical products whose IPR it needs to protect.
Historically, the pharmaceutical industry has dealt with threats
to its IPR by attempting to exercise power. This is changing,
however, as shown by the industrys creation of various
drug subsidy programs such as the Together-Rx prescription savings
program and its contributions to various global disease initiatives.
Of course, pharmaceutical companies have not given up entirely
on using their muscle. The industry, however, must be careful
about emphasizing a realpolitik strategy because it can backfire
in the court of public opinion. Moreover, pressure against developing
countries has led them to undertake a counteroffensive in the
WTO regarding the proper interpretation of TRIPS
In the short-run, pharmaceuticals should adopt a three-pronged
strategy, which reduces the benefits that countries derive from
infringing upon patents and increases the costs of such infringements.
First, they should seek to partner not only with global health
organizations, but also multilateral and bilateral development
agencies. Such partnerships will leverage their charitable activities
and deal directly with some of the root causes of the global
health care crisis. Second, they should undertake public relations
initiatives that reach wider audiences. Third, they should support
developing country efforts to nurture industries using traditional
medicines and indigenous biological endowments. In the long
run, it is to the advantage of the pharmaceutical industry to
assist global efforts to facilitate economic development. This
is due to the fact that development can reduce the incentives
for governments to break drug patents and can create a more
hostile environment for patent violators.
Although the pharmaceutical industry always will be under a
modicum of pressure given government budgetary pressures, rising
health care burdens, and economic development objectives, more
effective strategies can help to prevent the current situation
from degenerating into an unending bad TRIP(s).
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and Slovenia A Growth of European Momentum?
Scott B. MacDonald
On March 9, 2003 the island-state of Malta voted in favor of
joining the European Union in a referendum. This was the first
popular test among 10 nations invited to become EU members next
year. According to official results, 53.65% or 143,094 Maltese,
voted "yes," The no vote won 46.35% or
123,628. This was a relatively narrow margin mirroring worries
that membership in the EU could compromise the island-states
tradition of highly prized independence.
The vote was important for the EU. Clearly EU headquarters in
Brussels and the other nine EU candidates were watching closely
due to concerns that enthusiasm for an expanded Europe was weakening.
European Commission President Romano Prodi said the result boded
well for ratification in other countries. "This is a choice
for stability and growth, as well as for the peaceful reunification
of Europe and the European people," Mr. Prodi said in a
statement from Brussels.
One of the reasons for the possibility of waning excitement
over EU membership has been the seemingly heavy-handed approach
to developing a common European foreign policy, led by France
and followed by Germany. Indeed, the Paris-Berlin bid at leadership
in regard to policy over Iraq ultimately resulted in French
President Jacques Chirac talking down to a number of potential
EU members, in particular, Poland, Bulgaria and Romania. Other
concerns have been in surrounding policy independence to Brussels
in a number of areas, despite obvious gains in terms of the
EUs generous assistance.
The vote was a victory for Malta's pro-membership Prime Minister,
Eddie Fenech Adami, though the opposition challenged him to
call elections soon for another test of voter sentiment. But
Labour party leader Alfred Sant said that with 270,000 ballots
cast, the 20,000 people who didn't vote meant the "yes"
total amounted to less than half the eligible electorate. Voter
turnout was roughly 90 per cent.
The Prime Ministers Nationalist government met soon thereafter
and decided to make an "opportune decision" on Mr.
Sant's demand by calling for a general election on April 12.
This was not a shock to the public as it was widely expected
that the cabinet would call for elections in a few weeks, possibly
to be held just before Malta is to sign its EU accession treaty
in an April 16 ceremony in Athens.
Doubts about EU expansion have been growing across the continent,
and the people of Malta proud of decades of independence
and policies of non-alignment went to the polls divided
over whether their Mediterranean archipelago should join the
A spat between Paris and EU-candidate nations over Washington's
tough stance on Iraq only aggravated unease among smaller, less-developed
countries that they would be dwarfed politically by bloc members
such as France, Germany and the UK. New EU members will receive
billions of dollars in aid, but they will also have to open
their markets. Many workers in Malta worry that the price of
membership would be slashed jobs as protectionist barriers come
Slovenia's referendum is next, on March 23. Other candidates
with referendums pending include Poland, where a strong farming
lobby fears agriculture will suffer from EU membership, as well
as the Czech Republic, Estonia, Latvia, Lithuania, Hungary and
Slovakia. Cyprus is to ratify its bid with a parliamentary vote.
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.
Return of Spheres of Influence?
By Scott B. MacDonald
For all the discussion about the split between the United States
and Europe over Iraq, the fundamental issue is that the international
political system is heading back into spheres of influence.
The Western alliance is becoming history. This was bound to
happen. We sometimes forget that nature abhors a vacuum. Perhaps
having a single superpower is a little bit like a vacuum
so many places to play policemen and not enough soldiers to
go around. Now, we see the drift away from uni-polarity back
to multi-polarity, with President Jacques Chirac of France,
backed by Germanys Chancellor Gerhard Schroeder and, to
a lesser extent, Russias Vladimir Putin, leading the way
to asserting Europes independence vis-à-vis the
United States. We also see a more self-confident China, willing
to defy the U.S. on Iraq and quietly asserting itself in Southeast
The main indicator of the return of spheres of influence foreign
policy is evident in recent encounters between the United States
and Europeans. The United States is now in the process of seeking
to re-write the Middle Eastern map to its advantage by
invading Iraq and seeking to create a new democratic-capitalist
government in the place of Saddam Husseins regime. From
this point, U.S. power can be easily projected throughout the
region, including those states that have long track records
of supporting international terrorism Iran, Syria and
Saudi Arabia. Simply stated, the hope is that bad regimes will
be replaced with governments that share the same values as the
West democracy, elective government, equal rights for
men and women, secular rule of law, and capitalism. Through
this process, beginning with Iraq, even the Palestinian-Israeli
issue can be resolved. Everyone will benefit, in particular,
the United States, which will clearly be dominant in the region
for a long time. While oil is part of the equation, it is only
a small part.
President Jacques Chirac is actively re-asserting Frances
sphere of influence in Europe, the Middle East and Africa.
By opposing war against Iraq -- as opposed to standing up for
Saddam Hussein -- France is standing tall among the Arab world,
a longstanding French constituency based on history, economic
and political ties, and Frances own Muslim population
of about 6 million individuals. President Chirac in March also
visited Algeria, where he was given a heros welcome from
estatic crowds. France considers Algeria important and has been
a strong base of support for the embattled quasi-authoritarian,
yet secular government. France also carries considerable clout
in relations with its former North African colonies of Morocco
and Tunisia. At the same time, French troops have been sent
to the Ivory Coast, where they helped to impose a peace plan.
French troops are based elsewhere in sub-Saharan Africa, clearly
representing Frances national interest in what was traditionally
its sphere of influence.
While France and Germany are asserting their sphere of influence
in Europe, Africa and the Middle East, Russia remains the dominant
player in parts of Central Asia. However, the projection of
U.S. power in the region, in particular, in the former Soviet
republics around Afghanistan, is a point of concern in Moscow.
On one hand the Russians are happy to have the U.S. as an ally
in the fight against global radical Islam. They also like foreign
investment in their economy. However, the Russians do not like
U.S. forces in the region and there is come jockeying for influence.
This explains the recent thaw in relations between Russia and
the European Union, in particular, with France. Whereas French
and German governments were vocal over Russias heavy-handed
actions in Chenynia, those criticisms have become far more muted
over recent months. Closer ties with France and Germany also
provide Russia with some leverage over the United States.
The other two major players in the regional spheres of influence
game are China and India. China clearly looks to Southeast Asia
and the South China Sea as zones of influence, where its economic
and military power are evident. Beijing also has influence in
Korea, though would rather have the United States bear the costs
of North Koreas failed economy. China also has a good
relationship with Pakistan, which it uses to counterbalance
India. For its part, India is the major regional power in South
Asia. It is also seeking to play a more active role in Southeast
Asia, standing up for Malaysias Indian population and
seeking to develop a closer military relationship with Singapore.
The return to spheres of influence is a hardly finished development.
The United States has not surrendered being the dominant and
sole superpower or its option of going it alone when it observes
its national interests at risk. U.S. military power remains
a major factor in Asia, Europe, and the Middle East. And economically
speaking no other economy can come close in sheer size and ability
to generate world growth. At the same time, the Franco-German
gambit to make Europe stand tall vis-à-vis the Americans
has not gone well with many other European nations. Certainly
the UK, Spain and Italy have taken a different Iraqi policy
path from that dictated from Paris and Berlin. In addition,
prospective Central and Eastern European members to the European
Union have a greater sense of unease with Paris-Berlin leadership,
especially after French President Jacques Chiracs recent
comments of their immaturity, which recalls similar
hegemonic behavior reminiscent of the Soviet Union and the eastern
bloc. In Asia, Chinas influence is hardly
bringing North Korea to heel. India cannot control the violence
in Nepal that is creeping toward civil war. Russia is still
not able to stop acts of terrorism in the Caucasus.
What does this mean for those countries without spheres of influence?
A major concern of this trend is that globalization is likely
to be curtailed. Political spheres of influence also have an
economic component. Political tensions in other areas are likely
to creep into trade talks or further efforts for financial liberalization.
This poises significant risks for countries, such as Japan,
Korea and Chile that have placed an emphasis on international
trade and export-led economic growth. Japan, long a free rider
in military power agreements, will increasingly be forced to
compete with China in maintaining an economic sphere of influence
in the rest of Asia. This raises the tough questions of the
durability of the U.S. alliance and how far Japan wants to go
in upgrading its military.
If the current drift into spheres of influence continues, prospects
for political tensions are likely to increase. Multi-polar world
political systems are more unstable than uni-polar or bi-polar
ones. Competing spheres of influence usually lead to confrontation.
Prior to both World Wars, the global political system was decidedly
multi-polar - and inherently unstable as proved by the two following
bloodbaths. We are left with the words of Lord Palmerston, a
British prime minister during the Victorian era, who observed:
There are no permanent alliances, only permanent interests.
French Foreign Policy: A Perspective from History
Maybe its something in the wine from Bordeaux. Maybe its
something in the Roquefort cheese. Maybe its a desire
to imitate the Scottish salmon that generations of French rulers
after William the Conqueror were unable to acquire. Whatever
it is, historically, France seems committed to swimming against
the current of foreign policy, opposing the worlds most
powerful state, and pushing itself forward as the champion of
unlikely causes. At face value, it might be expected that France,
one of the most respected and long-lived democracies in the
world, would support the American led campaign to disarm Iraqi
dictator Saddam Hussein of his weapons of mass destruction,
and to prevent him from supporting terrorists, and remove him
from power. After all, France is, and has been for two-hundred
years, an important American ally. In this case, however, France
and the United States do not see eye to eye. In fact, France
has aligned itself squarely against the United States, Britain,
Spain, Italy, and almost all of Eastern Europe, and shoulder
to shoulder with Germany and Russia. Now, it is no surprise
that Germany and Russia should oppose American policy, but Frances
opposition is troubling and bears some explanation.
Theres no doubt that every nation acts almost exclusively
out of self-interest in international affairs. France, however,
has taken this principle to new levels of contrarian action
that betray her position in the world. Yet, the stalwart opposition
-- so much more resolute than that against Germany during twenty-seven
days in 1940 -- to the attempts of the United States to enforce
the mandate of the United Nations Security Council in disarming
Iraq, is only the most recent example of how France has stymied
other nations with its actions.
The root cause of Frances actions can possibly be found
in its egotistical pretensions. Pushed from the limelight of
the international stage, France has made it its duty to reign
in the burgeoning power of the worlds only remaining superpower
the United States. France aspires to be the watchdog
of the world, a nation that can hold back the tide of American
hegemony and keep the world a healthy and balanced conglomeration
of more or less equal nations. France is no longer an imposing
world power and perhaps thinks that no one else should be either.
The mirage of French greatness was shattered on the battlefields
of WWI and finally put to sleep during the above mentioned seventy-seven
days in 1940. The French star is likely to remain in the eclipse
for the present and the foreseeable future. Interestingly enough,
this is not the first time that France has pursued an unorthodox
course following a fall from conspicuous power. Three significant
examples stand out from history to demonstrate how France, deprived
of open dominance, has attempted to alter the worlds balance
of power through its diplomatic positioning.
During the first half of the sixteenth century, after her imperial
ambitions were foiled in Northern Italy, France found herself
in a difficult strategic situation. The possessions of Holy
Roman Emperor Charles V in Spain, Burgundy, the Netherlands,
and Germany, effectively surrounded the country. To counter
the Hapsburg threat, France found a shocking ally. In 1536,
King Francis I became the first Christian ruler to sign an alliance
with the Ottoman Turks. This was a momentous occasion, while
many powers had previously signed treaties of peace with the
Sultan no one had become an ally. The Turks, hitherto regarded
as the greatest threat to European liberty since the Mongol
hordes of the thirteenth century, now became the partners of
one Christendoms most powerful rulers. Nevertheless, Francis
was intent on the move in order to contain the ambitions of
Charles V, the most powerful ruler in Europe. Granted, the French
have not become an ally of Saddam Hussein, but they have become
his advocate, insisting he is cooperating with UN weapons inspectors
and poses less of a threat to peace than the loose cannons directing
American foreign policy.
Less than a hundred years after the Franco-Turkish alliance,
with Europe shuddering under the strain of the Thirty Years
War, France once again chose an unexpected but politically expedient
side. The country itself was recently emerging from decades
of civil and religious strife. Instead of allying itself, as
a Catholic country, with the Catholic Emperor Ferdinand II,
France decided to fight on the side of the Protestant German,
Swedish, and Dutch forces. This course was pursued not out of
devout belief in the Protestant cause, but mainly to counter
the resurgent power of the empire, and the dominant power of
Spain. France had no real affinity for the Protestant cause,
but the desire to maintain the balance of power in Europe drove
the fleur-de-lis onto the side of the heretics.
Finally, we must not forget that France supported the revolution
of thirteen British colonies in North America. Bourbon France
was one of the bastions of Europes Old Order
of empires. Despite this position, the bait of revenge against
a British Empire that had so recently taken over Frances
large holdings in North America and pushed it out of the Indian
sub-continent proved too strong. Holding its aristocratic nose
against the progressive doctrines of liberty, equality, and
justice, France allied itself against Britain, the most powerful
state in the world. Men, arms, and ships were sent across the
Atlantic to help America win its freedom. This, in the end,
of course had the odd result of pushing an already shaky French
economy into dire straits and sparking a new, exclusively French
Revolution with liberty, equality, and fraternity
as its (borrowed) by-words.
Now in the present, France has once more aligned herself against
the greatest power in the world in an effort to stem that nations
attempts to deal with international problems as it sees fit.
It is important for America to recognize the lessons of history
and to realize how far France may go to deny the United States
what she denied Charles V in the sixteenth century, Ferdinand
II in the seventeenth, and (soon to be mad) George III in the
eighteenth. France, whether rich or poor, powerful or weak,
cannot accept a secondary role in world affairs and will use
every means at its disposal to push forward into the limelight.
In light of the track record, the actions of our so-called
ally, France* are not as surprising as they seem on the
Andrew Novo is an independent foreign policy analyst based in
New York. His opinions may not necessarily reflect those of
Emerging Market Briefs
Scott B. MacDonald
Trends in the Right Direction: Credit conditions for
Brazil are gradually improving. In mid-March Fitch changed the
outlook on its B sovereign ratings from negative to stable. The
rating agency indicated the change was due to a marked turnaround
in international trade performance and signs the new government
is committed to economic policies that could place Brazils
public and external finances on a sustainable path. Looking
ahead, Fitch believes that maintenance of sizable primary
surpluses, a trend toward declining real interest rates, and critically,
a resumption of reasonable economic growth rates will be critical
to further improvements in Brazils international credit
Colombia Coca Down:
There is some good news on the war on drugs. According to
United Nations data, Colombias coca harvest was down by
30% in 2002. This data was derived from satellite imaging, comparing
the prior years data to 2002s. Most of the 105,600
acre (42,736 hectare) fall in coca production was due to the forced
eradication campaign undertaken by the Uribe government. The acreage
removed from production is estimated to cover an area more than
double the size of Washington, D.C. The Uribe government attack
on drugs is a major weapon for the government in its war against
leftist guerrillas and far-right paramilitaries who sell coca
to buy weapons.
Israel Israel Elect
Goes Down: Standard & Poor's downgraded in February Israel
Electric, from A- to BBB+, with a negative outlook. The agency
cited uncertainties in the companys operations and investment
program and its weak financial profile.
Malaysia Positive Growth Numbers: Real GDP grew
5.6% in Q4 2002, slightly ahead of the consensus and slightly
lower than the previous quarters growth rate, which was
revised up to 5.8%.
Peru 2002s GDP Faster Than Expected: Good
news is always welcome, even in the form of a surprise. Expectations
for real GDP growth in 2002 were around 4.8%. However, the final
number was 5.2%, making 2002 the fastest year of growth since
1997. The key drivers for growth were improved performances by
the mining and construction sectors. The Peruvian government has
made a forecast of 4% growth for 2003. Mining benefited from the
opening of the Compania Minera Antamina copper-zinc mine, which
is owned by BHP Billiton (33.75%), Noranda (33.75%), Teck Cominco
(22.5%), and Mitisubishi Corp (10%).
South Africa Upgrades Coming: At the end of February
2003, Moodys revised South Africas Baa2 outlook from
stable to positive. The agency cited declining debt ratios, improved
external liquidity and careful macroeconomic management. Shortly
following that, Finance Minister Trevor Manuel presented his 2003/04
budget. The government revised its budget deficit to 1.4% of GDP
in fiscal 2002/03 (from 1.6% of GDP) and is forecasting a deficit
of 2.4% of GDP in 2003/04 (allowing for a little more room in
social spending). In addition, the government signaled it was
loosening foreign exchange controls, long urged by the IMF. In
March, Fitch placed its BBB- rating on review for a possible upgrade.
We suspect that S&P, which rates South Africa at BBB-, with
a positive outlook, will soon be upgrading the country as well.
The Terror Network that Threatens the World,
(New York: Thunders Mouth Press, 2002). 315 pages. $24.95
by Robert Windorf
here to purchase "Al-Qaeda:
The Terror Network that Threatens the World"
directly from Amazon.com
al-Qaeda has faded from the daily headlines focus on Iraq, the
terrorist organization is hardly dead and buried. Indeed, there
is a good chance that the organization will strike again against
the West, in particular, the United States. For anyone looking
for a well-written and researched book on this radical Islamic
organization, Jane Corbins Al-Qaeda: The Terror Network
that Threatens the World makes for a comprehensive read. Corbin
is a senior reporter for the BBCs flagship current affairs
program, Panorama and has become an expert on Middle Eastern terrorist
movements. She also did a Panorama Special Towards Zero
Hour, following 9/11, which revealed in considerable detail
how the hijackers plotted their assault on the United States.
The fundamental thrust of Al-Qaeda is to reveal who and
what al-Qaeda is and what are its objectives. It is also about
the Wests response to the threat of this particular terrorist
group. As to al-Qaedas objectives, Corbin quotes Osama bin-Laden
(1998): Every grown-up Muslim hates Americans, Jews and
Christians. It is part of our belief and our religion. Since I
was a boy I have been at war with and harboring hatred of Americans.
Simply stated, al-Qaedas objectives are to free the Middle
East, in particular, Saudi Arabia (the home of the two holy cities
of Mecca and Medina) from being occupied by American
troops and being dominated by the West. This means overthrowing
local, pro-Western governments and striking at the West and Israel.
Corbin traces the roots of al-Qaeda back to the Soviet occupation
of Afghanistan and follows the adventures of bin-Laden as he became
involved in the anti-Soviet war effort. She also notes his growing
hostility to the Saudi regime and the United States. At the close
of the failed Soviet occupation of Afghanistan, bin-Laden has
emerged as a key international personality in what was soon to
grow into a truly international organization of terror.
One of the strong points of Corbins book is her examination
of how the West failed to fully detect the growing threat from
al-Qaeda. As she notes, the Wests political correctness
and very openness was adeptly used against it, even after the
bombings in East Africa in 1998. Corbin states of the Western
is a tale of weakness and exploitation and a failure of imagination.
Al-Qaeda, fundamentally a product of the Arab world, could only
flourish in a free and forgiving climate, unlike that of many
Middle Eastern countries, where harsh regimes stick to the only
form of rule recognized and respected by militant Islamic organizations.
Bin Ladens group turned instead to the softer underbelly
of the West; to democracies with respect for human rights, more
open immigration policies and laws that restricted intelligence
and law enforcement agencies. Bureaucratic turf wars, complacency,
military timidity and political weakness, not to mention political
correctness, contributed to our inability to deal with these extremists,
until it was too late to save the lives of thousands.
Corbin also offers insights into Allied military operations against
al-Qaeda and Taliban forces, following the end of the Afghan war.
Operation Tora Bora, which ended the first round of fighting,
probably let Osama bin Laden out of the country and into Pakistan,
in part due to relying on inept local forces. Operation Anaconda,
which followed, was also not the raging success the U.S. military
portrayed it. Rather, Corbin suggests Afghanistan will not be
a story of quick military victories, but will have to be a long-term
commitment, considering the countrys complex political realities
and the porous nature of the borders with Pakistan, itself divided
with cleavages between more secular and fundamentalist Muslims
as well as a myriad of tribal and regional loyalties.
Corbin offers a sobering, journalistic account of a major problem
facing the West something destined to be around for a long
time. She believes that Western governments must continue to reassess
terrorist laws and what political correctness means both
from a societal stance and from a security viewpoint. Corbin concludes
with this warning: It is not a question of whether we will
see another terrorist outrage but when and where and how
many innocent lives it will claim.
King of Terror (New York: Harper Collins,
2002). 350 pages. $26.95
here to purchase "Saddam
King of Terror
directly from Amazon.com
Scott B. MacDonald
It has become popular to write about Saddam Hussein. Indeed,
a small sea of ink is now dedicated to explaining how a man
who became one of the most powerful Arab leaders in modern times
emerged from a hard and deprived childhood. Yet, Saddam is now
well-known through the world for presiding over a near-totalitarian
regime and for bringing the world down the path of another Middle
Eastern war. One of the books that stands out from the pack
is Con Coughlins Saddam King of Terror, which in
some ways harkens back to Samir al-Khalils Republic of
Fear (1989) in terms of chronicling the brutish, but methodical
nature of Saddams Baathist regime.
Coughlin sets the tone of his book in the very beginning by
stating: Writing a biography of Saddam Hussein is like
trying to assemble the prosecution case against a notorious
criminal gangster. Most of the key witnesses have either been
murdered, or are too afraid to talk. To Coughlin, Saddam
is a creation of his roots, much like Hitler and Stalin, who
also overcome their less auspicious starts in life to take absolute
control of their respective nations. As he notes, The
shame of his humble origins was to become the driving force
of his ambition, while the deep sense of insecurity that he
developed as a consequence of his peripatetic childhood left
him pathologically incapable in later life of trusting anyone
-- including his immediate family.
Saddam began his political career as a political thug, gradually
climbing up the ranks of the Baathist party, especially following
the 1968 coup that brought them to power. The climb to power
was one marked by ruthlessness and tenacity. Much like Stalin,
Saddam focused on the machinery of the state, quietly assuming
power. By July 1979, Saddam officially became the president
of Iraq, then one of the more developed and wealthiest Arab
nations. He followed this by purges of the Baath party, the
military and the bureaucracy. In the place of many of the fallen,
Saddam placed his family and trusted cohorts.
What makes Saddam such an interesting historical figure is that
he was not content with ruling just Iraq. Bigger dreams beckoned.
In many regards, he saw himself as a modern-day Saladin, being
the man to re-unify the Arab world and re-take Jerusalem. In
this, he sought to carve up his bigger neighbor Iran, which
had incited Iraqs local Shitte population. The ensuing
war was to last from 1980 to 1988, result in wrecking the Iraqi
economy and leaving thousands dead or wounded from the brutal,
yet inconclusive conflict. Only a couple of years later, Saddam
launched the invasion of Kuwait. That was to end up with the
near-destruction of the Saddam regime.
What Coughlin finds the most interesting is Saddam Husseins
ability to survive. Despite major setbacks, numerous coups and
assassination attempts, and the hostility of the United States,
the bully of Baghdad has managed to cling to power.
He attributes this to Saddams ability to maintain control
over the security apparatus, rely on only a very small group
of people, and the regimes manipulation of the countrys
oil wealth. The last always allowed Saddam to buy the necessary
weapons from the outside world and to have some degree of largesse
for keeping the key troops happy.
Coughlins book is certainly timely and informative. It
paints a picture of a man who is clearly an over-achiever in
the most bizarre sense a dictator willing and ready to
eliminate, though continuous purges anyone that remotely resembled
a threat. At the same time, Coughlin is certain that Saddam
has been active in seeking to re-arm Iraq, including with weapons
of mass destruction. As he noted: even the medical supplies
shipped in by the U.N. were exploited by the regime, and ended
up being sold on the black market in Jordan, the profits being
channeled back to the Presidential Palace in Baghdad. The lions
share of the substantial income Saddam received from these various
illicit activities was spent on arms. Most of the arms
came from China, North Korea, Russia and Serbia.
Whether or not one agrees with the Bush administrations
decision to pursue war with Iraq, anyone reading Coughlins
book comes off not wishing Saddam Hussein well. At the same
time, it also makes one wonder about difficult nature of the
rocky soil that Iraq will offer for any attempt to create a
democratic government in a post-Saddam society.
Railway King: A Biography of George Hudson, Railway Pioneer
(London: Review, 2002). 274 pages UK Pounds 14.99
here to purchase The
Railway King: A Biography of George Hudson, Railway Pioneer
directly from Amazon.com
a world currently marked by corporate scandals and the controversial
figures behind them, it is often instructive to remember that
we have been on this stage before. History is filled with scoundrels,
rouges, and hucksters. Despite being labeled as such, not all
scandal-linked individuals are necessarily evil
and, indeed, in a warped way, some good has come out of their
efforts. One such individual that has been much vilified, but
arguably did some good was George Hudson, known in the 19th
century as the railway king. In his well-researched
and easily readable The Railway King, Robert Beaumont,
a journalist for the York-based Yorkshire Evening Press, undertakes
the challenge of a man who led a turbulent and mould-breaking
existence. According to Beaumont, Hudson was many things,
probably the most significant of which was his role in Great
Britains industrial revolution, in particular, with the
development of railways.
Hudson began life in 1800 in relatively poor surroundings in
Yorkshire. He was apparently kicked out of his home for fathering
an illegitimate child. From those humble beginnings, Hudson
was to work his way up at a drapers firm. However, in 1827,
fortune smiled on him as a distant relative died and left him
a small fortune. He took part of that inheritance and bought
shares of the North Midland Railway. Over time, he came to control
over a third of Britains rail network, which mostly hubbed
out of York. Indeed, Hudson made York a commercial hub as he
quickly grasped, ahead of many others, that rail travel was
the wave of the future. In this, he was similar to those that
understood that the Internet was a revolutionary breakthrough.
He was also an excellent salesman, which helped him sway many
to put their money into his companys shares. At his high
point, Hudson employed tens of thousands of workers, was a leading
member of the Conservative Party, and laid hundreds of miles
of virgin track.
Yet, for all the positives of Hudsons life, there was
a downside. As did the Internet in its time, rail in its time
was a major force in financial markets, capable of creating
and destroying great fortunes through speculation. In this Hudson
was a primary force. He was a man of vision and an excellent
salesman. He was also a polarizer people tended to either
really like and trust him or hate him. Part of the reason for
this Beaumont notes, was that his subject was a mass of
contradictions: immensely hard-working, yet dangerous self-indulgent;
tremendously generous, yet a purveyor of the sharpest financial
practices; poorly educated and roughly spoken, but a quick-witted
visionary; and unbearably arrogant, yet strongly humble at the
What did Hudson in was his financial practices sloppy
at best, intentional at worst, he offered investors big dividends,
but eventually questionable profits. In a sense, the finances
behind Hudsons many railway companies were like so many
ponzi-schemes, with new money in, new money to old investors,
while the newest contributors waited for their profits. At the
same time, Beaumont notes: The problem was that he had
difficulty in differentiating between his own interests and
those of his companies, but that is a failing common to autocratic
businessmen. (Look at the former heads of Tyco International,
WorldCom and Adelphia). He further elaborates: It is essential
that George Hudson was simply behaving in exactly the same manner
as the other managers and directors of Britains railway
companies across the country. They were making up the rules
as they went along, as occasionally happens in fast-growing
Hudson was eventually voted out of the House of Commons, saddled
with large debts from failed companies, hounded by creditors
and angry company boards, and viciously attacked by his detractors.
At one stage, he fled to France, where he lived well below his
former splendor. Hudson finally was able to return from exile
and be re-united with his wife, who he had left behind. He was
to die in 1871, though his name was to remain considerably tarnished
Considering the current round of fascination with business scandals
and the key personalities involved, Beaumonts book about
George Hudson reminds us that these figures are far more complex
than being transfixed between simple faces of good and evil.
At the end of the day, they must be seen as simply individuals,
forced to make decisions about how to conduct their business
for the better or the worse. However, for this reviewer,
Hudson remains a far more sympathetic figure than the top management
at Enron, WorldCom or Qwest. Rules and regulations concerning
corporate governance were rudimentary during Hudsons day;
today the rules and regulations are far more clear-cut. While
Hudson is perhaps entitled to a fair shake in the historical
sense, it is likely that Bernie Ebbers, Kenneth Lay and Ralph
Nuccio will have to wait much longer. We strongly recommend
Beaumonts The Railway King.
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