Economy - Another Boom?
Scott B. MacDonald
YORK (KWR) -- Anyone looking for evidence that the U.S.
economy is recovering did not have to look
too far beyond the recent flow of data. The third
quarter real GDP number was 7.2% -- the fastest
pace of growth since Q1 1984. It clearly had the
flavor of an economic boom number. Full year real
GDP expansion is likely to be over 3%. The consumer,
of course, played a major role in pumping up the
economy, partially due to the impact of the federal
government tax rebates. The excitement about the
strength of the Q3 real GDP number, which easily
surpassed the consensus estimate of 6%, is understandable.
Adding to the excitement, unemployment for the
month of October fell from 6.1% in September to
6.0%, largely driven by greater employment in the
Most people (except those heavily invested in gold) want
to believe the worst is behind them – the recession
is becoming a distant memory and the good times are about
to roll again. Are we on the edge of a new economic boom?
Although we see a pick up in growth in 2004 (in the 3.3%-3.6%
range), there are a number of nagging issues that could
function as a brake to another boom.
First the good news. What was the most encouraging about
the Q3 GDP figure was that it included corporate equipment
purchases. Business investment in equipment and software
rose at a 15.4% annual pace, the fastest since Q1 2000.
Indeed, total corporate spending rose at 11.1%. Equally
important, inventories in many sectors were depleted and
now need to be replenished – something that will
continue to fuel growth. Other news on the U.S. economy
was generally upbeat. This included durable goods orders,
construction, consumer confidence and manufacturing. Adding
to positive sentiment is that corporate earnings are doing
well. There have been fewer major disappointments and most
companies appear to be on track for a better year compared
Where do we go from here? We expect the economic data will
continue to be generally positive, with 4th quarter real
GDP around 4%. More importantly, we expect there will be
a slow improvement of the unemployment numbers, which will
become more pronounced in 2004. We do not see much of an
improvement in U.S. unemployment below 6% in 2003. What
will make the difference will be the shift in the driver
of the economy from consumer spending to corporate spending.
Q3 2003 corporate spending numbers were encouraging and
we expect Q4 numbers will reflect the continuation of this
trend, reinforcing recovery.
Although there is concern about the growing nature of the
U.S. fiscal deficit, we see this more as an issue for 2005.
While the build-up of red ink is potentially problematic,
the deficit must be put in historical perspective. In the
past two recessions, the fiscal deficit as a percent of
GDP was much larger. In 1983, the deficit was 6% of GDP;
in 1992, it was 4.7%. As of September 30, 2003, the federal
deficit was 3.5% of GDP (it will probably be over 4% by
year-end). The point here is that the federal deficit is
manageable – thus far. If the U.S. economy has hit
a period of sustainable growth (which is likely) the revenue
base should improve. Consequently, the deficit is not a
concern for 2004. However, if revenues do not recover and
costs are not brought under control in 2004, the deficit
could become a more pronounced negative factor in 2005.
Indeed, a voracious federal borrower could crowd out private
sector companies in credit markets, undermining the sustainable
nature of the recovery.
What makes us somewhat cautious about jumping on the robust
growth bandwagon is that we see consumer spending and housing
demand tapering in Q1 2004 as the federal economic stimulus
fades. This is not to argue that we see a collapse in either
consumer spending or housing, but a marked slowdown as
American household do a little consolidating of their own
high debt numbers. If corporate spending does not pick
up the slack, then the economic activity could slow. Instead
of looking at 4% growth, the number could be closer to
3%, which would still be relatively strong, but a disappointment
to the stock market.
There are two other potential spoilers sitting out in the
reeds like alligators in 2004 – the potential for
a faster than expected rise in interest rates (if economic
growth continues at a fast pace) and a geopolitical tremor
(another major al-Qaeda attack on the United States or
Although the most recent Federal Reserve meeting left rates
at 1% and the language was neutral on inflation, that dynamic
could change if the pace of U.S. growth stays at a higher
level. Consequently, the Q4 real GDP number will be closely
watched. Only a few months ago many analysts expected that
the Fed would maintain no change in rates through most
of 2004. That consensus is changing. In November 2003,
both the Reserve Bank of Australia and the Bank of England,
two countries that often run on the same business cycle
as the United States, raised rates for the first time in
a long while. A shift in interest rate policy – especially
one that comes quickly – could have a negative impact
on the stock market and would certainly ripple through
the financial sectors – banking, brokerages, insurance
companies and credit card companies. It could also put
many individual buyers under pressure – something
that could trickle into the general economy and make the
tapering of the consumer into a crumbling of the consumer.
We do not see this as likely – at this point, but
it is a possibility that should be carefully watched.
The other issue is that of a major geopolitical incident.
This could come in the form of terrorist attack on the
United States by al-Qaeda, which is constantly threatening,
or from a potential outbreak of war in Korea. North Korea
clearly remains a wild card in the geopolitical game, a
situation made that much more dangerous considering the
high probability that the Kim Jung-il regime possesses
nuclear weapons. Even if war does not occur, North Korea
could provoke an Asian financial crisis if it collapses
and forces the South to pick up the costs of reunification.
An implosion of the Kim regime could be bloody, economically
costly (estimates for rebuilding the North range from $500
billion to $1.75 trillion), and highly dangerous in terms
of international relations, drawing in not just South Korea,
but the United States, Japan, China and Russia. It would
also make a bet on Asian equities a bad decision.
Consequently, we see the U.S. economy on a roll – good
economic data is likely to continue, interest rates are
under control and corporate earnings have generally been
good. The Dow should end 2003 a little over 10,000. That
takes us through the end of the year and into 2004. Once
into 2004 a new set of variables, as outlined above, takes
on greater significance. A new game will be afoot – there
is an economic turnaround and faster growth, but how fast
and how does it measure with expectations is the unanswered
Next Big Step: Monetary Tightening
180 ON INFLATIONARY EXPECTATIONS...
TOKYO (KWR) -- The sharp but brief 825-point sell-off in the
Japanese market in late October had within it hints of what investors
can expect when the Bank of Japan (BOJ) is eventually forced
to abandon its zero interest rate policy (ZIRP), or even when
the U.S. Federal Reserve (FED) moves first.
By sector, the biggest losers were the financials, including
the banks, securities companies, other financials and insurance.
There has been some serious foreign institutional money coming
into the banks during this rally, in addition to short covering
by the hedge funds.
As long as foreign investors keep buying, the market technicals
of the financials should provide support. Conversely, any correction
that causes a serious breakdown in the market technicals of the
financials is a warning sign of a significant shift in sentiment.
That would bring about an extended correction, one that could
be instigated by perceived changes in monetary policy-ostensibly
first by the US FED, and then by the BOJ.
Actually, such a move by the central banks would be good news
for the US and Japanese economies, as it would signal that central
banks were confident enough in the sustainability of the economic
recovery to begin pulling some liquidity off the table. However,
if the moves are more aimed at pre-empting inflation -- i.e.,
primarily because of commodity price movements and the weak dollar
-- market liquidity could dry up before earnings are strong enough
to drive the market rallies.
...HAS THE CENTRAL BANKS TRYING TO KEEP IT SUBDUED
The sudden improvement in the U.S. employment picture has some
economists scrambling to revise their views on when the Federal
Reserve will raise interest rates, but the FED for its part is
trying to play down these fears. According to Alan Greenspan, "in
these circumstances, monetary policy is able to be more patient." Fed
Governor Ben Bernanke acknowledged some improvement in the labor
market, but emphasized there was considerable scope for policy
to remain accommodative. However, financial futures markets,
regardless of what the FED was saying, had the fed funds contract
showing a 90 percent chance of a 25 basis point rise after the
strong jobs report, up from 70 percent before the statistics
were released. Presently a rate rise appears fully priced in
for May of next year.
Japan's economic growth probably slowed to an annualized rate
of 1.5 percent in the third quarter, but there has been a substantial
improvement in business sentiment. A stronger stock market, evidence
of economic recovery and reduced financial sector and corporate
bankruptcy risk have all contributed to the improvement in sentiment.
This has the Japanese press and investors already speculating
about when and how the BOJ would abandon its ZIRP.
The BOJ has responded by releasing its medium-term outlook for
inflation, which saw Japanese consumer prices remaining minus
through FY2004, implying no change in the BOJ's quantitative
easing until March, 2005. This notwithstanding, the debate about
how and when to "normalize" monetary policy is already
underway within the Bank, while it is taboo to mention this debate
in pubic circles.
The BOJ itself and Japan's economy as a whole can ill-afford
to have market expectations about inflation get out of hand.
As the BOJ itself holds JGBs worth JPY64 trillion versus capital
of JPY5 trillion, the Bank would have negative net worth should
a renewed surge in bond yields wipe out 10% of the value of their
JGB holdings. As they continue buying JPY1.2 trillion of JGBs
every month, this exposure continues to grow. Thus in the words
of BOJ governor Fukui; "It is necessary for the BOJ to keep
the current easy policy in order to ensure an economic recovery
and to develop (read protect) the role of the financial system."
FOREIGN INVESTOR PERCEPTIONS WILL LEAD
Foreign investors remain the main driving force of the Tokyo
market, although their buying has slackened noticeably in October,
and there is some evidence of profit taking. On the other hand,
there is no sign that the net selling by domestic institutions
is abating. While individual investors have been very active
traders (accounting for more of the value of shares traded than
foreign investors), they are not exactly buying and holding.
Moreover, their sentiment has been positively stimulated by active
But a major change of direction (i.e., from providing as much
liquidity and monetary stimulus as possible to an increasingly
tight monetary policy) has historically led to an interim correction
in stock prices, as investors adjust to stock prices driven by
excess liquidity to stock prices driven by earnings fundamentals
and valuations. This is why stock prices tend to perform best
in the early stages of an economic recovery, while monetary policy
is still focused on trying to stimulate the economy, rather than
trying to inhibit growing inflationary pressures.
If foreign investors perceived that a move to tighten monetary
policy by the FED was imminent, it may have the same effect as
move by the BOJ, as the expectation would be that the US move
would eventually be followed by a move by the BOJ, assuming of
course that the Japanese economy is indeed now in a sustainable
recovery phase. A perceived change in monetary policy would prompt
portfolio re-positioning to cope with the impact this would have
on asset allocations and sector selection.
Already, the larger capital, international blue chips as reflected
in the Topix Core 30 recently corrected more even though the
index has lagged its smaller capital peers during the rally.
These stocks of course are more sensitive to foreign investor
perceptions. Conversely, the small-cap JASDAQ has out performed
the Topix by nearly two-fold, and could withstand a shift in
monetary policy that did not seriously inhibit the economic recovery.
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Tycoon Detention Highlights the Country’s
MOSCOW (KWR) - Controversy over continued detention of Russia’s
richest man Mikhail Khodorkovsky arguably served to emphasize
the country’s endemic investment risks. On November 4,
embattled Yukos said it had appointed a new chief executive
to replace Mikhail Khodorkovsky, who has been jailed on charges
of fraud and tax evasion since October 25. Simon Kukes, formerly
president and chief executive officer of the Tyumen Oil Company,
or TNK, was given the job. A Russian-born U.S. citizen, he
was elected chairman of Yukos' board of directors in June.
On November 3, Khodorkovsky resigned, saying he wants to deflect
the blows from his company, and Yukos said Khodorkovsky would
not seek any executive position within YukosSibneft, the world's
fourth-largest oil company, which will be created by Yukos'
agreed takeover of Sibneft.
The company also appointed Steven Theede, an American, as executive
director of Yukos-Moscow, a subsidiary under which many of
Yukos' central corporate functions are incorporated. Bruce
Misamore, also a U.S. citizen, remains the group's chief financial
officer. The appointment of foreigners was seen as a further
attempt to protect Yukos from Russian prosecutors.
The Russian government also announced on November 5 that it
was "practically inevitable" that production licenses
to an unspecified number of oil fields will be taken away from
the company. "The ministry's actions against Yukos will
be swift and precise," Natural Resources Minister Vitaly
Artyukhov told the official government newspaper Rossiiskaya
Gazeta. "Full or partial
noncompliance with license obligations -- and in the current
situation it is practically inevitable -- will immediately
lead to license-revoking," he said. "If need be,
we will act pre-emptively. The reasons are obvious: The company,
whose controlling stake is under arrest, is not likely to be
a suitable partner to work with a federal licensing body."
In a conference call with Western investors, Yukos' chief financial
officer Bruce Misamore called the development "extremely
strange," adding that he didn't know if it were a reason
However, President Vladimir Putin said on November 6 that he
was against taking away Yukos' operating licenses because it "would
give the impression that the state was trying to shut down
the company." Putin said the economic consequences of
such a move "would be negative and would have no basis
If Artyukhov's threats are realized, particularly in light
of the fact that Khodorkovsky resigned as head of Yukos in
early November, the blow to Russia's investment climate could
Prosecutors last week sequestered a 39.6 percent stake of Yukos
as "collateral" for the $1 billion Khodorkovsky,
Platon Lebedev and other Yukos shareholders allegedly cheated
the state out of via tax evasion, fraud and forgery.
Meanwhile, Russia has accused the US of meddling and double
standards approach following Washington’s expression
of concern over continued detention of Khodorkovsky.
The State Department’s comments on events surrounding
Yukos amount to “interference in Russia’s internal
affairs,” Russian Foreign Minister Igor Ivanov said.
The United States practices a policy of “double standards," he
told the official Russian RTR television.
State Department spokesman Richard Boucher has warned against
the Khodorkovsky case’s implication for the rule of law
in Russia, "raising serious questions" about the
independence of the Russian judiciary and the country's commitment
to free markets.
Yet apart from the State Department’s measured criticism,
Moscow was also presumably unhappy over Richard Perle’s
call to expel Russia from the Group of Eight industrialized
countries over Khodorkovsky’s arrest. "Russia should
be excluded from the G-8 as no G-8 country is allowed to treat
its leading businessmen the way Khodorkovsky was treated," Perle
was quoted as saying by Russia’s Kommersant daily.
Moscow has rejected the US criticism. "It is, at the very
least, tactless and disrespectful toward Russia," Foreign
Ministry Spokesman Alexander Yakovenko told Russian television
Saturday. He further stated that the US military actions in
Iraq and pre-trial detention of suspects at the Guantanamo
base in Cuba were also far from a notion of human rights being
Russian prosecutors accuse Yukos top executives of tax evasion,
fraud and embezzlement of state property, which allegedly cost
the Russian state coffers $1 billion. Prosecutors also accuse
Khodorkovsky of a failure to pay $2 million in taxes in 1998-1999.
The prosecutors froze 44 percent of Yukos, still worth of some
$15 billion. Although the 4.5 percent stake was eventually
unfrozen, the move was understood to be aimed at preventing
the sale of a strategic stake in Yukos to ExxonMobil or ChevronTexaco.
Dmitry Medvedev, the new Kremlin chief of staff, told the Russian
RTR television channel that the “legal efficiency of
this seizure of Yukos stock is far from certain.” He
also talked of the "full economic consequences of these
actions," in what seemed to be veiled criticism of Khodorkovsky’s
Meanwhile, last October Yukos and Sibneft completed a merger,
creating a company worth $50 billion and with oil and gas production
of 2.35 million barrels of oil equivalent per day, making it
the world's fourth largest private oil producer. It is due
to become a new entity after a November shareholder meeting,
but it remains to be seen whether the meeting can take place
with Yukos’ two major shareholders behind bars.
In late October, President Vladimir Putin's chief of staff
Alexander Voloshin resigned, reportedly in protest against
Khodorkovsky’s arrest. He was replaced by Dmitry Medvedev,
Voloshin's first deputy.
Prime Minister Mikhail Kasyanov has also said he was against
the detention of businessmen on economic charges and criticized
the freeze of Yukos shares. As Kasyanov disregarded President
Putin’s direct order to the government not to be involved
in Yukos case, Russian media speculated that Kasyanov might
However, according to VTsIOM-A polling agency, the
crackdown on the country’s oligarchs
received a 73 percent approval among 1,600
Russians polled Oct.24-28. According to the
increasing numbers of Russians believe that the action against
Yukos would improve the political situation in Russia.
in a Name? The Shifting Role of the Asia-Pacific Economic
Economic Stability in Asia: How Will the Bush Administration
(KWR) -- Given the diversity that exists under the umbrella
of the Asia-Pacific Economic Cooperation (APEC) – its
21 member countries range from prosperous nations with free-market
economies to socialist states in the first throes of development – it
was perhaps inevitable that the grouping would suffer an identity
crisis. At no time was this more obvious than this year’s
summit of APEC leaders, which wrapped up in Bangkok Oct. 21.
For despite the convivial back-slapping that accompanied the
joint communiqué released by the heads of state after
their talks, APEC as a whole rarely seemed as far from the
goals that founded it.
Established in 1989 to promote an aggressive agenda of trade
liberalization, APEC agreed at a 1995 summit in Bogor, Indonesia
to set target dates for free trade in the Asia-Pacific Region.
It called on its developed economies to eliminate trade barriers
by 2010 and its poorer members to do the same a decade later.
With the collapse of September’s World Trade Organization
(WTO) ministerial talks in Cancun, Mexico, in September, there
was much optimism that the forum would take the lead in salvaging
international trade negotiations. The summit in Bangkok was
the first high-level meeting devoted to commerce after the
Cancun fiasco, and it was greeted with high expectations that
the leaders would chart the future of the global trade process.
The heads of state tried hard not to disappoint, devoting much
of their communiqué to endorsements of the WTO’s
Doha agenda. The “Bangkok Declaration on Partnership
for the Future,” asserted "strong support" for
efforts to push forward the Doha Round as early as possible.
It also committed APEC members to work toward “the abolition
of all forms of agricultural export subsidies, unjustifiable
export prohibition and restrictions,” while advancing
free trade “in a coordinated manner.”
Noble sentiments, to be sure, but the declaration fell short
on specifics – concrete measures to advance the Doha
round and liberalization targets are conspicuous by their absence.
This is even more evident when compared with the provisions
of the agreement dealing with security, which – despite
the “economic” part of APEC’s moniker – clearly
dominated the Bangkok talks. Leaders pledged to secure weapons
stockpiles and to take immediate action to "regulate the
production, transfer and brokering" of portable missiles,
as well as to “dismantle, fully and without delay, transnational
terrorist groups that threaten the APEC economies by establishing “a
regional trade and financial security initiative with the Asian
Development Bank, to support projects that enhance port security,
combat terrorist finance and achieve other counter-terrorism
US President George Bush thus left Bangkok with further promises
of international solidarity for the US-led war on terrorism – though
many observers argued that he and his counterparts chose the
wrong forum in which to cement these pledges.
Representatives of the global business community meeting at
the related APEC CEO Summit criticized the leaders for failing
to adequately address pertinent economic issues, including
the reduction of tariffs and China’s continued reluctance
to devalue the yuan.
Michael Drucker, executive vice president of FedEx International,
told reporters the grouping needed to “rethink and restate
its objectives,” keeping the economic principles on which
it was founded in mind.
The chairman of Chile’s Association of Banks and Financial
Institutions, Hernan Somerville, meanwhile expressed disappointment
that despite the sentiments expressed in the communiqué,
APEC leaders had so far failed to “work out a common
position” in global trade talks.
There was also widespread speculation that WTO head Supachai
Panitchpakdi, in Bangkok to address the CEO summit, had requested
and was denied the opportunity to address APEC leaders, raising
further questions about the group’s commitment to involvement
in trade issues. It is perhaps just as well that the meeting
never took place, for the leaders may not have liked what Panitchpakdi
had to say. His continued warnings that the relatively recent
profusion of bilateral and regional trade agreements may divert
much-needed attention from multilateral negotiations may not
have gone down well in a forum where discussions on bilateral
and regional pacts -- between Thailand and the US, the US and
Australia, and Thailand and China, among others -- have received
so much attention.
It could be argued that in Bangkok, APEC not only failed to
rally behind its cause celebre of global economic integration,
but also failed to showcase the integration of APEC itself.
With smaller-scale political issues -- Bush’s discussions
with new Chinese president Hu Jintao on North Korea, the stance
of members of the Association of Southeast Asian Nations (ASEAN)
on moves, or the lack thereof, toward democracy in Myanmar,
and Malaysian Prime Minister Mahathir Mohamad’s exit
from the world stage as he prepared to transfer power to his
deputy – dominating headlines, the group’s progress
toward the goals set out in Bogor barely merited a mention.
None of this is to say that the Bangkok meet was entirely unproductive – delegates
struck a blow for intellectual property rights by endorsing
an anti-piracy plan under which the regulation of disc production
facilities will be tightened and it will be illegal to export
disc production parts or raw machinery without government approval.
Previous meetings throughout Thailand resulted in agreements
to establish an international network to deal with Internet
crime and wide support to a Thai-backed effort to launch an
Asian bond fund.
It is clear then that APEC still has an important role to play
in the global economy, but after the Bangkok meet many, particularly
from the business community, may be wondering what that role
is. APEC leaders would do well at their next session to reclaim
the organization’s heritage as a body devoted to championing
trade dialogue and economic liberalization at a time when one
is so clearly needed.
Russell L. Smith and Caroline G. Cooper
Willkie Farr and Gallagher, LLP
(KWR) -- The meetings of the Association of Southeast
Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation
(APEC) forum last month ended very differently, and
sparked concern among trade watchers as to the future
role played by the United States in Asia. The ASEAN
meeting concluded with a stronger commitment by member
countries and observers--Korea, China, Japan, and India--to
integrate the region more fully by 2020, suggesting
that Asia is once again pursuing an economic path that
excludes the United States. This development should
be particularly pleasing to Former Malaysian Prime
Minister Dr. Mahatir Mohamed, as it harkens back to
the days when he first proposed an East Asian Community.
But the APEC Leaders’ meeting revealed a much different
picture: the United States still wields much influence in
Asia, especially when President Bush puts Asia high on his
policy agenda. Despite strong protests from Dr. Mahatir,
the United States was successful in winning support among
APEC leaders to restart WTO trade talks using the Derbez
text from Cancun. President Bush kept the talks centered
on security, and strengthened support for his war against
terrorism. Some of this apparent inconsistency could be attributed
to Asian embarrassment over Mahatir’s blatantly anti-Semitic
comments at a recent forum of Muslim countries, and his attacks
on both the United States and the WTO.
The result of the ASEAN and APEC meetings last month were
similar to those from summit meetings held in November of
2000. However, Asian regionalism appeared more imminent and
formidable then: China was beginning to exert more economic
influence in the region, the United States was less engaged
in Asia, and only a few countries were giving real consideration
to FTAs as alternatives to the WTO. The re-emergence of Asian
regionalism appears less threatening today in large part
because in recent months the United States has displayed
more interest in regional economic dynamics, especially those
involving China. Problems may arise in the future if U.S.
officials do not continue to expand their focus in Asia.
Since September, U.S. officials have stepped up pressure
on Chinese officials to float the yuan and comply more fully
with China’s WTO commitments. The results have been
mixed. Chinese officials have committed to move gradually
towards a more flexible exchange rate. Japan has provided
some limited and very carefully worded support for this effort.
As a first step, the Chinese government decided to relax
some controls on the outflow of capital. Both USTR Zoellick
and Commerce Secretary Evans, during their trips to China
in October, pressed Chinese officials to implement fully
China’s WTO commitments relating to the protection
of intellectual property rights (IPR), fair distribution
and trading rights, and market access in agriculture. But
industry groups and some Republican and Democratic Members
of the U.S. Congress are not satisfied; they complain the
Administration’s handling of the issue has included “too
much rhetoric.” They want President Bush to consider
undertaking a Section 301 unfair trade investigation of China
and/or confront China on the issue at the WTO.
While the Bush Administration works to placate domestic interests
on the China issue, they may not be sufficiently sensitive
to China’s popularity is growing in Asia. U.S. officials
forget that countries in the region welcome China’s
stable currency, as it helped to mitigate contagion during
the Asian Financial crisis. The need to maintain stable regional
currencies has prompted countries to enter into bilateral
currency swaps with China, and to consider a more cooperative
regional financial framework. U.S. officials also fail to
consider why China has been so successful in expanding its
economic ties with the ASEAN countries; for most countries
in Southeast Asia, China is now a more important economic
partner than the United States. The least developed countries
of Cambodia and Laos depend heavily on China’s foreign
economic development assistance, and the former Asian Tigers
are hopeful that completion of the China–ASEAN FTA
will bring about a return of investment to the region and
increased access to the Chinese market.
China’s success in expanding its economic influence
has often come at the expense of the United States. Chinese
officials displayed shrewd diplomatic skills at the WTO Ministerial
at Cancun in September, currying favor with developing countries
on specific issues while taking care to demonstrate to industrialized
countries a willingness to make concessions in other areas.
These same diplomatic skills were employed at the recent
ASEAN summit, where Chinese officials moved forward with
their efforts to integrate China within the region by agreeing
to the Treaty of Amity and Cooperation, while at the same
time considering broader economic ties with Japan, South
Korea, and India. At the APEC meeting, President Hu Jintao
used diplomacy to encourage countries to maintain stability
in the region and to counter efforts by the United States
to increase economic ties with non-Asian members of APEC.
Like the United States, China has proposed an expansion of
trade ties with Australia.
The United States does remain important to many Asian countries,
both as an important economic partner and regional stabilizer.
Singapore was the first Asian country to complete an FTA
with the United States, and now Australia and Thailand are
following suit. But FTAs with the United States are only
one part of their strategy. They also seek to balance their
regional interests by negotiating agreements with other large
economies in Asia--Japan and Korea. The Bush Administration
would do well to take a lesson from these countries regarding
future U.S. Asia trade policy.
Under President Bush, U.S. trade policy in Asia has centered
around FTAs with specific countries that USTR Zoellick has
said meet certain criteria, and which offer economic advantages
to U.S. exporters and strategic advantages to the Administration.
But truth be told, U.S. FTA policy in Asia has been driven
by one factor--support for U.S. foreign security policy.
Asian countries which have been selected as viable FTA partners
(“can do”) support the war in Iraq, and are considered
essential partners in the war against terrorism. Australia
and Thailand are two cases in point. Whatever the criteria,
U.S. FTA policy so far has overlooked two of the United States’ most
important trade and security partners--Korea and Japan--both
of whom supported President Bush’s war against terrorism
and contributed to the Iraqi invasion and occupation.
The Bush Administration must do more to engage Asian partners
to ensure a fair balance of both economic and security power
in the region. Asian regionalism by default centers around
China, as countries depend on China’s market for economic
survival. Much of this has resulted because of lack of full
engagement by the Administration in the region. Indeed U.S.
FTAs with Singapore, Australia, and Thailand as well as continuing
dialogue in APEC will help to balance regional interests
in the short-term. But the United States will have to think
outside the box to achieve a balance over the long-term.
Economic stability in Asia will require more active, positive
economic engagement by the United States with Japan and Korea.
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in North-East India
Kumar Amitav Chaliha
DEHLI (KWR) -- The seven states of north-east India
have witnessed insurgency and ethnic strife since
the Naga tribes revolted against the first independent
Indian government in 1947. The region, bordering
Myanmar, China, Bhutan and Bangladesh, has always
remained on the fringes of mainstream India. A
continuous influx of illegal immigrants from East
Pakistan (and later Bangladesh) to the sparsely
populated area, and an unwillingness by successive
Indian governments to check this inflow, has led
to alienation among the local population. The people
have also felt that while mainstream India has
been exploiting its rich mineral resources, economic
benefits have never accrued to them. These factors,
together with historical distrust among various
ethnic groups, have resulted in innumerable insurgencies
in the north-east.
After Tripura, Assam has seen the largest influx of illegal
Bengali-speaking migrants from East Pakistan, and later
Bangladesh. In 1979, the All Assam Students Union (AASU),
the premier student body in the state, and the All Assam
Gana Sangram Parishad (AAGSP), an amalgamation of ethnic
Assamese political parties, started a mass movement for
the detection and deportation of illegal migrants from
the state. The agitation soon took a violent turn and began
to display secessionist tendencies. A militant organization,
the United Liberation Front of Assam (ULFA), was set up
in 1979 to "liberate Assam from Indian colonial rule" and
to form a "sovereign Socialist Assam".
In 1985, the AASU-AAGSP signed an accord with the Indian
government to end the agitation, and subsequent elections
saw this combined group coming to power as a new regional
party, the Assam Gana Parishad (AGP). Under a sympathetic
AGP state government, ULFA ran a parallel administration
and created terror in Assam disrupting communications and
hitting economic targets, kidnapping businessmen for ransom,
and killing government officials. As the AGP lost control
of the situation, the Union government dismissed the state
government in 1990 and called in the army. Nearly 2,500
militants were killed and arrested. In 1992, the Congress
government in power suspended army operations and announced
a general amnesty. Over 4,000 ULFA cadres surrendered to
the authorities. Since then, hundreds have been killed
in internecine encounters between surrendered ULFA members,
known as the SULFA, and ULFA militants.
The ULFA, however, has proved resilient and continues its
activities in the state. It now has around 2,000 members
in 36 camps in Bhutan’s Sandrup Jongkhar bordering
Assam’s Nalbari district. Chairman Rajib Raj Konwar
- alias Arabinda Rajkhowa - and commander-in-chief Paresh
Barua lead the organization.
The outfit shifted its base to Bhutan in the early 1990s
for strategic reasons. At the insistence of India, Bhutan
has now started pressuring the ULFA to move out of the
country. The group is reportedly looking for alternative
sites to relocate. Besides Assam, ULFA has become active
in Meghalaya, Arunachal Pradesh, and north Bengal where
it has been aiding nascent local insurgent groups.
The outfit has also been running training camps in Bangladesh
since 1989. It operates several profitable business ventures
in the country to finance its activities. Sympathetic Bangladesh
regimes, especially the anti-India Bangladesh Nationalist
Party, have always patronized the ULFA and other north-east
insurgent groups. The ULFA is also suspected to have close
links with Pakistan’s intelligence agency, the Inter-Services
The other major insurgency in Assam is by the Bodos, a
major plains tribe. The Bodos have always resented the
hegemony of the non-Mongoloid Assamese and have been demanding
better social, political, and economic conditions since
India’s independence in 1947. In 1989, the militant
Bodo Security Force was formed to secure a "sovereign
Bodoland" in the areas of Assam north of the river
Brahmaputra. It was later renamed the National Democratic
Front of Bodoland (NDFB) with Ranjan Daimary as the chairman.
The 1,500-strong NDFB has been involved in widespread killings,
bombings, and extortions, often in collaboration with the
ULFA. It is active in Assam’s Bongaigaon, Kokrajhar,
Dhubri, Barpeta, Darrang, and Sonitpur districts. It has
bases in Myanmar and has set up 21 camps in southern Bhutan.
Another terrorist group, the Bodo Liberation Tiger Force
(BLTF) headed by Prem Singh Brahma, was set up in 1996
to fight for a separate "Bodoland" within the
Indian Union on the north bank of the Brahmaputra. The
800-strong BLTF signed an agreement with the government
in February for the creation of the Bodoland Territorial
Council, a reserved area for the Bodos.
The NDFB and the BLTF have frequently fought each other.
Both have also resorted to ethnic cleansing of non-Bodos
in Bodo-inhabited areas.
The Kamatapur Liberation Organization (KLO), the Dima Halong
Daoga (DHD), and the United People’s Democratic Solidarity
(UPDS) are three other terrorist organizations active in
Assam. The KLO wants a separate Kamatapur state for the
Koch-Rajbangshi tribe comprising Assam’s Goalpara
district and six districts in north Bengal. The DHD and
the UPDS are fighting for separate homelands in the North
Cachar Hills and Karbi Anglong districts. The three are
small outfits with limited areas of operation.
In 1997, a unified command was set up by the state government
to counter insurgency in the state, which continues to
date. It comprises 40,000 army, paramilitary, and state
The Nagas were the first to revolt against the Indian government
with Angami Zapu Phizo’s Naga National Council (NNC)
in 1947. In 1956, Phizo formed an underground government
and an armed wing. The Indian army was deployed to crush
the insurgency, and Phizo escaped to East Pakistan and
later to exile in London.
In 1975, the NNC signed an accord with the Union government
and surrendered. But a group of 140 NNC activists repudiated
the accord and set up the National Socialist Council of
Nagaland (NSCN), a terrorist organization, under Thuengaling
Muivah, Isak Swu, and S.S.Khaplang. In 1988, the outfit
split along tribal lines with Khaplang setting up the NSCN
(K) with Konyak Naga tribe members and Muivah and Swu forming
the NSCN (IM) with Tanghkul Nagas. Since then, hundreds
of cadres have been killed in inter-factional clashes.
The 3,000-strong NSCN (IM) has been demanding an independent "greater
Nagaland" comprising Nagaland state and Naga-inhabited
areas in Assam, Manipur, Arunachal Pradesh, and Myanmar.
It is aided by the ISI and is active in parts of Nagaland,
the North Cachar Hills, and Karbi Anglong districts of
Assam, Tirap and Changlang districts of Arunachal Pradesh,
and in the Naga-inhabited northern districts of Manipur.
The NSCN (IM) has been observing a ceasefire with the security
forces for the past four years and has been holding peace
talks with the Indian government.
The NSCN (K) has 2,000 armed cadres and its organization
and aims are similar to those of NSCN (IM). It is active
in parts of Nagaland and the Naga-inhabited areas of Myanmar.
It signed a ceasefire agreement with the Union government
in 2001 and has agreed to hold peace talks. Despite the
ceasefire and the presence of over 5,000 army, paramilitary,
and police personnel, extortion and kidnappings by both
NSCN factions have continued.
Internecine conflicts among Manipur’s ethnic groups
and tribes are common. The Hindu Meitei majority in the
Imphal valley have long resented the reservation of jobs
and land for the other tribes in the state’s five
hill districts. Disillusionment with the Indian government
has led to secessionist sentiments among the Meiteis and
several separatist groups have emerged.
The United National Liberation Front (UNLF), the oldest
Meitei insurgent group, was set up in 1964 to establish "an
independent Socialist Manipur". The UNLF, with about
800-armed cadres and training camps in Myanmar and Bangladesh,
has close ties to the NSCN (K).
The People’s Liberation Army (PLA) was established
in 1978 by N Bisheshwar Singh to unite all ethnic groups
in the state for "liberating Manipur from Indian rule".
It has a "government in exile" in Bangladesh,
and has two camps in Myanmar and five in Bangladesh where
about 700 recruits have received training in guerrilla
The People’s Revolutionary Front of Kangleipak (PREPAK)
was formed in 1977 for the expulsion of non-Manipuris in
the state. It has 400 cadres trained by the NSCN (IM).
While Meitei outfits are active in the Imphal valley, the
NSCN (IM) is strong in four of Manipur’s five hill
districts. For most of the 1990s, the NSCN (IM) fought
with the Kuki National Army and the Kuki National Front
over the control of narcotic traffic from Myanmar, leaving
over 1,000 people dead. The Kukis are an avowedly anti-Naga
tribe in the state.
After Assam, Manipur has the largest deployment of security
forces to counter insurgency. Nearly 20,000 army, paramilitary,
and police personnel are stationed in the state.
The indigenous Mongoloid people of Tripura, who accounted
for 95 percent of the population in the 1931 census, were
reduced by successive immigration from East Pakistan and
Bangladesh to 31 percent in the 1991 census. This unchecked
migration has led to widespread discontent among the tribal
population and subsequently to militancy.
The first terrorist outfit in Tripura was the Tripura National
Volunteers (TNV) set up in 1978 to fight for a separate
tribal state. To counter the TNV, immigrant Bengalis formed
the militant Amra Bangali. In the ensuing violence about
1,800 people were killed. The TNV surrendered in 1988.
Some former TNV cadres formed the National Liberation Front
of Tripura (NLFT) in 1989 to carry on the TNV cause. It
has an estimated strength of 800 cadres, and its headquarters
is in the Khagrachari district of Bangladesh. The Communist
Party of India-Marxist (CPI-M), which controls the state
government, has been the chief target of NLFT attacks.
Another group of former TNV cadres formed the All Tripura
Tiger Force (ATTF) in 1990. The strength of the outfit
has been considerably reduced after 1,600 cadres surrendered
in 1994. It has 400-armed members now, and its headquarters
is in Tarabon, Bangladesh. It has strong links with the
CPI-M party and the ULFA.
Two local militant groups are active in the state. The
demands of the smaller Hynniewtriep National Liberation
Council (HNLC), a Khasi tribal outfit, are not clear. The
larger 350-strong Achik National Volunteers Council (ANVC)
is fighting for a separate state for the state’s
Garo tribe. Both have set up bases in Bangladesh and are
being aided by the NSCN (IM), ULFA, and the NLFT.
THE FUTURE OF INSURGENCY IN THE REGION
Many see the peace overtures by major militant outfits
such as both factions of the NSCN, and sporadic surrenders
by disillusioned militants, as signs of the rest of the
region going the Mizoram way. There has been complete peace
in the region’s Mizoram state since the Mizo National
Front laid down arms in 1986 after two decades of insurgency.
However, the widening network of extortion and criminal
activities by militants is increasingly having a corrupting
influence on government officials, politicians, and society.
It would be difficult to easily shake off this influence.
Also, the fissionary trend of every tribal, linguistic,
cultural, and religious sub-group demanding separation
from the others, and radical demographic shifts and the
record of poor governance, makes north-east India a potential
source of increasing mass strife in the future.
VIEWPOINTS & INTERVIEWS
Overview: Interview with Ambassador Donald P.
By Keith W. Rabin, KWR International, Inc.
his graduation from Williams College in 1951, Donald
P. Gregg joined the Central Intelligence Agency
(CIA), and over the next quarter century was assigned
to Japan, Burma, Vietnam and Korea. Gregg was seconded
to the National Security Council staff in 1979,
where he was in charge of intelligence activities
and Asian policy affairs. In 1982, he was asked
by the then Vice President George H. W. Bush to
become his national security advisor. He then retired
from the CIA, and was awarded its highest decoration,
the Distinguished Intelligence Medal. During his
six years with Vice President Bush, Gregg traveled
to 65 countries. Between 1980–89, Gregg also
served as a professorial lecturer at Georgetown
University, where he taught a graduate level workshop
entitled “Force and Diplomacy.” From
September 1989, Gregg served as ambassador to Korea
for three and one-half years. Prior to his departure
from Korea in 1993, Gregg received the Department
of Defense Medal for Distinguished Public Service,
an honorary degree from Sogang University, and
a decoration from the Prime Minister of Korea.
In March 1993, Gregg retired from a 43-year career
in the United States government, and assumed his
current position as the president and chairman
of The Korea Society in New York City. He is a
member of the Council on Foreign Relations. Recent
awards include an honorary degree from Green Mountain
College (1996), the Secretary of Defense Medal
for Outstanding Public Service (2001) and Williams
College’s Kellogg Award for career achievement
NEW YORK (KWR) –
Thank you Ambassador Gregg for agreeing to speak with
us today. Before proceeding with our questions, can you
tell us a little about your background and current activities?
I first went to Asia in March of 1952, spent ten years
in Japan, shorter periods in Burma and Vietnam and six
or seven years in Korea, first as CIA station chief and
later as Ambassador. Since early 1993 I have been Chairman
of the Korea Society. In this capacity I travel to Korea
three or four times a year and last year traveled twice
to North Korea.
Despite its clear potential and achievements,
Korea has lagged behind many other Asian countries over
year, at least in terms of its equity indices. Many investors
mention problems with the North, heightened labor tensions,
high consumer debt and the emerging competitiveness of
China as reasons for their ambivalence. Are investor’s
right to be concerned and what should they be keeping
in mind about Korea and the future course of its economy?
The Korea Society recently featured Hogan Oh as a speaker
about a month ago. He is a highly successful Korean banker
who managed debt restructurings under Lee Hung Jae during
the Kim Dae Jung regime. This included the makeover of
Daewoo. His feeling is the Koreans are still learning
the power of the marketplace, and they are still moving
away from the period where government made decisions
which he believes are better left determined by the private
sector. He was asked what he would do if he were king
now and noted he would work through the banks to make
sure they would play their role in making things transparent
and that borrowing is conducted in satisfactory fashion.
He is quite bullish on the future of Korea but admits
that questions on North Korea act as a deterrent to investors
and hopes very much that the American role in dealing
with North Korea will become clearer than it is at the
One Korean official recently noted to me their belief
that some of the current anxiety over Korea is reflective
of its having become a more advanced participatory democracy.
As a result, a wider range of stakeholders are now voicing
and learning how to advocate their opinions. Their thought
was while this was creating some concern in the short-term
it was a long-term positive. Do you share this view and
what are your own thoughts on the current administration
in Korea and its policy agenda?
I think that South Korea is probably the most vibrant
democracy in Asia and President Roh has said to some
of his confidants that governing South Korea is much
more difficult than he thought. I think this is a very
healthy remark and is similar to what American presidents
used to say about the difficulties they found in governing
this country. I think that President Roh is caught in
almost a zero sum game between the over 60s-set and the
younger people who played such a major role in electing
him. Memories of the Korean War have faded in the younger
peoples minds if they ever knew about it in the first
place. They tend to see the U.S. as an obstruction to
North-South reconciliation. The older generation, however,
remembers the horrors of the war and remains grateful
to the United States. They are also very skeptical of
the Sunshine Policy. I think it is a very difficult task
for Roh Moo Hyun to thread his way between these very
different sets of perceptions. I think he leads a forward-looking
administration and remain confident in the end he will
emerge as a constructive president, who will advance
South Korea on its role to become the hub of Northeast
Recently, Japan has been receiving a lot of positive
attention for the first time in many years. Some people
believe this is simply a cyclical upturn and others that
this marks the start of an economic recovery. What are
your thoughts about Japan at the present time?
The Japanese economy is something almost beyond comprehension
in how it has floundered over the past dozen years. I
draw some hope from Prime Minister Koizumi’s reelection
and some of his cabinet appointees, including Mr. Takenaka
as evidence they are going to push forward with genuine
reformation. It still has a long way to go but I think
that Koizumi is one of the better leaders Japan has produced
since the Ron-Yasu (Nakasone) relationship during the
time of President Reagan.
A Financial Times reporter recently described Europe
as the past, the U.S. the present and China the future
leading force in the world economy. How do you view the
emergence of China and what will be the implications
for Americans and other nations over the next few decades?
I only have a superficial response to that. I was in
Qingdao in September for a six party meeting and was
astonished by the development of the city and the construction
along the beach. It looked almost like Southern California
with every kind of car in the world in the streets. The
Chinese diplomats dominated the meeting. Their sophistication
was notable and they are on the rise. But - inner China
is still very much lagging behind. There are still huge
problems with corruption, unemployment and highly inefficient
public sector industries that have yet to be dealt with.
Last year I heard you speak at the annual Foreign Policy
Association conference and was intrigued by your comments
on Iraq and the global war on terrorism. Now that we
have gone to war, what are your current views on Iraq
and the global war on terrorism? Are we striking the
right balance between military-, diplomatic- and socially-oriented
means to deal with these problems?
I was very much impressed by Retired Marine General Anthony
Zinney’s recent comments on the war. He felt the
actual battle plan had been brilliantly conceived and
carried out but there had been far too little anticipation
to what would follow at the end of the full-scale military
engagement. I think this is a very difficult situation
for the United States, but that it is something from
which we have to emerge successful. I draw some comfort
from things that were written about the U.S. occupation
of Germany in 1946 and 1947, which were filled with skepticism
about our ability to reconstruct a nation that had been
devastated by our making war upon it. Germany was a tremendous
success as was Japan but whether Iraq will emerge in
those terms remains to be seen. However, there is a tendency
in the press to focus on the bad news. I am guardedly
optimistic but still appalled at the costs.
One issue you’ve spent a lot of time focusing on
is the future course of North Korea and the heightened
security tensions that have emerged since the nation
was included in the "axis of evil" by President
Bush in 2001. How do you view the current situation in
North Korea? Do you think that current concerns can be
resolved through diplomatic means and is the U.S. administration
taking the right course of action?
I think there is a growing body of evidence that North
Korea is making a serious effort to change the way it
deals with economic issues and that it wants to become
a nation that is qualified to deal constructively and
effectively with western markets. This is a very difficult
transition to make. The South Korean Minister of Unification
at the end of September said at the Korea Society that
North Korea has moved from symbolic change to serious
change in economic terms but has not yet reached irreversible
change. For that to occur North Korea will need outside
economic assistance. He hopes it will be forthcoming
from donors including the U.S. At this point the Bush
administration still seems to be divided. The President
is making the right noises when he says we are pointed
toward a peaceful solution. But strident voices within
the administration and some of its outriders are expressing
a very different line talking about the possible need
for force and their interest in regime change. So I think
the administration still hasn’t made up its mind
whether to negotiate seriously offering something in
the way of security guarantees before North Korea completely
steps away from its nuclear program. I hope very much
that serious negotiations occur between the U.S. and
North Korea because I believe North Korea will give up
their nuclear programs in return for a security guarantee
and promises of continuing economic assistance.
There has been a lot of talk over the past year or two
about the U.S. shift toward a policy based on preemptive
rather than retaliatory action and anticipatory/unilateral
decisions, rather than multilateral consensus. What is
your view on this change in orientation?
I think one of the central issues in the next presidential
election will be a very spirited debate on the role of
the U.S. in the world and how we respond to it. President
Bush’s team has brought with it a more aggressive
hard edge approach to our role, which he inherited from
a policy group that called themselves the “Vulcans “ before
the election. They go back to the Wohlstetters and Professor
Strauss from the University of Chicago. The events of
911 seemed to validate much of what they had said. Whether
or not the elements of unilateralism, preemption and
regime chance will remain central to the way we play
our role is a great question that I think will be debated
vigorously in the next election and I think that issue
will have a profound impact as to who will emerge the
winner in November of next year.
During the lead-up to the Iraq war, we saw heightened
tensions between the U.S. and its traditional allies
in Europe. In this regard, Secretary of Defense Rumsfeld
highlighted differences between the views of "Old" and "New" Europe.
Do you have any thoughts you can share with us on the
European Union and its place in the world, the contrast
between old and new Europe and their relationship with
It is certainly true that some European countries such
as Poland are emerging in a new light and I am glad to
see that. I am concerned however that our traditional
friends Germany and France are still not comfortable
with the approach we have taken in Iraq and to some extent
so is the U.K., our closest supporter and ally. The key
is some new formulation that will give the UN a greater
role in Irag that will allow France and Germany to be
involved. This seems to be in the works although it is
a difficult procedure given the facts involved in the
run up to the American invasion earlier this year.
I have heard you mention your belief that the Middle
East is at the forefront of U.S. concerns and that if
you were just starting out your career you would likely
choose to focus on this region. What are your views on
the seeming intractability of problems within the region?
Are we destined to see accelerating amounts of violence?
What are the prospects for diplomatic and political solutions
to these problems?
We are more ignorant of Islam and the Middle East today
than we were of Asia 50 years ago. We do not know the
language, the religion and the psyche. I admire the job
our troops are doing in Iraq but it is an extraordinarily
difficult one. The Israeli-Palestinean problem is central
and the complications there are obvious for everyone
to see. I think it is imperative that we maintain and
strengthen our relations with traditional friends in
the Middle East including Egypt Oman, Jordan and Morocco
and through these relationships do everything to demonstrate
our interest in helping that entire region develop economically.
One area of the world that has become increasingly important
is Russia and Central Asia, which possesses a wealth
of minerals, energy and other natural resources. As a
former cold warrior, can you talk a little about this
area of the world and its prospects for the future?
As someone with a long CIA background who saw Russia
as the main opponent during the Cold War, I am convinced
that a positive U.S.-Russia relationship is vital if
the 21st century is to be better than the 20th century
-- and god help us if it isn’t. I think that President
Putin is more or less what Russia seems to need at the
moment. I am glad to see that he and President Bush have
developed a good personal relationship and one that allows
Putin to speak very frankly about areas where he disagrees
with us. I hope that eventually we can reach the same
degree of intimacy and honesty with the Chinese leadership.
Thank you so much Ambassador Gregg for sharing your views
with us. Before concluding do you have any final thoughts
you would like to leave with us?
I am more generally optimistic about the how the American
system is working in October than I was 2-3 months ago.
I think a serious run-up to the election has commenced
and that all the things that have been mentioned in this
brief overview will be debated in a healthy way. This
will enable the American people to make an enlightened
choice about the ongoing political leadership of this
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the Devil’s Gate – Observations of
the Koizumi “Revolution”
Scott B. MacDonald
November 9th, 2003 Japanese voters went to the
polls to elect their next government.
Although the opposition Democratic Party of
Japan (DPJ) achieved substantial gains (winning
additional seats to end up with a total of 177),
Junichiro Koizumi’s Liberal Democrats won
240 seats, which with its coalition allies, gives
it a secure majority of 278 seats in the lower
house of the Diet. Koizumi now starts a second
term with a popular mandate to implement the so-called “Koizumi
revolution.” But is it really a revolution?
Is the Prime Minister really capable of moving
Japan into a new era of sustainable economic
growth, supported by a restructured economy?
The expression “Devil’s Gate” came up during
a conversation in Tokyo in 2003 about President George W. Bush’s
decision to invade Iraq. The Japanese speaker indicated that
by invading Iraq, the President put himself at the Devil’s
Gate – at the door of considerable potential troubles.
Simply stated, on one side of the Devil’s Gate all
was well; on the other side were the demons of treachery,
For many reasons President Bush walked through the
Devil’s Gate and the United States entered unknown country.
In the same respect, Junichiro Koizumi’s decision to
become Japan’s prime minister in 2001 took him to the
Devil’s Gate. While Japan can hardly compare to Iraq
in terms of political chaos, the East Asian country was in
a troubled state – the economy was suffering from over
a decade of stagnation, the political will for change was largely
lacking, and society was adrift, transfixed by the dilemmas
of an aging population and a sense of unease over the economic
malaise. In addition, there was a sense that Japan’s
place in the world was slipping, especially before the rising
economic power of China and, to a lesser extent, South Korea.
For a combination of reasons, Koizumi decided to walk through
the Devil’s Gate into the unknown.
Since 2001, Koizumi has given the world the image of Godzilla,
the famous screen monster, always rising out of the sea
and fighting over Japan, usually against bad monsters.
In a broad
sense, Godzilla represented the Schumpeter-like forces
of creative destruction. Although Godzilla often destroyed
fighting the bad monsters), this caused the inhabitants
to rebuild their city – at least the city was always brand
new in each successive movie. In the same sense, Koizumi projects
an image that he too is releasing creative destruction and
from the ruins of the old Japanese economy, a new stronger
and more modern economy will emerge. Consequently, Koizumi
is credited for launching a “revolution” of economic
change in Japan. He has made proclamations of his willingness
to shake up Japan, uproot the political order and bring the
economy back to a period of sustainable economic growth. All
of this, of course, will help restore Japan’s role
in the world.
There is little question that Koizumi is a breath of fresh
air in what had become a stale world of Japanese politics.
His proposed reforms to overhaul the state sector (with
an eye to reducing wasteful spending), to privatize parts
it (mainly the postal system and highway corporation),
up bad bank debt, and reform the taxation, medical care
and public pension systems, all promised much to an increasingly
cynical and frustrated public. After two years, much of
program remains unfulfilled. The rhetoric of revolution
remains in place, but the results seem lacking.
The Koizumi revolution confronts considerable opposition,
both within the government and out. Members of Koizumi’s own
Liberal Democratic party (LDP) have fought hard against reform
as have business leaders from the protected and often inefficient
domestic sector – agriculture, retail and construction.
Koizumi’s supporters have been under fire for pushing
reforms and in some cases there have been sustained efforts
to force them to resign.
Additional opposition to the Koizumi reforms comes from
the banks, many of which carry bad debts from what have
to be known as the zombie companies. It is no mistake that
of the zombies are in the retail, agriculture and construction
sectors. Many of the same companies have long held close
political ties to the ruling LDP. LDP members have not
been shy about
seeking ongoing government and bank forbearance for dead-beat
companies. Adding another layer of opposition to reform
comes from within the bureaucracy, where certain factions
been ill at ease at the idea of allowing bankrupt companies
go bankrupt. This also implies that the banks should stop
providing loans and begin calling non-performing loans
what they are – lost
All of this means that Koizumi coming to power in 2001
faced a Gordian Knot of the Japanese political economy,
system created in the aftermath of the Second World War
to help Japan catch up with the West economically. The
placed an emphasis on business, government and the LDP
working together to expand and upgrade the country’s industrial
infrastructure geared for export markets. In essence, the government
guided the nation’s development, channeling credit
to key sectors through the financial system.
The high level of success of that development model in
the 1950s and 1960s, however, guaranteed that making any
changes would be difficult. While the global economy changed
and Japan’s major exporting companies adapted, the rest
of the development model did not. It was politically easier
to tinker around the edges than it was to make a meaningful
overhaul. While the 1980s showed a highly dynamic Japanese
economy to the world, the structural weaknesses inherent in
the system, in particular the stunted role of the banks, the
shallow nature of capital markets, and poor corporate governance
were all to be revealed in the “lost decade” of
The consensus-driven nature of Japanese society and the
factional nature of its politics made the arrival of a
willing and able to cut the Gordian Knot of the political
economy, difficult. Throughout much of the postwar era,
ministers have operated with far less power than their
Western counterparts, considering that they often had to
a number of factions within the LDP. Achieving consensus
time-consuming and opaque, allowing considerable latitude
to the bureaucracy in how policy should be implemented.
therefore a surprise in 2001 when Koizumi, one of the country’s
more colorful leaders, emerged as the head of the LDP and
became prime minister. Regarded as handsome, with wavy
hair and slender
build, he became well know for being an Elvis fan and for
having something lacking in earlier leaders, flamboyance.
The reality of the Koizumi revolution is that is really
more of an evolution. For all the marketing of Prime Minister
Koizumi as a revolutionary, he is more of a reformer and
a master manipulator
of the press. Simply stated, Japan under Koizumi since
is seeing an evolution of reform, not a revolution. One
of the definitions for revolution is “any complete change
of method or conditions”. This implies sweeping changes
in how things are done. Japan after two years of Koizumi
is not at this stage.
From an Anglo-American standpoint this evokes a sense of
disappointment, that Japan is forever condemned to the
promise of reform, but
a reality of inaction and ultimately economic decline.
From the standpoint of many Western analysts, Japan has
many failed reformers, heard too many claims that reforms
will now work; and observed too many policy dead-ends.
had considerable goodwill, but patience has been eroded
as the Prime Minister’s promises have not fully matched
expectations. Deflation is still a problem, the banking sector
remains wobbly, and the domestic sectors contain many of the
same pitfalls that characterized them pre-Koizumi. And, behind
all of this is a stark demographic reality – Japan’s
population is aging, which will place that much more pressure
on the economy. Accordingly, the Nikkei Newspaper recently
noted a National Institute of Population and Social Security
report that households headed by those aged 65 and older
are projected to increase 65 percent from 2000 to 18.43
in 2025, accounting for nearly 40 percent of the all Japanese
From a Japanese standpoint, what Koizumi is pushing is
radical – he
is calling for and, in a piecemeal fashion, breaking up the
old political economy. He has adopted the mantra of “structural
reform” or kozo kaikaku to sum up his agenda and
to signal his commitment to radical change. For conservative
of the LDP, the many special interest groups in the domestic
economy and parts of the bureaucracy, any change is dangerous
as it represents a loss of power, the strong potential
of more business failures, and an overall loss of control
economy by the bureaucracy.
Somewhere between the Western and Japanese views sits reality.
Japan is making changes and reforms are occurring, but
the process is slow, convoluted, and at risk of slippage
to inaction. Because of this, it is difficult to measure
that has been made. It is also difficult to gauge the role
of Koizumi and what his long-term impact will be on Japan.
It is therefore important to underscore that the two issues
are entwined – Koizumi’s place in Japanese
history will be judged by how much he changes his country.
another fashion, Koizumi will be judged on his ability
to halt the decline of Japan.
Although there is frustration about the gradual nature of
reform, Koizumi is changing Japan. The domestic sector is
to embrace structural adjustments, some companies are being
allowed to fail, and others are coming under much greater
pressure from their bankers to restructure with a coherent
transparent plan. There has been some creative chaos as reflected
by the high levels of bankruptcies in the 2001-2003 period.
The banks have made an effort to reduce bad loans. In two
cases (Long-Term Credit Bank and Nippon Credit Bank), Japanese
have been sold to foreigners, and one major bank, Resona,
was taken over by the government after it failed to have
capital ratios. Legislation has also moved forward pertaining
to the privatization/overhaul of the postal system and the
Currently Koizumi appears as a transitory figure. Within
the lexicon of historical figures, he sits somewhere between
Soviet Union’s Mikhail Gorbachev and the United Kingdom’s
Margaret Thatcher. The former understood the need for reform
and started the process, but was unable to bring it to a successful
conclusion. Once started, reform quickly overcame Gorbachev’s
ability to control the process and his base of support – the
Communist Party and the state – proved wholly inadequate
to accommodate change and ultimately brittle, destined
to fragment. In 1992, the Soviet Union ceased to exist
and Russia emerged
as the major successor state, commencing a long and difficult
process of economic reform.
In sharp contrast to Gorbachev, Thatcher was able to advance
her revolution, which entailed the radical overhaul of
the British economy. Thatcher was abrasive and ruthless
her reforms and the opposition was weak and ultimately
lacked widespread public support. By the time Thatcher
from power by her own party, she was largely successful
in reversing decades of decline and a profound sense of
drift. Today the United Kingdom is one of the world’s
As Koizumi embarks upon his second term in office he must
give serious consideration to his place in history. Thus
has lasted longer in office than many other Japanese prime
ministers in recent history. However, lasting in office
is not making a revolution. Much has been promised. He
a popular mandate to make good those promises. In a sense,
Koizumi has pulled Japan across the Devil’s Gate threshold,
but not moved much beyond. Does he have the strength to take
Japan further into the unknown country, where there are tough
challenges and very likely considerable rewards? If so, he
will be remembered as one of his country’s exceptional
leaders. If not, he will be seen a man with vision, but limited
by his inability to implement badly needed changes – a
transitory figure, waiting for another more capable (or
maybe luckier) figure to come along. Only time will tell.
Scott B. MacDonald
Guatemala– Presidential Elections:
On November 9th, 2003 Guatemalans went to the polls to
elect a new president. Former Guatemala City Mayor Oscar
Berger received 47.6% of the vote, while center-left
candidate Alvaro Colom finished second with 26.4%. Retired
General Efrain Rios Montt came in third with 11.2%. To
win the election, however, a candidate must gain more
than 50% of the vote. Consequently, the top two candidates
face each other in a run-off election December 28.
- S&P Warning: S&P announced that it thinks it is
more likely that the North Korean government led by the colorful Kim
Jong-il would collapse rather than gradually reform itself. The ratings
agency also urged South Korea to build the financial reserves that
will be required once the Northern regimes collapse takes place. S&P
noted that the North Korean collapse was only a matter of time and
when it comes it will cause a greater shock to the South's economy
than the 1997-98 Asian financial crisis. Although the North has started
to reform its command economy over the past year by liberalizing wages
and prices, the regime is simply too rigid to emulate the market openings
adopted by other communist governments in China and Vietnam. As the
rating agency stated: "Although some other Asian nations that
used to have centrally planned economies have successfully moved to
a market-based system, the North Korean leadership probably lacks the
flexibility and vision to undertake such a change." To this we
would add, there are elements within North Korea's leadership that
clearly have a vested interest in no change, rather maintaining the
status quo, which allows them to make a lot of money from trading in
narcotics and weapons, including the transfer of nuclear technology.
The North is constantly short of food and fuel and it is desperate
to develop a more solid bilateral relationship with the United States
in order to exact more aid and stave off becoming more dependent on
China. In a sense, the North's view is better to become a U.S. client
state with Washington far away than a client state of China next door.
Jordan – Changing the Guard: King Abdullah
II changed his government in October by asking Ali Abu Ragheb
to step down as prime minister and Faisal al-Fayez to assume
that post. Ragheb was the prime minister since June 2000 and
presided over an opening of the country to greater foreign trade,
including a free trade agreement with the United States. During
his period in office Ragheb allowed U.S. troops to deploy prior
to the start of hostilities in the last Iraq war, something that
did little to endear him to the majority of Jordanians. Ragheb
also had problems with the economy. He came into office promoting
reforms that aimed to reduce poverty, unemployment and corruption.
Unfortunately, the Jordanian economy was hard hit by the effects
of the regional security situation on tourism, a major source
of foreign exchange. Growth fell from 4.9% in 2002 to a more
modest 3%, which is slower than the country’s population
growth rate. Al-Fayez is the former court minister, has a close
working relationship to the King and is regarded as both pro-reform
and pro-U.S. His new cabinet is smaller, shrinking from 29 ministers
to 20, and is supposed to be more focused on reform. At the same
time, al-Fayez should benefit from stronger economic growth expected
in 2004, with the IMF forecasting 5.5% real GDP expansion.
Oman – ratings
Affirmed: n November 5, 2003, Standard & Poor’s
affirmed Oman’s BBB rating, with a stable outlook.
Poland: In early November,
Fitch has changed the outlook for Poland's BBB+ sovereign rating
from stable to positive, reflecting improvements in foreign exchange
reserves. In addition, Poland's financial position will be reinforced
by its just announced sale of 7.5-8.5% of TPSA (it now currently
owns 14% of the Polish telecom). The sale of TPSA shares is expected
to raise Euro 376 million, which will help finance the fiscal
deficit and make up for lower tax revenues related to slow economic
growth. We do not expect the sale of state shares will have any
adverse impact on TPSA as the ratings were not dependent on state
ownership. This was confirmed in conversations with both rating
agencies. Indeed, it is felt that the government's intention
to move ahead with the share sale will reduce volatility in the
Up, But Politics Hangs Like a Dark Cloud: Russian
real GDP expanded 6.5% percent in the first nine months
of 2003, compared to 4% growth over the same time in
2002, Russian Prime Minister Mikhail Kasyanov announced
on Oct. 23. Kasyanov added that the GDP is expected to
grow 6 percent overall in 2003, largely fueled by higher
energy prices. Despite the strong nature of the economy,
the political situation turned problematic in early November
when the Putin government arrested Yukos oil Chief Executive
Officer Mikhail Khodorkovsky on charges of fraud and
tax evasion. Moody’s had only the month before
generously raised Russia sovereign ratings from Ba2 to
Baa3, a two-notch upgrade. Now, Standard & Poor’s,
which rates Russia BB, is thinking of a possible downgrade,
stating: “Although we do not expect it at this
point, if the Yukos affair leads to a significant outflow
of capital and ensuing deterioration in economic activity,
then we would consider an outlook change or downgrade.” The
fundamental problem is that Russia’s recent strong
spurt of growth has been based on higher oil prices and
a substantial inflow of foreign capital, largely attracted
to opportunities in the hydrocarbon sector. The issues
concerning Khodorkovsky are directly related to the fact
that he refused to back out of being involved in the
country’s political life, in particular, ahead
of the upcoming Duma elections. Other Russian oligarchs
have either opted out of Russia (taking some of their
money with them to London and continental Europe) or
have quietly joined ranks with Putin, who appears to
have the support of the old security crowd in Russia.
None of this is positive for Russia and it makes a mockery
of Moody’s two notch upgrade.
Thailand – On
Review for an Upgrade: In early October Moody’s
placed Thailand’s Baa3 ratings on review for a
possible upgrade. If the upgrade occurs, which is widely
expected, Thailand will be climbing back up the ratings
ladder from which it fell in the aftermath of the Asian
financial crisis in 1997-98. Backing up the upgrade tide,
the government raised its estimate of how fast the economy
will grow over the next five years to 6% annually, up
from 5%. In addition, the nation’s budget is close
to being balanced for the time since 1997 and investors
have made the stock-market in Bangkok the best performer
in Asia. It is no surprise that Thai stocks are at six-year
Vietnam – A
Warning from Fitch: On November 6,
Fitch sent a warning to Hanoi about the country’s
sovereign rating. Although it is maintaining
the BB- rating, it changed the outlook from
positive to stable and, if present trends continue,
we would not be surprises to see the outlook
go negative in the months ahead. The rating
agency changed its outlook on concerns about
the widening trade and current account deficits,
excessive domestic credit growth and a dispute
with the International Monetary Fund. Vietnam
has enjoyed fast economic growth over the last
couple of years: 5.8% real GDP expansion in
2002, with 6% expected in 2003. Rapid growth,
however, has fueled demand for imports, both
as consumer goods and industrial inputs. The
trade deficit in 2003 could be a record $4.5
billion, putting pressure on the current account
balance, which could top 7% of GDP, well above
IMF projections of 3.6% of GDP.
At the same time, credit at Vietnamese banks
has increased by an annual rate of 30% for
the first half of the year. Even for a more
developed banking system this would place the
banking system under pressure. In Vietnam,
the banking system still has considerable bad
debt on the books, especially at the state-owned
banks that are still the dominant players.
Public nervousness with the banks is already
evident as there was a ruin on a private-owned
bank, largely due to rumors. The message from
Fitch is that while strong economic growth
is great, it must be balanced with ongoing
structural reforms and proper regulation and
supervision in the financial sector. Without
a balanced approach, Vietnam could be heading
The Tragedy of Monarchies
at the Palace: The Doomed Royal Dynasty of Nepal (London:
Fourth Estate, 2002).
Tomes, King Zog: Self-Made Monarch of Albania (Gloucestershire,
UK: Sutton Publishing Limited, 2003).
by Scott B. MacDonald
here to purchase "Massacre
at the Palace: The Doomed Royal Dynasty of Nepal"
directly from Amazon.com
here to purchase "King
Zog: Self-Made Monarch of Albania" directly
is often an air of tragedy surrounding the history of
monarchies. This is certainly the cases of Albania and
Nepal, the subject of two new books. The first book is
by Jason Tomes, King Zog: Self-Made Monarch of Albania
and the second is Jonathan Gregson's Blood Against the
Snows: The Tragic Story of Nepal's Royal Dynasty. For
anyone with an interest in the hisotry of two countries
a bit off the beaten track, Tomes and Gregson address
a gap in the literature, providing very readable accounts.
Tome, a lecturer in modern history and politics, presents
a more traditional history (complete with footnotes and
a bibliography), full of primary sources, reflecting
considerable attention to detail. Gregson's approach
is more journalistic, but benefits from contacts among
the surviving courtiers and members of the Nepalese royal
family. He also has spent a fair amount of his time with
his subject, including being one of the few journalists
to be granted an interview with the late King Birenda.
In both cases, the authors are sympathetic to the countries
and peoples, they are portraying, though neither shrinks
from telling the historical story as they see it.
Tomes' King Zog could have easily been titled Everything
That You Want to Know About King Zog. With a well-told
sweap of Albanian/Ottoman/Balkan history, the author
traces the roots of King Zog's family in the Mati region,
the rise of Ahmed Bey Zogolli, first as a military leader
and later as a prime minister, then president and finally
as king. King Zog's reign lasted from 1928 to 1939, when
it was brought to an end by Benito Mussolini's Fascist
legions. Zog was to leave his country in 1939 never to
return. He eventually died in 1961 in France of cancer
after having lived in exile in London and Egypt prior.
Long years of hoping for a return to power proved to
be futile. Ultimately, King Zog's dreams came up against
the harsh Stalinist reality of the new communist despot,
Enver Hohxa, who was to rule Albania with an iron fist
until his death in 1986, leaving behind an isolated and
amazingly backward country in the midst of a Europe that
long sionce had bypassed it.
Where then did all this leave King Zog in the great flow
of history? Tomes asks the question of Albania's one
and only king: "Adventurer or patriot? Hero or scroundrel?" On
the scroundrel side, he reagrds Zog as a self-made monarch,
shifting from being president to king with relative ease,
willing and able to eliminate or buy off/exile any opposition,
channel what revenues the state generated into his own
coffers, and being dependent on Italian assistance (much
of went into his own pockets). Indeed, he notes other
writers "detect nothing worthy of praise and dismiss
the appalling Zog as an unsavory tyrant." He adds:
His personal wealth sham elections and political murder
feature prominently here."
Yet, Tomes contends Zog came to power over a backward,
tribal-like society, riven by regional and religious
differences. In addition, Albania's neighbors were not
thrilled with the birth of th> e new country, considering
that Yugoslavia, Italy and Greece all held territorial
claims and/or overlapping populations. Indeed, Albania
was a small, poor nation caught up in the power politics
of a Europe heading into the Second World War, a situation
which left her with few international friends and at
the mercy of Italy, already the mainstay of the economy
in terms of massive amounts of foreign loans. Consequently,
Tomes makes the point that before Zog Albania largely
existed as an idea, but central authority was weak and
in many parts of the country, nonexistant. In two decades,
Zog managed to consolidate the Albanian state and provide
a more enduring foundation for the country's future as
a nation-state with respected international borders.
Tomes concludes his masterful treatment of King Zog with
the following assessment:
Soon Albanians will be able to look dispassionately at
their history in the twentieth century: liberation, instability,
occupation, instability, Zogist dictatorship, occupation,
civil war, Stalinist dictatorship, and more instability.
When they do, they may will count the reign of King Zog
among the good times. It is a sobering thought.
At the other end of the Eurasian landmass, the trials
and tribulations of the Nepalese royal family represented
a very different historical track record in terms of
longevity of royal rule, but smilar in terms of a small,
relatively backward nation, sorrounded by larger more
powerful neighbors (China and India). Like Albania, Nepal
was a very tribal surrounded, divided by tough mountainous
terrain. It was in this environment that the Shah dynasty
came to power over a united Nepal in 1769. That same
dynasty was almost snuffed out of existance in June 2001,
when the Crown Prince Dipendra shot and killed most of
his immediate family, including his father, King Birendra
and his mother, the Queen.
Armed with a 9 mm Glock pistol,
MP5K sub-machine gun, Colt M-16 and Franchi twelve-bore
pump action shot gun, the Crown Prince ultimately killed
12 members of the royal family in a cold-blooded and
methodical fashion and then turned the gun on himself,
only to linger a couple of days before succumbing to
his wounds. In a hastily-organized cornation, Prince
Gyanendra, a brother of the deseased King, became the
new king, a strange twist of fate considering that he
had at the age of three been crowned monarch, serving
a brief three month period in 1950 before a popular coup
ousted the then overly powerful prime minister.
The immediate cause of the 2001 palace masssacre was
a bitter conflict between Queen Aishwarya and the Crown
Prince over whom he would marry. Indeed, the Queen was
known for her unbending will and for being unable to
bear any snubs, especially from any commoners. The Crown
Prince's preference, Devyani, was the daughter of a weathly
and well-placed Indian family. The Queen, however, was
anti-Indian, having earlier gotten herself embroiled
in a tiff with the Gandhi family. In addition, Gregson
also believes that the Queen "would not tolerate
a woman as independent and tough-minded as Devyanyi becoming
her daughter-in-law." Consequently, the Queen did
everything possible to ruin the relationship between
her son and the woman he loved. Adding to what was to
be a volatile mix, the Crown Prince was prone to mood
swings and used drugs. On the night of June 1st, the
Crown Prince apparently decided that he had taken enough
from his parents, feeling a strong sense of betrayal
from his father and deeply resentful of his mother.
Although much attention is given to the events leading
up to the June 2001 palace massacre, Gregson does an
excellent job in telling the story in the context to
Nepal's dynastic history, especially since the Shah family
cam> e to power in the 18th century. In large part,
he notes that the role of the royal family at the apex
of Nepal's political culture and society played an important
role in setting the sateg for the June 2001 bloodshed.
The royal family had long ruled, often through absolutist
prime ministers, apart from the rest of Nepalese society
- the vast majority of whom were poor, yet reverent of
In this regard, politics in Nepal were limited
to a handful of royal families and the families of the
prime ministers. Signiciantly, differences of opinion
were often settled by violence. As Nepal advanced into
the 20th century, there developed a gap between the relatively
isolated royal family (living a rich lifestyle behind
the walls of their many palaces) and the vast majority
of Nepalese. The 1990 pro-democracy riots cut into the
royal family's base of power, but the lifestyle of privilage
continued unabated. In this light, the unbending nature
of Queen Aishwarya > is portrayed as a lynchpin in
undermining the Shah dynasty as it was opposition to
the Crown Prince's love and triumpal nature caused the
Crown Prince to resolve matters in what manner such affairs
had been resolved in the past - violence.
Nepal was left "bereft and confused" by the
palace massacre and the new king sits uneasy on the throne.
Covering a third of the country, a Maoist insurrection
challenges the royal government, grappling to respond.
Blood Against the Snows provides a useful reference point
to the ills that are confronting Nepal, a country that
is usually beyond the general media scope. Although the
Maoist insurrection is not discussed in any detail, Gregson
does provide insight into part of the country's ruling
elite - a partial cuase for the insurrection. It is little
wonder that the end of the monarchy is one of the major
objectives of the Maoists. Blood Against the Snows is
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