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February 2010 Country Archive


Widows and Orphans Arise!
Since Gordon Gecko's claim that investment bankers were the "Masters of the Universe”, it can be seen that many actually do nurture that view of themselves. There was astonished outrage on Wall St when Lehman Bros Bank in New York went down during the banking crisis. “Why were Lehmans allowed to fail?” It is the title of a recent book which ignores the point that the answer is evident - because it went bust, just as throughout commercial history, many retailers, manufacturers, wholesalers, professionals of all kinds, go bust when for an unsustainable period of time, losses exceed profits, the cash flow has gone to hell and they are unable to pay their bills.

It was the assumption of the title and the book, that banks, unlike any other form of trading, couldn’t be allowed to go under. ‘Too big to fail’ was indeed a proposition posed by many observers of the situation, then and now! Cutting to the chase, the reality was that Lehmans as an investment bank, was not a candidate for rescue. It was not a retail banker with widows and orphans funds to be protected, so it didn’t qualify for help and wasn’t about to be bailed out by government. Lehmans in fact, was a large speculative financial business that had made shiploads of money in the past, but this time had got it wrong. No drama except for its shareholders and employees, and the serious knock-on effects on its trading partners and counter parties.

There are currently two approaches in the outfall of the 08/09 financial crisis relating to the banks. The important one is led by governments still trying a year afterwards to put measures in place that can prevent any repetition of the taxpayers bail-out of many of the big banks. Without this intervention millions of citizen’s savings and current accounts would simply have gone down the tubes.

After a year they haven’t resolved the problem, but governments individually are striving and via Davos and the G8 in the last days of January, were seeking a solution to which they could all sign up. Some form of global insurance funded by the banks is currently the favourite. But remembering the colossal AIG bail-out, and AIG was devised for the purpose of insuring any conceivable volume of transactions - it is reasonable to doubt if any insurance fund would suffice, given the number of zeroes involved ‘when the music stops’ in split-second computer transactions. At one time combined debt during the recent crisis was reckoned in trillions, larger than any conceivable rescue fund could cope with.

Then there is also the media-driven attack on individual big earners in the banks, because that is something that is obvious to the man in the street, offering a combination of outrage and envy, but in itself no kind of guarantee that the whole thing won't happen again. People being paid astronomical sums, always capture the interest of the majority who are not. Newspapers generally have seized on this, and governments too, as though to skin the fat cats will appease the masses. But, unless firmly capitalist societies have discovered a new mission to ‘level down,’ how can governments object to banking teams who earn their employers remarkable profits being paid their contractual market- rate, given that there are plenty of banks that wish to employ teams with a record of success? Those that are, would say they were successful because they have high-flying, high cost executives.

Normally taxation is the appropriate response to high incomes. Won’t that do?

Is there some logical reason that all the rest: entrepreneurs, property developers, company marriage brokers, senior execs of giant corporations outside of the financial world spotlight, can continue to earn astronomically, but bankers cannot?

Banks which are heavily in debt to governments however, are in a class of their own. It is an impertinence for them as major debtors due to their speculative mistakes, to pay astronomical bonuses when they owe so much to their government rescuers. Some banks which apparently solved their own problems without compromising their depositor’s money, were able to avoid a government bail-out only because their trading partners/counter parties had been saved by government intervention, so this is not just a few banks, but an industry which needs sorting out. The rescue of AIG the US insurance company which was one of the biggest bail-outs was the only reason that many banks survived without needing rescue.

Our preferred solution to bailing out institutions that went into the international investment casino over their heads, using money they didn't own, in short, confidently placed with them as deposits, savings accounts, etc; would be a break-up of the biggest banks; as envisaged in Glass Steagal, named after the movers of this piece of US legislation of 76 years ago. This law effectively said: "Be a retail banker subject to regulation, licensed by government, make normal commercial loans with your deposit holders guaranteed. Or, be a financial investment business - raise your money in the market, carry on with your casino gambling if you will, but you can’t take deposits and won’t be a licensed bank any more”. It seems obvious, given the recent events, but the idea is struggling to gain traction simply because the bankers don’t like the idea of being downsized. Well they wouldn’t would they!

The US government is showing signs of grasping the nettle, but the UK government exhibits a visceral fear that in disciplining the bankers, the City of London could wither on the vine and those financial institutions that pay taxes - and some do, will up and off to somewhere with waving palm trees and PO box addresses. But despite the reach of the ‘phone and the world-wide web, bankers are urban animals with families and need cities, human interface and peer group admiration. Why would they leave London to go to Frankfurt or Zurich, if the laws there are much the same?

We have consistently made these points since the crisis blew up. It has appeared thus far that the global financial industry is more powerful than governments who dare not do what needs to be done. If nothing more substantial happens than has presently taken place, then we must expect similar crises, the wringing of hands - for the same reason. In summary, it is time for widows, orphans and ordinary account holders to insist that lawmakers separate banking from financial speculation – it’s not too hard a concept to grasp! Licence banks to take deposits, savings etc; to open business accounts and make commercial asset-guaranteed loans, thus serving the community. Have a separate category of commercial investment companies, funded by the market, owned by their shareholders who have the risk and reward in all events and are in no way underwritten by the taxpayer. Deal with grotesquely high incomes via the taxation system.

The Terrible Twins
Well publicised AFGHANISTAN has already provoked the fears of the world in that it may be unmanageable and headed for the rocks of being an acknowledged failed State, although since it is a ward, basically a creation of the US and its allied western nations who overthrew the Taliban after 9/11, the fact that AFGHANISTAN is a failed state doesn’t get the west (including the IMF and the World Bank) off the hook. Last month we enjoined readers to go to the AFGHANISTAN report in order to understand the realities there. This month we make the same plea regarding next door (and more important) PAKISTAN. This state has steadily been moving into a perhaps even more dire situation, so bad in fact that it defies moderate description. Reading the important current February reports on both these deeply troubled nations allows the comparisons to be made.

The AFGHAN situation attracts a lot of public interest obviously because of the western troops there. The Obama government will continue to try to resolve the problem and understandably are throwing money at it, in terms of paying the Taliban not to be rebels. One problem is that the Taliban are also paying - it is suggested more than the US is offering- to the largely unemployed mountain men who are their fighters. There is another fundamental problem which is that the core ideology of the Taliban is in defence of their religion and territory, to expel the unbelievers - as generations of Afghans have always managed to do, throughout history. So money, plus the departure of all westerners might do it, allowing AFGHANISTAN to relapse under a restored Taliban government. But that opens up the whole point of the US intervention in the first place, which was to destroy the Al Qaeda international terrorists and to prevent this distant nation in future having a government sympathetic to and complicit with international terrorists, as the Taliban were when last in government.

There are other issues. For example, post 9/11, the civil war in which the US joined in on the side of the Northern Alliance, was a result of a Taliban government in Kabul mainly recruited from and supported by the dominant tribe in the south, the Pashtuns, up against an alliance of other tribes, Uzbek, Hazara, and Tajik mainly, under the command of Ahmed Shah Massoud, the brilliant Tajik warlord who had achieved the successful eviction of the Russians. He was assassinated by two members of Al Qaeda, significantly on the day before 9/11, as a favour to the Taleban. If the US does a deal with the Islamic militants who would then boot out Karzai in short order, then why would the Northerners agree that their ancient rivals, the Pashtuns should revert to controlling the nation - a sure recipe for a new civil war. As our recent report on the Afghan National Army makes clear, the officer corps of the army are largely Tajiks. There are few who would not agree that AFGHANISTAN is in an almost insuperable mess, but apart from its ability to dominate its part of Central Asia and its capacity for harbouring international terrorists and bogging down foreign armies, it has no major geopolitical significance.

PAKISTAN on the other hand, is an established Islamic state and a nuclear weapons power, with all that that implies. Its politics are also a mess. Stability ultimately depends on the army, which is to an unknown extent penetrated by Islamic fanatics, and them aside, harbours collectively a deep-seated hatred for INDIA (who have three times since they both became independent, beaten Pakistan in short sharp wars). The casus belli - ownership of Kashmir remains unresolved. There will not be peace between them until it is.

Reading this months review of PAKISTAN against that background identifies this nation as one of the most seriously defunct administrations anywhere, with " all hell'' capable of breaking out at any time!

Russia's Presidential Elections
This month we take a view of the next elections due in eighteen months time, where it is widely believed that it will be a two horse race between Putin and Dimitry Medvedev, that Putin will win and in this game of political musical chairs, probably appoint Medvedev as his Prime Minister. But hold! We are now speculating that there will be a third candidate, bearing the famous name of Yeltsin, no less.

Tatyana Yeltsin is quite formidable, as we remember from the time she was prominent in her fathers brilliant re-election campaign in the nineties, which she appeared to run. We review the opening shots in her campaign, if that is what it is, and delight in the prospect of a real three cornered race. Mother RUSSIA might yet achieve democracy, despite herself.

Google and China
After some delay, China riposted vigorously to the recent unfavourable publicity following Google’s hesitation to proceed with expansion plans in China, following an onslaught by China –based hackers assumed to be in some form, agents of government. China replied that the US had a “cyber army of 80,000 people equipped with over 2,000 computer viruses”. China denied any involvement and pointed out that they are the world’s largest online community and that last year they had logged attacks on 262,000 Chinese computers, with 16% of these originating on computers located in the US. Yahoo and Microsoft have thus far steered clear of the squabble, except that Bill Gates when asked, said that online censorship by Beijing was “very limited.” This row, which really centres on the Chinese authorities removing ‘harmful content’ (by which of course they mean much more than the likes of child pornography), can be expected to run on for some time.

The African Union
The extraordinary Colonel Ghadafi is pushing for a United States of Africa – you can guess under whose leadership - and since his tenure as its current president expires in February, he has been lobbying for a further year to get this dream nearer to reality.

Read about it in this months LIBYA.

India and its northern neighbours
Pakistan/Afghanistan is nowhere a more burning geopolitical issue than in INDIA. This months Update on INDIA records the recent statements of US Defence Secretary Robert Gates who has the delicate job of convincing the Indian government and intelligentsia, that US dealings with PAKISTAN amount to the best available policies, whilst generally reassuring the equivalent audience in PAKISTAN, particularly their military. He stated the seldom-made point that terrorism is equally the scourge of both nations and the work of Islamic militants is directed against the establishment in both nations. INDIA still outraged by the Bombay massacre perpetrated by PAKISTAN-based terrorists killing at random, has perhaps not fully appreciated that particularly in the area of ‘human bombs,’ their northern neighbour has suffered and continues to suffer on a regular basis, from the depredations of the terrorists. Gates points out that this is a vital matter of mutual interest . More complicated however are matters pertaining to nuclear weapons, where the differences between these two nuclear armed states are outlined in this report.

Iran's Quandary
Our review of Iran this month suggests that there is a quandary at government level about whether to opt for a tougher crackdown, or negotiate a compromise with the array of opposition that manifested themselves, over the recent fraudulent election. We also see some significance in that Supreme Leader Ayatollah Khamenei is being quite silent in these troubled times for IRAN, which might not augur well for President Ahmadinejad. We also consider recent events in the nation’s economy.

Iraq: The Ongoing Shambles
The fate of Prime minister al-Maliki seems much less assured than at the very beginning of 2010. The massive renewed violence in Baghdad is destroying much of the political capital accumulated by him, as the man who brought a modicum of security back to his nation. The recent row, when it was discovered that a long list of parliamentary candidates had been excluded by government fiat, has put Baghdad in a similar position to neighbouring IRAN, whose parliamentary candidates before being allowed to stand are examined by a committee of the ‘Guardians’ to be tested for the appropriate degree of godliness. In IRAQ the test is supposed to be any former affiliations to the Baath party that ran the country for some forty years. In practice this test excludes many current and potential candidates from the Sunni, and has re-sparked outrage and violence as the Sunni, although a minority, are not substantially smaller than the Shi-ite majority. Because many Sunni potential candidates and voters as a matter of (mistaken) tactics, boycotted the last general election, their representation in parliament does not reflect their actual proportion of the population.

This blanket ‘Baath’ censorship, if it had been applied say, to former members of the communist party in all the iron-curtain nations that democratised after 1991, would have excluded not just former political leaders, but way below the level of middle-rank leaders and achievers in almost every activity. The Chemical Ali’s and other senior malefactors in IRAQ have been tried and many punished. If there are others who committed criminal injustices against their own population, then they should answer for their crimes, but the Baath was dissolved eight years ago. It is time in such a fractious political entity as IRAQ, to move on.

Bangladesh shows the way
It seems to have been little observed that Islamic Bangladesh has advanced it’s democratic credentials with a giant leap, which if it were to be adopted in IRAQ and other raw states, might greatly advance the cause of their democracy. As our February report tells, BANGLADESH, through it’s election commission, backed by a recent Supreme Court judgement, is on a concerted drive to ban religious- based parties. It has communicated to the three existing religious-based parties that their respective constitutions, which acknowledged Allah as the sovereign and supreme being, denying recognition to any other elected government, were in direct contravention of the State’s Constitution. The Election Commission pointed out that such manifestos undermine the authority of Bangladesh’s parliament and elected legislature and were contrary to the nation’s constitution. Nice one Dhaka!

Afghanistan equals corruption
The insistence by existing and prospective national donors at the London January conference on the nation’s future, understandably dwelled to a considerable extent on President Karzai clamping down on government corruption in his country. Unfortunately that isn’t going to happen. At the very time that those NATO and other nations that haven’t got troops in the central Asian country, are being enjoined to increase their funding of the allied efforts there, the realisation is slowly dawning that corruption at government level is not only the way it all works in AFGHANISTAN, but is a powerful part of the culture, shared to be sure with many central Asians, and indeed probably to a degree with a majority of all the worlds nations. To many politicians, that’s the reason why they are in politics at all, unless it is expected of them, because traditionally it is the ‘family business,’ which often means institutionalised corruption over the generations. Most post- communist governments and many others entirely meet that criterion. (see data on our current World Audit on the subject). But AFGHANISTAN is the champion, now able to share not only the massive gains of growing and exporting opiates – in which field they are the worlds largest, but also having inflowing funds from well-meaning nations seeking to do ‘their bit’.

North Korea: Mixed Messages
January witnessed no progress on any front in or with Pyongyang. It is almost as though atheist North Korea had taken Christmas off. Actually, to describe the nation as 'atheist' is less than accurate. The relationship of the people to the figure of Kim Il Sung and his descendants, who are not spoken of by name, but by honorifics: Kim il Sung = "Great Leader"; Kim Jong-il = "Dear Leader," is actually religious. Since 2009, the best bet as prospective heir is the youngest son of the present leader, Kim Jong-eun = "Brillant Comrade." And so it goes on. The required attitude from the citizens may be described as reverential to their leading clan who are to be considered as super–human, quasi- divine, in fact just as their emperors were once regarded.

The main focus of efforts in 2010 is to be economics. This is described on the North Korean Naenara website under the title (take a deep breath): “Bring about Radical Turn in People’s Standard of Living by Accelerating Development of Light Industry and Agriculture Once Again This Year That Marks 65th Founding Anniversary of the Worker’s Party of Korea”.

This is in real terms an impoverished regime, currently under UN sanctions, locked into outmoded centralized control. It has just wiped out its own people’s savings with a predatory currency “reform,” and can hardly deliver better living standards unless it radically alters its policies at home, gives up its nuclear weapons, and so makes peace with the wider world. In the sense of South Korea being the most relevant part of that wider world, we do report a mellowing of tone in its normally scurrilous public references to its southern neighbour, yet knowing that this can change with the wind..

Whatever else North Korea has achieved, it has provided an almost perfect ‘economic laboratory’ comparison with South Korea, in the sense that both nations at about the same time, lost their colonial-type political and economic dependence - in Pyongyang’s case with Moscow, and Seoul with Washington. Seoul went flat out to become a modern democratic state with a free-ranging economy, whilst North Korea reverted under totalitarianism to the hermit status, which historically characterised the whole peninsula. Now South Korea’s economy is a multiple of that of North Korea! GDP measured by purchasing power parity is $1.343 trillion in the south and $40 billion in the north. GDP per capita in South Korea is $27,700, compared with $1,800 in North Korea.

Taiwan's Democracy slipping away
This month’s review of Taiwan illustrates the increased dependency of the island democracy on mainland China. It becomes clear that exports, the fuel that has been the very stuff of life in Taiwan, are now overwhelmingly directed at China which is emerging from the world financial crisis in good shape, whilst the other major export market, the USA where peoples credit cards are maxed out, are clearly not.

Any sane administrator would obviously like to boost the China trade and restore Taiwan’s traditional dynamism. The problem is that China sees this as a good opportunity to reel in the wayward territory to bring it back under the control of Beijing – no doubt with some modification of the Hong Kong / Taiwan deals, which would give a measure of autonomy to Taipei. That in itself, would not be conclusive except that President Ma of the KMT government has appeared to be the leading advocate for reunification with Beijing. They already have the offer of a “one nation two systems” deal. He has had his predecessor as president, the leading opponent to Taiwan surrendering its independence, locked up, after a disgraceful trial which has negated the growing reputation of the Taiwanese legal system.

It may not be true of all leading Taiwanese, but the KMT party that sixty years ago brought the escapees from the mainland, after Mao’s forces had defeated them, who formerly were the strongest opponents of Beijing, have with the change in generations become the most avid proponents of a reunification deal. They are not necessarily carrying the population with them, as is evidenced by a series of by-election defeats which leads us to believe that the KMT government will seek to avoid a referendum which they might well lose. If Taiwan decides on reunification with China, then that is their business, but the constitution would require a popular mandate and this is what we fear will be circumvented in the KMT’s rush for reunification. It bodes ill for the rather admirable democratic progress we have observed and reported over past years.

Women on Top?
It is a rare event, even in the modern world, for women to attain the highest political office but it does happen and often in the most unlikely places. This is illustrated by our updates on UKRAINE and RUSSIA. The Ukrainian opposition leader Viktor Yanukovych and Premier Yulia Tymoshenko, who topped the first-round presidential election in early January, face each other in a run-off vote on February 7, after incumbent Viktor Yushchenko had been eliminated. Yanukovych won around 31% of the vote, insufficient for an outright victory. Tymoshenko, who had around 27%, expects to meet Yanukovych in the February 7th second round. Incumbent Viktor Yushchenko lost his bid for re-election with only 6% of the vote. Tymoshenko has a good chance of winning and Ukraine could have a woman president. Meanwhile, in RUSSIA we learn that the daughter of the late Boris Yeltsin, Tatyana Yumasheva, may leap into the fray, criticising Vladimir Putin, her father's choice of successor, for overly strong and manipulative policies all round. Formerly known as Lady Rasputin, she used to exercise enormous power behind the scenes and ten years later, she is back. This is seen by many as an opening salvo in a new bid for power. Presidential elections are due in 2012 and the two-horse race between Putin and Medvedev could be opened up to a woman candidate with a genuine contest in prospect.

Turkey and the EU
This months report on TURKEY looks at their number one foreign policy objective - gaining membership of the EU. We consider their principal difficulty – the opposition to this from France and Germany, but also the required normalisation of relations with ARMENIA. The obstacle of Cyprus we considered in our last issue and before that the issues involved in their resolving the Kurdish question. .

Central Asia and Caucasus
RUSSIA has an interest in the complicated relations between TURKEY, AZERBAIJAN and ARMENIA. As our updates show, the normalisation of relations between Armenia and Turkey has run into difficulties. Turkey considers that progress being made in the resolution of the Nagorno-Karabakh conflict is an essential condition of this normalisation, and Azerbaijan will probably demand this for the sake of Turkish-Azerbaijan relations. However Armenia states that these two issues should not be connected. Putin agrees. He says both issues are complicated enough, and linking them will make their resolution even more complicated. It is suggested that Russia does not want to resolve the Karabakh conflict because Armenia would then not need Russian military assistance. Azeri analysts and political figures think that Putin did not say anything new. Co-chairman of the Azeri Social Democratic Party Araz Alizade has stated that Russia supports establishing Turkish-Armenian relations for its own benefit, on its own terms.

KAZAKHSTAN, the Central Asian republic, took over the leadership of the Organization for Security and Cooperation in Europe (OSCE) on New Year's Day for the coming year. This comes amid grave concern over its human rights record. It is the first former Soviet state to chair the 56-nation trans-Atlantic security body, after making promises of democratic reforms.

Kazakhstan says it will put the main emphasis on security and development, rather than democracy, during its chairmanship of the OSCE. Kazakh President Nursultan Nazarbayev said the Organisation for Security and Cooperation in Europe had for years been too fixated on Western values. Hardly surprising because, as we show in our update, the Kazakhstan government imprisons political opponents and closes down dissident journals. The other Central Asian republics do the same, although UZBEKISTAN conscious of its poor image abroad, allows different political parties to stand in elections, provided they are registered and support the president!

The Balkans
In the Balkans, SERBIA is edging towards EU membership with the help of Greece, its historic ally. Serbian President Boris Tadic and Greek Prime Minister Georgios Papandreou renewed these ties in the New Year. They had talks in Belgrade on the acceleration of the European integration of Serbia, the improvement of the cooperation between their two countries and on the situation in Kosovo and wider regions. Tadic thanked Athens for its resolute support in the process of European integration. He emphasized that it was Papandreou who started the initiative for all the former republics of Yugoslavia, and Albania to become full members of the EU by 2014.

However, internal political squabbling is harming ALBANIA's progress in this direction. It held parliamentary elections in June last year. They were won by the incumbent party, the Liberal Party of Premier Sali Berisha and were strongly denounced as fraudulent by the opposition. The opposition Socialist Party (SP) leader Edi Rama has said his party will continue its parliamentary boycott until the government agrees to investigate the June 2009 elections. The SP has been boycotting parliament since September, hampering the EU accession process. The EU has called on Albania to start political dialogue to overcome the problems in the country. The Swedish foreign minister Carl Bildt called on the Albanian authorities and political parties to start immediate dialogue on the development of the country. Political conditions in Albania require fast dialogue for the country to move forward and this message is important for Tirana, Bildt said.

In contrast, CROATIA's eventual entry into the EU is now all but certain, since its border dispute with Slovenia has been resolved. Its accession will be of great symbolic importance to the rest of the turbulent Balkans. Diplomats and analysts have said even if some reforms lag, Croatia should make swift progress to joining the group, which will go a long way to boosting investor confidence and reviving stalled EU ambitions across the region. A senior EU diplomat in Zagreb remarked: “Some time during the next nine months one will be able to finish the talks. Croatia has made a great effort already, it's a great transformation. One must not forget that only 15 years ago we had a war here."

The EU hopes the prospect of membership will help to persuade the other former Yugoslav republics to put the 1990s and all their explosive rows behind them. In that regard Croatia can be an inspiration for the whole region.

In our update on BULGARIA and ROMANIA, the two poorest EU member states, we can see that EU membership is no cure-all for their problems. Bulgaria is mired in an economic crisis, crime and corruption. A disputed presidential election in Romania has helped to compound its economic woes. However, a constitutional court ruling rejecting allegations of fraud has been accepted by the opposition and has paved the way for another five year presidential term.

Clive Lindley

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