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Saturday, January 07, 2017

The Curious World of Donald Trump’s Private Russian Connections
James S. Henry

 

06TRUMPSOHOweb2-master675
Donald Trump, Tevfik Arif, and Felix Sater

 Did the American people really know they were putting such a "well-connected" guy in the White House?

 Intro by David Cay Johnston

Pulitizer-Prize winning author, The Making of Donald Trump.

Throughout Donald Trump's presidential campaign, he expressed glowing admiration for Russian leader Vladimir Putin. Many of Trump's adoring comments were utterly gratuitous. After his Electoral College victory, Trump continued praising the former head of the KGB while dismissing the finding of all 17 American national security agencies that Putin had directed Russian government interference to help Trump in the 2016 American presidential election.

 As veteran investigative economist and journalist Jim Henry shows below, a robust public record helps to explain the fealty of Trump and his family to this murderous autocrat and the network of Russian oligarchs.

 Putin and his billionaire friends have plundered the wealth of their own people. They have also run numerous schemes to defraud governments and investors in the United States and Europe. From public records, using his renowned analytical skills, Henry shows what the mainstream news media in United States have failed to report in any meaningful way: for at least three decades Donald Trump has profited from his connections to the Russian oligarchs, whose own fortunes now depend on their continued fealty to Putin.

We don't know the full relationship between Donald Trump, the Trump family and their enterprises with the network of the world– class criminals known as the Russian oligarchs. Henry acknowledges that his article poses more questions than answers, establishes more connections than full explanations. But what Henry does show should prompt every American to rise up in defense of their country, to demand a thorough out in the open Congressional investigation with no holds barred. The national security of United States of America and of peace around the world, especially in Europe, may depend on how thoroughly we understand the rich network of relationships between the 45th president and the Russian oligarchy. When Donald Trump chooses to exercise, or not exercise, his power to restrain Putin's drive to invade independent countries and seize their wealth, as well as to loot countries beyond his control, Americans need to know in whose interest the president 's acting or looking the other way.

 

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Tell me who you walk with and I’ll tell you who you are.”

—Cervantes

“I’ve always been blessed with a kind of intuition about people that allows me to sense who the sleazy guys are, and I stay far away.”

—Donald Trump, Surviving at the Top

Even before the November 8 election, many leading Democrats were vociferously demanding that the FBI disclose the fruits of its investigations into Putin-backed Russian hackers. Instead FBI Director Comey decided to temporarily revive his zombie-like investigation of Hillary’s emails. That decision may well have had an important impact on the election, but it did nothing to resolve the allegations about Putin. Even now, after the CIA has disclosed an abstract of its own still-secret investigation, it is fair to say that we still lack the cyberspace equivalent of a smoking gun.

Fortunately, however, for those of us who are curious about Trump’s Russian connections, there is another readily accessible body of published and other Internet material that has so far received surprisingly little attention. This suggests that whatever the nature of President-elect Donald Trump’s relationship with President Putin, he has certainly managed to accumulate direct and indirect connections with a far-flung private Russian/FSU network of outright mobsters, oligarchs, fraudsters, and kleptocrats. Vladimir-putin-judo

Any one of these connections might have occurred at random. But the overall pattern is a veritable Star Wars bar scene of unsavory characters, with Donald Trump seated right in the middle. The analytical challenge is to map this network—a task that most journalists and law enforcement agencies, focused on individual cases, have failed to do.

Of course, to label this network “private” may be a stretch, given that in Putin’s Russia, even the toughest mobsters learn the hard way to maintain a respectful relationship with the “New Tsar.” But here the central question pertains to our new Tsar. Did the American people really know they were putting such a “well-connected” guy in the White House?

The Big Picture: Kleptocracy and Capital Flight

A few of Donald Trump’s connections to oligarchs and assorted thugs have already received sporadic press attention -- for example, former Trump campaign manager Paul Manafort’s reported relationship with exiled Ukrainian oligarch Dmytro Firtash. But no one has pulled the connections together, used them to identify still more relationships, and developed an image of the overall patterns.

Nor has anyone related these cases to one of the most central facts about modern Russia: its emergence since the 1990s as a world-class kleptocracy, second only to China as a source of illicit capital and criminal loot, with more than $1.3 trillion of net offshore “flight wealth” as of 2016.[1]

  TOP30FLIGHTWEALTHCOUNTRIES2010-14

This tidal wave of illicit capital is hardly just Putin’s doing. It is in fact a symptom of one of the most epic failures in modern political economy -- one for which the West bears a great deal of responsibility. This is the failure, in the wake of the Soviet Union’s collapse in the late 1980s, to ensure that Russia acquires the kind of strong, middle-class-centric economic and political base that is required for democratic capitalism, the rule of law, and stable, peaceful relationships with its neighbors.

Instead, from 1992 to the Russian debt crisis of August 1998, the West in general—and the U.S. Treasury, USAID, the State Department, the IMF/World Bank, the ERDB, and many leading economists in particular—actively promoted and, indeed, helped to finance one of the most massive transfers of public wealth into private hands that the world has ever seen.

For example, Russia’s 1992 “voucher privatization” program permitted a tiny elite of former state-owned company managers and party apparatchiks to acquire control over a vast number of public enterprises, often with the help of outright mobsters. A majority of Gazprom, the state energy company that controlled a third of the world’s gas reserves, was sold for $230 million; Russia’s entire national electric grid was privatized for $630 million; ZIL, Russia's largest auto company, went for about $4 million; ports, ships, oil, iron and steel, aluminum, much of the high-tech arms and airlines industries, the world’s largest diamond mines, and most of Russia’s banking system also went for a song.

In 1994–96, under the infamous “loans-for-shares” program, Russia privatized 150 state-owned companies for just $12 billion, most of which was loaned to a handful of well-connected buyers by the state—and indirectly by the World Bank and the IMF. The principal beneficiaries of this “privatization”—actually, cartelization—were initially just 25 or so budding oligarchs with the insider connections to buy these properties and the muscle to hold them.[2] The happy few who made personal fortunes from this feeding frenzy —in a sense, the very first of the new kleptocrats—not only included numerous Russian officials, but also leading gringo investors/advisers, Harvard professors, USAID advisers, and bankers at Credit Suisse First Boston and other Wall Street investment banks. As the renowned development economist Alex Gerschenkron, an authority on Russian development, once said, "If we were in Vienna, we would have said, "We wish we could play it on the piano!"

For the vast majority of ordinary Russian citizens, this extreme re-concentration of wealth coincided with nothing less than a full-scale 1930s-type depression, a sudden “shock therapy”-induced rise in domestic price levels that wiped out the private savings of millions, rampant lawlessness, a public health crisis, and a sharp decline in life expectancy and birth rates.

Sadly, this neoliberal “market reform” policy package that was introduced at a Stalin-like pace from 1992 to late 1998 was not only condoned but partly designed and financed by senior Clinton Administration officials, neoliberal economists, and innumerable USAID, World Bank, and IMF officials. The few dissenting voices included some of the West's best economic brains -- Nobel laureates like James Tobin, Kenneth Arrow, Lawrence Klein, and Joseph Stiglitz. They also included Moscow University’s Sergei Glaziev, who now serves as President Putin’s chief economic advisor.[3] Unfortunately, they were no match for the folks with the cash.

There was also an important intervention in Russian politics. In January 1996 a secret team of professional U.S. political consultants arrived in Moscow to discover that, as CNN put it back then, “The only thing voters like less than Boris Yeltsin is the prospect of upheaval.” The experts' solution was one of earliest "Our brand is crisis" campaign strategies, in which Yeltsin was “spun” as the only alternative to "chaos." To support him, in March 1996 the IMF also pitched in with $10.1 billion of new loans, on top of $17.3 billion of IMF/World Bank loans that had already been made.

With all this outside help, plus ample contributions from Russia’s new elite, Yeltsin went from just 8 percent approval in the January 1996 polls to a 54-41 percent victory over the Communist Party candidate, Gennady Zyuganov, in the second round of the July 1996 election. At the time, mainstream media like Time and the New York Times were delighted. Very few outside Russia questioned the wisdom of this blatant intervention in post-Soviet Russia’s first democratic election, or the West's right to do it in order to protect itself.

By the late 1990s the actual chaos that resulted from Yeltsin's warped policies had laid the foundations for a strong counterrevolution, including the rise of ex-KGB officer Putin and a massive outpouring of oligarchic flight capital that has continued virtually up to the present. For ordinary Russians, as noted, this was disastrous. But for many banks, private bankers, hedge funds, law firms, and accounting firms, for leading oil companies like ExxonMobil and BP, as well as for needy borrowers like the Trump Organization the opportunity to feed on post-Soviet spoils was a godsend. This was vulture capitalism at its worst.

The nine-lived Trump, in particular, had just suffered a string of six successive bankruptcies. So the massive illicit outflows from Russia and oil-rich FSU members like Kazahkstan and Azerbaijan from the mid-1990s provided precisely the kind of undiscriminating investors that he needed. These outflows arrived at just the right time to fund several of Trump's post-2000 high-risk real estate and casino ventures – most of which failed. As Donald Trump, Jr., executive vice president of development and acquisitions for the Trump Organization, told the “Bridging U.S. and Emerging Markets Real Estate” conference in Manhattan in September 2008, on the basis, he said, of his own “half dozen trips to Russia in 18 months”:

"[I]n terms of high-end product influx into the United States, Russians make up a pretty disproportionate cross-section of a lot of our assets; say in Dubai, and certainly with our project in SoHo and anywhere in New York. We see a lot of money pouring in from Russia."

All this helps to explain one of the most intriguing puzzles about Donald Trump’s long, turbulent business career: how he managed to keep financing it, despite a dismal track record of failed projects.[4]

According to the “official story,” this was simply due to a combination of brilliant deal-making, Trump’s gold-plated brand, and raw animal spirits – with $916 million of creative tax dodging as a kicker. But this official story is hokum. The truth is that, since the late 1990s, Trump was also greatly assisted by these abundant new sources of global finance, especially from "submerging markets" like Russia

This suggests that neither Trump nor Putin is an “uncaused cause.” They are not evil twins, exactly, but they are both byproducts of the same neoliberal policy scams that were peddled to Russia’s struggling new democracy.

A Guided Tour of Trump's Russian/FSU Connections

The following roundup of Trump’s Russo-Soviet business connections is based on published sources, interviews with former law enforcement staff and other experts in the United States, the United Kingdom, and Iceland, searches of online corporate registries,[5] and a detailed analysis of offshore company data from the Panama Papers.[6] Given the sheer scope of Trump’s activities, there are undoubtedly other worthy cases, but our interest here is in overall patterns.

Note that none of the activities and business connections related here necessarily involved criminal conduct. While several key players do have criminal records, few of their prolific business dealings have been thoroughly investigated, and of course they all deserve the presumption of innocence. Furthermore, several of these players reside in countries where activities like bribery, tax dodging, and other financial chicanery are either not illegal or are rarely prosecuted. As former British Chancellor of the Exchequer Denis Healey once said, when it comes to financial chicanery, the difference between “legal” and “illegal” is often just “the width of a prison wall.”

So why spend time collecting and reviewing material that may either not point to anything illegal and or in some cases may even be impossible to verify? Because, we submit, the mere fact that such assertions are widely made is of legitimate public interest in its own right. In other words, when it comes to evaluating the probity of senior public officials, the public has the right to know about any material allegations—true, false, or, most commonly, unprovable—about their business partners and associates, so long as this information is clearly labeled as unverified.

Furthermore, the individual case-based approach to investigations employed by most investigative journalists and law enforcement often misses the big picture: the global networks of influence and finance, licit and illicit, that exist among business people, investors, kleptocrats, organized criminals, and politicians, as well as the "enablers" -- banks, accounting firms, law firms, and havens.

Any particular component of these networks might easily disappear without making any difference. But the networks live on. It is these shadowy transnational networks that really deserve scrutiny.

Bayrock Group LLC—Kazakhstan and Tevfik Arif

 We’ll begin our tour of Trump's Russian/FSU connections with several business relationships that evolved out of the curious case of Bayrock Group LLC, a spectacularly unsuccessful New York real estate development company that surfaced in the early 2000s and, by 2014, had all but disappeared except for a few lawsuits. As of 2007, Bayrock and its partners reportedly had more than $2 billion of Trump-branded deals in the works. But most of these either never materialized or were miserable failures, for reasons that will soon become obvious.

Bayrock’s “white elephants” included the 46-story Trump SoHo condo-hotel on Spring Street in New York City, for which the principle developer was a partnership formed by Bayrock and FL Group, an Icelandic investment company. Completed in 2010, the SoHo soon became the subject of prolonged civil litigation by disgruntled condo buyers. The building was foreclosed by creditors and resold in 2014 after more than $3 million of customer down payments had to be refunded. Similarly, Bayrock’s Trump International Hotel & Tower in Fort Lauderdale was foreclosed and resold in 2012, while at least three other Trump-branded properties in the United States, plus many other “project concepts” that Bayrock had contemplated, from Istanbul and Kiev to Moscow and Warsaw, also never happened.

Carelessness about due diligence with respect to potential partners and associates is one of Donald Trump’s more predictable qualities. Acting on the seat of the pants, he had hooked up with Bayrock rather quickly in 2005, becoming an 18 percent minority equity partner in the Trump SoHo, and agreeing to license his brand and manage the building.[7]

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Donald Trump and Tevfik Arif

 Exhibit A in the panoply of former Trump business partners is Bayrock’s former Chairman, Tevfik Arif (aka Arifov), an émigré from Kazakhstan who reportedly took up residence in Brooklyn in the 1990s. Trump also had extensive contacts with another key Bayrock Russian-American from Brooklyn, Felix Sater (aka Satter), discussed below.[8] Trump has lately had some difficulty recalling very much about either Arif or Sater. But this is hardly surprising, given what we now know about them. Trump described his introduction to Bayrock in a 2013 deposition for a lawsuit that was brought by investors in the Fort Lauderdale project, one of Trump’s first with Bayrock: “Well, we had a tenant in …Trump Tower called Bayrock, and Bayrock was interested in getting us into deals.”[9]

According to several reports, Tevfik Arif was originally from Kazakhstan, a Soviet republic until 1992. Born in 1950, Arif worked for 17 years in the Soviet Ministry of Commerce and Trade, serving as Deputy Director of Hotel Management by the time of the Soviet Union’s collapse.[10] In the early 1990s he relocated to Turkey, where he reportedly helped to develop properties for the Rixos Hotel chain. Not long thereafter he relocated to Brooklyn, founded Bayrock, opened an office in the Trump Tower, and started to pursue projects with Trump and other investors.[11]

Tevfik Arif was not Bayrock’s only connection to Kazakhstan. A 2007 Bayrock investor presentation refers to Alexander Mashevich’s “Eurasia Group” as a strategic partner for Bayrock’s equity finance. Together with two other prominent Kazakh billionaires, Patokh Chodiev (aka “Shodiyev”) and Alijan Ibragimov, Mashkevich reportedly ran the “Eurasian Natural Resources Cooperation.” In Kazakhstan these three are sometimes referred to as “the Trio.”[12]

The Trio has apparently worked together ever since Gorbachev's late 1980s perestroika in metals and other natural resources. It was during this period that they first acquired a significant degree of control over Kazakhstan’s vast mineral and gas reserves. Naturally they found it useful to become friends with Nursaltan Nazarbayev, Kazakhstan’s long-time ruler. Indeed, State Department cables leaked by Wikileaks in November 2010 describe a close relationship between “the Trio” and the seemingly-perpetual Nazarbayev kleptocracy.

In any case, the Trio has recently attracted the attention of many other investigators and news outlets, including the September 11 Commission Report, the Guardian, Forbes, and the Wall Street Journal. In addition to resource grabbing, the litany of the Trio's alleged activities include money laundering, bribery, and racketeering.[13] In 2005, according to U.S. State Department cables released by Wikileaks, Chodiev (referred to in a State Department cable as “Fatokh Shodiyev”) was recorded on video attending the birthday of reputed Uzbek mob boss Salim Abduvaliyeva and presenting him with a $10,000 “gift” or “tribute.”

According to the Belgian newspaper Le Soir, Chodiev and Mashkevich also became close associates of a curious Russian-Canadian businessman, Boris J. Birshtein. who happens to have been the father-in-law of another key Russian-Canadian business associate of Donald Trump in Toronto. We will return to Birshtein below.

The Trio also turn up in the April 2016 Panama Papers database as the apparent beneficial owners of a Cook Islands company, “International Financial Limited.” [14] The Belgian newspapers Het Laatste Nieuws, Le Soir, and La Libre Belgique have reported that Chodiev paid €23 million to obtain a “Class B” banking license for this same company, permitting it to make international currency trades. In the words of a leading Belgian financial regulator, that would “make all money laundering undetectable.”

The Panama Papers also indicate that some of Arif’s connections at the Rixos Hotel Group may have ties to Kazakhstan. For example, one offshore company listed in the Panama Papers database, “Group Rixos Hotel,” reportedly acts as an intermediary for four BVI offshore companies.[15] Rixos Hotel’s CEO, Fettah Tamince, is listed as having been a shareholder for two of these companies, while a shareholder in another—“Hazara Asset Management”—had the same name as the son of a recent Kazakhstan Minister for Sports and Tourism. As of 2012, this Kazakh official was described as the third-most influential deputy in the country’s Mazhilis (the lower house of Parliament), in a Forbes-Kazakhstan article.

According to a 2015 lawsuit against Bayrock by Jody Kriss, one of its former employees, Bayrock started to receive millions of dollars in equity contributions in 2004, supposedly by way of Arif’s brother in Russia, who allegedly “had access to cash accounts at a chromium refinery in Kazakhstan.”

This as-yet unproven allegation might well just be an attempt by the plaintiff to extract a more attractive settlement from Bayrock and its original principals. But it is also consistent with fact that chromium is indeed one of the Kazakh natural resources that is reportedly controlled by the Trio.

As for Arif, his most recent visible brush with the law came in 2010, when he and other members of Bayrock’s Eurasian Trio were arrested together in Turkey during a police raid on a suspected prostitution ring, according to the Israeli daily Yediot Ahronot.

At the time, Turkish investigators reportedly asserted that Arif might be the head of a criminal organization that was trafficking in Russian and Ukrainian escorts, allegedly including some as young as 13.[16] According to these assertions, big-ticket clients were making their selections by way of a modeling agency website, with Arif allegedly handling the logistics. Especially galling to Turkish authorities, the preferred venue was reportedly a yacht that had once belonged to the widely-revered Turkish leader Atatürk. It was also alleged that Arif may have also provided lodging for young women at Rixos Group hotels.[17]

According to Russian media, two senior Kazakh officials were also arrested during this incident, although the Turkish Foreign Ministry quickly dismissed this allegation as “groundless.” In the end, all the charges against Arif resulting from this incident were dismissed in 2012 by Turkish courts, and his spokespeople have subsequently denied all involvement.

Finally, despite Bayrock’s demise and these other legal entanglements, Arif has apparently remained active. For example, Bloomberg reports that, as of 2013, he, his son, and Rixos Hotels’ CEO Fettah Tamince had partnered to pursue the rather controversial business of advancing funds to cash-strapped high-profile soccer players, in exchange for a share of their future marketing revenues and team transfer fees. In the case of Arif and his partners, this new-wave form of indentured servitude was reportedly implemented by way of a UK- and Malta-based hedge fund, Doyen Capital LLP. Because this practice is subject to innumerable potential abuses, including the possibility of subjecting athletes or clubs to undue pressure to sign over valuable rights and fees, UEFA, Europe’s governing soccer body, wants to ban it. But FIFA, the notorious global football regulator, has been customarily slow to act. To date, Doyen Capital LLP has reportedly taken financial gambles on several well-known players, including the Brazilian star Neymar.

The Case of Bayrock LLC—Felix Sater

06TRUMPSOHOweb2-master675Our second exhibit is Felix Sater, the senior Bayrock executive introduced earlier. This is the fellow who worked at Bayrock from 2002 to 2008 and negotiated several important deals with the Trump Organization and other investors. When Trump was asked who at Bayrock had brought him the Fort Lauderdale project in the 2013 deposition cited above, he replied: “It could have been Felix Sater, it could have been—I really don’t know who it might have been, but somebody from Bayrock.” [18]

Although Sater left Bayrock in 2008, by 2010 he was reportedly back in Trump Tower as a “senior advisor” to the Trump Organization – at least on his business card -- with his own office in the building.

Sater has also testified under oath that he had escorted Donald Trump, Jr. and Ivanka Trump around Moscow in 2006, had met frequently with Donald over several years, and had once flown with him to Colorado. And although this might easily have been staged, he is also reported to have visited Trump Tower in July 2016 and made a personal $5,400 contribution to Trump’s campaign.

Whatever Felix Sater has been up to recently, the key point is that by 2002, at the latest,[19] Tevfik Arif decided to hire him as Bayrock’s COO and managing director. This was despite the fact that by then Felix had already compiled an astonishing track record as a professional criminal, with multiple felony pleas and convictions, extensive connections to organized crime, and — the ultimate prize —a virtual “get out of jail free card,” based on an informant relationship with the FBI and the CIA that is vaguely reminiscent of Whitey Bulger.[20]

Sater, a Brooklyn resident like Arif, was born in Russia in 1966. He reportedly emigrated with his family to the United States in the mid-1970s and settled in “Little Odessa.” It seems that his father, Mikhael Sheferovsky (aka Michael Sater), may have been engaged in Russian mob activity before he arrived in the United States. According to a certified U.S. Supreme Court petition, Felix Sater’s FBI handler stated that he “was well familiar with the crimes of Sater and his (Sater’s) father, a (Semion) Mogilevich crime syndicate boss.” [21] A 1998 FBI report reportedly said Mogilevich’s organization had “approximately 250 members,” and was involved in trafficking nuclear materials, weapons and more as well as money laundering. (See below.)

But Michael Sater may have been less ambitious than his son. His only reported U.S. criminal conviction came in 2000, when he pled guilty to two felony counts for extorting Brooklyn restaurants, grocery stores, and clinics. He was released with three years’ probation. Interestingly, the U.S. Attorney for the Eastern District of New York who handled that case at the time was Ms. Loretta Lynch, who succeeded Eric Holder as US Attorney General in 2014. Back in 2000, she was also overseeing a budding informant relationship and a plea bargain with Michael’s son Felix, which may help to explain the father's sentence.

By then young Felix Sater was already well on his way to a career as a prototypical Russian-American mobster. In 1991 he stabbed a commodity trader in the face with a margarita glass stem in a Manhattan bar, severing a nerve. He was convicted of a felony and sent to prison. As Trump tells it, Sater simply “got into a barroom fight, which a lot of people do.” The sentence for this felony conviction could not have been very long, because by 1993 27-year-old Felix was already a trader in a brand new Brooklyn-based commodity firm called “White Rock Partners,” an innovative joint venture among four New York crime families and the Russian mob aimed at bringing state-of-the art financial fraud to Wall Street.

Five years later, in 1998, Felix Sater pled guilty to stock racketeering, as one of 19 U.S.-and Russian mob-connected traders who participated in a $40 million “pump and dump” securities fraud scheme. Facing twenty years in Federal prison, Sater and Gennady Klotsman, a fellow Russian-American who'd been with him on the night of the Manhattan bar fight, turned "snitch" and helped the Department of Justice prosecute their co-conspirators.[22] Reportedly, so did Salvatore Lauria, another "trader” involved in the scheme. According to the Jody Kriss lawsuit, Lauria later joined Bayrock as an off-the-books paid “consultant.” Initially their cooperation, which lasted from 1998 until at least late 2001, was kept secret, until it was inadvertently revealed in a March 2000 press release by U.S. Attorney Lynch.

Unfortunately for Sater, about the same time the NYPD also reportedly discovered that he'd had been running a money-laundering scheme and illicit gun sales out of a Manhattan storage locker. He and Klotsman fled to Russia. However, according to the New York Times, citing Klotsman and Lauria, soon after the events of September 11, 2001 the ever-creative Sater succeeded in brokering information about the black market for Stinger anti-aircraft missiles to the CIA and the FBI. According to Klotsman, this strategy “bought Felix his freedom,” allowing him to return to Brooklyn. It is still not clear precisely what information Sater actually provided, but in 2015 US Attorney General Loretta Lynch publicly commended him for sharing information that she described as “crucial to national security.”

SaterBizCardMeanwhile, Sater’s sentence for his financial crimes continued to be deferred even after his official cooperation in that case ceased in late 2001. His files remained sealed, and he managed to avoid any sentencing for those crimes at all until October 23, 2009. When he finally appeared before the Eastern District's Judge I. Leo Glasser, Felix received a $25,000 fine, no jail time, and no probation, in a quiet proceeding that attracted no press attention. Some compared this sentence to Judge Glasser's earlier sentence of Mafia hit man “Sammy the Bull” Gravano to 4.5 years for 19 murders, in exchange for “cooperating against John Gotti.”

In any case, between 2002 and 2008, when Felix Sater finally left Bayrock LLC, and well beyond, his ability to avoid jail and conceal his criminal roots enabled him to enjoy a lucrative new career as Bayrock’s chief operating officer. In that position, he was in charge of negotiating aggressive property deals all over the planet, even while—according to lawsuits by former Bayrock investors — engaging in still more financial fraud. The only apparent difference was that he changed his name from “Sater” to “Satter.” [23]

In the 2013 deposition cited earlier, Trump went on to say “I don’t see Felix as being a member of the Mafia.” Asked if he had any evidence for this claim, Trump conceded “I have none.”[24]

As for Sater’s pal Klotsman, the past few years have not been kind. As of December 2016 he is in a Russian penal colony, working off a ten-year sentence for a failed $2.8 million Moscow diamond heist in August 2010. In 2016 Klotsman was reportedly placed on a “top-ten list” of Americans that the Russians were willing to exchange for high-value Russian prisoners in U.S. custody, like the infamous arms dealer Viktor Bout. So far there have been no takers. But with Donald Trump as President, who knows?

The Case of Iceland’s FL Group

 One of the most serious frauds alleged in the recent Bayrock lawsuit involves FL Group, an Icelandic private investment fund that is really a saga all its own.

Iceland is not usually thought of as a major offshore financial center. It is a small snowy island in the North Atlantic, closer to Greenland than to the UK or Europe, with only 330,000 citizens and a total GDP of just $17 billion. Twenty years ago, its main exports were cod and aluminum – with the imported bauxite smelted there to take advantage of the island's low electricity costs.

But in the 1990s Iceland’s tiny neoliberal political elite had what they all told themselves was a brilliant idea: "Let's privatize our state-owned banks, deregulate capital markets, and turn them loose on the world!" By the time all three of the resulting privatized banks, as well as FL Group, failed in 2008, the combined bank loan portfolio amounted to more than 12.5 times Iceland’s GDP -- the highest country debt ratio in the entire world.

Iceland1
Iceland 2008 - All Cross-Holdings

For purposes of our story, the most interesting thing about Iceland is that, long before this crisis hit and utterly bankrupted FL Group, our two key Russian/FSU/Brooklyn mobster-mavens, Arif and Sater, had somehow stumbled on this obscure Iceland fund. Indeed, in early 2007 they persuaded FL Group to invest $50 million in a project to build the Trump SoHo in mid-town Manhattan.

According to the Kriss lawsuit, at the same time, FL Group and Bayrock’s Felix Sater also agreed in principle to pursue up to an additional $2 billion in other Trump-related deals. The Kriss lawsuit further alleges that FL Group (FLG) also agreed to work with Bayrock to facilitate outright tax fraud on more than $250 million of potential earnings. In particular, it alleges that FLG agreed to provide the $50 million in exchange for a 62 percent stake in the four Bayrock Trump projects, but Bayrock would structure the contract as a “loan.” This meant that Bayrock would not have to pay taxes on the initial proceeds, while FLG’s anticipated $250 million of dividends would be channeled through a Delaware company and characterized as “interest payments,” allowing Bayrock to avoid up to $100 million in taxes. For tax purposes, Bayrock would pretend that their actual partner was a Delaware partnership that it had formed with FLG, “FLG Property I LLC,” rather than FLG itself.

The Trump Organization has denied any involvement with FLG. However, as an equity partner in the Trump SoHo, with a significant 18 percent equity stake in this one deal alone, Donald Trump himself had to sign off on the Bayrock-FLG deal.

This raises many questions. Most of these will have to await the outcome of the Kriss litigation, which might well take years, especially now that Trump is President. But several of these questions just leap off the page.

First, how much did President-elect Trump know about the partners and the inner workings of this deal? After all, he had a significant equity stake in it, unlike many of his “brand-name only” deals, and it was also supposed to finance several of his most important East Coast properties.

Second, how did the FL Group and Bayrock come together to do this dodgy deal in the first place? One former FL Group manager alleges that the deal arrived by accident, a “relatively small deal" was nothing special on either side.[25] The Kriss lawsuit, on the other hand, alleges that FLG was a well-known source of easy money from dodgy sources like Kazakhstan and Russia, and that other Bayrock players with criminal histories— like Salvatore Lauria, for example—were involved in making the introductions.

At this stage the evidence with respect to this second question is incomplete. But there are already some interesting indications that FL Group’s willingness to generously finance Bayrock’s peculiar Russian/FSU/Brooklyn team, its rather poorly-conceived Trump projects, and its purported tax dodging were not simply due to Icelandic backwardness. There is much more for us to know about Iceland’s “special” relationship with Russian finance. In this regard, there are several puzzles to be resolved.

First, it turns out that FL Group, Iceland’s largest private investment fund until it crashed in 2008, had several owners/investors with deep Russian business connections, including several key investors in all three top Iceland banks.

Second, it turns out that FL Group had constructed an incredible maze of cross-shareholding, lending, and cross-derivatives relationships with all these major banks, as illustrated by the following snapshot of cross-shareholding among Iceland’s financial institutions and companies as of 2008.[26]

ICELANDALLGROUPS2010SIC
Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008

 

This thicket of cross-dealing made it almost impossible to regulate “control fraud,” where insiders at leading financial institutions went on a self-serving binge, borrowing and lending to finance risky investments of all kinds. It became difficult to determine which institutions were net borrowers or investors, as the concentration of ownership and self-dealing in the financial system just soared.

Third, FL Group make a variety of peculiar loans to Russian-connected oligarchs as well as to Bayrock. For example, as discussed below, Alex Shnaider, the Russian-Canadian billionaire who later became Donald Trump’s Toronto business partner, secured a €45.8 million loan to buy a yacht from Kaupthing Bank during the same period, while a company

Cross-shareholding Relationships, FLG and Other Leading Icelandic Financial Institutions, 2008

belonging to another Russian billionaire who reportedly owns an important vodka franchise got an even larger loan.[27]  

Fourth, Iceland’s largest banks also made a series of extraordinary loans to Russian interests during the run-up to the 2008 crisis. For example, one of Russia’s wealthiest oligarchs, a close friend of President Putin, nearly managed to secure at least €400 million (or, some say, up to 4 times that much) from Kaupthing, Iceland’s largest bank, in late September 2008, just as the financial crisis was breaking wide open. This bank also had important direct and indirect investments in FL Group. Indeed, until December 2006, it is reported to have employed the FL Group private equity manager who allegedly negotiated Felix Sater’s $50 million deal in early 2007.[28]

Fifth, there are unconfirmed accounts of a secret U.S. Federal Reserve report that unnamed Iceland banks were being used for Russian money laundering.[29] Furthermore, Kaupthing Bank’s repeated requests to open a New York branch in 2007–08 were rejected by the Fed. Similar unconfirmed rumors repeatedly appeared in Danish and German publications, as did allegations about the supposed Kazakh origins of FLG’s cash to be “laundered” in the Kriss lawsuit.

Sixth, there is the peculiar fact is that when Iceland’s banks went belly-up in October 2008, their private banking subsidiaries in Luxembourg, which were managing at least €8 billion of private assets, were suddenly seized by Luxembourg banking authorities and transferred to a new bank, Banque Havilland. This happened so fast that Iceland’s Central Bank was prevented from learning anything about the identities or portfolio sizes of the Iceland banks’ private offshore clients. But again, there were rumors of some important Russian names.

Finally, there is the rather odd phone call that Russia’s Ambassador to Iceland made to Iceland’s Prime Minister at 6:45 a.m. on October 7, 2008, the day after the financial crisis hit Iceland. According to the PM's own account, the Russian Ambassador informed him that then Prime-Minister Putin was willing to consider offering Iceland a €4 billion Russian bailout.

Of course this alleged Putin offer was modified not long thereafter to a willingness to entertain an Icelandic negotiating team in Moscow. By the time the Iceland team got to Moscow later that year, Russia’s willingness to lend had cooled, and Iceland ended up accepting a $2.1 billion IMF "stabilization package" instead. But according to a member of the negotiating team, the reasons for the reversal are still a mystery. Perhaps Putin had reconsidered because he simply decided that Russia had to worry about its own considerable financial problems. Or perhaps he had discovered that Iceland’s banks had indeed been very generous to Russian interests on the lending side, while -- given Luxembourg’s fact actions -- any Russian private wealth invested in Iceland banks was already safe.

On the other hand, there may be a simpler explanation for Iceland’s peculiar generosity to sketchy partners like Bayrock. After all, right up to the last minute before the October 2008 meltdown, the whole world had awarded Iceland AAA ratings – depositors queued up in London to open high-yield Iceland bank accounts, its bank stocks were booming, and the compensation paid to its financiers was off the charts. So why would anyone worry about making a few more dubious deals?

Overall, therefore, with respect to these odd “Russia-Iceland” connections, the proverbial jury is still out. But all these Icelandic puzzles are intriguing and bear further investigation.

The Case of the Trump Toronto Tower and Hotel—Alex Shnaider

 Our fourth case study of Trump's business associates concerns the 48-year-old Russian-Canadian billionaire Alex Shnaider, who co-financed the seventy-story Trump Tower and Hotel, Canada’s tallest building. It opened in Toronto in 2012. Unfortunately, like so many of Trump’s other Russia/FSU-financed projects, this massive Toronto condo-hotel project went belly-up this November and has now entered foreclosure.

Shnaider
Donald Trump and Alex Shnaider

According to an online profile of Shnaider by a Ukrainian news agency, Alex Shnaider was born in Leningrad in 1968, the son of "Евсей Шнайдер," or "Evsei Shnaider" in Russian.[30] A recent Forbes article says that he and his family emigrated to Israel from Russia when he was four and then relocated to Toronto when he was 13-14. The Ukrainian news agency says that Alex's familly soon established "one of the most successful stories in Toronto's Russian quarter, " and that young Alex, with "an entrepreneurial streak," "helped his father Evsei Shnaider in the business, placing goods on the shelves and wiping floors."

Eventually that proved to be a great decision – Shnaider prospered in the New World. Much of this was no doubt due to raw talent. But it also appears that for a time he got significant helping hand from his (now reportedly x) father-in-law,   another colorful Russian-Canadian, Boris J. Birshtein.

Originally from Lithuania, Birshtein, now about 69, has been a Canadian citizen since at least 1982.[31] He resided in Zurich for a time in the early 1990s, but then returned to Toronto and New York.[32] One of his key companies was called Seabeco SA, a "trading" company that was registered in Zurich in December 1982.[33] By the early 1990s Birshtein and his partners had started many other Seabeco-related companies in a wide variety of locations, inclding Antwerp,[34] Toronto,[35] Winnipeg,[36] Moscow, Delaware,[37] Panama, [38] and Zurich.[39] Several of these are still active.[40] He often staffed them with directors and officers from a far-flung network of Russians, emissaries from other FSU countries like Kirgizstan and Moldova, and recent Russia/FSU emigres to Canada.[41]

According to the Financial Times and the FBI, in addition to running Seabeco, Birshtein was a close business associate of Sergei Mikhaylov, the reputed head of Solntsevskaya Bratva, the Russian mob's largest branch, and the world’s highest-grossing organized crime group as of 2014, according to Fortune. [42] A 1996 FBI intelligence report cited by the FT claims that Birshtein hosted a meeting in his Tel Aviv office for Mikhaylov, the Ukrainian-born Semion Mogilevich, and several other leaders of the Russo/FSU mafia, in order to discuss “the sharing interests in Ukraine.”[43] A subsequent 1998 FBI Intelligence report on the "Semion Mogilevich Organization" repeated the same charge,[44] and described Mogilevich's successful attempts at gaining control over Ukraine privatization assets. This FT article also described how Birshtein and his associates had acquired extraordinary influence with key Ukraine officials, including President Leonid Kuchma, with the help of up to $5 million of payoffs.[45] Citing Swiss and Belgian investigators, the FT also claimed that Birshtein and Mikhaylov jointly controlled a Belgian company called MAB International in the early 1990s.[46] During that period, those same investigators reportedly observed transfers worth millions of dollars between accounts held by Mikhaylov, Birshtein, and Alexander Volkov, Seabeco's representative in Ukraine.

In 1993, the Yeltsin government reportedly accused Birshtein of illegally exporting seven million tons of Russian oil and laundering the proceeds.[47] Dmytro Iakoubovski, a former associate of Birshtein’s who had also moved to Toronto, was said to be cooperating with the Russian investigation. One night a gunman fired three shots into Iakoubovski’s home, leaving a note warning him to cease his cooperation, according to a New York Times article published that year. As noted above, according to the Belgian newspaper Le Soir, two members of Bayrock’s Eurasian Trio were also involved in Seabeco during this period as well—Patokh Chodiev and Alexander Mashkevich. Chodiev reportedly first met Birshtein through the Soviet Foreign Ministry, and then went on to run Seabeco’s Moscow office before joining its Belgium office in 1991. Le Soir further claims that Mashkevich worked for Seabeco too, and that this was actually how he and Chodiev had first met.

All this is fascinating, but what about the connections between Birshtein and Trump's Toronto business associate, Alex Shnaider? Again, the leads we have are tantalizing.The Toronto Globe and Mail reported that in 1991, while enrolled in law school, young Alex Shnaider started working for Birshtein at Seabeco’s Zurich headquarters, where he was reportedly introduced to steel trading. Evidently this was much more than just a job; the Zurich company registry lists "Alex Shnaider" as a Director of "Seabeco Metals AG" from March 1993 to January 1994. [48]

In 1994, according to this account, reportedly left Seabeco in January 1994 to start his own trading company in Antwerp, in partnership with a Belgian trader-partner. Curiously, Le Soir also says that Mikhaylov and Birshtein co-founded MAB International in Antwerp in January 1994. Is it far-fetched to suspect that Alex Shnaider and mob boss Mikhaylov might have crossed paths, since they were both in the same city and they were both close to Shnaider’s father-in-law?

According to Forbes, soon after Shnaider moved to Antwerp, he started visiting the factories of his steel trading partners in Ukraine.[49] His favorite client was the Zaporizhstal steel mill, the Ukraine's fourth largest. At the Zaporizhstal mill he reportedly met Eduard Shifrin (aka Shyfrin), a metals trader with a Ph.D. in metallurgical engineering. Together they founded Midland Resource Holdings Ltd. in 1994.[50]

As the Forbes piece argues, with privatization sweeping Eastern Europe, private investors were jockeying to buy up the government’s shares in Zaprozhstal. But most traders lacked the financial backing and political connectons to accumulate large risky positions. Shnaider and Shifrin, in contrast, started buying up shares without limit, as if their pockets and connections were very deep. By 2001 they had purchased 93 percent of the plant for about $70 million, a stake that would be worth much more just five years later, when Shnaider reportedly turned down a $1.2 billion offer.

Today Midland Resources Holdings Ltd. reportedly generates more than $4 billion a year of revenue and has numerous subsidiaries all across Eastern Europe.[51] Shnaider also reportedly owns Talon International Development, the firm that oversaw construction of the Trump hotel-tower in Toronto. All this wealth apparently helped Iceland's FL Group decide that it could afford to extend a €48.5 million loan to Alex Shnaider in 2008 to buy a yacht. [52]

            As of December 2016, a search of the Panama Papers database found no less than 28 offshore companies that have been associated with “Midland Resources Holding Limited.”[53] According to the database, "Midland Resources Holding Limited" was a shareholder in at least two of these companies, alongside an individual named “Oleg Sheykhametov.”[54] The two companies, Olave Equities Limited and Colley International Marketing SA, were both registered and active in the British Virgin Islands from 2007–10.[55] A Russian restaurateur by that same name reportedly runs a sushi franchise owned by two other alleged Solntsevskaya mob associates, Lev Kvetnoy and Andrei Skoch, both of whom are pictured below with Sergei Mikhaylov below. Of course mere inclusion in such a group photo is no evidence of any wrong-doing. (INSERT Picture Link here: https://www.theguardian.com/world/2012/nov/28/man-behind-megafon.) According to Forbes, Kvetnoy is the 55th richest person in Russia and Skoch, now a deputy in the Russian Duma, is the 18th. [56]           

            Finally, it is also intriguing to note that Bori Birshtein is also listed as the President of "ME Moldova Enterprises AG," a Zurich-based company" that was founded in November1992, transferred to the canton of Schwyz in September 1994, and liquidated and cancelled in January 1999.[57] Birshstein was a member of the company's board of directors from November 1992 to January 1994, when he became its President. At that point he was succeeded as President in June 1994 by one "Evsei Shnaider, Canadian citizen, resident in Zurich," who was also listed as Director of the company in September 1994.[58] " Evsei Schnaider" is also listed in the Panama registry as a Treasurer and Director of "The Seabeco Group Inc," formed on December 6, 1991, [59]and as Treasurer and Director of Seabeco Security International Inc.," formed on December 10, 1991. As of December 2016, both companies are still in existence.[60] Boris Birstein is listed as President and Director of both companies.[61]

The Case of Paul Manafort’s Ukrainian Oligarchs

 Our fifth Trump associate profile concerns the Russo/Ukrainian connections of Paul Manafort, the former Washington lobbyist who served as Donald Trump’s national campaign director from April 2016 to August 2016. Manafort’s partner, Rick Davis, also served as national campaign manager for Senator John McCain in 2008, so this may not just be a Trump association.

 

Firtash
Dymytro Firtash

One of Manafort’s biggest clients was the dubious pro-Russian Ukrainian billionaire Dmytro Firtash. By his own admission, Firtash maintains strong ties with a recurrent figure on this scene, the reputed Ukrainian/Russian mob boss Semion Mogilevich. His most important other links are almost certainly to Putin. Otherwise it is difficult to explain how this former used-car salesman could gain a lock on trading goods for gas in Turkmenstan and also become a lynchpin investor in the Swiss company RosUrEnergo, which controls Gazprom's gas sales to Europe[62]

In 2008, Manafort teamed up with a former manager of the Trump Organization to purchase the Drake Hotel in New York for up to $850 million, with Firtash agreeing to invest $112 million. According to a lawsuit brought against Manafort and Firtash, the key point of the deal was not to make a carefully-planned investment in real estate, but to simply launder part of the huge profits that Firtash had skimmed while brokering dodgy natural gas deals between Russia and Ukraine, with Mogilevich acting as a “silent partner.”

Ultimately Firtash pulled out of this Drake Hotel deal. The reasons are unclear – it has been suggestd that he needed to focus on the 2015 collapse and nationalization of his Group DF's Bank Nadra back home in the Ukraine.[63] But it certainly doesn't appear to have changed his behiavor. Since 2014 there have been a spate of other Firtash-related prosecutions, with the US try to extradict from Austria in order to stand trial on allegations that his vast spidernet "Group DF" had paid $18.5 million in bribes to Indian officials to secure mining licenses. The Austrian court, knowing Firtash like a brother, required him to put up a record-busting €125 mm bail while he awaits a decision. [64] And just last month, Spain has also tried to extradite Firtash on a separate money laundering case, involving washing €10 million through Spanish property investments.

After Firtash pulled out of the deal, Manafort reportedly turned to Trump, but he declined to engage. Manafort stepped down as Trump’s campaign manager in August of 2016 in response to press investigations into his ties not only to Firtash, but to the Ukraine's previous pro-Russian Yanukovych government, which had been deposed by a uprising in 2014.  However, following the November 8 election, Manafort reportedly returned to advise Trump on staffing his new administration.  He got an assist from Putin -- on November 30 a spokeswoman for the Russian Foreign Ministry accused Ukraine of leaking stories about Manafort in an effort to hurt Trump.

The Case of “Well-Connected” Russia/FSU Mobsters

 Finally, several other interesting Russo/FSU connections have a more residential flavor, but they are a source of very important leads about the Trump network.

Indeed, partly because it has no prying co-op board, Trump Tower in New York has received press attention for including among its many honest residents tax-dodgers, bribers, arms dealers, convicted cocaine traffickers, and corrupt former FIFA officials. [65]

Mogilevich
Semion Mogilevich

One typical example involves the alleged Russian mobster Anatoly Golubchik, who went to prison in 2014 for running an illegal gambling ring out of Trump Tower -- not only the headquarters of the Trump Organization but also the former headquarters of Bayrock Group LLC. This operation reportedly took up the entire 51st floor. Also reportedly involved in it was the alleged mobster Alimzhan Tokhtakhounov, [66] who has the distinction of making the Forbes 2008 list of the World’s Ten Most Wanted Criminals, and whose organization the FBI believed to be tied to Mogilevich’s. Even as this gambling ring was still operating in Trump Tower, Tokhtakhounov reportedly travelled to Moscow to attend Donald Trump’s 2013 Miss Universe contest as a special VIP.

In the Panama Papers database we do find the name “Anatoly Golubchik.” Interestingly, his particular offshore company, "Lytton Ventures Inc.," [67] shares a corporate director, Stanley Williams, with a company that may well be connected to our old friend Semion Mogilevich, the Russian mafia’s alleged “Boss of Bosses” who has appeared so frequently above. Thus Lytton Ventures Inc. shares this particular director with another company that is held under the name of “Galina Telesh.”[68] According to the Organized Crime and Corruption Reporting Project, multiple offshore companies belonging to Semion Mogilevich have been registered under this same name -- which just happens to be that of Mogilevich’s first wife.

A 2003 indictment of Mogilevich also mentions two offshore companies that he is said to have owned, with names that include the terms “Arbat” and “Arigon.” The same corporate director shared by Golubchik and Telesh also happens to be a director of a company called Westix Ltd.,[69] which shares its Moscow address with “Arigon Overseas” and “Arbat Capital.”[70] And another company with that same director appears to belong to Dariga Nazarbayeva, the eldest daughter of Nursultan Nazarbayev, the long-lived President of Kazakhstan. Dariga is expected to take his place if he ever decides to leave office or proves to be mortal.

Lastly, Dmytro Firtash—the Mogilevich pal and Manafort client that we met earlier—also turns up in the Panama Papers database, as part of Galina Telesh’s network neighborhood. A director of Telesh’s “Barlow Investing,” Vasliki Andreou, was also a nominee director of a Cyprus company called “Toromont Ltd.,” while another Toromont Ltd. nominee director, Annex Holdings Ltd., a St. Kitts company, is also listed as a shareholder in Firtash’s Group DF Ltd., along with Firtash himself.[71] And Group DF’s CEO, who allegedly worked with Manafort to channel Firtash’s funding into the Drake Hotel venture, is also listed in the Panama Papers database as a Group DF shareholder. Moreover, a 2006 Financial Times investigation identified three other offshore companies that are linked to both Firtash and Telesh.[72] 

FIRtashneighborhood
Anatoly Golubchik’s Panama Papers Network Neighborhood

Of course, all of these curious relationships may just be meaningless coincidences. After all, the director shared by Telesh and Golubchik is also listed in the same role for more than 200 other companies, and more than a thousand companies besides Arbat Capital and Arigon Overseas share Westix’s corporate address. In the burgeoning land of offshore havens and shell-game corporate citizenship, there is no such thing as overcrowding. The appropriate way to view all this evidence is to regard it as "Socratic:" raising important unanswered questions – not providing definite answers.

In any case, returning to Trump's relationships through Trump Tower, another odd one involves the 1990s-vintage fraudulent company YBM Magnex International. YBM, ostensibly a world-class manufacturer of industrial magnets, was founded indirectly in Newtown, Bucks County, Pennsylvania in 1995 by the "boss of bosses," Semion Mogilevich, Moscow’s “brainy Don.”

This is a fellow with an incredible history, even if only one-half of what has been written about him is true. [73] Unfortunately, we have to focus here only on the bits that are most relevant.. Born in Kiev, and now a citizen of Israel as well as the Ukraine and Russia, Semion, now 70, is a lifelong criminal. But he boasts an undergraduate economics degree from Lviv University, and is reported to take special pride in designing sophisticated, virtually undetectable financial frauds that take years to put in place. To pull them off, he often relies on the human frailties of top bankers, stock brokers, accountants, business magnates, and key politicians.[74]

In YBM’s case, for a mere $2.4 million in bribes, Semion and his henchmen spent years in the 1990s launching a product-free, fictitious company on the still-badly under-regulated Toronto Stock Exchange. Along the way they succeeded in securing the support of several leading Toronto business people and a former Ontario Province Premier to sit on YBM’s board. They also paid the “Big Four” accounting firm Deloitte Touche very handsomely to issue glowing audits. By mid-1998, YBM’s stock price had gone from less than $.10 to $20, and Semion cashed out at least $18 million—a relatively big fraud for its day—before the FBI raid its YBM's corporate headquarters. When it did so, it found piles of bogus invoices for magnets, but no magnets. [75]

In 2003, Mogilevich was indicted in Philadelphia on 45 felony counts for this $150 million stock fraud. But there is no extradition treaty between the United States and Russia, and no chance that Russia will ever extradite Semion voluntarily; he is arguably a national treasure, especially now. Acknowledging these realities, or perhaps for other reasons, the FBI quietly removed Mogilevich from its Top Ten Most Wanted list in 2015, where he had resided for the previous six years.[76]

For our purposes, one of the most interesting things to note about this YBM Magnex case is that its CEO was a Russian-American named Jacob Bogatin, who was also indicted in the Philadelphia case. His brother David had served in the Soviet Army in a North Vietnamese anti-aircraft unit, helping to shoot down American jet pilots like Senator John McCain. Since the early 1990s, David Bogatin was considered by the FBI to be one of the key members of Semion Mogilevich’s Russian organized crime family in the United States, with a long string of convictions for big-ticket Mogilevich-type offenses like financial fraud and tax dodging.

At one point, David Bogatin owned five separate condos in Trump Tower that Donald Trump had reportedly sold to him personally.[77] And Vyacheslav Ivankov, another key Mogilevich lieutenant in the United States during the 1990s, also resided for a time at Trump Tower, and reportedly had in his personal phone book the private telephone and fax numbers for the Trump Organization’s office in that building.[78]

________

So what have we learned from this deep dive into the network of Donald Trump's Russian/FSU connections?

¶ First, the President-Elect really is very "well-connected," with an extensive network of unsavory global underground connections that may well be unprecedented in White House history. In choosing his associates, evidently Donald Trump only pays cursory attention to questions of background, character and integrity.

¶ Second, Donald Trump has also literally spent decades cultivating senior relationships of all kinds with Russia and the FSU. And public and private senior Russian figures of all kinds have likewise spent decades cultivating him, not only as a business partner, but as a "useful idiot."

After all, on September 1, 1987 (!), Trump was already willing to spend a $94,801 on full-page ads in the Boston Globe, the Washington Post, and the New York Times, calling for the US to stop spending money to defend Japan, Europe, and the Persian Gulf, "an area of only marginal significance to the US for its oil supplies, but one upon which Japan and others are almost totally dependent.''[79]

This is one key reason why just this week, Robert Gates, a registered Republican who has served Secretary of Defense under Presidents from both parties, as well as Director and Deputy Director of the CIA, critized the response of Congress and the White House to the alleged Putin-backed hacking as far too "laid back." [80]

¶ Third, even beyond questions of illegality, the public clearly has a right to know much more than it already does about the nature of such global connections. As our opening quote from Cervantes suggests, these relationships are probably a pretty good leading indicator of how Presidents will behave once in office.

Unfortunately, for many reasons, this year American voters never really got the chance to decide whether such low connections and entanglements belong at the world’s high peak of official power. In the waning days of the Obama Administration, with the Electoral College about to ratify Trump's election and Congress in recess, it is too late to establish the kind of bipartisan 9/11-type commission that would be needed to explore these connections in detail.

Finally, the long-run consequence of careless interventions in other countries is that they often come back to haunt us.  In Russia's case, it just has.

♥♥♥ 

James S. Henry, Esq. is an investigative economist and lawyer who has written widely about offshore and onshore tax havens, kleptocracy, and pirate banking. He is the author of The Blood Bankers (Basic Books, 2003,2005), a classic investigation of where the money went that was loaned to key debtor countries in the 1970s-1990s. He is a Senior Fellow at the Columbia University's Center on Sustainable Investment, a Global Justice Fellow at Yale, a Senior Advisor at the Tax Justice Network, and a member of the New York Bar. He has pursued frontline investigations of odious debt, flight capital, and corruption in more than 50 developing countries, including Russia, China, South Africa, Brazil, the Philippines, Argentina, Venezuela, Nicaragua, Mexico, and Panama.

 

[1] Author’s estimates; see globalhavenindustry.com for more details.

[2] For an overview and critical discussion, see http://prutland.faculty.wesleyan.edu/files/2015/08/The-role-of-the-IMF-in-Russia.pdf.

[3] See Lawrence Klein and Marshall Pomer, Russia's Economic Transition Gone Awry (Stanford U. Press, 2002); see also James S. Henry and Marshall Pomer, "A Pile of Ruble," The New Republic, 1998, 219 (10), 20-21.

[4] See this Washington Post report, which counts just six bankruptcies to the Trump Organization’s credit, but excludes failed projects like the Trump SoHo, the Toronto condo-hotel, the Fort Lauderdale condo-hotel, and many others Trump was a minority investor or had simply licensed his brand.

[5] For example, the Swiss federal and cantonal corporate registries, available at http://zefix.admin.ch.

[6] For ICIJ's April 2016 "Panama Papers" database of offshore companies, see https://offshoreleaks.icij.org.

[7] Trump’s minority equity deal with Bayrock was unlike many others, where he simply licensed his name. See this March 2008 New York Magazine piece.

[8] “I dealt mostly with Tevfik,” he said in 2007 http://www.thedailybeast.com/articles/2011/05/26/inside-donald-trumps-empire-why-he-wont-run-for-president.html

[9] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 15. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.

[10] https://kazakhbusinessbulletin.wordpress.com/kazakh-businessman/tevfik-arif/.

[11] Bayrock reported its co-ownership of six Rixos hotels in a 2007 press release.

[12] See also Salihovic, Elnur, Major Players in the Muslim Business World, p.107

https://books.google.com/books?id=aSa1DAAAQBAJ&pg=PA107&lpg=PA107&dq=%22the+trio%22+kazakhstan&source=bl&ots=pwxBZWjuGi&sig=v43XY1UxLhub0YayYH6vY1lcAJc&hl=en&sa=X&ved=0ahUKEwigx6Hi08rQAhUJwiYKHSoQACQ4ChDoAQgnMAM#v=onepage&q=%22the%20trio%22%20kazakhstan&f=false; http://www.telegraph.co.uk/finance/newsbysector/industry/mining/8171468/US-ambassador-unimpressed-by-food-at-oligarch-Alexander-Mashkevichs-house.html.

[13] See also http://www.sahistory.org.za/sites/default/files/file%20uploads%20/alastair_fraser_miles_larmer_zambia_mining_anbook4you.pdf; http://www.brusselstimes.com/belgium/3302/the-belgian-billionaire-georges-forrest-denies-any-involvement-in-kazakhgate; http://archives.lesoir.be/le-parquet-de-bruxelles-enquete-kazakhgate-tractebel-co_t-19991228-Z0HNTZ.html.

[14] According to the Panama Papers database, "International Financial Limited" was registered on April 3, 1998, but is no longer active today, although no precise deregistration date is available. See https://offshoreleaks.icij.org/nodes/167402.

[15]According to the Panama Papers, “Group Rixos Hotel” is still active company, while three of the four companies it serves were struck off in 2007 and the fourth, Hazara Asset Management, in 2013.

[16] http://www.ynetnews.com/articles/0,7340,L-4048812,00.html.

[17] See also [17] http://turizmguncel.com/haber/savarona-zanlilari-sorgulanirken-ismailov-adliyeye-gitti-h3325.html; [17] http://www.legrandsoir.info/Machkevitch-et-ses-complices-blanchis-par-la-justice-turque.html.

[18] Case 1:09-cv-21406-KMW Document 408-1. Entered on FLSD Docket 11/26/2013. p. 16. https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n19/mode/2up.

[19]The exact date that Sater joined Bayrock is unclear. A New York Times article says 2003, but this appears to be too late. Sater says 1999, but this is much too early. A certified petition filed with the U.S. Supreme Court places the time around 2002, which is more consistent with Sater’s other activities during this period, including his cooperation with the Department of Justice on the Coppa case in 1998–2001, and his foreign travel.

[20] See https://www.ft.com/content/549ddfaa-5fa5-11e6-b38c-7b39cbb1138a; http://www.nytimes.com/2016/04/06/us/politics/donald-trump-soho-settlement.html; https://www.washingtonpost.com/politics/former-mafia-linked-figure-describes-association-with-trump/2016/05/17/cec6c2c6-16d3-11e6-aa55-670cabef46e0_story.html

; [20] http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf. Note that previous accounts of Sater's activities have overlooked the role that this very permissive relationship with federal law enforcement, especially the FBI, may have played in encouraging Sater's subsequent risk-taking and financial crimes. See http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf.

[21] See http://c10.nrostatic.com/sites/default/files/Palmer-Petition-for-a-writ-of-certiorari-14-676.pdf, 13.

[22] Sater’s 1998 case, never formally sealed, was U.S. v. Sater, 98-CR-1101 (E.D.N.Y.) The case in which Sater secretly informed was U.S. v. Coppa, 00-CR-196 (E.D.N.Y.). See also http://www.thedailybeast.com/articles/2016/11/06/trump-s-russia-towers-he-just-can-t-get-them-up.html.

[23] http://www.nytimes.com/2007/12/17/nyregion/17trump.html. Sater also may have taken other steps to conceal his criminal past. According to the 2015 lawsuit filed by x Bayrocker Jody Kriss, Arif agreed to pay Sater his $1 million salary under the table, allowing Sater to pretend that he lacked resources to compensate any victims of his prior financial frauds. See Kriss v. Bayrock, pp. 2, 18, at https://assets.documentcloud.org/documents/2638421/Kriss-v-Bayrock-Complaint.pdf The lawsuit also alleges that Sater may have held a majority of Bayrock's ownership, but that Arif, Sater and other Bayrock officers may have conspired to hide this by listing Arif as the sole owner on offering documents.

[24] See https://archive.org/stream/DonaldTrumpArchive/Branding%20%20DJT%20Fort%20Lauderdale%20Depo%2011-5-2013#page/n153/mode/2up, 155.

[25] "Former FL Group manager," interview with London, August 2016. Sigrun Davidsdottir, Iceland journalist.

[26] See "Report of the Special Investigation Commission on the 2008 Financial Crisis." (April 12, 2010), available at http://www.rna.is/eldri-nefndir/addragandi-og-orsakir-falls-islensku-bankanna-2008/skyrsla-nefndarinnar/english/.

[27] These loans are disclosed in the Kaupthing Bank's "Corporate Credit – Disclosure of Large Exposures > €40 mm." loan book, September 15, 2008. This document was disclosed by Wikileaks in 2009   See http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5968231/Kaupthing-leak-exposes-loans.html; http://file.wikileaks.info/leak/kaupthing-bank-before-crash-2008.pdf, p.145 (€79.5mm construction yacht loan to Russian vodka magnate Yuri Shefler's Serena Equity Ltd.;   p. 208: (€45.8 mm yacht construction loan to Canadian-Russian billionaire Alex Shnaider's Filbert Pacific Ltd..

[28] Kriss lawsuit, op. cit.; author's analysis of Kaupthing/ FL G employees published career histories.

[29] Author's interview, "Iceland Economist," Reykjavik, July 2016.

[30] http://uniad.com.ua/main/940-dose-aleksa-shnajdera-sovladelca-zaporozhstali.html. The passage in Russian, with the father's name underlined, is as follows: "Родители Алекса Шнайдера владели одним из первых успешных русских  магазинов в русском квартале Торонто. Алекс помогал в бизнесе отцу – Евсею Шнайдеру, расставляя на полках товар и протирая полы. С юных лет в Алексе зрела предпринимательская жилка.  Живя с родителями, он стал занимать деньги у их друзей и торговать тканями и электроникой с разваливающимися в конце 80-х годов советскими предприятиями." "Евсею Шнайде

ру" is the dative case of "Евсей Шнайдер," or "Evsei Shnaider," the father's name in Russian.

[31] The Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. It entered liquidation on May 5, 1999, in Arth, handled by the Swiss trustee Paul Barth. The Zurich company registry listed "Boris Joseph Birshtein, Canadian citizen, resident in Toronto," as the President of Seabeco Kirgizstan AG in 1992, while "Boris Joseph Birshtein, Canadian citizen, resident in Zurich," was listed as the company's President in 1993. "Boris Birshtein" is also listed as the President and director of a 1991 Panama company, The Seabeco Group, Inc. as of December 6 1991. See below.

[32] See http://blog.marcelsel.com/2015/02/26/quand-kubla-et-de-decker-tournent-kazakh/.

[33] The Zurich company registry reports that "Seabeco SA" (CHE-104.863.207) was initially registered on December 16, 1982, with "Boris Joseph Birshtein, Canadian citizen, resident in Toronto" as its President. According to the registry, it entered liquidation on May 5, 1999. See also https://groups.google.com/forum/#!topic/soc.culture.ukrainian/1mtgIacNtMw. The liquidation was handled by the Swiss trustee Paul Barth, in Arth.

[34] For Seabeco's Antwerp subsidiary, see http://archives.lesoir.be/mafia-russe-la-justice-suisse-fond-sur-anvers-et-bruxel_t-19970317-Z0DFVX.html.

[35] "Royal HTM Group, Inc." of Toronto, (Canadian Federal Corporation # 624476-9), owned 50-50 by Birshtein and his nephew. See https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=6244769&V_TOKEN=1481946919835&crpNm=Royal%20HTM%20Group,%20Inc.&crpNmbr=&bsNmbr= .

[36] Birshtein was a director of Seabeco Capital Inc. (Canadian Federal Incorporatio # 248194-4,) a Winnipeg company created 6/2/1989 and dissolved 12/22/1992 )https://www.ic.gc.ca/app/scr/cc/CorporationsCanada/fdrlCrpDtls.html?corpId=2481944&V_TOKEN=1481931998238&crpNm=Seabeco&crpNmbr=&bsNmbr=

[37] Since 1998, Boris Birshtein (Toronto) has also served as Chairman, CEO, and a principle shareholder of "Trimol Group Inc.," a publicly-traded Delaware company that trades over the counter. (Symbol: TMOL). Its product line is supposedly "computerized photo identification and database management system utilized in the production of variety of secure essential government identification documents." See https://www.bloomberg.com/quote/TMOL:US; https://www.sec.gov/Archives/edgar/data/1011733/0000950123-98-005826.txt.

However, according to Trimol's July 2015 10-K (http://www.wikinvest.com/stock/Trimol_Group_Inc_(TMOL)/Filing/10-K/2015/10-K/D20069370) the company has only had one customer, the former FSU member Moldova, with which Trimol's wholly-owned subsidiary Intercomsoft concluded a contract in 1996 for the producton of a National Passport and Population Registration system. That contract was not renewed in 2006, and the subsidiary and Trimol have had no revenues since then. Accordingly, as of 2016 Trimol has only two part time employees, its two principle shareholders, Birshtein and his nephew, who, directly and indirectly account for 79 percent of Trimol's shares outstanding. According to the July 2015 10-K, Birshtein, in particular, owned 54 percent of TMOL's outstanding 78.3 million shares, including 3.9 million by way of "Magnum Associates, Inc.," which the 10-K says only has Birshtein as a shareholder, and 34.7 million by way of yet another Canadian company, "Royal HTM Group, Inc." of Ontario (Canadian Federal Corporation # 624476-9), which is owned 50-50 by Birshtein and a nephew. It is interesting to note according to the Panama Papers database, a Panama company called "Magnum Associates Inc. was incorporated on December 10, 1987, and struck off on March 10, 1989.   See https://offshoreleaks.icij.org/nodes/10213728. As of December 2016, TMOL's stock price was zero.

[38] See the case of Trimol Group Inc above. The Seabeco Group, Inc., a Panama company that was formed in December 1991, apparently still exists. Boris J. Birshtein is listed as this company's Director and President. See "The Seabeco Group Inc." registered in Panama by Morgan Y Morgan, 1991-12.06, with "Numero de Ficha" 254192, http://ohuiginn.net/panama/company/id/254192; https://opencorporates.com/companies/pa/254192.

[39] As of December 2016, the Zurich company registry (http://www.zefix.ch/info/ger/ZH020.htm) listed a Zurich company called "Conim Investment AG" (CH-020.3.002.334-7) was originally formed in May 1992, and in January 1995 was transferred to Arth, in the Canton of Schwyz, where it is still in existence. (CHE-102.029.498). This is confirmed by the Schwyz Canton registery: https://sz.chregister.ch/cr-portal/auszug/auszug.xhtml?uid=CHE-102.029.498. According to these registries, Conim Investment AG is the successor company to two other Zurich campanies, "Seabeco Kirgizstan AG,"formed in 1992, and "KD Kirgizstan Development AG," its direct successor.   (http://zh.powernet.ch/webservices/net/HRG/HRG.asmx/getHRGHTML?chnr=CH-020.3.002.334-7&amt=020&toBeModified=0&validOnly=0&lang=1&sort=).

The Swiss federal company registry also reports the following Swiss companies in which Boris J.Birshtein has been an officer and or director, all of which are now in liquidation: (1) Seabeco Trade and Finance AG (CH-020.3.002.179-4, 4/3/92-11/30/98 ), ; (2) Seabeco SA (CHE-104.863.207,12/16/82-5/9/99) ; (3) Seabeco Metals AG (4/3/92-6/11/96); (4) BNB Trading AG (CH-020.3.002.181-9, 1/10/92-11/19/98 ); and (5) ME Moldova Enterprises AG (CH-020.3.003.104-1, 11/10/92-9/16/94). All of these liquidations were handled by the same trustee, Paul Barth in Arth.

[40] As of December 2016, active Birshtein companies include "Conim Investment AG" (CH-020.3.002.334-7) in the Swiss Canton of Schwyz and he Seabeco Group, Inc. in Panama.

[41] For example, the Zurich and Schwyz company registries indicates that the following have been board members of Birshtein companies: (1) Seabeco Trade and Finance AG: Iouri Orlov (citizen of Russia, resident of Moscow), Alexander Griaznov (citizen of Russia, resident of Basserdorf Switzerland), and Igor Filippov (citizen of Russia, resident of Basel). (2) ME Moldova Enterprises: Andrei Keptein (citizen of FSU/ Moldova; Evsei Shnaider (Russian émigré to Canada); (3) Seabeco Kirigizstan/ Conim Investment AG: Sanjarbek Almatov (citizen of Bishkek, FSU/ Kirgizstan), Toursounbek Tchynguychev (citizen of Bishkek, FSU/Kirgizstan), Evsei Shnaider (Russian émigré to Canada); (4) BNB Trading AG: Yuri Spivak (Russian émigré to Canada; (5) Seabeco Metals AG: Alex Shnaider (Russian émigré to Canada).

[42] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html See also Misha Glenny, 2009. McMafia: A Journey Through the Global Criminal Underworld. (New York: Vintage Books), 63-65.

[43] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html .

[44] See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.

[45] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html

[46] Charles Clover, "Ukraine: Questions over Kuchma's adviser cast shadows," FT, October 30, 1999, available at http://willzuzak.ca/lp/clover01.html .

[47] Toronto Star, Aug 28, 1993 “Boris knows everyone,”

http://www.telusplanet.net/public/mozuz/crime/lemieszewski20001103.html#bottom%288%29.

[48] See Zurich corporate registry for "Seabeco Metals AG" (CH-020.3.002.181-9), formed 4/3/92 and liquidated 6/11/96.

[49] http://www.forbes.com/forbes/2005/0328/132.html

[50] http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=20412545

[51] http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=20412545.

[52] See Kaupthing Bank, "Loan Book, September 2008," wikileaks: https://wikileaks.org/wiki/Financial_collapse:_Confidential_exposure_analysis_of_205_companies_each_owing_above_EUR45M_to_Icelandic_bank_Kaupthing,_26_Sep_2008

[53]The Panama Papers database provides an address for “Midland Resources Holding Limited" (https://offshoreleaks.icij.org/nodes/12085103) that exactly matches the company's corporate address in Guernsey, as noted by Bloomberg's corporate data base. Here are the 28 companies that are associated with Midland in database:  

Aligory Business Ltd., https://offshoreleaks.icij.org/nodes/10127460;

Anglesey Business Ltd., https://offshoreleaks.icij.org/nodes/10123508;

Blue Industrial Skies Inc., https://offshoreleaks.icij.org/nodes/10130255;  

Cl 850 Aviation Holdings Ltd., https://offshoreleaks.icij.org/nodes/10122735;

Cl 850 Aircraft Investments Ltd., https://offshoreleaks.icij.org/nodes/10122774;

Caray Business Inc., https://offshoreleaks.icij.org/nodes/10131819;

Challenger Aircraft Company Limited, https://offshoreleaks.icij.org/nodes/12155627;

Colley International Marketing S.A., https://offshoreleaks.icij.org/nodes/10123599;

East International Realty Ltd., https://offshoreleaks.icij.org/nodes/10122122;

Filbert Pacific Limited, https://offshoreleaks.icij.org/nodes/10199822;

Gorlane Business Inc., https://offshoreleaks.icij.org/nodes/10210594;

Jabar Incorporated, https://offshoreleaks.icij.org/nodes/10110254;

Jervois Holdings Inc.( https://offshoreleaks.icij.org/nodes/12125131) ,

Kerryhill Investments Corp., https://offshoreleaks.icij.org/nodes/10103732;

Leaterby International Investments Corp., https://offshoreleaks.icij.org/nodes/10202817

Maddocks Equities Ltd.,( https://offshoreleaks.icij.org/nodes/12085103,

Maverfin Holding Inc.( https://offshoreleaks.icij.org/nodes/12130837),

Midland Maritime Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),

Midland River-Sea Holding Ltd. (https://offshoreleaks.icij.org/nodes/12136120),

Midland Drybulk Holding Ltd.( https://offshoreleaks.icij.org/nodes/12136120),

Midland Fundco Ltd. (https://offshoreleaks.icij.org/nodes/12136120),

Norson Investments Corp.( https://offshoreleaks.icij.org/nodes/12130837),

Olave Equities Limited, https://offshoreleaks.icij.org/nodes/12155627; https://offshoreleaks.icij.org/nodes/10125740;

Orlion Business Incorporated, https://offshoreleaks.icij.org/nodes/12155627

Perseus Global Inc., https://offshoreleaks.icij.org/nodes/10111891;

Sellana Investments Global Corp., https://offshoreleaks.icij.org/nodes/12155627

Stogan Assets Incorporated, https://offshoreleaks.icij.org/nodes/10206109

Toomish Asset Ltd., https://offshoreleaks.icij.org/nodes/10128146.

[54] With the address "11 First Tverskaya-Yamskaya Street; apt. 42; Moscow; Russia." https://offshoreleaks.icij.org/nodes/10123599;; https://offshoreleaks.icij.org/nodes/12078236; https://offshoreleaks.icij.org/nodes/10125740.

[55] As for the Midland-related offshore vehicles still listed as active, one shareholder in two of them -- -- Stogan Assets Incorporated and Blue Sky Industries Inc. -- happens to have the same name as Russia’s Deputy Culture Minister Gregory Pirumov, reportedly arrested in March 2016 on embezzlement charges. The “Gregory Pirumov” in the Panama Papers (https://offshoreleaks.icij.org/nodes/250440) has a registered address in Moscow (4 Beregkovskaia Quay; 121059), as do the reported agents of these two companies: "Global Secretary Services Ltd. Mal. Tolmachevskiy pereulok 10 Office No.3 Moscow, Russia 119017 Attention: Katya Skupova)." See https://panamadb.org/entity/stogan-assets-incorporated_189367. A "Georgy Pirumov" is also listed separately in the Panama Papers as having been a shareholder in the same two companies (https://offshoreleaks.icij.org/nodes/10206109; https://offshoreleaks.icij.org/nodes/12111401.) For what it is worth, in September 2016, one "Georgy Pirumov" was convicted in Moscow of "illegally taking over a building in Gogolevsky Boulevard," and sentenced to 20 months in a minimum-security correctional facility. See The Investigative Committee of the Russian Federation, Sept 15, 2016, http://en.sledcom.ru/news/item/1067178/. At this point, however, we need to emphasize that there is still plenty that needs to be investigated -- we cannot yet confirm whether "Georgy" and "Gregory" are the same person, whether they are related, how they might be related to Shnaider's Mineral Resources, or whether they are the same people named in the articles just noted above about criminal prosecutions.

[56] http://www.forbes.com/profile/lev-kvetnoi/.

[57] See Schwyz canton corporate registry, https://sz.chregister.ch/cr-portal/suche/suche.xhtml, ""ME Moldova Enterprises AG," CH-130.0.007.159-5.

[58] See Zurich corporate registry, http://www.zefix.ch/info/ger/ZH020.htm, "ME Moldova Enterprises AG," CH-020.3.003.104-1 (11/10/92-9/16/94).

[59] See "Seabeco Group Inc.," Panama Corporate Registry # 254192, https://opencorporates.com/companies/pa/254192, formed 12-6-1991.

[60] See "Seabeco Security Intl Inc." Panama Corporate Registry #254206, formed 12-10-1991," https://opencorporates.com/companies/pa/254206.

[61] Ibid, footnotes 58 and 59.

[62] http://www.independent.co.uk/news/uk/crime/Dmytro-firtash-spain-seeks-extradition-for-ukrainian-oligarch-linked-to-senior-tories-for-alleged-a7439621.html

[63] See http://www.unian.info/economics/1041128-nadra-bank-owned-by-firtash-declared-insolvent.html.

[64] http://www.independent.co.uk/news/uk/crime/Dmytro-firtash-spain-seeks-extradition-for-ukrainian-oligarch-linked-to-senior-tories-for-alleged-a7439621.html

[65] See http://transparency.org.ru/en/news/first-we-take-miami-why-russian-businessmen-and-criminals-move-into-trump-s-towers.

[66] A.K.A. "Tochtachunov." See FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization: Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf., 1.

[67]According to the Panama Papers, as of December 2016, Lytton Ventures Inc., incorporated in 2006, was still an active company but its registration jurisdiction was listed as "unknown." See https://offshoreleaks.icij.org/nodes/207427.

[68] For Telesh’s company the director’s name is given as “Stanley Williams,” as compared with “Stanley Edward Williams” in Golubchik’s, but they have the same address. See https://offshoreleaks.icij.org/nodes/196083. Telesh’s company, Barlow Investing, was incorporated in 2004. In the PP database, as of December 2016 its status was “Transferred Out,” although its de-registration date and registration jurisdiction are unknown.

[69] Westix Ltd., registered in 2005, is still active, according to the Panama Papers. See https://offshoreleaks.icij.org/nodes/214472.

[70] In the Panama Papers, Telesh’s company and Golubchik’s reportedly have the same director, one Stanley Williams. Williams is also reportedly a director of Westix, which shares its address with two other offshore companies that use corporate names that Mogilevich has reportedly used at least twice each in the past. Arbat Capital, registered in 2003, was still active as of December 2016, as was Arigon Overseas, registered in 2007.

[71] See the diagram below.

[72]These three offshore companies are not in the Panama Papers data base. https://www.ft.com/content/29f06170-12a2-11db-aecf-0000779e2340. Firtash acknowledged these connections to Telesh but still told FT reporters that he didn’t know her. The three companies identified in the report are (1) Highrock Holdings, which Firtash and Telesh each reportedly owned 1/3rd of, and where Firtash served as director beginning in 2001; (2) Agatheas Holdings, where Firtash apparently replaced Telesh as director in 2003; and (3) Elmstad Trading, a Cyprus company owned by Firtash which in 2002 transferred the shares of a Russian company named Rinvey to Telesh and two other people: one of them Firtash’s lawyer and the other the wife of a reputed Mogilevich business partner. See also http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.

[73] On Mogilevich, see, for example, http://rumafia.com/en/eksklyuziv/kidala-vseya-strany-pervaya-chast.html.

[74] See also FBI, Organizational Intelligence Unit (August 1998), "Semion Mogilevich Organization; Eurasian Organized Crime," available at http://www.larryjkolb.com/file/docs/fbimogilevich.pdf.

[75] http://www.theglobeandmail.com/globe-investor/personal-finance/how-to-spot-fraud-and-be-a-vigilant-investor/article556022/

[76] See https://archives.fbi.gov/archives/news/stories/2009/october/mogilevich_102109;

 

http://www.slate.com/blogs/crime/2013/08/05/semion_mogilevich_fbi_ten_most_wanted_list_this_obese_mob_boss_is_twice.html.

[77]David Cay Johnston, interview with the author, November 2016. Wayne Barrett, Trump: The Greatest Show on Earth: The Deals, the Downfall, the Reinvention (Regan Arts, 2016).

[78]Johnston, interview; see also http://russianmafiagangster.blogspot.com/2012/12/the-superpower-of-crime.html. [78] In another interesting coincidence, the President of YBM Magnex was also reportedly a financial director of Highrock in the late 1990s, before Manafort-client Dmytro Firtash joined the company as a director in 2001. See note 151. http://foreignpolicy.com/2014/03/19/married-to-the-ukrainian-mob/.

 

[79] http://www.apnewsarchive.com/1987/Trump-U-S-Should-Stop-Paying-To-Defend-Countries-that-Can-Protect-Selves/id-05133dbe63ace98766527ec7d16ede08.

[80] https://www.theguardian.com/us-news/2016/dec/18/robert-gates-russia-election-interference-donald-trump-hillary-clinton.

***

January 7, 2017 at 11:37 PM | Permalink | Comments (0)

Tuesday, March 09, 2010

THE ROBIN HOOD TAX

Why Doesn't Obama Support This Very Modest Progressive Tax?
Just Guess Who Opposes It!
James S. Henry

While we wait patiently for any signs whatsoever of progressive change in America, progress is still being made, deo gratis, elsewhere. Of course this is no thanks to the banker-minded Spartans who still occupy the Trojan Horse that is become the US Treasury Department.

Today the European Parliament adopted a resolution supporting the kind of global financial transactions tax that is discussed in the extraordinary performance by Bill Nighy below. For more information about the European action, please follow this link.

NGOs like Tax Justice Network International, Oxfam GB, Global Financial Integrity, Action Aid, New Rules, Christian Aid have all been working hard to support this proposal. They could use your active involvement and support -- right now.

As the Puritan minister Stephan Marshall once said in a sermon addressed to Parliament in 1641, "You have great works to do, the planting of a new heaven and a new earth among us, and great works have great enemies."

(If for some odd reason the video does not appear below, please travel here to get it.)


March 9, 2010 at 10:21 PM | Permalink | Comments (1)

Monday, November 02, 2009

"WHO KNEW?": WILMINGTON NAMED WORLD'S WORST HAVEN

Wild Protests in Geneva, Vaduz, and Guernsey
James S. Henry


Sevy_swiss_gnomes

"Delaware Named As Better Place to Hide Money Than Switzerland"

"Delaware Beats Switzerland As Most Secretive Financial Center"

"Delaware Most Opaque Haven, Switzerland Third."


(Geneva) Thousands of angry private bankers from SwitzerlandLiechtenstein, and the Channel Islands have taken to the streets to denounce Delaware's official designation as the world's worst "financial secrecy center" by the heretofore-renowned international critic of tax havens, TJN International.

"Surely this is one contest that we deserved to win," said a leading Geneva private banker. "We feel like Ist-imf3 Chicago after the Olympics selection."

A Guernsey banker echoed his sentiments. "I smell a rat. Just because the US VP is from Delaware, the fix must have been in. Our assets have been flowing out since 2005. Now we know where they've gone."

"Wilmington.  Who'd' a thunk it?"

For the past few years jurisdictions like Switzerland,  Liechtenstein, and the Channel Islands  have indeed been competing vigorously for the prize of the "world's worst haven."

Riot3 According to Dubios Pictet von Hentsch, another  long-time Swiss banker, "I don't know what they want from us. We have tried everything -- including  having many senior bankers from our largest banks get indicted and convicted for helping thousands of wealthy foreigners evade taxes!

"This was supposed to be OUR YEAR!"

"We've also been laundering all those smarmy Euros  for decades! This is the thanks we get?  Meh!  " 

"What's happened to "pay-for-performance" in financial services?"

A Vaduz-based private banker from BIL, the legendary Liechtenstein private money-laundering bank owned by the Crown Prince's family, also expressed shock and dismay.

"We're just a tiny developing country (even if we do happen to have the world's highest per capita income.) How's our Crown Prince supposed to feel after this? After all our efforts to help wealthy foreigners all over the planet evade taxes over the last decade, we lose to...Wilmington? Meh!"

"All the really dirty money has been flowing to an even tinier, more obscure place than we are:  this place Wilmington_Delaware_aerial_view called  WilmingtonAnd we didn't even know about it. We are obviously a little embarrassed." 

"Personally Dirty+Money+V.5(DJ+RPM)I've never been to Wilmington. But I am dying to go there now. Are there any direct flights?"

 A Singapore banker commented, "Wilmington?  Uh, where is that, exactly?  Surely If its number one, it must be packed with non-doms, wealthy sheiks, fancy hotels and shops, and of course lots and lots of ultra-ancient, ultra-discrete private banks, law firms, and accounting firms." 

"How is the skiing and the diving, by the way? Not good? Meh!"

Other sources confirm that  until it was disclosed by TJN,  Wilmington's  role in global financial chicanery was  one of the world's best kept secrets. 

"Apparently all the truly sophisticated dirty money goes there," said a Panama lawyer.

 "It's a facade-- purposefully understated, if you will."

"Of course we had all heard rumors. But now  that it has been officially2008031817roubiniDentro_20080319 confirmed by TJN,  it must be true."

A_dirty_rat_with_a_lot_of_dirty_laundry__1137403701

 "I tell you,  you  Americans are something else.  For years you have been pointing the fingers at the rest of us, while secretly preparing this bid. 

Now it turns out to be you who are the real winners. Meh!"

A Luxembourg private banker commented: "We got the third highest per capita incomes in the world and these peons  in Wilmington wanna piece of our pie!! " 


THE WAY THE WORLD WORKS

The Luxembourg private banker agreed to expand a bit on why he thinks the first prize for Wilmington is just so unfair.

"Ok, sure, yeah, everybody has known for some time that First World countries like the US, the UK, Switzerland, Austria, the Netherlands, and Luxembourg  are the world's largest ultimate havens -- at least since that book Banqueros Y Lavadolares (1996) laid out the whole story.  Foreign money has been  flowing out of higher-tax places and developing countries for decades. 

Images-1 "Part of it is just natural risk-diversification. For example, what moron wants to keep all his hard-earned shekels in a place like Mexico? The place is a cesspool of corruption, on the front lines of the drug wars, with lots of kidnappings, and the courts for sale to the highest bidder.  You wanna keep all your money there or pay taxes to a government like that?  Knock yourself out."

"But  it isn't just a question of diversifying away from country risk, because that doesn't explain why all the money gets invested in FIRST WORLD banks. 

We First World havens also worked really hard  to become the world's top laundromats, so the money would come here."  

THE BEST TAX CODE THAT MONEY CAN BUY.......

"First of all,  we got the tax laws right, hiring the best lawyers on the planet to design them to attract capital flight and tax evasion, as well as any criminal proceeds that happen to come along for the ride. 

None of these rich countries wealthy foreign investors on, say,  the interest income they get from, say, bank deposits at UBS or HSBC or Citigroup,  or our 200 offshore banks in Luxembourg.  And sure we'll respond if the US Department of Justice comes a callin'."

"But we sure as hell don't report this income to, say, the Mexican IRS.

"So all the wealthy foreigners from developing countries investing in First World banks?"

"There are no big customers secrets!  The banks know who they are! 

"We have to. They are all our private banking clients!"  

"So Angel Gurria can keep his lousy foreign accounts in New York and Geneva, we ain't gonna tell 37577175DSC_0672a-200 nobody." 

You see -- even if the US IRS knew the "beneficial owners" of every offshore account in Luxembourg, and New York, and London, and Wilmington, the income these owners earn isn't taxable here. And under the rules we've set,  no  First World government is going to turn over this information to some no-count Third World country Hey, there's big bucks at stake! "

"It isn't  about "secrecy," my friend.  It's about tax laws and the people who write them. Or at least that's what we always thought -- until now!"

 ....WRITTEN BY PRIVATE BANKERS

Number two,  we build a vast global pirate banking industry.  We put together  top fifty most powerful First World Banks, law firms, and accounting firms in the world, and unleashed them on the developing world, where most of this  

"Who do you think made all these tax and banking laws, Elwin?  Did they just sorta pop up?"

"Naw, this haven stuff is a big business.

Robert-rubin "So our  lobbyists went to work and designed all these  tax laws, plus the banking laws that accomodated them.  If  we don't get it done with lobbyists, we  get a Treasury Secretary or two -- likeForeclosure-Phil-Gramm28may08 Robert Rubin, who came from Goldman Sachs and went back to work at Citigroup, or former US Senator Phil Gramm, who was Chairman of the Senate Banking Committee for five years before he left the Senate to become Vice Chairman of UBS.

"Understand one thing:   the City of London, Geneva, Zurich, and New York City would barely exist without this offshore banking/ investments businesses. Naturally Singapore and Hong Kong and Dubai now want a piece of action."

THE IRRELEVANCE OF "SECRECY" TO TAX JUSTICE

"You see, my friend -- that's why we're so troubled by Wilmington's victory here.

Bush-SPY-ON-YOU We don't understand how all the pure "corporate secrecy" in the world has anything necessarily at all to do with being an outstanding tax haven -- or the flip side, with taking money out of poor countries and keeping it outside, tax free. Or with "tax justice."

"We always thought: we take care of the tax laws and have an aggressive private banking industry, then  we will win."

"Since  the banks and hedge funds know who their clients are anyway, the government could always order them to cough the info up, whether or not there's a single "secret" beneficiary anywhere.

On the other hand, you could have all the most perfect information on beneficial owners in the world, and if you can't get First World governments to either (a)  tax foreigners on their investments or (b) share the information with developing countries, it won't matter. "

REDOMICILIATION - WAH? 

"But now, according to this index,  it isn't enough for us havens not to tax foreigners. It isn't enough for us to have the world's most aggressive private bankers."

"Now we gotta get down and  compete with Wilmington Delaware on all the 14 technical/legal factors in this stupid index!  You look closely at this fancy index,  which took two years to complete. 

"You find, for example, that  Luxembourg lost first place to Delaware just because Delaware corporate law allows redomiciliation and ours doesn't?  

"What private banking client ever heard of redomiciliation in Delaware? Of redomiciliation anywhere? Tax rates? Sure. Information exchange? Sure. Great private banking services? Absolutely.  Redomiciliation??

Are you shitting me?"

"Any corporate lawyer worth his salt knows you can accomplish the same thing in lots of other ways."But now that CNN is talking about it, you're gonna have every two bit crook in the world running around saying "Redom....redom....Nah nah nah-nah nah...You ain't got it, we're heading to Wilmington!"

Who are they working for, the Delaware Secretary of State?" 

A NEW DAY DAWNS IN WILMINGTON

Meanwhile, in Wilmington, the town's 72,000 residents woke up this morning to discover that the world had literally shifted under their feet.

"Our cover has finally been blown," said one local banker. "I'm not sureMoney-launderer_medium this is a prize we wanted to win. Certainly it comes as a huge surprise to most of our community -- except for the tiny, carefully selected group that have been in on the secret. "

"The VP was not one of them, so we think he's in the clear. Hopefully."

"TJN really knows their stuff. I think they even sent a small squad of undercover investigators here last summer -- a group of Brits, mainly.

 "We immediately suspected them of being up to something, but we didn't know until now just how much sleuthing they were doing. We thought they were here for the nightlife, the boys and girls. It never pays to try and fool those folks."

"After all, after having had a hand in the design of offshore havens in Anguilla, Antigua, Aruba, Bahamas, Barbados, Barbuda, Belize, Bermuda, BVI, the Cayman Islands, the Cook Islands, Cyprus, Gilbraltar,  Guernsey, Hong Kong, the Isle of Man, Malaysia, Mauritius, Nauru, Niue, St. Kitts,  St. Lucia, St. Vincent, Singapore, the Turks and Caicos, and the UAE, they really know a good haven when they see one."

Electiondayinfreetown "Naturally our heart goes out to all the other secretive financial centers in the world. It's never fun to go to bed one night thinking you were number one,  and discover that some tiny town thAlg_bidenat no one has heard of has beaten you to a pulp."

"The downside?  Well, it'll probably be much harder to be a secretive financial  center, obviously.  And now we'll have all those smarmy Euros, plus a lot of Florida cosmetic surgeons  coming here with their bags of cash. Meh!"

"Personally I'm already thinking about moving to Wyoming." 


(c) JSH 2009

November 2, 2009 at 07:24 PM | Permalink | Comments (0)

Monday, October 26, 2009

"WHAT MIDDLE CLASS"?

Global Wealth Inequality (2007-08 Average)
James S. Henry and Brent Blackwelder
(Click chart)

Globaldistoffshore200809 Res Ipsa Loquitur.

October 26, 2009 at 01:44 PM | Permalink | Comments (0)

Friday, October 02, 2009

Pittsburgh's State of Siege

Suppressiing Dissent With High-Priced Cop Toys

James S. Henry
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3953363973_bdf039ae20 Studentinjury2

You didn't hear much about it from any major US news organizations, but there was a very disturbing case of gratuitous police-led violence and intimidation at the G20 Summit in Pittsburgh on September 23rd-25th, 2009. Perhaps the only consolation is that it allowed those of us who were there to get a close look at some of the disturbing "brave new world:  technologies for anti-democratic crowd control. These were initially developed by the US military to fight terrorists on the high seas and abroad, in places like Afghanistan, Somalia, and Iraq, but are now coming home to roost.  Indeed, ironically enough, this is one of the few remaining global growth industries where the US is still the undisputed world leader, as we'll see below.


Police2 One local newspaper account described  the events at the Pittsburgh G20  as a "clash" between the police, protesters, and college students. 

Indeed, a handful of storefronts were reportedly broken on Thursday September 24 by a  few unknown vandals. 

However, based on our own visit to the summit,  interviews with several students and other eye witnesses,  and a careful review of the significant amount of video footage that is available online, the only real "clash"  that occurred in Pittsburgh on September 23-25, 2009, was between lawless policing and the Bill of Rights. 

The most aggressive large-scale policing abuses occurred from 9 pm to 11:30 pm on Friday September 25th near Schenley Park, in the middle of the University of Pittsburgh campus. This was miles away from the downtown area where the G20 had met, and, in any case, it was hours after the G20 had ended.

This particular case of aggressive policing -- "Hammer and Anvil," as the operation was described on police scanners -- was clearly not just a matter of a few "bad apples." 

Rather, it appears to have been part of a willful, highly-organized, one-sided, rather  high-tech experiment or training exercise in very aggressive crowd control by nothing less than a really scary uniformed mob.

New York police sometimes describe their firemen counterparts, tongue in cheek, as "robbers with boots." In this case we have no hesitation at all in describing this uniformed mob in Pittsburgh as "assailants with badges."

Their actions resulted in the unlawful suppression of the civil rights of  hundreds of otherwise-peaceful students who were just "hanging out with their friends on a Friday night in Oakland," or attending a free jazz/blues concert in Schenley Park. 

Essentially they got trapped in a cyclone of conflicting and inconsistent police directives to "leave the area." The result was nearly 200 arrests, gassings, beatings, and the deployment of dogs and rubber bullets against dozens of innocent people.

In addition to the students,  this aggressive policing also assaulted the civil rights of a small number of relatively-peaceful protesters and quite a few ordinary Pittsburgh residents, most of whom were as innocent as bystanders can possibly be these days. 

Why did this occur?  In addition to whatever top-down "experiment" or training action was being conducted there appears to have been an extraordinary amojnt of pent-up police frustration and anger.  For example, one student overheard a policeman piling out of a rented Budget van near Schenley Park around 9:50 PM Friday.

The officer was heard to exclaim, "Time to kick some ass!"

This is disturbing, but perhaps not all that surprising. After all, thousands of police had  basically stood around for days in  riot gear, sweltering in the "Indian Summer" heat, dealing with  the tensions associated with potential terrorist attacks as well as all the hassles of managing large-scale protest marches, even if peaceful.There was also the inevitable tensions of social class and culture among police, Guardsman, and college students.

On the other hand, precisely because such tensions are so predictable, those in direct command or higher political office, and, indeed University officials, should have acted forcefully to corral them.

JOIN THE CLUB


ArrestedstudentposedwithpoliceAll this means that Pittsburgh  has unfortunately now joined the growing list of  cities around the world that have experienced such serious conflicts -- mainly in connection with  economic summits or national political conventions.

The list of summit frays includes this summer's G-8 in Italylast Spring's G20 in London,  the September '08 RNC in Minneapolis,  the '04 RNC in New York City, Miami's Free Trade Area of the Americas Summit (11/03),  Quebec (4/01),  Naples (3/01), Montreal (10/00),  Prague 9/00), Washington D.C. (4/00),  the  November '99 WTO "Battle in Seattle," the J18 in London (6/99), Madrid (10/1994), and Berlin (9/88).

President Obama had  originally selected Pittsburgh for the G20 because he hoped to showcase its recovery  since the 1980s, especially in the last  few years, under a Democratic Mayor, in a Democratic state that he barely carried in the 2008 Presidential contest. 

In seeking to explain such events, therefore, it alway helps to keep a firm eye on the question -- whose interests did really  this serve?

In retrospect, the failure of these leaders to control the police at the G20 has created a serious blemish on the city's reputation for good government. It may have also to some extent undermined Obama’s relations with college students and other activists  who worked so hard for his election in this key state. And it certainly did not help the reputation of the Democratic Party in Pittsburgh or Pensylvania at large.

TIANANMEN FLASHBACKS

To journalists like me who happened to have been in Beijing in May 1989, during the buildup to the June 4th massacre in Tiananmen Square,  Pittsburgh also bears an interesting resemblance. The analogy may sound a little strained, but bear with me.  

(1)  As in Beijing, there was a very large deputized police force from all over the country.  These included  over 1000 police "volunteers" (out of 4000 total police and 2500 National Guardsmen) who were ported in just for the G20.

According to the conventional wisdom, not being from the same community is likely to reduce your inhibitions when it comes to macing and kicking the crap out of unarmed, defenseless young people.

The guest policeman also included several hundred police who were under the command of Miami Police 2076 Chief John F. Timoney,  pioneer of the infamous "Miami model" for suppressing protest that was first deployed at the Miami Free Trade Area of the Americas Conference in November 2003. (Here’s the Miami model checklist, most of which was repeated in Pittsburgh.)

As one writer has observed, Timoney, who  also served as Police Chief in Philadelphia,   "(L)iterally transformed the city into a police state war zone with tanks, blockades and “non-lethal” (but severely damaging) artillery."

It is unclear to what extent he played a similar role behind-the-scenes in Pittsburgh this year, but there certainly is a strong sulfurous odor.     Scaredstudents

(2) As in Beijing, In Pittsburgh there were no identifying badges on officers' uniforms, and they also refused to provide any identifying personal information in response to questions. Several photographers also complained about receiving threats and actual damage to their cameras.

(3) As in Beijing, there was simply no  direct contest between the power of the security forces once they mobilized, and those of the unarmed students.   The only kind of victory that the students could possibly have one in both cases was a moral one -- by essentially sacrificing their bodies and their rights to a tidal wave of repression.

Indeed, the "clash" theory of these events looks even odder once we take into account the  fact that on Friday night in Pittsburgh, for example, unarmed students and protesters faced  hundreds of police in full riot gear,  armed for bear with equipped  muzzled attack dogs, gas, smoke canisters, rubber bullets, bean-bag shotguns, pepper pellets, long-range pepper spray,  at least four UH-60 Black Hawk helicopters (courtesty of New York Governor Patterson and his National Guard's 3-142nd Assault Helicopter Battalion unit),  plus several brand new "acoustic cannons" (see below). There were also probably dozens of undercover agents provocateurs -- at least three of whom were actually "outed" by the students. 

The police were also actively monitoring student communications on web sites like Twitter.

 From this angle, a key difference with Bejing  in 1989 was that the Chinese authorities felt genuinely  threatened by the growth of student power and the democracy movement, and feared being ousted,from power.  and  were therefore able to justify their brutality as part of a zero-sum game. In the case of Pittsburgh, whatever police violence occurred was entirely gratuitous.

Police6 (4) As in Beijing, the Pittsburgh police  really liked deploying loud, repetitive warnings, broadcast from sound-trucks -- like the following,  broadcast  repeatedly last Thursday and Friday: 

"I hereby declare this to be an unlawful assembly. I order all those assembled to immediately disburse. You must leave the immediate vicinity. If you remain in this immediate vicinity, you will be in violation of the Pennsylvania crimes code, no matter what your purpose is. You must leave. If you do not disburse, you may be arrested and/or subject to other police action. Other police action may include actual physical removal, the use of riot control agents, and/or less lethal munitions, which could risk of injury to those who remain."

The fact is that this warning was itself completely unlawful.  Putting on the NYCLU lawyer's hat for a moment, absent a "clear and present danger" to the public peace, these threats violated the First Amendment's explicit recognition of right to "peacefully assemble.” 

In effect, the fact is that the police and National Guard in Pittsburgh  temporarily seized control over public streets, parks, and other public spaces, and exercised it arbitrarily.  By the time the victims of these outrageous civil rights infringements have their day in court, the damage will have been long since done.

(5) As in Beijing, the police and military decided  to launch their biggest raid late at nightafter the summit had ended most major mediaPolice11 had gone home, and the courts had closed for the weekend.

Of course, there were no tanks, no real bullets, and no fatalities in Pittsburgh. Unlike the April '09 G20 and the Genoa G8 protests, no civilians died as a direct result of police actions. But the Pittsburgh students who were on the receiving end of all this unprovoked police brutality -- like one who was shot four times in the back and legs with rubber bullets, and another who was gassed and shot in the face -- may be forgiven for wondering just how close they came to emulating their peers in Europe.

GLOBAL  COP TOYS

Police behavior at all these global summits has evolved over time into a rather high-tech affair that would make Iranian crowd control experts turn  bright green with envy. 

5c6c33b0-9c3f-49e6-8ca5-d5aea8751de5_300 For example,  last week's G20 featured one of the largest US deployments ever against civilian demonstrators of  "LRADS," or acoustic cannons

These sophisticated  "phase array" device s emit a targeted 30-degree beam of 100+decibel  sound that is effective up to several hundred yards, and is potentially very harmful to the human ear. 

LRAD2Manufactured by San Diego's tiny American Technology Corporation (NASDQ: ATCO), the $37,500 so-call "500X" version of the sound cannon that was used in Pittsburg was developed at the behest of the US military, reportedly in response to the USS Cole incident in 2000,  to help the Navy repel hostile forces at sea.

The Pittsburgh units  were apparently  purchased by  local sheriffs' departments across the country with the help of recent grants from the US Department of Homeland Security. Officially the grants have been justtified in the name of improving communications with the public, by permitting clearer voice channels (!), but that's a cover story -- the true purpose is crowd control. ( Roll tape: LRAD-500X_SDCo_Sheriff1).

Other recent ATCO customers include the US Army (for "force protection" in Iraq  and Afghanistan), and  the US Navy and the navies of Japan and Singapore, for communicating with potentially-hostile vessels at sea. 

In 2008 ATCO flogged its wares at the biannual China Police Forum, Asia's largest mart for police security equipment. Obviously China would make a terrific reference customer, since it is one of the global front-runners in the brutal suppression of mass dissent.

ATCO also has a 2007 contract with the US Marine Corps' "Joint Non-Lethal Weapons Program" to develop new, even more powerful weapons, euphemistically branded  "acoustic hailing devices." Saakashvili

Police3 Until recently the most widely-publicized use of LRADS had been against Somali pirates. The devices have also been deployed against "insurgents" by the US military in Fallujah,  by the increasingly-unpopular, anything-but-democratic regime of Mikhail Saakashvili in the Republic of Georgia, and by New York City at the RNC in 2005.

Just two weeks before the Pittsburgh G20,  they turned up  in San Diego, where the Sheriff's Department provoked controversy by stationing them near a Congressional town hall forum -- just in case.

This growing  use of LRADs for domestic crowd control in theSomalis_called_pirates_while_the_West_du US is worrisome, not only because it is a potent anti-civil liberties weapon, because -- just like tasers,  rubber bullets, OC gas, and other so-called "non-lethal but actually just "less lethal" weapons" -- they can cause serious injuries to ears, and perhaps even provoke strokes. 

TECHNOLOGY BLOWBACK

For all the homeland security technology buffs in the audience, you may rest assured that LRADs are hardly the  only Military potential "less-lethal" free speech-and-assembly killers in the pipeline. 

In the last decade the non-lethal weapons arena has exploded, and the US appears to be  far ahead, assisted by ample  R&D grants and purchase contracts from organizations like the Department of Justice's "National Institute of Justice," DHS's multi-billion dollar Homeland Security Grant Program, the U.S Coast Guard, and the Security Advanced Research Projects Agency, and DOD's Joint Non-Lethal Weapons Directorate (JNLWD) Program

The industry has also been aided by key contractors like ATCO, spearheaded by legendary engineer, inventor, and entrepreneur "Woody" Norris;  and Penn State's Advanced Research Lab -- home of the Institute for Emerging Defense Technologies.   NIJ also works closely with police organizations like PERF, and international organizations like the UK's Home Office Scientific Development Branch.

In the first instance, the development of such non-lethal technologies is usually justified by their potential for providing an alternative to heavier weaponry, thereby reducing civilian casualties in combat situations.

The fact that the US military now has at least 750 military bases around the world, and has also recently  been playing an important "military policing" role in countries like Somalia, Haiti, Bosnia, Iraq, and Afghanistan, underscored DOD's rationale for these technologies.

The problem is that just as in the case of the LRAD,  once developed, it is very difficult to wall such technologies out of the US, or restrict them to "pro-civilian/pro-democratic" uses, like providing clearer amplification for outdoor announcements.  

Even aside from their technical merits, the competitive nature of the global law enforcement equipment industry  virtually insures that every tin-horn US sheriff, as well as every Chinese party boss in Urumqi, will soon have access to these very latest tools in the arsenal for suppressing dissent.  

The ultimate irony, of course, is that the first generation of all  these powerful new free speech suppressors have all been developed,  not by authoritarian China, Iran, Burma or North Korea, but by US,  ostensibly still the leader of the "Free World." 

TOYS IN THE PIPELINE

So what's in store for those who are on the front lines of popular dissent?  We assume that some of the juiciest details are classified. But even a cursory review of public sources reveals that the following new crowd-control technologies may soon be coming to an economic summit near you.  (See this recent UK review for more details.). 

"Area Denial Systems." This is a powerful new "directed-energy" device that generates a precise, targeted beam of "millimeter waves," producing an "intolerable heating sensation on an adversary's skin." 

Under development by the US military since at least the late 1980s, this class of "non-lethal" weapons is now close to field deployment. Its key advantage over LRADs is that it has about ten times the range. Raytheon is already supplying its "Silent Guardian" version of the system to the US Army.

The next step required to bring this product to the police market will be to make it smaller and more mobile. According to this week's New Scientist, a new highly-portable, battery-powered version of the system, called the "Thermal Laser," will soon become available -- though it has yet to show that demonstrate conclusively that it is within the bounds of the UN Binding Protocol on Laser Weapons.
Apple-1984

New Riot-Control Chemicals and Delivery Systems.

Subject to the dicey question of whether these new "calmative," drug-like agents are outside the boundaries of the 1993 Chemical Weapons Convention (to which the US and 187 other countries are signatories), these would not irritate their targets, unlike pepper spray or tear gas, but calm them down.

In the words of one DOD/JNLWD research director:  "We need something...like anesthetic agents, that would put everyone to sleep or in a good mood..." Or as the former Marine Corps commander of the program said," "I would like a magic dust that would put everyone in a building to sleep.." Among the delivery mechanisms considered: drinking water, aerosol spray, or rubber bullet. (Apparently the old-fashioned, tried-and-true "light up, inhale, and pass on" method is not a candidate.) The College of Medicine at Penn State's ARL, locGluegunated 135 miles east of Pittsburgh, has been especially active in advocating the advantages of such new chemical weapons.
Unfortunately for it, DOD apparently believes that the CWC and its current regulations prohibit it from funding the developing such magic dust directly, so it is working through DOJ and DOE to do so.

Glue Guns. If all else fails, UK's Home Office reports that another approach to "less- lethal" crowd control weaponry is also making progress -- a gigantic glue gun that sprays at least some 30 feet, bemingling its target audience in one huge adhesive dissident-ball.

Apparently still unsolved is the question of precisely what becomes of all those who are stuck together, or how the police avoid becoming entangled with them. But undoubtedly millions of pounds  are being devoted to solving these issues even as we speak.

SUMMARY

I went to Pittsburgh last week on behalf of  Tax Justice Network, a global NGO that is concerned about the harmful impacts that tax havens and dodgy behavior by First World banks, MNCs, lawyers, and accountants are having, especially on developing countries. I was under no illusion that the reforms we   were rather politely advocating would quickly be adopted, but at least we'd  say our piece,  if anyone cared to listen.

I came away with the depressing sense that the G20 summit, like its many predecessors,  was never intended  to be a listening post for independent, outside opinions. But even worse, it had actually become, in practice, an excuse for the criminalization of dissent in capital cities all over the globe, even in those that are nominally the most free,  by way of the vast new security measures that it requires and subsidizes,and the repressive tactics that it legitimized. 

In this day and age, of course,  we are told that almost any amount of security is too little.  And this heightened sense of insecurity  is certainly not aided by having the world's top 20 leaders regularly shuffling from pitstop to pitstop,  trying to conduct the world’s business from a traveling roadshow.

But I was struck by just how unnecessary,  senseless, and counterproductive almost all of the repressive policing tactics deployed in Pittsburgh really were -- how they ran roughshod over many of our  most precious freedoms, freedoms  that we are supposedly trying to protect.   And to what a degree whatever “terrorists” there are out there have already won, by  succeeding in creating a society that is really is often ruled by fear instead of justice, by force instead of discourse.

Rather than, say,  simply allowing the overwhelmingly non-violent demonstrators and students at that peaceful Friday night blues concert  to have their say, instead some 200 people were arrested and scores were gassed, clubbed, rubber-bulleted, and imprinted with galling memories that will last a lifetime. The City of Pittsburgh and its residents will certainly be fighting criminal cases and civil rights law suits for years to come.  I supposed we are meant to be consoled by the fact that, as the New York Times chose to emphasize this week, things are much more repressive in Guinea.

So perhaps it is time to establish a permanent location for all these global summits. Perhaps one of the Caribbean tax havens, like Antigua or St. Kitts, would do -- journalists always like the sun, and after TJN gets done with them, these havens are going to need to find a new calling anyway!  

***


   









 




October 2, 2009 at 08:47 AM | Permalink | Comments (3)

Wednesday, February 04, 2009

Obama's Pseudo-Stimulus

(This article appeared in The Nation on February 4, 2009 here.)

First of a three-part series on the economic crisis.

You, telling me the things you're gonna do for me.
I ain't blind and I don't like what I think I see.

   --Michael McDonald, The Doobie Brothers,
    "Takin' It To the Streets"

For what is the crime of robbing a bank, compared with the crime of owning one?   --Berthold BrechImagest

Hope-bong-743955 So now that President Obama is in office, his economic team is in place, the largest stimulus package in  US history is nearly complete, real interest rates are negative and the Treasury is about to announce a "big bang" version of TARP that provides even more capital to private banks, we're good, right?

Lo siento, no, as shown by last week's steep stock market slide, even after his program passed the House. For once, the Republican wingnuts may be right. There really is much less to Obama's stimulus than meets the eye.

His new plan for ridding the banks of toxic assets--"cash for trash," as economist Joseph Stiglitz has aptly described it--is also likely to be way too kind to bank executives and shareholders, and he appears to be remarkably ignorant about the indisputable successes that capitalist countries like Norway, Chile, and Japan have had with temporary, partial bank nationalizations that make the taxpayers "owners of last resort."

There has been far too little debt relief provided to the growing number of homeowners facing foreclosure, small business owners facing bankruptcy, and other debtors. This step is urgently needed to stem the free fall in housing prices and the rising tide of layoffs among small businesses, where most of the country's jobs are.

  There are rumors afloat that Obama's team may soon announce something like this, but the numbers that we've heard from key Congressmen--$50 billion to $100 billion--are far too modest. We need to pressure the president for a "People's TARP," no less generous than the ones that the banks are receiving.

Finally, while US policymakers have been throwing gargantuan sums of borrowed money at the wall, mollycoddling Wall Street, and dithering on debt relief for the rest of us, the global crisis has deepened. All across Europe and Asia--from Athens, Chongqging, London, Moscow, Paris and Prague, to Rekyavik, Riga, Seoul, Sofia and Vilnius--people have become completely fed up with their governments and are taking it to the streets.

So here's a message for our new president, from someone who worked hard for his election long before it was fashionable: if you dally and temporize, the very same thing could easily happe180px-Combat_Bootstrapn here--perhaps just in the form of a massive tax strike, in solidarity with Messrs. Geithner and Daschle.

While Americans are usually much less militant and certainly less well organized than our comrades around the world, the serious deficiencies in the first drafts that we've seen of Obama's stimulus and financial plans really do need to be corrected in short order.

We also need to see much tougher action with the financial services industry, which bears a disproportionate share of the responsibility for this nightmare. At a minimum, this means a return to a more orthodox and tightly regulated banking system, a renewed assault on tax havens and the anarchy of the world's financial order, strict limits on executive pay plans that reward unbalanced risk-taking, and a 1930s Pecora Commission-style investigation of the industry's misbehavior--complete with subpoena power.

In the words of FDR's first inaugural address in March 1933--which, by the way, was harder-hitting and much more memorable than Obama's--it is time for the "money changers" to be forced to flee from "their high seats in the temple of our civilization" once and for all. The only thing we have to fear is Obama's temerity.

THE CONTEXT

By now everyone has had just about enough bad economic news, but just to set the stage for the discussion, it is important to review the basics. 

It's is already a cliché to describe this crisis as "the deepest global downturn since the Great Depression." Actually in many ways it threatens to become even worse--faster, sharper and far more global. Here at home there are already more than 11.1 million unemployed, close to the 11.4 million peak that was reached in 1933, when 20 percent of the population still lived on farms and, apart from the Dust Bowl and bank repossesions, could at least count on having a place to grow their own food. In 2008 alone there were already 2.3 million residential foreclosures filed and 861,664 completed in the US, compared with the 600,000 total that was recorded from 1930 to 33. Obviously, relative to the Image5_016size and wealth of the economy, conditions were worse back then, partly because the social welfare system provided less help and more bank depositors got wiped out. But in absolute terms the sheer number of our fellow citizens who are already experiencing serious hardship is really disturbing. And we are only a few months into this.

Since October, growth rates have plummeted and unemployment has soared worldwide. Just last week, the International Monetary Fund cut its latest forecast for world growth in 2009 to .5 percent, and for the United States to negative 1.6 percent, as fourth-quarter US growth plunged by over 5 percent, apart from inventory accumulation. Other credible observers are far more gloomy.

Each day brings news of massive layoffs, corporate losses, foreclosures, the bankruptcies of well-known brands like Waterford Wedgwood and Circuit City, continuing house price declines, bank failures, abandoned projects, soaring government deficits and bailouts and widening spreads on loans to some First World countries, not to mention financial frauds, robberies, suicides and other indexes of deep financial distress.

Seuss-bootstrapsThis is the world's first post-globalization debt crisis, and the worldwide effects are catastrophic. From Labuan, Jakarta and Guangdong to Chicago and Detroit, London and Moscow, the ranks of the unemployed are expected to swell by 51 million by mid-2009, and of those living in dire poverty by at least 176 million. Beyond impersonal statistics, there are also innumerable tragic stories of personal hardship, involving people and families that have suddenly lost jobs, careers, businesses, homes, life savings, healthcare, scholarships and, most important, hope for the future.

WHAT ARE WE STIMULATING?

  Given this situation, the US economy's influence on the global situation, and the importance of resetting expectations, the stakes for Obama's very first economic initiatives are enormous. Unfortunately, the first drafts already adopted by the House and under debate in the Senate are disappointing.

Surely, at these prices we deserved a much more carefully targeted anti-Depression program. Instead, over 63 percent of Obama's $825 billion-plus in new spending and tax cuts won't even be felt for at least a year, and more than $100 billion won't show up until 2012 or beyond. Even if the plan works as advertised, it would only reduce unemployment by less than one percentage point a year, relative to the more than 9 percent baseline projection we are facing.

But this plan will almost certainly not work as advertised. It has been weighed down with $275 billion in tax cuts that would have very modest short-term multipliers. At least 21 percent to 25 percent of Obama's tax credits would go to recipients in the top 20 percent, with incomes above $113,000. These folks are more likely to save the money than those with lower incomes--and right how what we need is spending, not saving.

Evidently these tax cuts were included out of some broad-minded attempt to reach out to Republicans and Blue Dog Democrats. One might have thought they were already sated by a decade of record tax cuts for upper-income groups, starting with Bill Clinton's sharp reduction of capital gains taxes in 1997--even larger, by the way, than George W. Bush's. But Obama's diplomatic gesture yielded not a single Republican vote in the House last week, and also failed to win over eleven Democrats. Welcome back to Earth, Mr. President.

Even Obama's $550 billion of extra spending will not be sufficiently stimulative. First, around $200 billion will be channeled through state aid. On average, this will have an even lower multiplier than tax cuts, because of bureaucratic delays and the fact that our political system always channels a disproportionate share of aid to less-needy states. At one end of the spectrum, six states with unemployment rates above 9 percent now account for about one-fourth of the nation's unemployment--2.8 millioAlan_Greenspan_Hotnessn people. Under Obama's program these states would get less than 20 percent of all this state-channeled aid, an average of $8,623 per jobless person. But ten mainly Western states with unemployment rates below 5 percent will get nearly $20,000 per unemployed person.

Second, despite the sales rhetoric about promoting recovery and saving jobs, these were clearly not the plan's only--or even its most important--objectives. If they had been, there'd be far more up-front spending on direct job creation and programs with higher multipliers and faster paybacks, like unemployment benefits and populist debt relief. There'd also be more top-down control.

Louboutin_noeudette_gisa_sandal_2 Instead what we have is a dog's breakfast of pet projects, spread across 104 federal agencies, from the Administration on Aging and the Bureau of Indian Affairs to Fish and Wildlife and the National Endowment for the Arts. Dozens of projects were evidently extracted from various liberal wish lists, dusted off and dressed up in the latest "recovery-jobs" couture. Almost anything can qualify so long as it carries a big enough price tag: digital TV conversion ($640 million, on top of the $1.3 billion already spent for this worthy cause), port security ($600 million), research on biomass and geothermal ($1.2 billion), constructing the "smart grid" ($4.4 billion), climate science ($390 million), fixing Amtrak ($800 million), developing satellites ($460 million), restoring wildlife habitats ($400 million), preserving forest health ($850 million), special education ($13.3 billion), immunization ($954 million), STD prevention ($350 million), water projects ($13.7 billion), preparing for a flu pandemic ($620 million), grants to local police ($4 billion), advanced batteries ($2 billion), wireless broadband ($6 billion), a new data center for Social Security ($400 million)...

The overall impression is a parody of bloviated corporate liberalism. It is as if every deep-sea creature in the ocean suddenly came to the surface at the same time. There they all are, writhing and waiting for someone to make sense of the overall game plan.

Road and bridge repair be damned! Why worry about being unemployed when there's so much else to do? Soon we'll all be firing up the clean-coal stoves and sewage-fired generators, recharging our federally subsidized Volts and the underground battery farms and heading on over to new neighborhood health centers, where we'll download some interactive broadband training on aging and avoiding STDs. Then perhaps we'll plant a tree or apply for grants to "weatherize" or found a "rural enterprise." By then it will be time to pick up Little Dorothy at Early Head Start, get her vaccinated, say hey to the new federally funded "local" police chief, artists and high school teachers, then kick back in front of the converter box with a long cool draught of federal H2O and a generous helping of nutritious cuisine from the "local" Emergency Food store--making sure that the CO2 that we generate is properly sequestered and not bubbling up through the neighbor's brand new geothermal system.

By the laws of probability, of course, at least a few of these schemes may actually turn out to have some merit. But it is clear that Washington's finest lobbyists and law firms--second only to Wall Street in terms of sheer venality--have already been hard at work to insure that no key client has been left behind: electric utilities, the coal industry, telecoms, agribusiness, the IT industry, the teachers unions, the Asphalt Pavement Alliance, the Portland Cement Association ("we pour strength into our recovery"), commercial real estate developers and even venture capitalists, are all lined up to profit from Obama's extraordinary spending spree.

I'm beginning to sound like a Republican wingnut. But really, at lightning speed, we've gone from booting single mothers off the dole in the interests of "personal responsibility" (saving a grand total of--what, Bill Clinton?--maybe $5 billion per year at most, while finding jobs for only half of the 60 percent who got the boot) to having almost every single key interest group in the country lining up with a tin cup, right behind the banks.

More important, from a global perspective, Obama's program takes the eye of the ball. What the world economy desperately needs most right now from the US economy--remember, we're the ones who originated this debacle--is not "reinvention," or some hastily-assembled collection of alternative energy demonstration projects, but a good, old-fashioned healthy US market recovery.

Once that is in place, there will be plenty of time and money to save the planet. But unless that is in place, there will be no serious worldwide attention paid to climate change, global warming or alternative energy, nor will there be necessary funds and economic incentives that are required to really fix the the problem. At a time when tens of millions are having a hard time feeding their families, these are luxury goods. I defer to no one in my hardcore environmentalism--but Obama's plan has had a little bit too much input from Al Gore's "green limousine" set, and is putting the green cart before the debt-ridden horse

In fact, this program somehow manages to be neither reinvention nor recovery. Nor is it very thoughtful. Rather, it is a Jackson Pollack approach to social and economic policy. That kind of action painting may have been OK for hip Hamptons artists way back in the 1950s, but in these times it is dangerously blithe. It also risks discrediting everything that progressives should stand for, if we want to see government taken seriously again as an agent of social change. If we continue with this scattershot, favorite-liberal-interest-group approach, creditors like China may soon begin to wonder whether we've become just another Banana Republic--not the chain store, but the political pathology--or an aging superpower that has an acute case of ADHD.

Of course it is easy to criticize. The real test is to come up with a superior, politically feasible alternative. Later on in this series, I'll suggest one--a combination of high-multiplier spending and serious popular debt relief that would command more support, provide a much greater direct stimulus, stem the decline in housing prices and small business closings and placate foreign creditors who are worried about our sanity. It might even permit Obama to finally win a few Republican votes for his program.

February 4, 2009 at 12:33 PM | Permalink | Comments (0) | TrackBack

Saturday, August 19, 2006

BEYOND DEBT RELIEF
The Next Stage In the Fight for Global Social Justice
James S. Henry

Images12“Third World debt relief”  has become a little like Boston’s “Big Dig,” the Middle East “peace process,” and the “ultimate cure for cancer” -- long anticipated, endlessly discussed, and perpetually, it seems, just around the corner.Live8angie2

At the end of the day, after decades of effort, the fact is that very little Third World debt relief has actually been achieved.

There is also mounting evidence that even the paltry amount of debt relief that has been achieved has not done very much good. 

This is partly  because debt relief tends t19991101bonoo reinforce questionable policies and bad habits that get developing countries into hock in the first place.  It is also because debt relief has reinforced the prerogatives of IMF/World Bank econo-crats, whose policies have often been incredibly detrimental. 

Finally, debt relief is also often a very poor substitute for other forms of aid and development finance. 

Furthermore, most of the costs of debt relief have been born by ordinary First and Third World taxpayers, while the global banks and Third World elites that have profited enormously from all the lousy projects, capital flight, and corruption that were financed by the debt have escaped scot-free.

This is not to suggest that the debt relief campaign has been utterly pointless.

It has provided a bully pulpit for scores of entertainers, politicians, economists, religious leaders, and NGOs. It  has occasionally reminded us of the persistent problems of global poverty and inequality.

I180pxgeldofpopet has also provided an excuse for some pretty good free concerts.

From the standpoint of actually providing enough increased aid to improve living conditions in debt-ridden countries, however, debt relief has been a disappointment. In the immortal words of Bono himself, "We still haven't found what we're looking for."

Fortunately, there is an alternative strategy that would have much greater impact. But this strategy would require a more combative stance on the part of anti-debt activists, and it would almost certainly not generate nearly as many convivial press conferences or photo opportunities.

“Fact Check, Please”

Surprisingly, there have been few efforts to take stock of debt relief efforts, to see whether this game has really been worth the candle.

It is high time that we took a closer look. After all, it is now more than 30 years since Zaire’s bilateral debts were rescheduled by the Paris Club in 1976, 27 years since UNCTAD’s $6 billion write-off for 45 developing countries in 1977-79, 23 years since the climax of the so-called “Third World debt crisis” in 1983,  and more than a decade since the inauguration of the IMF/World Bank’s debt relief program for “Heavily-Indebted Poor Countries” (“HIPCs”) in 1996. 

On the debt relief campaign side, it is two decades since the formation of the UK Debt Crisis Network, eight years since the 70,000-strong “Drop the Debt” demos at G-8’s May 1998 meetings in Birmingham, and over a year since the “Live-8/End Poverty Now” fiesta at Gleneagles.

Along the way, there have been Bradley Plans, Mitterand Plans, Lawson Plans, Mizakawa Plans, Sachs Plans, Evian Plans, and more than 200 debt rescheduling by the Paris Club on increasingly generous terms -- Toronto terms (’88-‘91), London (‘91-‘94) terms, Naples terms (’95-96), Lyon terms (’96-99), and Cologne terms (’99-).

Most recently, in the wake of “Live 8,” the G-8, the World Bank, and the IMF launched their “Multilateral Debt Relief Initiative” (“MDRI”) with a great deal of fanfare, declaring that it will be worth at least “$40 to $50 billion” to the two score  countries that are eligible. 












Realities

Despite all this activity, the fact is that developing country debt is now greater than ever before, and is still increasing in real terms. For most countries,  the debt burden – as measured by  the ratio of debt service to national income – is even higher than in the early 1980s, at the peak of the so-called “Third World debt crisis.” 

By our estimates,  as of 2006, the nominal stock of all developing country foreign debt outstanding was $3.24 trillion. This debt generated about $550 billion of debt service payment each year for First World  banks, bondholders, and multilateral institutions.

That includes $41 billion a year that was paid by the world’s 60  poorest countries, whose per capita incomes are all below $825 a year. Even after twenty-five years of “debt relief,” this annual bill for debt service still almost entirely offsets the $40-$45 billion of foreign aid that these countries receive each year. Their debt burden also remains higher, relative to national income, than it was the early 1980s.   

As discussed below, most heavy debtors also have very little to show for all this debt.  So these payments are, in effect,  a “shark fee” paid to First World creditors  for funds that have long since vanished into the ether – and a not a few offshore private bank accounts.

Present Value

Since most existing Third World debt was contracted at higher interest rates than now prevail, the “present value” of the debt -- a better measure of its true economic cost -- is actually even higher: nearly $3.7 trillion. 

China and India alone now account for about $.5 trillion of this developing country “PV debt.”  Both countries  were relatively careful about foreign borrowing, and they also largely ignored IMF/World Bank policy advice, so their debt burdens are small, relative to national income. But in absolute terms, their debts are large, simply because they are so huge.  They can easily afford it --  thanks in part to their non-neoliberal economic strategies, both countries now have high-growth economies and large stockpiles of reserves.

Of the other $3.2 trillion of “PV debt,” however, $2.6 trillion is owed by 26 low-income and 49 middle-income countries that pursued “high debt” growth strategies. 

These heavily-indebted countries have about 1.6 billion residents – over a quarter of the world’s population, a share that has been steadily increasing.

After decades of debt relief, their “PV debt/ national income ratios” are all in the relatively-high 60-90 percent range. Debt service consumes 4 to 9 percent of national income each year,  more than they spend on education or health, and far more than they receive in foreign aid.   
III. Where’s the “Relief”?

These numbers beg a question -- what have all the professional debt relievers at the World Bank, the IMF, and the Paris Club,  not to mention debt relief activists, been up to all these years?  How much debt relief have they actually secured, who received it, and how helpful has it been?

To begin with, it is not easy to measure “debt relief.” The definitions of debt relief  employed by debtor countries, commercial creditors, bilateral creditors, and multilateral organizations like the IMF/World Bank, the OECD, the Paris Club, and the Bank for International Settlements vary significantly, and the reported data is subject to huge discrepancies.  This helps to account for the fact that only a handful of systematic attempts to measure debt relief have ever been attempted.   

As usual, however, some things can be said. This article provides the most comprehensive estimate of debt relief to date, based on a careful review of these data sources and our own independent analysis. 





Overall Relief

Our first key finding is that the actual amount of debt relief provided to all developing countries to date has been pretty modest.

From 1982 through 2005, in comparable $2006 NPV terms, the total value of all low- and middle-income developing country debt  that was “relieved” -- rescheduled, written down, or cancelled –- was only $310 billion -- just 7.8 percent of all the pre-relief debt outstanding.   

Low-Income Relief

The relief ratio for the world’s 60 poorest countries  has been higher – about 28 percent of their pre-relief debt levels. All told, in PV terms, these countries have received  about $161 billion of debt relief – more than half of all the debt relief to date.  This is now saving the recipient countries about $15.3 billion per year of debt service.

This  is certainly nothing to sneeze at.  But it is a far cry from the extra $50 billion to $100 billion per year of cash aid that most leading development experts believe will be needed if developing countries  are to attain the (rather modest) “Millennium Development Goals” that were set back in 2000 by the UN, with a target date of 2015.   

It is also important to remember that most low-income countries have been waiting a very long time for even this modicum of debt relief, most of did not start arriving until the late 1990s. By then, several countries that had not been “highly-indebted” to begin with had become so, just by dint of the delay.

Debt Relief Sources – Low-Income Countries

Our analysis shows that 30 percent of  this low-income debt relief has come from the World Bank/ IMF’s HIPC and MDRI programs. Another 30 percent has come from Russia alone, which forgave a substantial load of bilateral debt that were owed to it by Nicaragua, Vietnam, and Yemen, when Russia joined the Paris Club in 1997. In February 2006, Russia also wrote off another $5+ billion debt that was  owed by Afghanistan.

Finally, another $65 billion of debt relief for low-income countries  was provided by the Paris Club, an association of First World export credit agencies (EGCs) like the US EXIM Bank and the UK’s EGCD.  These agencies have a strong “client base” among the ranks of First World exporters, contractors, and engineering firms. All these private entities received significant business from the first round of Third World lending, in the form of orders for large projects.  They are now eager to have the EGCs forgive still more loans,  at taxpayer expense, in order  to clear the way for another round of project finance.

On the other hand, leading global banks like Citigroup, UBS, JPMorganChase, Goldman Sachs,  Deutsche Bank, BNP, and ABN-Amro, and Barclays, have provided a grand total of just $1.5 billion of low-income debt relief,  mostly by way of the HIPC program.

In the 1970s and early 1980s, of course,  these giant international banks led the way in syndicating loans for developing countries. At the same time, many of them also became pioneers in “private banking,” the dubious business of helping Third (and First) World elites park their capital offshore and onshore, as free of taxes and regulations as humanly possible. 

Since the early 1990s, apart from China and India, these private banks have largely handed over the task of providing new loans to low-income countries to multilateral institutions like the IMF, the World Bank, and the IDB, as well as to the EGCs.  Ironically, this has permitted them to focus on more lucrative Third World markets, including low-debt/ high-growth markets like China and India.


For middle-income countries, while the foreign loan business was booming in the 1970s and early 1980s,  these banks became deeply involved in stashing abroad the proceeds of the banks’ own country loan syndicates.   For low-income countries, private bankers  were more often called upon to recycle the proceeds of  loans from the development banks, the IMF, and the EGCs, as well as the proceeds of various government-owned asset rip-offs. 

Overall, therefore,  from the standpoint of debt relief, these First World financial giants have provided very little debt relief. This is despite the fact that they have not only reaped enormous profits from Third World lending, but also continue to reap enormous profits from Third World private banking. In the wake of the debt crisis, they have also been able to scoop up undervalued financial assets – banks, pension funds, and insurance companies – in countries like Mexico, the Philippines, and Brazil. In good times and in bad, in other words, these private institutions have always found ways to prosper, help their clients  launder money, evade taxes, and conceal ill-gotten gains, and they have never been reluctant to profit from social catastrophe.

We will return to these financial giants below, because the history of their involvement in this story suggests one possible antidote for our “debt relief” blues.

B. Middle-Income Relief

So-called “middle-income” countries like Brazil and Mexico have received $149 billion of debt relief –- just 4.3 percent of their $3.4 trillion of pre-relief debt outstanding.  As discussed below, most of this was obtained by the early 1990s, by way of Paris Club restructuring and  the Brady Plan.

This reflected the high priority given to these large, lucrative, highly-indebted markets in the 1980s by First World banks and governments, mainly because such a large share of their loan portfolios was tied up in them. 

That, indeed, was the true meaning of the “Third World debt crisis,” so far as First World bankers, central bankers, officials and, indeed, most First World journalists was concerned.  It was viewed primarily as a ‘crisis’  for the banks and their shareholders. Over time, as they managed to reduce their exposure, the “crisis” disappeared from the headlines  – except for the countries involved. 

Debt Relief Sources – Middle-Income Countries

Overall, private banks provided $75 billion of debt relief to middle-income countries, about half the total. Most of this was achieved through debt swaps and buy-backs. The Paris Club added another $28 billion, mainly by way of traditional bilateral debt rescheduling.

The US Treasury added $47 billion, by way of the Baker Plan (1985-89) and the Brady Plan (1989-95.)  On its own,  the Baker Plan actually increased  middle-income country debt by $77 billion, consuming $45 billion of US taxpayer subsidies in the process.

From 1995 to 2002, the US Treasury, the World Bank, and the IMF also provided short-term financial relief to several large middle-income countries like Argentina, Brazil, Mexico, and Indonesia. In theory, these were pure reschedulings, with all loans paid back with interest,  and no net impact on “PV debt” levels.

In practice, several of these bailouts were completely mismanaged. Indonesia, Mexico, and Argentina were all permitted to use their emergency dollar loans to bail out dozens of domestic banks and companies -- which just happened to be connected to influential members of the local elite, who were also “not unknown” to leading private bankers and US Treasury Secretaries.

So a large share of these bailout loans was wasted on outright graft. On the other hand, countries were still expected to service the bailout loans,  often at very high interest rates. Given their reluctance to raise taxes, especially on capital,  most countries repaid the bailout loans by boosting domestic debt – in effect, by printing money. For example, Mexico’s bailout in the mid-1990s ended up costing the country’s taxpayers more than $70 billion, while Indonesia’s bailouts ended up costing the country at least $50 billion.  In effect,  the  bailouts actually ended up increasing overall country debt levels,  just as the Baker Plan had done. Our estimates of debt relief have generously omitted the impact of these bailouts, which would make the total amount of debt relief even smaller.

Overall, during the 1970s and 1980s, middle-income countries like Argentina, Brazil, Indonesia, Iraq, Mexico, the Philippines, Russia, Turkey, and Venezuela became the world’s largest debtors. Combined with the fact that they have also received so little debt relief since the early 1990s, this helps us to understand why their debt service costs soared to all-time highs since 2000, in real terms, and relative to national income.  Recent debt relief programs have focused almost entirely on low-income countries, ignoring the situation of heavily-indebted middle-income countries.  This is another strategic choice that debt relievers may want to reconsider.

The Political Economy of “Debt Relief”

So what’s gone wrong with debt relief? Why has so little been achieved after all these years? Whose interests have been served, and whose have been ignored or gored? Is there a different strategy that could have  been more effective?

A. The Roots of the “Debt” Crisis

To understand this disappointing debt relief track record, it will be helpful to review the origins of the so-called “Third World debt crisis.”  This continuing crisis had its roots in the fact that from the early 1970s to 2003, developing countries absorbed  more than $6.8 trillion  of foreign loans, aid, and investment, much more foreign capital than they had ever before received.

A handful of developing countries managed this enormous capital influx more or less successfully -- for example, Asian countries like Korea, China, India, Korea, Malaysia, and Vietnam. For a variety of historical reasons, they were able to resist the influence of First World development banks and private banks. Today they are the real winners in the globalization sweepstakes, ranking among the world’s fastest growing economies  and the First World’s most important suppliers, customers, and potential competitors. 

Our concern here is not with this handful of winners, but with the great majority of the world’s 150 developing countries.  In general, compared with the winners,  they have been much more open to unrestricted foreign capital and trade since the 1970s, as well as policy advice from the “BWIs” (the Bretton Woods institutions – the World Bank and the IMF).  For many countries this close encounter with global capitalism has proved to be troublesome – indeed, for many,  disastrous.   

In effect, these countries have conducted a very risky policy experiment for several decades.  By now the results are clear. Across country income levels, these countries have  paid a very heavy price for unfettered access and dependence on foreign banks. Indeed, we are hard-pressed to find a single exception to the miserable track record of this “wide open, debt-heavy, bank-promoted” growth strategy.

Lousy Regimes and Unproductive Debts

Overall, we estimate that more than a trillion dollars – at least 25 to 35 percent  -- of the $3.7 trillion foreign debt that compiled by low- and middle-income countries from 1970 to 2004  either disappeared into poorly-planned, corruption-ridden "development" projects, or was simply stolen outright. 
For several of the largest debtors, like the Philippines, Indonesia, Mexico, Brazil, Venezuela, Argentina, and Nigeria, the share of the debt that was wasted was even higher. Indeed, one of the most important patterns underlying the  “debt crisis” was that borrowing, wasteful projects, capital flight, and corruption were all concentrated in a comparative handful of countries.   As we’ll argue, this is crucial fact for those who seek to revitalize the debt relief movement to understand,  because it implies that the interests at stake are far greater than those that have come to the surface in the struggle for “low income” debt relief. 
Low-Income Heavy Borrowers

In the case of the 48 low-income countries that eventually qualified for debt relief from the BWIs  under the HIPC and MDRI programs, a similar pattern of concentration applies. In the early 1980s,  the real value of these countries’ debts increased by 70 percent in just six years.  By the time the World Bank got around to launching HIPC in 1996, their debts had increased another 7-10 percent.  Just 11 of these low-income countries –- including Bolivia, Congo Republic, Cote d’Ivoire, DR Congo, Ethiopia, Ghana, Mozambique, Myanmar, Nicaragua, Sudan, and Zambia -- accounted for 68 percent of  this group’s debt increase from 1980 to 1986.

All these top low-income borrowers were not only desperately poor to begin with,  but they were also either “weak open states” run by kleptocratic dictators, or  were caught up in bloody civil wars –  in most cases, both at once.   Sometimes the causality flowed in both directions -- excess debt could exacerbate political instability. But the primary relationship was the unsavory combination of weak states, corrupt leaders, wide open capital markets, and symbiotic relationships with “easy money” and seductive bankers.

Extending this analysis to the key middle-income debtors noted  above, we find similar long-run patterns of mis-government, weak states, and wide-open banking.

All this suggests that the heaviest debtors got into troubles for reasons that only were only  superficially related to  the usual villains in the orthodox neoliberal account of debt crises -- “exogenous shocks,” “policy errors,“ “liquidity crises,” and – when pushed to acknowledge the existence of corruption and capital flight – a “lack of transparency in the management of natural resources.”  Those countries that are deepest in debt and most in need of relief today include countries that have long been among the most consistently mis-governed, wide-open, and “mis-banked.” While natural resource wealth like minerals and oil have indeed often turned out to contribute to economic mismanagement,  their presence is not a sufficient condition for such mismanagement – the decisive question is the relationship between foreign and domestic elites.   

From the standpoint of debt relief, this pattern presents a dilemma –Without insisting on deep political reforms,  simply providing countries with more relief alone might accomplish little – they are likely to dig themselves right back into a hole. After all, corrupt dictatorships like the Central African Republic have been more or less continuously in arrears on their foreign debts since at least 1971!

The Debt/Flight Cycle

Servicing these huge unproductive debts took a large bite out of these countries’ export earnings and government revenues,  draining funds that were badly needed for health, education, and other forms of  public investment, and helping to produce crisis after  financial crisis. Growth, investment, and employment were throttled by the continuing need – enforced by First World creditors --  to generate enough foreign exchange to service the loans.

Meanwhile, even as all this foreign capital was rushing in, an unprecedented quantity of flight capital – including a substantial portion of the loan proceeds – headed for the exits.

Of course Third World capital flight is an old story, associated with long-standing factors like individual country political risk, unstable currencies, bank secrecy, the rise of “offshore havens,”  and the absence of global income tax enforcement. 

But the dramatic increase in poorly-managed financial inflows to the developing world in the 1970s and early 1980s – especially foreign loans and aid – boosted these capital outflows by an order of magnitude. They basically overwhelmed existing political institutions in many countries, producing the largest tidal wave of flight capital in history, and fundamentally revolutionizing offshore private banking markets. 

We simply cannot account for this sharp increase in flight capital unless we take into accounts its close relationship to all this “lousy lending and loose aid.” 

Poorly-controlled lending and foreign aid contributed to the rise of global flight capital in the first place.  From one standpoint it did so in a purely mathematical sense, by providing the foreign exchange that was needed to finance capital flight. But that doesn’t explain why these new “loanable funds” didn’t become a net addition to investment  in the borrowers’ economies. The loans also stimulated additional capital flight, for several reasons: (1) they destabilized the economies of many newly-indebted countries, providing more capital than they could productively absorb in a short period of time; (2) the inflows provided sources of government revenue that were not directly responsible to taxpayers. This generated enormous opportunities for corruption and waste, partly by way of poorly-planned projects with weak financial controls, and partly by providing Finance Ministers, central bankers, and other insiders with dollars they could use to  speculate against their own currencies; (3) the debt flows laid the foundations for a new, highly-efficient global haven network, which made it possible to spirit funds offshore and stash them in anonymous, tax-evading investments.  It is no coincidence that this network was dominated by the very same global banks that led the way in Third World syndicated lending. 

All this combined to encourage Third World officials and wealthy elites to move a significant share of their private wealth offshore, even as their own governments were borrowing more heavily abroad than ever before.   

Part of the resulting flight wave took the form of large stocks of strong-currency “mattress money” that was hoarded by residents of Third World countries -- especially $100 bills, Swiss francs, Deutschmarks, British pounds, and after 2002,  €100, €200, and €500 notes. By 2006, for example, the total stock of US currency outstanding was $912 billion. At least two-thirds of it was held offshore, especially in developing countries with a history of devaluations.   

An even larger amount  of capital flight was accounted by  private “elite” funds that were spirited to offshore banking havens  – often, it turns out,  with the clandestine assistance of the very same First World banks, law firms, and accounting firms.

The outflows that resulted from this “debt-flight” cycle were massive -- by my estimates, an average of $160 billion per year (in real $2000),  each year, on average,  from 1977 to 2003.   

Furthermore, a great deal of  this flight capital was permitted to accumulate offshore in tax-free investments,  especially bank deposits and government bonds by nonresidents, which were specifically exempted from taxation by First World countries. By the early 1990s, he total stock of untaxed Third World private flight wealth soon came to exceed the stock of all Third World foreign debt. 

Indeed, for the largest “debtors,” like Venezuela, Nigeria, Argentina, and Mexico – the same countries that dominated borrowing --  the value of all the foreign flight wealth owned by their elites is almost certainly now worth several times the value of their outstanding  foreign debts.   

For so-called “debtor” countries, therefore,  the real problem was never simply  a “debt” problem; it was  an “asset” problem – a problem of collecting taxes, controlling corruption, managing state-owned resources, and recovering foreign loot.  All this, in turn, was based on the fact that a huge share of private wealth had simply flown the coop, under the “watchful eyes” of the BWIs, other multilateral institutions, Wall Street, and the City of London.

Meanwhile, these countries’ public sectors – and ultimately ordinary taxpayers – were stuck with having to service all these unproductive debts, while their legal systems, banking systems, and capital markets also ended up riddled with corruption.

Conventional economists have not ignored these phenomena completely. But they have tended to compartmentalize them into “institutional” problems like “corruption” and “transparency,” and have treated them as “endogenous” to particular countries.  In this approach, the individual country is the appropriate unit of analysis. In fact, however, such local problems were greatly exacerbated by a global problem – the structure of the transnational system for financing development, on the one hand, and for stashing vast quantities of untaxed private capital  -- from whatever source derived --  on the other.

Human Capital Flight

This underground river of financial flight was also accompanied by an increased  outflow of “human capital” as well,  as large parts of the developing world became jobless and unlivable, and a significant share of its precious skilled labor decamped for growth poles like Silicon Valley and other booming First World labor markets. My own estimate for the net economic value of this displaced Third World “human flight” wealth, as of 2006,  is  $2.5 to $3.0 trillion. 

This offshore human capital does send home a stream of remittance income that is now estimated at $100 billion- $200 billion a year. But much of this is wasted on high transfer costs and other misspending. Clearly, a country that chooses to depend heavily on labor exports – as the Philippines, Mexico, Haiti, and Ecuador have done, is a poor substitute for generating jobs and incomes at home.   

Summary – Roots of the Crisis

Overall, the impact of the patterns just described on Third World incomes and welfare has been devastating.  Except for the handful of globalization winners that managed to avoid the “debt trap” and neoliberal nostrums, real incomes in the Third World basically stagnated or declined from 1980 to 2005.   While growth has revived since then, especially among commodity  exporters, large parts of the developing world are still struggling to regain their pre-1980 levels of consumption, social spending, and domestic tranquility. 

In addition to prolonged stagnation, many countries have also experienced sharp increases in unemployment, poverty, inequality,  environmental degradation, insecurity,  crime, violence, and political instability, all of which were exacerbated by the debt-flight crisis.

Of course, instability was sometimes beneficial – in Argentina, Bolivia, Brazil, Chile, Guatemala, Indonesia, Kenya, Mexico,  the Philippines, and South Africa, financial crises helped to undermine autocratic regimes. But we should be able to democratize without so much hardship.

All these Third World troubles provided a striking contrast to the First World’s relative prosperity during this period. To be sure,  there were brief hiccups at the hands of oil price spikes in 1973 and 1979, plus recessions of 1982-83, 1990-91, and 2001-03. Japan stagnated in the 1990s, and France and Germany also experienced prolonged doldrums. But these were the exceptions. Overall, a large share of the world’s poor basically treaded water, while most First World residents paddled by.  (continued on page 27)


B. “Can’t Get No Relief!”

Whatever one thinks of neoliberal policies, therefore,  it is very hard to make this track record look like an achievement. This perspective should help us to view  “debt relief” in a different light.

Given this history,  we might well have expected that at least by now,  First World governments, the BWIs, and even the global private banking industry would have acknowledged their partial  responsibility, pitched in, and offered to share a large portion  of the bill.

Obviously this hasn’t happened. As the sidebar discusses, this is not because of any principled opposition to “debt relief” per se. Indeed, debt relief turns out to be a venerable capitalist institution, at least where the debtors in question have clout. 

Nor was it possible for the countries themselves to agree on a unilateral moratorium on debt service.  More generally, while a handful of individual countries -- Argentina in 2001-2, Russia after World War I, and Cuba in the early 1960s and 1980s –- have declared debt moratoria on their own,  Third World debtors as a whole have never been able to marshal the collective will needed to take this step. 

Given this, the only alternative has been to rely on voluntary actions by First World creditors, as accelerated by appeals to conscience. We’ve seen the rather modest results that this approach has achieved.

Several key factors are at work here:

•    Sticks. Most developing countries believe they are too dependent on the  trade finance and aid to risk outright defiance of international creditors.

•    Carrots. Many members of the Third World elite have been “bought in.” One common reward is the opportunity to participate in international ventures and receive foreign loans and investments.  Beyond that, there is a whole range of other incentives, including  offshore accounts, insider profits, and outright bribes and kickbacks. There are also more subtle forms of influence  -- Dow Jones board seats (Mexico’s Salinas), positions at prestigious universities, banks and BWIs (Mexico’s Zedillo at Yale, Argentina’s Cavallo at NYU, (Bolivia’s ex-Finance Minister Juan Cariaga) and any number of other former officials at the World Bank/ IFC) participation in other exclusive organizations (for example, the Council of the Americas, the Council on Foreign Relations, or the Inter-American Dialogue), and even more subtle forms of ideological influence. These intra-developing world networks have been relatively weak.

•    The Banking Cartel. Compared with the debtor countries,  the global financial services industry is very well organized. Country specialists at leading banks and BWIs have dealt with the same debt problems over and over again, while on the country side, dozens of debt negotiators  have come and gone.  Specialists like Citigroup’s William Rhodes and Chase’s Francis Mason were adept at isolating more militant countries and exploiting inter-country rivalries. Boilerplate language in standard country loan and bond contracts – for example, jurisdiction and cross-default clauses – also helped to perpetuate the “creditor cartel.” 

•    Declining Political Competition.  After 1990, the Soviet Empire ceased to be a serious competitor for Third World affections. Interestingly, from that point on, the real value of total First World aid and aid per capita to developing countries fell until late 1990s.  Meanwhile, First World banks completed write-downs of Third World loans, and  the BWIs and other official institutions displaced them as the principle source of new low-income loans.  With credit risk effectively transferred to the public sector, and the largest debtors focused on the neoliberal reforms that the BWIs were demanding in exchange for debt relief, debtor country support for joint relief atrophied.



With country debtors so fragmented, “small-scale” debt relief became just another instrument of neoliberal reform, while the cause of “large-scale” debt relief was relegated to the NGO community, without much developing country involvement. The resulting “movement” was a loosely-run coalition of First World NGOs and well-meaning celebrities. Lacking a strong political base, the movement mounted a series of intermittent media campaigns. It also assumed the supplicant position of appealing to the “better selves” of  politicians like Tony Blair and George Bush, central bankers, and BWI bureaucrats – a hard-nosed, flea-bitten bunch if ever there was one.

The Best-Laid Plans…     

One factor that certainly has not played a role in the failure to achieve substantial debt relief is a shortage of clever proposals from the First World policy establishment.

Indeed, ever since Third World borrowing took off in the 1970s, there has been a plethora of schemes for “international credit commissions,” “debt facilities,” debt buybacks,  debt-equity swaps, and “exit bonds.” In the last decade, as frustrations with HIPC grew, there have also been proposals for a new “sovereign debt restructuring agency,” global bankruptcy courts, and modifications in the boilerplate contracts noted above.

These proposals provided grist for a steady stream of journal articles and conferences, but very few made much practical difference. The overall pattern was  one of cautious incrementalism -- a  series of modest proposals, each one just slightly more ambitious than its predecessor, and all doomed to be ineffectual – but with the  saving grace that at least no powerful financial interests would be offended.

A. The Baker Plan

The majority of today’s Third World population  was not even born in October 1985 when Reagan’s second Treasury Secretary, James A. Baker III, announced his “Baker Plan” for debt relief. This acknowledged the fact that the market-based debt rescheduling approach to the debt crisis pursued by commercial banks since 1982 wasn’t working.  Indeed, traditional rescheduling was aggravating the problem, because banks had ceased to provide new loans, while continuing to role over back-due interest at higher and higher interest rates.

The Baker Plan hoped to change this by offering a combination of new loans funded by US taxpayers and the MFIs, plus some private bank loans, in exchange for “market reforms” in the recipient countries. It was motivated by the conventional notion that the 1980s debt crisis was basically a short-term “liquidity” problem, not a reflection of deeper structural interests. Supposedly a fresh round of (government-subsidized) new loans, conditioned on reforms, would allow debtor countries to “grow their way” out of the “temporary” crisis.

By 1989, the Baker had produced a grand total of $32 billion of new loans,   mainly to 15 middle-income countries like Mexico and Brazil. This was achieved at a cost of  $45 billion to First World taxpayers, by way of the US Treasury. By comparison, the gross external debt of all developing countries at the time was about $1 trillion, so the amount of relief provided was relatively small. Indeed, to the extent that the Plan added $77 billion to Third World debt,   it actually constituted negative debt relief.

Finally, of course, both Plans omitted almost all low-income countries completely, partly because First World exposure to them was limited,  and partly because at that point, the notion of writing down “development loans” was still  anathema to the World Bank and the IMF.

B. “Market-Based” Debt Relief

While observers were waiting for the Baker Plan to work in the late 1980s,  private banks  were also busy retiring to manage some $26 billion of debt on their own, by way of so-called “market-based” methods, including buy-backs and debt swaps. Some of these techniques had harmful consequences for the countries involved. They also tended to reinforce the de facto “takeover” of the Third World debt problem by the BWIs and other official lenders. With our support, however, they succeeded in offsetting part of the Baker Plans’ harmful effect on debt levels, however. 
C. The Brady Plan

When these two approaches failed to make much of a dent in the problem, James Baker’s successor, former Wall Street investment banker Nick Brady came up with a more aggressive debt swap plan in March 1989. The key motivator was not just generosity. Brazil’s February 1987 attempted moratorium on interest payments had set a dangerous precedent,  and Mexico’s rigged July 1988 Presidential transition, combined with its huge debt overhang and declining oil prices, suggested that a more widespread default might occur unless more debt relief were forthcoming. 

Under Brady’s plan, first implemented by Mexico in July 1989, private banks agreed to swap their country loans at 30-35 percent discounts for a menu of new country bonds, whose interest and principle were securitized by bonds issued by US Treasury, the World Bank, the IMF, and Japan’s Export-Import Bank – backed up, in turn, by reserves from the debtor countries. 

By the end of the Brady Plan in 1993, this “semi-voluntary” incentives scheme had provided another relatively small dose of relief, mainly to about 16 Latin American, middle-income countries like Argentina, Brazil, and Mexico, plus US favorites like Poland, the Philippines, and Jordan.  With the help of taxpayer subsidies, it also succeeded in virtually wiping out the debts owed by several small developing countries – Guyana, Mozambique, Niger, and Uganda – to private banks. By 1994, just prior to Mexico’s “Tequila Crisis,” the Brady Plan had yielded about $124 billion (in $2006 NPV terms) of debt reduction – at a cost of $66 billion in taxpayer subsidies.  To date, it remains the largest – and most costly -- initiative in the entire debt relief arena.

Some have argued that Brady Plan also had a beneficial indirect effect on the total amount of new loans and investments received by debtor countries in 1989-93, by way of its impact on equity markets and direct investment.  However, these gains were more than offset by increased capital flight, leaving a net benefit to developing countries that was almost certainly lower than the initial First World tax subsidies.

Furthermore, any such gains were largely wiped out by the subsequent financial crises in Mexico, Argentina, Brazil, Nigeria, Peru, and the Philippines in 1995-99. These were partly due to the brief surge of undisciplined borrowing, facilitated by the Brady Plan   Indeed, while the early 1990s produced a reduction in debt service relative to exports and national income for the 16 countries, by the end of 1990s, most of the “Brady Bunch” had seen their debt burdens return to pre-Plan levels. 

Overall, therefore, this provides a graphic illustration of the point noted earlier: without basic institutional reform – not just “market” reforms within one country, but more general reforms of the global financial system – debt relief in one period may just lead to increased borrowing and another crisis in the next.

D. “Traditional” Bilateral Relief – Low Income Countries

As noted, these early debt relief initiatives were focused mainly on the world’s largest debtors, although a handful of low-income countries took advantage of them. By the late 1980s, there was a growing recognition of the trend described earlier – that the debts of low-income countries were exploding. 

These countries were also paying astronomical debt service bills, despite the fact that they had all qualified for “concessional” finance. By 1986, 19 out of the (future) 38 HIPC low-income countries were devoting at least 5 percent of national income to servicing their foreign debts, and many countries were paying much more. On average, debt service consumed over a third of their export revenues, compared with less than 10 percent  a decade earlier.  And the “present value” of their low-income country debt had continued to rise throughout the Baker/Brady Plan period. By 1992, the debt was three times the l980 level, and well above the 1986 level.  Finally, from 1985 on, private bank lending to low-countries had  only  been exceeded by lending by development banks and export credit agencies.

One of the first to recognize the need for a closer focus on low-income debt was another UK Chancellor, Nigel Lawson. In 1987 he proposed that the Paris Club refocus its negotiations with debtor countries on trying to reduce  their “debt overhang” – the present value of their expected future debt service payments.  This  was a striking contrast to conventional debt relief, where the goal of rescheduling had always been to  avoid write-downs and preserve the loans’ present value by stretching out repayment. Once again,  that had assumed that the key debt problem was one of “illiquidity” and that the nasty random shocks would soon reverse themselves. As Lawson and other observers had come to recognize, in the absence of serious intervention, the resulting “debt overhang” might just become permanent.

Lawson’s proposal launched the Paris Club on a prolonged series of debt restructurings. In the next decade,  it conducted 90 bilateral restructurings with 73 individual countries, on increasingly-generous term sheets.  By 1998, this effort – supplemented by assistance for debt swaps from the World Bank/IDA’s Debt Facility --  had produced another $95 billion of debt relief. 
E. HIPC

In September 1996, the BWIs established the “HIPC Initiative,” their first comprehensive debt relief program ever, targeted at “heavily-indebted developing countries.” They didn’t take this initiative unilaterally – they were responding to numerous complaints from NGOs and the debtor countries, who said that existing  relief programs were not doing enough for the world’s poorest, most insolvent countries, and that it was  also high time for multilateral lenders like the IMF and the World Bank to finally share the costs.

Initially the program was supposed to include the 41 low-income countries that had been included on the World Bank’s first list of “HIPCs” in 1994. That list was supposed to have been determined by objective criteria, including real income levels and the “sustainability” of projected debt service levels,  relative to projected exports. But such criteria are of course anything but objective, especially where acute foreign policy interests are concerned. The original list of countries  would have included all those with per capita incomes less than $695 in 1993, plus (a) PV debt to income ratios of at least 80 percent,  or (b) debt service to export ratios of at least 220 percent. Those criteria would have admitted such major debtors as Angola, Nigeria, Kenya, Vietnam and Yemen.  On the other hand,  it would have also omitted future HIPCs like Malawi, Guyana,  and Gambia. As of 1996, the countries on this original HIPC list accounted for $244 billion of debt and 672 million people – about 63 percent of all low-income country debt and more than a third of all low-income country residents.

Qualifications

For a variety of reasons – including shifting admissions criteria, the desire of the BWIs to contain costs, and sheer geopolitics – this initial list was soon altered.  Seven countries, including several large low-income debtors like Kenya, Nigeria, and Angola, were eliminated, while nine much smaller countries suddenly qualified for relief.   When the dust settled, there were still precisely 41 countries on the HIPC debt relief list. However, compared with the original list, as of 1996, they now only accounted for 39 percent of all low-income country debt –- indeed, only 6 percent of all developing country debt --  and just 23 percent of all low-income country residents.

This downsizing was partly just due to BWI self-interest. The World Bank is a self-perpetuating bureaucracy, funded by its own long-term bond sales, as well as by First World contributions.  It is always very concerned about securing its own cash flow and debt rating.

In principle, contributions from the BWI’s  First World members could always make up any shortfalls.  In practice, however, the World Bank liked to avoid having to solicit contributions from the US Congress – it always meant difficult hearings where the Bank had to explain where Togo or the Comoros was, and why it deserved assistance.

Initially the BWIs had proposed to fund HIPC debt relief by liquidating part of the IMF’s huge 3.22 metric tons of gold reserves, whose market value had increased to several times book value.  Indeed, in 1999-2000, the IMF had conducted a round-trip sale and buyback of 12.9 million ounces with Brazil and Mexico, booking the profit to fund HIPC’s initial costs.  Here, however, another powerful set of interests intruded. The BWIs’ proposal for a much larger gold sale were successfully scuttled by the World Gold Council’s lobby, whose membership includes 23 leading global gold mining companies, including the US’ Newmont Mining, South Africa’s AngloGold, and Canada’s Barrick Gold Corp. 

So debt relief turned out to be  something that  the BWIs  had to fund on a “pay as you go” basis,  through bond sales and periodic contributions from its First World  members. The larger the amount of debt relief, the smaller the World Bank’s own loan portfolio, and the more it feared that its own bond rating and financial independence might be jeopardized. So it had an innate bias in favor of providing less debt relief.

As for the precise list of qualifying countries, there were many anomalies. For example, as of the mid-1990s, Angola, Kenya, Nigeria, and Yemen all had higher debt burdens and lower per capita incomes than many of the countries on the final HIPC list, but they were excluded. 

On the other hand, at the behest of France, HIPC analysts also designed specific rules so that the Ivory Coast would be included, despite the fact that it had a higher per capita income and lower debt burdens than many other countries on the list. Guyana,  a bauxite-rich former British colony in northeast South America with a population of just 750,000 and a  real per capita income of $3600 – clearly a “middle income” country, if anyone cared to object – was also admitted.

Meanwhile, HIPC excluded 29 other mainly middle-income countries that had been classified by the World Bank itself as “severely indebted,” including “dirty debt” leaders like Argentina, Ecuador, Indonesia, Pakistan, and the Philippines. In many cases their debt burdens were much heavier than those that were admitted to the HIPC club.   (continued below)

All these exclusions were important, because it turned out that while the “HIPC 38” did reduce their debt service payments by about $2 billion a year from 1996 to 2003, debt service payments by non-HIPC low income countries actually increased by several times this figure.   

Overall,  the BWI’s filters with respect to “sustainable debt” and income were inconsistently applied. They were intended to contain the size of debt relief and focus it on tiny, more malleable countries.

The Long March

Debt critics were naturally a little disappointed at HIPC’s modest scope, relative to the size of all outstanding Third World debt. But at least they thought they could count on the BWIs to provide speedy debt relief to those countries on the HIPC list.

Unfortunately, even for those countries, the journey usually proved to be a very long march. The World Bank and the IMF decided to impose   a  long, drawn-out, tortuous process before countries actually got any relief, conditioning it on a menu of all the BWIs favorite neoliberal reforms, including privatization, tariff cuts, and balanced budgets.

This was especially hard to account, in light of the fact that the HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1100, and average life expectancies of just 49 years. So offering this crowd debt relief was unlikely to set a dangerous “moral hazard” precedent.
Nevertheless, under the original 1996 “HIPC I” scheme, countries were supposed to spend three years implementing such reforms under the WB/IMF’s watchful eye before they reached a “decision point.” Then a debt relief package would be assembled and a modest amount of debt service relief would be approved.
Countries were then supposed to continue their good behavior for another 3 years before reaching the “completion point,” at which point they’d finally see a serious reduction in debt service.
Even then, they wouldn’t receive a total debt write-off, but only a partial subsidy, reducing debt service to a level that the WB/IMF considered “sustainable,” relative to projected exports. 
Along the way, countries were also expected to draw up an IMF/World Bank-approved “Poverty Reduction Strategy Paper,” negotiate a “Poverty Reduction and Growth Facility,” and engage the IMF and the World Bank in regular, rather intrusive “Staff Monitoring Programs.”
To some extent, all this policy paternalism was justified by the fact that, as we’ve seen, many of these countries were unstable, poorly-governed, war-torn places. This is the old “more sand, same rat-holes” aid dilemma noted earlier – those countries most in need of assistance are also often precisely the ones with the most limited ability to use it wisely. Furthermore, under the influence of neoliberal policies, state institutions in many of these countries have become even weaker.

However, from the standpoint of delivering debt relief in a timely fashion,  the BWI’s strictures clearly went beyond the pal. Many BWI technocrats  adopted a kind of righteous, almost creditor-like stance toward the countries – perhaps because, after all,  the BWIs are substantial creditors.  They may also prefer gradual debt relief because this preserves their control. In any case, all of this is a poor substitute for the more constructive  neutral role that, say,  a “trustee in bankruptcy” would typically play in bankruptcy proceedings.

Combined with country backwardness, this  creditor-cum-neoliberal-reformer mentality had  predictable results. Indeed, if HIPC’s  true goal was to avoid giving meaningful debt relief, it almost succeeded!  By 2000, just six countries – Bolivia, Burkina Faso, Guyana, Mali, Mozambique, and Uganda - had managed to reach “completion,” and zero debt relief had been dispensed. Eventually, HIPC I afforded a grand total of $3.7 billion  of debt relief  to these six countries.    Even this amount was not distributed immediately in most cases, but was spread out over decades. For example, Uganda’s debt service relief from the World Bank was stretched out over 23 years, Mozambique’s over 31 years,  and Guyana will still be collecting $1 million per year of debt relief in 2050!

Would that First World  creditors and the BWIs had been anywhere near as circumspect about making loans to developing countries as they have been  about administering debt relief!













HIPC II

In June 1999,  following the massive “Drop the Debt” rallies at the May 1998 G-8 meeting in Birmingham, the WB/IMF launched “HIPC II,”  supposedly a faster, more generous version of HIPC I. But even this version soon proved to be embarrassingly slow. By 2006, of the 38 countries on the initial HIPC list way back in 1996, just 18 had reached  the “completion point.” Eleven others had reached their “decision points,” after a median wait of 49 months, but five of these were reporting “slow progress.”  Of the other original nine, just one was both ready to qualify and interested in participating. 

To fill out the ranks, in 2006 the WB/IMF identified six more low-income countries that might still be able to qualify for HIPC relief before the curtains finally descend in December 2006. However, only two of these were both ready and willing to try for this deadline. 

All told, compared with the original target group, at the end, HIPC was down to providing debt relief  to countries that accounted for just 18 percent of outstanding low-income debt and 13 percent of the world’s low income population.

The HIPC Sweepstakes

Those countries that managed to navigate all the HIPC hurdles did finally receive some debt relief – all told, for HIPC I and HIPC II,  a grand total reduction in debt service of $832 million per year for 2001-2006, compared with debt payments in 1998-99.  This sum was divided among for all 27 countries that had reached their completion or decision points. 

Some countries did much better than others.  For example, middle-income Guyana progressed quickly through the program, qualifying for debt relief to the tune of $937 per capita from both HIPCs  – compared with the “HIPC 38’s” average of just $75 per capita.  Indeed, Guyana became something of a pro at debt relief – by 2006, it had achieved a record total of $2971 for each of its citizens,  from all debt relief programs to date. 

Sao Tome, Nicaragua, Congo Republic, Guinea-Bissau, Zambia, Bolivia, DR Congo, Mozambique, Mauritania, Sierra Leone, Ghana, and Burundi also did relatively well on a per capita basis, all realizing more than $100 of HIPC relief per citizen. 

In terms of the share of all HIPC relief received, the clear winner was DR Congo, Mobutu’s old stomping ground,  which commanded an astounding 18.2 percent of al HIPC relief, and, indeed, nearly 8 percent of all First World debt relief received by low-income countries.

In these terms, other winners included Nicaragua (9.5% of HIPC, 10.8% of all relief), Zambia (7.2%/4.9%), Ethiopia (5.7%/5.5%), Ghana (6.2%/2.6%), Tanzania (5.8%/4.8%), Bolivia (3.7%/4.2%) and Mozambique (5.8%/6.7%), which single-handedly captured 55 percent of HIPC I’s $3.7 billion benefit.

Compared with our original list of “war-torn debt-heavy dictatorships,”  there is a huge overlap: The top ten low-income borrowers  in 1980-86 accounted for more than half of both HIPC relief and all First World debt relief distributed from 1988 through 2006.  On the other hand, many other indebted low-income countries received much less debt relief, both in per capita and absolute terms. 

This per country/ per capita debt relief analysis, presented here for the first time,  underscores several of the most serious problems with using debt relief as a substitute for development aid.

Of course it is difficult to insure that reductions in debt service (or the increased borrowing that occur in the aftermath of debt reductions)  will be applied to worthy causes. (“The Control Problem.”)

Even apart from that, as noted in the accompanying tables,  the amount of relief available varies wildly across countries, according to factors that may have very little to do with development needs. (“The Correlation Problem.”)

The BWIs in charge of the HIPC program tried to tackle the “Control Problem” by insisting on country “poverty reduction” programs and policy reforms, and by monitoring government spending,  and so forth.  Whether or not that has worked is a matter of dispute – there is a strong case to be made that most of this conditionality was counterproductive. Clearly it succeeded in slowing down the distribution of relief.

But there is nothing that HIPC could  do about the “Correlation” problem – the lack of proportionality between debt relief and development needs. Relying on debt relief, in other words,  inevitably means that some of the worst-governed, most  profligate countries in the world may reap the greatest rewards.

Overall HIPC Results

As noted, HIPC does appear to have reduced foreign debt service burdens somewhat, especially for the 18 countries that managed to complete the program – although domestic debt service may be another story.

However, 11 of the original 38 HIPC countries still had higher debt service/income ratios in 2004 than in 1996. Indeed,  to this day, poor Burundi is still laboring under a PV debt/income ratio of 91 percent!

Furthermore, debt service ratios had already declined for 25 out of the 38 countries from 1986 to 1996, prior to HIPC’s existence. Debt service burdens also declined for many other low-income countries that didn’t enroll in HIPC, as well as for the 9 “pre-decision point” countries that have so far received no relief from it.  So it is not easy to call the HIPC program a “success,” even for those countries that have been able to reach the finish line. 

What is also indisputable is that the total amount of debt relief achieved by HIPC to date has been very modest. While conventional press accounts often refer to HIPC as providing at least “$50 to $60  billion” of debt relief to developing countries, the more accurate estimate is at most $41.3 billion by 2006. This is less than 10 percent of all low-income country debt outstanding. 

Of this, $7.6 billion was awarded to the original six countries in the HIPC I program, and another $33.7 billion is expected to be received by the other 23 countries that have at least reached  the “decision point.”  The potential cost of providing relief to the remaining 9 to 15 countries that might still qualify for HIPC is estimated at $21 billion, but very little of this will ever be forthcoming.  Indeed, the timing  and levels of relief are still highly uncertain for half of the 11 “decision point” countries.

Once again, all these figures refer to the present values of expected future debt service relief, not to current cash transfers. As of 2006, only a third of HIPC I’s relief and less than 20 percent of HIPC II’s had actually been “banked” – an average of less than $1 billion of cash savings per year, to be divided up among all these very poor countries.

The High Costs of HIPC Relief   

Even these modest savings were not cost-free to the countries involved. To comply with the BWI’s demands  for HIPC relief, developing countries were required to the usual panoply of neoliberal reforms, many of which had perverse political and economic side effects. There are many examples that illustrate this point.   

F. MDRI

Our final stop on the debt relief train is the “Multilateral Debt Relief Initiative” (“MDRI”), announced with so much fanfare at the July 2005 G-8 meetings.  On closer inspection, this debt relief plan was even less impressive and generous than HIPC.

By 2004,  many debtor countries  and First World NGOs had finally had it with HIPC.  However, MDRI only really came together because the UK Chancellor, Gordon Brown, saw a chance to earn some political capital, make up for the UK’s lagging foreign aid contributions, and  heal some of the bad feelings that had been generated by the UK’s support for the Iraq War, all at very little cost.

With HIPC already set to expire,  and with so much low-income debt still outstanding, Brown decided to work closely – and indeed help to fund -- the Live 8/”End Poverty Now” alliance’s “free” concerts.  The collaboration with the NGOs was facilitated by the fact that one of Brown’s senior advisors, a former UBS banker, was an Oxfam board member, while Tony Blair’s senior advisor on debt policy was Oxfam’s former Policy Director. 

These connections no doubt smoothed the reception for Brown’s proposals in the NGO world,  but they ultimately failed to achieve very much incremental debt  relief for poor countries.

To begin with, the actual cash value of the debt relief provided by MDRI is  far less than the "$40 to $50 billion" that was widely touted in the press. 

The face value of the IMF, World Bank, and African Development bank debts of the low-income countries that may be eligible  for cancellation adds up to about $38.2 billion. 

But MDRI’s debt relief, like HIPC’s will not distributed in one fell swoop.  Given the concessional interest rates that already applied to most of the loans in question, and that fact that many of them were already in arrears, the actual debt service savings that these countries may realize from the program is just $.95 billion per year, on average, distributed over the next 37 years, to be divided among 42 countries.

This may appear to be a modest sum to First World residents who are  used to seeing much larger sums spent on farm subsidies, submarines, highway programs, and invasions of distant countries.  But it is undeniably a large share of the $2.9 billion that the top 19 likely qualifiers for the program spend each year on education, or the $2.4 billion they spend on public health.

Still,  the  G-8 debt cancellation gets us just 6 percent of the way home toward, say, the Blair/Brown Commission for Africa’s proposed $25-$30 billion per year of increased aid for low-income countries in Africa.

It also compares rather unfavorably with the $1.3  billion per week that the Iraq War was costing in 2005, and the $2 billion a week that it is costing now.   

Furthermore, to qualify for this MDRI relief, countries will still have to go through many of the same hoops that HIPC put them through. At least 8 countries among the 42 – including large debtors like Somalia and the Sudan --  may never meet these qualifications.

Even for the top 19 countries that are likely to qualify, MDRI will still leaves them with $23.5 billion of higher-priced bilateral government debt and private debt that are outside the program, with an annual debt service bill of $800 million a year. And here again, of course, the point bears repeating – the countries have virtually nothing to show for all these debts.

Finally, even assuming - optimistically - that MDRI’s  42 potential beneficiaries would otherwise continue to pay the $.7 billion to $1.3 billion of debt service owed to the BWIs and the AfDB over the next 37 years without arrearages or defaults, the "net present value" of this debt cancellation is not $40 billion, but at most $15 billion. In fact, given the  likelihood that some debtors may not qualify for the program, the PV of expected MDRI debt relief is really closer to $10 billion.

In fact, from the standpoint of World Bank and African Development Bank bondholders,  they may well prefer to have their member countries to take them out of these "dog countries."

Indeed, that might even be a very profitable deal for the World Bank,  since its cost of funds  is not the 3-3.5 percent paid – if and when  they pay -- by these low-income debtors, but at least 4.7 to 5 percent. Assuming that the members of the World Bank’s Executive Board will honor their pledges, exchanging a stream of highly-uncertain debt service payments from these benighted countries for $10 billion  to $15 billion of cold hard cash may look like a pretty good deal for the Bank.  Certainly it is better than having to play bill collector to all those nasty hell-holes.

And I bet you thought “debt relief” was all about generosity!

VI.  Summary – A Modest Proposal

So what are the key lessons from this saga for would-be debt relievers? And where should debt campaigners focus their energies now?

1. Beyond the BWIs.

As we’ve argued, it is no accident that twenty-five years after the debt crisis, some of the poorest countries on the planet, as well as many middle-income countries, continue to be struggling with their foreign debts. 

If we accept the basic premise of debt relief – that debtors who have become hopelessly in debt  deserve a chance to wipe the slate clean, once and for all,  then our conventional approach to debt relief, as administered by the IMF, World Bank,  the US Treasury, and the Paris Club, is a failure.  Not only has it failed to deliver the goods, but it has also had very high operating costs, in term of  delays, administration, and excessive conditionality.

Evidently it was not enough that so much of loans that these countries borrowed was wasted, stolen and laundered right under the noses of our leading banks. Debtor countries were then expected to jump through elaborate BWI policy hoops, testing out all their favorite policy prescriptions in order  to avoid having to continue paying for it for the rest of their lives.

In particular,  the huge World Bank and IMF bureaucracies  have proved to be far better at rationing  debt relief than at  making sure that impoverished countries don’t get up to their eyeballs in debt in the first place.

Indeed, Russia alone – which is itself still heavily-indebted  --  has been far more generous and expeditious  with developing countries than the BWIs.
If we are really serious about providing substantial amounts of debt relief, we will to find or design new institutions to administer debt relief. 

2. Beyond Narrow Debt Relief.

It not really surprising that First World governments and the BWIs tend to side with international creditors -- as, indeed, governments have often sided with landlords, enclosers, gamekeepers, slave-owners, and other propertied interests.

What is surprising is that, despite the very high stakes for developing countries, and the availability of so much potential mass support for a fairer solution, the debt relief campaign has been so ineffective.

This is no doubt partly just because it is difficult to sustain a global not-for-profit campaign across multiple activists and NGOs. It is also because the campaign faces powerful entrenched interests.

But another difficulty may be of our own making. Compared with the dire needs of many countries and the sheer volume of “dubious debt” and capital flight, we believe that the debt relief movements’ demands have simply been far too meek.

To make a real difference, the debt relief movement needs to get much tougher on two  closely-related  but necessarily more contentious aspects of the “debt” problem:

(1)  Dubious debt, contracted by non-democratic or dishonest governments and wasted on overpriced projects, shady bank bailouts, cut-rate privatizations, capital flight, and corruption. As noted earlier, my own rough estimate is that such debt may account for at least a third of the $3.7 trillion of developing country debt outstanding. 

(2) The huge stock of anonymous, untaxed  Third World flight wealth that now sits offshore – much of it originally financed by dubious loans, as well as by resource diversions,  privatization rip-offs, and other financial chicanery. 

Most of this wealth – estimated at  $4 trillion to $5 trillion for the Third World alone – has been invested in First World assets, where it generates tax-free returns for its owners and handsome fees for  the global private banking industry.

Obviously the sums at stake here are much larger the debt relief campaign has tacked so far. The issue also affects middle-income debtor countries as well as low-income ones. Finally, it also begs the question of the on-going responsibility of leading private global financial institutions, law firms, and accounting firms that built the pipelines for Third World flight capital, and continue to service it.  Since the 1980s, several of these institutions have become many times larger and more influential than the World Bank or the IMF.

If the debt relief movement had the will to tackle such problems, there is much that could be done.

For example, we could imagine:

(1) Systematic debt audits, and a global asset recovery institution that helped developing countries recovery stolen assets;

(2) Revitalization of the “odious debt” doctrine,  which specifies that debts contracted by dictatorships and/ or spent on non-public purposes or personal enrichment are unenforceable.

(3) Promotion of  international tax cooperation and information exchange between First and Third World tax authorities – including as one early step the creation of a “Tax Department” at the World Bank, which doesn’t even have one!

(4) Codes of conduct for transnational banks, law firms, accounting firms, and corporations, prohibiting their active facilitation of dubious lending, money laundering, and  tax evasion.

(5) The enactment of a uniform, minimum, multilateral  withholding tax on offshore “anonymous” capital – the proceeds of could be used to fund development relief. 

Many other  ideas along these lines are conceivable. Obviously a great deal of organization and education across multiple NGOs would be needed to tackle even one of them. But the most important requirement is nerve – the willingness to move beyond the debt movement’s all-too-narrow focus, to tackle the real issues in this arena.

3.  The Limits of Debt Relief

Earlier in this essay, we  expressed serious doubts about the "more sand,  same  rat-holes" approach to wiping out debts, increasing aid and "ending poverty."

As we argued, most of the prime candidates for debt relief would also have great difficulty in managing it. This skeptical viewpoint has recently received even more support -- there are disturbing reports that the corrupt leaders of poorly-governed, resource-rich countries like DR Congo and Malawi  are squandering the debt relief that they’ve recently received on fresh rounds of dubious borrowing and arms purchases.

The fundamental problem, glossed over by many debt movement campaigners, is that combating poverty is not just a question of malaria nets, vaccines,  and drinking water. Ultimately it requires deep-rooted structural change, including popular mobilization, and  the redistribution of social assets like political power, land, education, and technology. These are concepts that  BWI technocrats, let alone film stars and rock stars, may never understand.

On the other hand, it remains the case that poor people in debt-ridden countries are in dire need of almost any short-term relief whatsoever.  In that spirit, it would be wonderful to see the debt movement,  the G-8, and the BWIs join hands just one more time and finally deliver on their long-standing rhetorical commitment to deliver substantial debt relief. 

As we’ve just seen, the 1.6 billion people who reside in heavily-indebted developing countries are still waiting.

***
(c) SubmergingMarkets, 2006

August 19, 2006 at 01:23 AM | Permalink | Comments (0) | TrackBack

Sunday, February 26, 2006

ANOTHER CONJUGAL DICTATORSHIP?
Twenty Years Later, Near-Martial Law Returns to the Philippines
James S. Henry

PhpypzktpAt first glance, this week's news from the Philippines is even more dismal than usual. But the deepening crisis also discloses some interesting possibilities for fundamental change.

News_1The bad news has arrived in bulk. First, the search for more than 1050 victims of the recent Leyte mudslide has been called off without any progress.

Second,  President Gloria Macapagal-Arroyo has seen fit to declare a state of emergency -- 20 years to the day after "People's Power"/ EDSA I brought an end to the Marcos dictatorship on February 25, 1986.

Officially, Madame Arroyo attributed her "Proclamation 1017" -- an open-ended declaration of a "national emergency" -- to the supposedly imminent but actually rather vague threat of a coup,  purportedly organized by a cabal of dissident officers, politicians and professors -- in alliance, she claimed, with the Communist Party of the Philippines (!).

Fig_38_president_corazon_aquino_2Technically, this was not a full-fledged declaration of martial law.  But for those on the ground the distinction is theoretical.  At Arroyo's direction, the police moved quickly  to round up (without warrants) at least three Congressmen, a university professor, 25 protestors at an anti-Arroyo rally, and a half dozen senior miltary and police officers -- including a West Point graduate and and a former Chief of the National Police. All permits for political rallies were cancelled. A leading opposition newspaper was raided. 

Fig_31_ferdinand_and_imelda_1Meanwhile, Arroyo produced no hard evidence that any members of this disparate group had done anything more serious than join former Presidents Corazon Aquino and Fidel Ramos  in calling for her to resign.

Even if there had been a coup attempt in the offing, that could have been dealt with under existing laws -- as Aquino did with at least seven coup attempts during her years in office, without requiring emergency powers.

FULL CIRCLE?

In this respect, to long-time Philippines observers,  Arroyo's declaration is reminiscent of President Ferdinand Marcos' 1972 "Proclamation 1081." That was also justified by a fairy tale  -- a bogus assassination attempt against Defense Minister Juan Enrile that, years later, turned out to have been a theatrical production by his own security guards.

Fig_39_people_power_manila_1986_1It is likely that Arroyo's move is a desperate attempt to head off growing popular demands for her ouster.

Left unchecked, those demands might well have culminated in a huge "People Power" rally this weekend, demanding her resignation.

This popular movement is not based on a disgruntled cabal, much less on some left- or right-wing plot.

Rather, it is based on widespread,  rational disgust with President Arroyo's dismal performance since taking office in 2001.

  • Despite rising levels of economic growth -- 3-6 percent per year since 2002 -- the Philippines "oligarchy" remains firmly in control, less than 10 percent of the population perceives that its economic situation has improved under Arroyo, and  more than 71 percent of the population now considers itself poor.
  • In yet another striking parallel to the "conjugal dictatorship" of Ferdinand and Imelda, Arroyo's own husband Mike has been forced to live in exile because of his involvement in several gambling and corruption scandals.
  • Arroyo is widely believed to have stolen more than 1 million votes in the May 2004 Presidential election, a charge that was only strenghtened by the embarrassing "Gloriagate" tapes. Her position has only been preserved by virtue of her party's dominance in Congress, and her control over the 15-member Philippines Supreme Court, which she has managed to pack with 9 appointments.

Fig_314_joseph_estradaEven before the state of emergency, President Arroyo's popularity rating had fallen below that of any of the last four Presidents -- including Joseph Estrada, who was ousted by popular demand at EDSA II in January 2001. Indeed, by January 2006, "net satifaction" with Arroyo (% satisfied minus % dissatisfied)  had reached -30%, a record low. And well over half of the population simply want her to resign -- ala Marcos and Estrada.

US INTERVENTION?

In this situation, one might have hoped that the Bush II Administration would have followed in the footseps of Reagan/ Bush I, circa 1985-86,  and strongly "suggested" to Madame Arroyo that she "do the right thing" and board a plane to Hawaii -- not just for the sake of democracy, but also for the sake of the US' long-term relationship with the Philippines people.

Unfortunately,  this kind of intervention is unlikely,  at least for the moment. 

  • President Bush is much more concerned about the Philippines' contribution to the "war on terror" than its domestic  problems. Arroyo has been very accomodating on the "terror war"  front.
  • Indeed, throughout Southeast Asia, Bush and Secretary of Defense Rumsfeld have also been turning the other cheek to mis-democracy  -- resuming arms sales to Indonesia's horrific military, indulging the Prime Minister of Thailand in his offshore companies, and so forth. Arroyo is just another example.  
  • Arroyo has also carefully cultivated key US interest groups. She's Bill Clinton's former classmate at Georgetown, who still looks him up on trips to New York. She's also an outspoken fan of neoliberal policies, who has good relations with US  companies, Congress, and, indeed, President Bush.
  • Unlike 1986 and 2001, the opposition has no clear leader that would be acceptable to the US.
  • President Bush may well sympathize with an unpopular President whose electoral legitimacy is questionable, and who also repeatedly violates the Constitution and hides behind the skirts of a hand-picked Supreme Court and Congress.

In sum, from Manila, Bangkok, Egypt, the West Bank, and Iran, to Palm Beach County, Haiti, Caracas, Peru, Colombia, and Bolivia,  the US Government only finds "people power" as desirable as the results that it produces. The people of the Philippines should not expect any help from GMA's cronies in Washington.


BEYOND "PEOPLE POWER"?

So to rid themselves of this new usurper,  Filipinos will have to depend on yet another round of Manila popular democracy --  perhaps this time in the face of even more repression. 

Are they up to it? 

Some pundits have recently concluded that, having been through EDSA I and II without achieving very much, and now more economically beleaguered, Filipinos no longer have much stomach for mass resistance.

Indeed, according to one fall 2005 poll,  in hindsight, just 36 percent of the population supports EDSA I, 10 percent supports EDSA II,  and 42 percent believe that doing nothing would have been preferrable.

Images_3On the other hand, 6 out 10 Filipinos still reject martial law as the way to solve the country's problems, while at least 58 percent are willing to support another round of mass demonstrations if President Arroyo is clearly shown to have "cheated in the elections" -- e.g., to have violated the law.

Proclaiming a bogus state of emergency and violating civil rights en masse without a "clear and present danger" should surely cross that threshold.

Furthermore, while everyone now recalls "People Power" as a mass movement, in fact i only 7 percent -- 20 percent in Manila -- of Filipinos over the age of 18 actively participated in  it. That is far below the proportion that now says it is still prepared to demonstrate against Presidential illegality.

As usual in revolutionary situations, however, everything comes down to leadership and initiative -- plus a hefty dose of sheer fortuity. The importance of political entrepreneurship is often underestimated by revolutionaries. However, given such decisive opposition leadership, and its ability to avoid being crushed by GMA's supporters,  her newborn "conjugal dictatorshp" could well be headed for history's dustbin. She has just made, as they say, "A mistake the size of her life."  

                                                     ***
(C) JSH, SUBMERGING MARKETS, 2006. ALL RIGHTS RESERVED.

February 26, 2006 at 12:03 AM | Permalink | Comments (2) | TrackBack

Sunday, December 18, 2005

EVO'S HISTORIC VICTORY
Bolivia's Democratic Revolution
James S. Henry
LaPaz, Bolivia

The mood at Tuto Quiroga's well-appointed campaign headquarters at the Hotel Radisson in downtown LaPaz was funereal, while across town at MAS Party headquarters in the former Brazilian Embassy, and later on in the impoverished township of El Alto,  people were chanting and singing in the streets late into the night. Not long after the polls in Bolivia closed late this Sunday afternoon1022moralesn,  it was already clear that the country's impoverished majority had finally elected one of their own as the country´s next President -- and by a much larger margin than any foreign policy expert, journalist, or Latin America political pundit had expected.

This is easily one of the most surprising and important elections in the history of Latin American democracy. For fans of the "neoliberal," free-market approach to development, as well as coca eradication, it is also a time for soul-searching.

Evo Morales, the 46-year old working-class meztizo, cocalero organizer, and leader of the neo-left "Movement Toward Socialism" party, has soundly defeated the seven other Presidential candidates in the race, capturing close to 50 percent of the nationwide vote.

While the final vote tally still has to be certifed by Bolivia's Electoral Court,  this clearly puts Evo within reach of becoming the first Bolivian President ever to have won a first-round victory outright -- without having the choice default to Bolivia`s fractious, "rent-seeking" Congress.

Quiroga18

From an historical perspective, Evo's performance is an all-time record for a Bolivian Presidential candidate, far surpassing the 31 percent received by the second-place candidate, the free-market oriented-former President, Tuto Quiroga. It also surpasses the previous all-time high registered by Hernan Solis in 1982, as well as the 34 percent captured by neoliberal businessman "Goni" Sanchez de Lozada in 1993.

For that matter, relative to other recent elections in the Western Hemisphere, Evo has also outperformed the victory margins achieved by the US´President Bush, Brazil´s Lula, and Argentina's Kirchner. Whatever one thinks of Evo's economic platform -- and it certainly contains more than a little wishful thinking-- there is no doubt that, at least for the moment, he has far more credibility with the Bolivian people than his opponents.

A DEMOCRATIC REVOLUTION?

Even more important than the historical records,  Bolivians have clearly voted en masse in favor of at least three fundamental changes in Bolivia`s social and political landscape -- all of them supported by MAS.

 

  • Reasserting public control over Bolivia`s natural resources, especially its huge natural gas reserves -- already, in official terms, the second largest in Latin America, and quite possibly much more.

    Evo's vague, rhetorical shorthand for this is "nationalization," but there is a whole range of policy options that MAS is considering to increase the public`s share of the income generated by its natural resources, and add more value, and generate more jobs by using these resources at home. Whether or not any of these will make practical economic sense is far from clear. But it is hard to argue that this program will  necessarily be any more disappointing for ordinary people than the last two decades of neoliberal policies.

 

  • Rejecting (US-backed) coca eradication programs. This supply-side approach to cocaine trade has been pursued by Bolivia since at least the mid-1980s, especially under the Banzer-Quiroga administration from 1997 to 2002.

    Unfortunately, as most observers outside the "drug enforcement complex" now agree -- including good solid conservatives like Milton Friedman and Steve Forbes --  the impact on ultimate cocaine supplies have been limited at best.

    At the same time,  the social, political, and economic impacts on countries like Bolivia, Columbia, and Peru have been disastrous.

    Oddly enough, with respect to drug enforcement, Evo is the true "neoliberal."  He believes that a poor country like Bolivia has a right to grow crops like coca if it makes economic sense, that punishing them for doing so is like punishing Dupont because some of its chemicals end up in illicit drugs, and that Bolivian farms should not be made to pay for the fact that  Americans and Brazilians can't control their bad habits.

    From this angle, his election is just one in a growing series of "corrective interviews" that Andean countries are giving to Washington on the huge costs of the failed supply-side drug control strategy. To summarize the matter quickly -- wouldn't the American people really have preferred to be buying several million cubit feet per day of LNG from Bolivia this winter, rather than pursue coca eradication policies in Bolivia that have had little impact on drug supplies while fostering a hostile political movement?

  • Much greater effective representation for Bolivia´s impoverished, excluded, indigenous and meztizo majority. In this case the cliche happens to be true -- for centuries, the Bolivian people have stood by and watched the country´s incredible raw materials -- silver, tin, iron ore, guano, rubber, and now natural gas -- being expropriated by private interests or elite-controlled state companies, while the vast majority have remained dirt poor.

    Futhermore, since the 1990s, Bolivia has been a virtual laboratory for neoliberal economics, as well as coca eradication. The country ended up with its most valuable assets in private hands, while more than half the population remained poor and inequality increased dramatically. Evo´s election sends a message, loud and clear, that Bolivians have had enough. Indeed, from this standpoint, their voting behavior is not particularly radical -- in capitalist terms, they are  simply a group of shareholders who have finally decided to show incompetent managers the door.

This  is a message that will reverbrate throughout the region -- in next year's elections in Peru, Colombia, and even Mexico, for example. This is a message that the US, in particular -- so obsessed with implanting "democracy" in the Middle East, and recently so careless about paying attention to Latin America's troubled democracies closer to home -- ignores at its peril.    

EVO'S ALLIES?

There is an old Russian proverb that says, "Keep an eye on your friends -- your enemies will take care of themselves."

Of course it is to be expected that hard-line America haters like Venezuela's Hugo Chavez and Cuba's Fidel Castro, as well as leading Latin leftlists like Lula and Kirchner,  will take pleasure in Evo's victory, just as many simple-minded American neoconservatives will regard it as an unmitigated setback. 

But Evo's erstwhile left-wing allies should be careful not to celebrate too soon.

In Fidel's case, the key question is, how soon is he prepared to give Cubans the same democratic rights that Bolivians have just exercized?   

In Hugo's case, the question is, is he prepared to make up all for the economic aid, debt relief, and lost exports that Bolivia will lose if it alienates the US and the international community by adopting policies like coca legalization and gas nationalization?  Isn't it just possible that he may well prefer for Bolivia's gas to stay in the ground, where it can't compete with Venezuela's proposed pipeline to Brazil and its proposed LNG exports to the US? 

In the case of Lula's Brazil and Kirchner's Argentina, the question is, are they really willing to renegotiate the lucrative gas export contracts they now have with Bolivia, helping Evo by sharply increasing the prices that they pay, while increasing their Bolivian investments?  Assuming that Bolivia is going to export at least part of its gas, shouldn't it consider competitors to Brazil and Argentina, rather than continue to be a captive supplier to these monopsonists?

Overall, therefore, it is easy for Latin America's kneejerk Left to celebrate Evo's rise as yet another defeat for Yankee imperialism -- and, indeed, there is just enough truth in that story to keep the brew bubbling. 

But every day that  Evo wakes up, he needs to remind himself that it was not the Yankees who are responsible for the fact that his country is one-half the size that it was 150 years ago;  that it is not Yankees who consumed most of his country's silver and other resources; that it is not Yankees that are consuming up to 30 million cubic feet per day of Bolivian gas at prices less than a fifth of US market levels (but Brazil and Argentina -- and Chile, by way of Argentina);  that it not Yankees who are content to keep Bolivia landlocked. On the other hand, it IS Yankees who have provided Bolivia with more foreign aid per capita than almost any other Third World country since 1948 -- much of which was admittedly wasted, but much of which undoubtedly did some good. 

In short, now that Evo is President, and not just an angry outside critic of the system, he will have to take responsibility for governing, and admit that Venezuelan, Brazilian, Argentine, and Chilean imperialism -- or, indeed, Chinese imperialism --  are no better than gringo imperialism.

As I`ll argue in Part II, none of these changes will be easy for Evo to implement within the bounds of Bolivia's existing political system, with its increasing regional polarities.   

Indeed, he faces an extraordinary list of challenges -- the least of which will be to become an effective head of government.  He will need a great deal of help. The US could usefully start by lifting its ban on holding discussions with him, and by granting him a visa. 

Despite all the obstacles, it is not too early to pronounce the strong, unified outpouring in favor of this program a ¨democratic revolution.¨

And what is perhaps most striking about this particular one is that Bolivia's people have made it on their own -- without the costly outside intervention that has been required to construct Lego-democracy in other well-known energy-rich developing countries.

(c)SubmergingMarkets, 2005

December 18, 2005 at 05:58 PM | Permalink | Comments (0) | TrackBack

Wednesday, November 30, 2005

MONGOLIA'S FOUR HOURS
A Special Report from the Front in Ulaan Bataar
Joachim Nahem**

BushmongoliaNot usually known as a world traveler, President George W. Bush has recently been behaving like an itinerant Lonely Planet ghost writer. On November 21,  he and his 300-person entourage  -- including Ms. Bush and US Secretary of State Condi Rice -- stopped off in Mongolia for four hours on the last leg of an 8-day whirlwind tour through Asia.

With the mass protests of early November in Buenos Aires and Seoul still ringing in their ears,  it must have been a relief to be greeted in Ulaan Bataar by just threMongoliamap_1e well-mannered lonely souls with one placard, urging the US to sign the Kyoto Agreement.

The President could also take enormous pride in the fact that he is the very first US President in history to have visited Mongolia --  a land-locked, Alaska-sized grassy flatland with a per capita income below $500 and 2.8 million people, a third of whom herd sheep, live in round huts called "yurts," and dine on endless varieties of mutton stew.

Later, in a speech before a packed assembly of Mongolian troops and lawmakers,  Bush declared that the US is now Mongolia’s “third neighbor.” According to the President,  Bushmongr22110503the two countries are “standing together as brothers in the cause of freedom…..”  He added that Mongolia is  "an example of success for the region and for the world… a free society in the heart of Central Asia.”

Bushmongr22110507No, really. These hyperbolic assertions must have been somewhat perplexing to Mongolia's neighbors, Russia and China. But they no doubt amused and delighted the Mongolians, who gave Bush a thunderous ovation.

What was this mutual admiration all about? Does Mongolia really deserve all this praise because it has indeed established a thriving market democracy?

Or do the tributes perhaps have more to do with the fact that Mongolia has volunteered for two very difficult assignments -- a prolonged series of neoliberal economic policy experiments, and die-hard duty in the rapidly dwindling "Coalition of the Less-and-Less Willing?"

 

STILL WILLING?

200401132fMany of those in the audience must have understood that President Bush's special visit was not only determined by Mongolia's profound contributions to liberal democracy.Bush reminded them that there are still 160 Mongolian soldiers stationed with the Polish battalion in Iraq  -- relative to population size, the third largest country contribution to the “Coalition of the Willing.” This is the largest Mongolian contingent in Iraq since the Mongols sacked Baghdad in 1258.

Bush also paid a special tribute to two Mongolian soldiers in the audience who had shot and killed a would-be suicide-bomber outside Baghdad this year, preventing him from driving explosives into an army mess hall.   

200401132b_72With France and Germany AWOL right from the start of the Iraq War,  Spain  long since buggering out,  and  other  US “allies” like Italy, South Korea, Japan,  and the UK now actively debating the withdrawal of their troops next year, this US-spawned effort is threatening to become a “Coalition of One."

So it is not surprising that the Empire has finally decided to pay more attention to its most loyal, if distant and geographically insignificant, allies.

Wrestle1In fact Mongolia has recently been treated to a surfeit of such state visits, including  US Defense Secretary Donald Rumsfeld, Joint Chiefs Chairman Richard B. Meyers, and a US Congressional delegation led by House Speaker Dennis Hastert  --  who reportedly spent most of his time in the country discussing wrestling moves with his Mongolian counterparts. 

Mongolians are also aware that providing just a few hundred troops in Iraq and Afghanistan is bringing the country many other rewards. Earlier this year, President Bush announced a new “Solidarity Initiative,” offering financial assistance to Mongolia and other developing countries that ‘are standing with America in the war on terror.’  Under this initiative, Mongolia is already receiving $11 million to improve its military.

040715f5586b067_screenThe United States has recently become Mongolia’s second largest foreign aid donor.  Indeed, it will probably soon eclipse Japan as the largest donor – the country has already qualified for aid under the Bush Administration’s new “Millennium Challenge Account (MCA) funding. Although the MCA was ostensibly set up to assist countries that ‘govern justly, invest in their people, and promote economic freedom,’ Mongolia  certainly did not hurt its chance by contributing its soldiers to Iraq.


LAB RAT?

Mongoliamap_1On paper, from a distance, Mongolia is a post-communist success story, which has made a rapid recent  transformation to democracy and market economy. Indeed, compared with its Central Asian neighbors like Uzbekistan and Tajikistan,  it is a virtual Switzerland -- minus the alps, Davos, and private banking, of course.

However, Bush’s accolades notwithstanding, the truth is a little more complicated.  Most Mongolians are acutely aware that their erstwhile “democracy” is still very far from perfection.

200401132eMongolia was not only the first Asian country to adopt communism – it was also the first to abandon it. When the Soviet Union collapsed in the early 1990s, Mongolia turned to the West for political and financial advice on how to restructure the country. Agencies like the IMF, the World Bank, and the Asian Development Bank  insisted that  Mongolia follow virtually the same neo-liberal formula of shock therapy and rapid privatization that  had just been applied --- with very mixed results -- in  Russia and Eastern Europe.

These economic policies were coupled with a radical overhaul of the political system, which led to free elections, a liberal constitution, and human rights for all citizens – at least on paper.

ROOSTING CHICKENS

Fifteen years later,  the results  of this neoliberal experiment with “market democracy”  are now in, and they have been mixed at best.

  • In a recent nation-wide survey, a majority of the population reported that the transition has not improved their lives.
  • By most measures, poverty has increased significantly since communism, with more than a third of the population living on less than two dollars a day.
  • Rapid migration from the country-side has created large pockets of extreme poverty in  Ulaan Baatar, the capital,  where up to 300,000 people live in Ger (traditional Mongolian felt tents) slums without access to electricity or proper sanitation.
  • Endemic corruption, low trust in the political system, increasing crime rates, collapse of the welfare system, and growing disparities are just a few of the other  pressing issues that are threatening to undermine Mongolia’s democratic transition.
  • As in many other developing countries, so-called austerity programs,  and the  privatization of state assets recommended by multilateral financial institutions like the World Bank and the IMF, have left ordinary Mongolian citizens and the most vulnerable.Images_1
  • Nomads and other pastoralists have experienced tremendous hardship during this period. For example, natural disasters (‘dzuds’) in 2000 and 2001 wiped out much of their livestock, and the livelihoods of several thousand families. In the “New Mongolia,” they have no safety net.

WEALTH FOR WHOM?

Meanwhile, vast mining riches have recently been discovered in Mongolia. In principle, this might offered this country a much-needed break,  but by most account these new natural resources have actually compounded development issues – as in many other developing countries.

OtaerialRather than using profits from these resources (record high prices for commodities like copper and gold make this a very lucrative business) on much needed social spending and infrastructure, most of the revenues has gone to foreign mining companies and the tiny elite of Mongolians who often control or influence mine licensing.

The Mongolian economy grew by almost 11% last year, yet the lion’s share of this “growth” actually benefited international mining investors and the Mongolian arrivistes who dominate the urban landscape with their brand-new Hummers™ and Land-Cruisers™.

Ger9The privatization of land and environmental degradation caused by mining is also disturbing Mongolia’s traditional  social and demographic patterns, with pastoralists forced to leave what has traditionally been communal areas used for herding livestock. Artisan mining (which takes place illegally in areas that mining companies own but usually do not exploit) has become a way out of poverty for many Mongolians.  But the human costs have been huge, with incredible health hazards and little access to public services  -- entire families move to mining areas during the warmer seasons, where much of the work is done by child labor.Horsejpg

Although no one is longing for a return to the Communist past in Mongolia, there is growing apathy and discontent. Recent protests by pensioners and students show that a political backlash is quite possible, in what is generally seen as a very stable country.

The issue is not so much the country’s commitment to democracy in the abstract, but the way the political process actually functions.   Neo-liberal policies -- including privatization and the general shrinking of the state -- have proved to be disastrous, with a tiny elite managing to capture most of the political and economic benefits of this transition. Evidence from other developing parts of the world, especially Latin America, tends to show that this elite capture becomes entrenched over time, leading to even greater disparities between rich and poor.

Bushmongr22110508Perhaps if Mr. Bush and his entourage had a stayed a few more hours in Mongolia,  they might have begun to appreciate some of these troubling realities.  They might have begun to understand that ‘democracy’ and ‘counter-terrorism’ have little meaning to most Mongolians,  who are struggling  harder than  ever just to make ends meet.  But after four hours of speeches, carefully-scripted receptions, a little mutton and Mongolian beef, and reassurances that Mongolians will continue to fight on in Iraq, they got back on the plane and headed home.

**Joachim Nahem is a development specialist for the UN Development Programme and a SubmergingMarkets Contributing Editor, currently based in Ulaan Bataar. All articles for this website, however, are written in his personal capacity and do not in any way represent the views of UNDP.

(c) SubmergingMarkets, 2005

November 30, 2005 at 09:46 PM | Permalink | Comments (0) | TrackBack

Saturday, November 05, 2005

BUSH HEADS SOUTH
Receives Rousing Welcome In Argentina...
Fox News Analysis

160_ap_bush_051104President Bush received an incredibly warm welcome at the 34-nation Summit of the Americas in Mar de la Plata, as thousands of ordinary people from all over the Continent turned out to hail his presence.
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The effervescent US President was clearly buoyed by polls that showed that he still commands the support of an incredible 80 percent of Republicans -- otherwise known as his "base."

True, "non-base" support is reportedly a little less certain. Overall, in this week's latest polls, 59 percent expressed "disapproval," while 42 percent expressed "strong" disapproval." A quarter of the US population surveyed reported "violent morning sickness...."

However, knowledgeable insiders have called this a "temporary setback" that will be easily corrected if and when Presidential advisor Karl Rove, recently distracted by the Pflame investigation, starts covering the bases again.

The President, speaking through an interpreter, voiced optimism that "Free trade and liberal investment policies, plus a few billion dollars on defense, corn subsidiies, and our brand new military base in Paraguay" would completely change the lifestyles of the estimated 100 million Latin Americans who remain below the $1 per day world poverty line.
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Said Bush, "These policies have only been tried for a decade or two. They need to be given a chance. Right here in Argentina, you've seen how well they've worked, right?"
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Bush's sentiments were echoed by Vincente Fox, Mexico's amazingly popular lame-duck President, and Paul Martin, the astonishing Canadian PM, whose own popularity ratings have recently been taken to record levels by the Gomery Report, which documented the disappearance of $250 million of government funds, mainly by way of Mr. Martin's own party.
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Said Martin: "We are quite pleased to have become a wholly-owned subsidiary of US multinationals. We didn't think we'd like the sensation, but it has become an experience that we really look forward to every night. You will also learn to enjoy it. Now if only the US would pay us that $3.5 billion...."

Said Fox: "Yes, it is true, millions of Mexican small farmers have been wiped out by free trade. But this criticism is baseless. Just look at all the remittances they are sending back home from the US !"

Meanwhile, the US President had an especially warm greeting from Diego Maradona, the famous Argentine soccer star, now in recovery. Maradona used a colloquial Argentine expression to describe just how delighted he is to finally have this particular American President visit his country.
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Elsewhere, Cuba's Fidel Castro, who was not permitted to attend the summit, was reported to have decided to remove all restrictions on US trade and investment with Cuba, after having listened to President Bush's persuasive arguments.

Said the aging inveterate leftist leader, "I knew we were doing something wrong. Now I finally know what it was. We were way off base!"

After a prolonged negotiating session on Saturday, in which Summit delegates basically agreed to continue to debate the merits of free trade for a long time to come, Bush departed for a Sunday meeting in Brasiia with yet another embattled President, Luis Ignacio da Silva ("Lula.")

Brasilia is a pretty lonely, desolate, and distinctly un-Brazilian place on a Saturday night, because all the whores and politicians have flown back to Rio or Sao Paulo for the weekend, and one is just left with all these 1950s-vintage monuments to Brazil's cement industry. But perhaps President Bush will find a little solace taking a moonlit walk on the empty esplanades, wandering through the otherwise flat, lifeless landscape that Robert Campos once called "the revenge of a Communist architect against capitalist society."

(c)SubmergingMarkets, 2005

November 5, 2005 at 11:42 PM | Permalink | Comments (1) | TrackBack

Monday, April 18, 2005

WHAT'S SO F'IN FUNNY?
From One Wolfie to Another
"We Have a New Pope!"

News Flash! - World's Poor Dancing in Streets!


A note to our Faithful Readers:
Our Editor is on book leave, writing a long-awaited tome on international private banking.  Meanwhile, we will pass the time by offering free "Submerging Market" hats to the best proposed captions.  Here's the first. Question: Why are two these fellows smiling? Globe2

Send your proposed entries to jhenry@shg.com. Good luck!

April 18, 2005 at 02:47 PM | Permalink | Comments (0) | TrackBack

Friday, December 10, 2004

Global Growth, Poverty, and Inequality
Part I. A Little Christmas Cheer?
James S. Henry and Andrew Hellman

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Americhurch_2 The Christmas season is a very special time of year, when Americans, in particular,  engage in a veritable month-long orgy of holiday revels and festivities, including eggnog sipping, Santa sitting, package wrapping, neighborhood caroling, tree decorating, menorah lighting, turkey stuffing, and generally speaking, spending, getting, and giving as much as possible, at least with respect to their immediate friends and family.

We certainly don’t wish to question the legitimacy of all these festivities. After all, as this November’s Presidential election has reminded us, ours is surely one of the most powerful, vehement, unapologetic Judeo-Christian empires in world history.  Like all other such empires, it has every right to celebrate its triumph while it lasts.   

13933269_2 According to the latest opinion surveys, this is indeed an incredibly religious nation, at least if we take Americans at their word.  More than 85% of Americans adults consider themselves “Christians,” another 1.5% consider themselves “Jews," 84% pray every week, 81% believe in life after death, 60% believe the Bible is “totally accurate in all its teachings,59% support teaching creationism in public schools,  and fully 32% -- 70 million people, including 66% of all evangelicals --  would even support a Constitutional Amendment to make Christianity the official US national religion. 

In light of all this apparent religious fervor, it is disturbing to read several recent analyses by OXFAM and the UN of certain persistent, grim social realities around the world – and our paltry efforts to redress them. Is the intensity of our religious rhetoric and this season's celebrations just a way of escaping these unpleasant realities?  

CHRISTMAS CHEER?

·          According to the UN’s International Labor Organization (December 2004), among those still waiting for economic justice are nearly three-quarters of the world’s population – 4.7 billion people --  who somehow manage to survive on less than $2.50 per day. These include 1.4 billion working poor, half of the 2.8 billion people on the planet who are employed. 

·          According to the UN’s Food and Agricultural Organization (December 2004),  the world’s poor now include at least 852 million people who go to bed hungry each night – an increase of 20 million since 1997. The continuing problem of mass famine has many side-effects – including an estimated 20 million low-birth-rate babies that are born in developing countries each year, and another 5 million children who simply die of malnutrition each year. In some countries, like Bangladesh, half of all children under the age of six are malnourished.

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·          Overall, for the 5.1 billion residents of low- and middle-income countries, average life expectancy remains about 20-30 percent shorter than the 78 year average that those who live in First World countries now enjoy. By 2015, this will produce a shortfall of some 50 million poor children and several hundred million poor adults.  But at least this will help us realize the perhaps otherwise-unachievable “Millennium Development Goals” for poverty reduction.

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·          According to UNICEF (December 2004), more than 1 billion children – half of all children in the world -- are now growing up hungry, in unhealthy places that are suffering from severe poverty, war, and diseases like HIV/AIDs.

·          According to Oxfam (December 2004),  First World countries have basically reneged on their 1970 promise to commit .7 percent of national income to aid to poor countries.  Last year such aid amounted to just .24 percent of national income among OECD nations,  half the 1960s average.  And the US commitment level was just  .14 percent, the lowest of any First World country, and less than a tenth of the Iraq War’s cost to date.

·          This month’s 10th UN Conference on Climate Change (COP-10) in Johannesburg reviewed a growing body of evidence that suggests that climate change is accelerating, and that the world’s poor will be among its worst victims.  Among the effects that are already becoming evident are widespread droughts, rising sea levels, increasingly severe tropical storms,  coastal flooding and wetlands damage, tropical diseases, the destruction of coral reefs and arctic ecosystems, and, God forbid, a reversal of the ocean’s “thermohaline” currents. 

Overall, as the conference concluded,  for world’s poorest countries – and many island economies – the threat of such effects is much more threatening than “global terrorism.” 

So far, however, the US – which with less than one-twentieth of the world’s population, still produces over a fifth of the world’s greenhouse gases --  seems determined to do nothing but stand by and watch while energy-intensive “economic growth” continues.  This year’s oil price increases have slowed the sales of gas-guzzling SUVs somewhat,  yet more than 2.75 million Navigators, Hummers, Land Rovers, Suburbans, and Expeditions have already been sold. The  US stock of passenger cars and light trucks, which accounts for more than 60 percent of all US oil consumption, is fast approaching 220 million -- almost 1 per person of driving age.

Meanwhile, leading neoconservative economists and their fellow-travelers in the Anglo-American media continue to tout conventional measures of “growth” and “poverty.” Indeed, according to the most corybantic analysts,  a free-market-induced “end to poverty as we have defined it”  has either already arrived, or will only require the poor to hold their breath just a little bit longer – until, say, 2015. 

As we will see in Part II of this series, this claim turns out to be -- like so many other elements of modern neoconservative dogma – a preposterous falsehood.  But it does help to shelter our favorite dogmas – religious and otherwise --  from a day of reckoning with the truth.

èèè

(Next: Part II: Is this Really Not the Best of All Possible Worlds?)
© James S. Henry and Andrew Hellman, SubmergingMarkets™, 2004

December 10, 2004 at 03:16 PM | Permalink | Comments (0) | TrackBack

Friday, December 03, 2004

”WHERE’S WARREN?”
Bhopal’s 20th Anniversary

Today marks the twentieth anniversary of the deadly Bhopalunioncarbidefactor December 3, 1984, chemical gas leak at an Indian pesticide plant in the very  center of Bhopal, a city of 90,000 – just a little larger than Danbury, Connecticut -- in the state of Madhya Pradesh, in central India.  At the time the plant was owned by Union Carbide India, Ltd. (UCIL), an Indian company whose majority (50.9%) shareholder was Danbury-based Union Carbide Corporation (UCC) which was acquired by Dow Chemical in 2001.

This anniversary provides us with an opportunity to reflect on “lessons learned” from this disaster – including the need to make sure that the globalization of trade and investment is also accompanied by the globalization of justice for the victims of transnational corporate misbehavior.

Download WhereIsWarren12032004.pdf

THE COSTS

As a recent report by Amnesty International details, this industrial accident, perhaps the worst in history, killed more than 7,000 to 10,000 people in the first few days,  including many children. Bhopal01_3

There were also serious long-term injuries to up to 570,000 others who were exposed to the fumes.

At least 15,248 of these survivors have already died because of their injuries – in addition to the 7,000 to 10,000 initial victims.

Up to 570,000 others continue to suffer from a wide range of serious health problems, including birth defects, cancer, swollen joints, lung disease, eye ailments,  neurological damage, and many other painful, long-term illnesses.

Thousands of animals also died, and many people lost their homes, jobs, income, and access to clean water.

WHO WAS TO BLAME?    

U

nion Carbide’s ultimate “parent authority” for this accident is very clear. In the middle of the night, a cloud of lethal gas caused by the leak of at least 27 tons of “methyl isocyanate” (MIC), a high-toxic odorless poison,  and another 13 tons of “reaction products” began wafting through the city center. The gas spread without warning throughout the town. The leaks continued for more than two hours before any alarms were sounded.

All six of the plant’s alarm systems failed.  It was later shown that the company management had systematically tried to cut corners  on safety and warning equipment – by, for example, failing to equip the plant with adequate safety equipment and trained personnel to handle bulk MIC storage; failing to apply the same safety standards that it used in the US; and failing to insure that there was a comprehensive plan to warn residents of leaks. 

In fact,  company staff and many others were aware of the risks created by this situation. In June 1984, six months before the accident, an Indian journalist had written an article about them: “Bhopal – On the Brink of Disaster.” But nothing was done – partly, according to Amnesty, just to cut costs.    Bhopal_unioncarbide_victim_2

The result was that shortly after midnight on December 3, 1984, Bhopal’s families woke up screaming in the dark, unable to breathe, their eyes and lungs on fire from the poison, choking on their own vomit. By daybreak there were already hundreds of bodies on the ground, with scores of funeral pyres burning brightly.

In addition, long before the 1984 accident, there had been a series of leaks at the site that management was well aware of, and which caused serious pollution – contamination that continues to this day.

All told, as the Amnesty report makes clear, this amounts not only to an health and environmental disaster, but a serious infringement of the human rights of thousands of Indian citizens. 

CONTINUING IMPUNITY

All this was bad enough.  But the other key part of Bhopal’s injustice has to do with the fact that key actors like Dow Chemical/Union Carbide, the Indian Government, and the individual US and Indian senior executives and other officials who were responsible for the accident have managed to avoid  liability for the full costs of the “accident,” as well as personal accountability. 

This impunity was underscored this week when the BBC fell victim to a hoax perpetrated by someone who pretended to be a Dow Chemical executive. He concocted a false statement that the company was reversing its denial of all responsibility for Bhopal, and was establishing a E12 billion fund for 120,000 victims.   

In fact,

·          Union Carbide (UCC) and Dow Chemical,   UCC's new owner since it purchased the company for $10.3 billion in 2001,  have consistently denied any liability for the disaster.  They have argued, for example, that UCC was a “domestic” US company, with no “operations” in India. Supposedly it was also not responsible for UCIL’ actions, because UCIL was just an “independent” Indian company.

·          In fact, while UCC disposed of its interests in UCIL in 1994, until then, UCC maintained at least 51 percent ownership in UCIL. Furthermore, according to the Amnesty report, UCC played an active role in UCIL’s management and board activities, and was responsible for the detailed design, senior staffing, and on-going operating procedures and safety at the Bhopal plant.

·          Furthermore, as UCC’s CEO at the time, Warren Anderson, bragged before the US Congress in 1984, Union Carbide had 100,000 employees around the world. At the same time, another senior UCC executive, Jackson Browning, said that UCC’s “international operations represented 30 percent of sales,” and that “India was one of three dozen countries where the company has affiliates and business  interests.” 

·          After the spill, according to the Amnesty report, UCC officials (1) tried to minimize MIC’s toxicity, (2) withheld vital information about its toxicity and the reaction products, which they treated as trade secrets; and (3) refused to pay interim relief to the victims.

·          The Indian Government and the State Government of Madhya Pradesh also bear grave responsibility for the disaster itself, and then for striking an irresponsible private settlement with the perpetrators. As the Amnesty report makes clear, environmental regulations were very poorly enforced against UCIL. Then,  having sued for $3 billion in damages in 1988, the Indian Government settled for just $470 million in 1989,  without adequate participation from victims. The Indian Government has also discontinued medical research on the impact of the gas leak, and failed to publish its interim findings.

In October 2003, it was disclosed that  by then, some 15,298 death claims and 554,895 claims for other injuries and disabilities had been awarded by the Madhya Pradesh Gas Relief and Rehabilitation Department – five times the number assumed in the settlement calculations by the Indian Supreme Court.

·          UCC’s insurance paid that paltry amount in full. But then the Indian Government was very slow to pay out the money to victims. As of July 2004, $334.6 million had been paid out, while $327.5 million was still sitting in Indian government custody.  At that point, 20 years after the disaster, the Indian Supreme Court finally ordered that the remaining money be paid out to some 570,000 registered victims – an average of $575 apiece. Even these payments won’t all get to the victims;  a significant portion is reportedly consumed by India’s notorious bribe-ridden state bureaucracy.    20030815007013301_1 

·          Local authorities in Bhopal filed criminal charges against both UCC its former CEO Warren M. Anderson in 1991-2. Anderson was charged with “culpable homicide (manslaughter),” facing a prison term of at least 10 years. He failed to appear, and is still considered an “absconder” by the Bhopal District Court and the Supreme Court of India.

However, despite the existence of a US-India extradition treaty,  the Indian Government has failed to pursue a request for Anderson’s extradition vigorously.

Indiawantsanderson28jun03_1 Diamondlid_3 The 82-year old Anderson, who is still subject to an Indian arrest warrant, has a very nice home with an unlisted number in Bridgehampton, New York, and another in Vero Beach, Florida.

Meanwhile, while the Indian Government has been willing to hold local Indian companies that operate hazardous businesses strictly liable for damages caused by them, it has been reluctant to apply this rule to transnational companies -- perhaps because it is more worried about attracting foreign investment than insuring that foreign investors manage their activities responsibily.

SUMMARY – GLOBALIZING JUSTICE

Overall, twenty years after the original incident, Bhopal remains a striking example of transnational corporate misconduct, an incredible case of the negligent mishandling of a true “chemical  weapon of mass destruction.”

This behavior may not have been as culpable, perhaps, as the willful use of toxic weapons against innocent civilians by former dictators like Saddam and Syria's Assad. But it was no less deadly. 

As we saw above, Bhopal was also an example of the incredible loopholes that still apply to leading companies in globalized industries.

Especially in corruption-ridden developing countries like India, they have often been able to take advantages of lax law enforcement, weak safety regulations, clever holding company structures that limit liability, and the sheer expense of bringing them to justice.

Evidently the globalization of investment and trade is not sufficient. Economic globalization needs to be augmented by the globalization of justice. Among other things, that means that it is high time for transnational corporations to be subject to an enforceable code of conduct, back up by an International Court for Corporate Responsibility.   

èèè

                        © James S. Henry,  SubmergingMarkets™, 2004

December 3, 2004 at 09:26 PM | Permalink | Comments (1) | TrackBack

THE BEST WEEK IN UKRAINIAN HISTORY?
KIEV REPORT #2
Matthew Maly

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_40558321_kiev203bodyafp Ukraine has just had perhaps its luckiest week in its history -- a week where everything went right, and the educational process was so intense, so logical, so marvelously cogent that the country went through a hundred years of political evolution. It is now, by right, a part of Europe, a part of the Western cultural tradition, a true democracy! This has been not merely a week in life of one country, but an entire page in the history of the world -- and, let us hope, global democracy!

MEET THE CANDIDATES

It all started out rather unpromising with this fall's presidential elections. The alternatives were the usual: on one hand, Prime Minister Viktor Yanukovich, with a much smarter and more sinister person, Viktor Medvedchuk (and Kuchma’s son-in-law Viktor Pinchuk in tow), lurking behind; on the other hand, former Prime Minister Viktor Yushchenko, with a much smarter and more sinister person, Yulia Timoshenko, lurking behind.

_40480639_vik2 Both Yanukovich and Yushchenko were appointed by one and the same President Kuchma. Medvedchuk and Timoshenko had both proved that they know how to turn their government connection into enormous personal wealth. I could tell the difference between these two teams no better than I could tell Coke from Pepsi.

There was another divide: Ukraine speaks Ukrainian and Russian, it has Western and Eastern part, it can join NATO or ally itself with Russia. Yanukovich is from the Russian-speaking part of Ukraine, speaks bad Ukrainian, and so his campaign was getting its local currency by exchanging the rubles it had. Yanukovich’s campaign tone was thuggish, unmistakably betraying presence of Russian political consultants. Medvedchuk_putins_1

Yushchenko’s power base was in Western Ukraine, its tone was uncharacteristically sleek, it tended to mention democracy, and it was not hurting for dollars and euros.

Yanukovych_putins Since I wanted Ukrainian people to actually have a better life, I had no preference between the two. But I strongly felt that using a thuggish tone was a better electoral tactic as that was something the Ukrainians could relate to. My money was on Yanukovich, and I thought I was smart.

SURPRISES

Then an amazing thing happened: people appeared to deeply resent Yanukovich talking down to them, while actually appreciating Yushchenko’s respectful and meaningful messages.

Yanukovich’s billboards, with wonderful, in a certain way, ultimate, slogans “Just because!” and “That’s the way it should be!” were everywhere, while Yushchenko’s slogan “Yes!” (with a horseshoe as a symbol of luck), were nowhere to be seen. In Ukraine, it is called “using the administrative resource”: after all, Yanukovich is a current Prime Minister while Yushchenko is just an opposition leader. Ukraine is a democracy, and everyone can sell advertising space to Yushchenko if they wish to have all their documents for the last five years audited by someone extremely unfriendly and their permits and licenses withdrawn. And of course there could not be any fair description of Yushchenko on any state-owned media.

_40565531_yushchenko_203 Then, right in the middle of the campaign, Yushchenko had a little problem: in one day, his entire face got covered with horrific acne-like inflammation, his nose swelled to twice its former size, so that he started to look like a Hollywood movie monster. Since nobody in the world has ever had such a disease, especially one that developed so quickly and in such an inopportune time, people suspected that Yanukovich may have poisoned Yushchenko, probably with dioxin.

There is no direct evidence that Yanukovich was involved. But if you look like a thug, talk like a thug, and behave like a thug, people tend to suspect that you are a thug. It does not help matters if you come from a mafia-controlled Donetsk region of Ukraine, have a long history of association with the murderous mafioso who controls the region, and having had two criminal convictions, did time in jail. In a word, Yanukovich got stereotyped.

Yushchenko got stereotyped as well: people assumed that since he had suffered horrible disfigurement for talking about the truth and democracy he must have really meant it. You have the stigmata – you must be Jesus Christ. And as a result, two things happened: Yushchenko became infallible; for Ukrainians, he became the focus of all their dreams and aspirations, and (pay close attention!) truth and democracy became important because Yushchenko was talking about them. As far as poisoning, believers duly noted that mortal poison did Yushchenko no lasting harm.

Let me say it again, since this is very important. Jesus was the guy who could perform a miracle here and there. People did not have, nor could they understand, the moral code that Jesus was proposing. But since Jesus could do miracles, people accepted his moral code as their own.

Same here. Make no mistake, truth and democracy meant nothing for Ukrainians. Ukrainian students cheated and waited for the time when they become businessmen so they could start stealing. Kiev’s Mercedes-riding bureaucrats were the very epitome of graft, and now they are walking after Yushchenko with the strange smile on their faces, inviting students who demonstrated in the cold to spend the night in their palaces: obviously, there was more to them than graft.

Ukrainians did not accept the theoretical notion that somewhere there could be a government that actually served the people, respected them, and told them the truth. It has all changed now in Ukraine, probably forever, just because Yushchenko said that it should.

THE "ELECTIONS"

Then there came the first round of voting on October 31. It is now clear that Yushchenko got more than 50% of the vote. But God had mercy on Ukraine and prevented Yushchenko’s win in the first round. God has firmly decided to make Ukraine free and democratic once and for all, and for that Ukraine needed to go through some suffering so as to earn its freedom. There was serious fraud in favor of Yanukovich, with the result that both Yushchenko and Yanukovich got about 39% each, with Yushchenko getting marginally more votes. The total is less than 100% because there were 22 other candidates.

Now, that was really something. Never in the post-Soviet space did the opposition presidential candidate get more votes than the candidate of power. In fact, many people thought that voting against Yanukovich was quite useless. Other people thought that voting for Yanukovich was quite useless, but Yanukovich did much to disabuse them of this notion. Regional officials of the regions where Yanukovich would not win, knew they would be immediately fired (and they were). So, a lot of little tricks were used. Voting in Ukraine is voluntary, and students who wanted to get a failing grade on their next exam could abstain from voting. For the rest, the procedure was as follows: a student would obtain a ballot, choose any candidate he or she wanted as long as it was Yanukovich, show the ballot to the person quietly standing by the ballot box, probably their Civics or Ethics professor, drop the ballot into the ballot box, and be assured of a passing grade on their next Chemistry examination. For the older generation, there was another trick. Fail to vote for Yanukovich, and see your heat and water turned right off.

And yet, even with all these tricks, Yanukovich only obtained 45% of the vote. It meant that his true level support could not have been greater than 30%. And yet, Yanukovich HAD to win the second round, had to get at least 20% more. Why could not Yanukovich lose? Because there is a lot of stolen property at stake, and when property is stolen, there is no receipt to prove ownership. That means that a new government could take the property away. Whatever you could say about the famous Khodorkovsky case, it is no longer advisable for the oligarchs to have property for which they have absolutely no legal title.

In the second round, there was even more fraud on behalf of Yanukovich. As this is now well documented, I will not go into that. People of Ukraine are no strangers to fraud, and they could have submitted to it easily, with barely a sigh. But now they had a lightning rod of Yushchenko, a highly moral person they imagined him to be. Regardless of who Yushchenko actually is, what matters is that people appointed him as a personification of all the best that is in them, a focal point of all their hopes. From now on, a stab at Yushchenko was a stab in their heart.

And that made Yushchenko much more than a President: he is now in the same league with Reagan, the Pope of Rome, and the Beatles. There is a Woodstock atmosphere in Kiev, and Yushchenko supporters, people of all ages, look like the happiest people in the world. They have clearly found themselves, their inner freedom, and their strength.

IRONIES

Let us again return to what happened here, as it is unprecedented. In the second round of voting on November 21, Yushchenko got about 70% of support, and if the elections were fair he would have by now be the President-elect. Would Ukraine be a real democracy now?

Absolutely not!!! Ukraine would have gotten Yushchenko as President, and would have calmly gone back to cheating, stealing, hiding from authorities, and suffering as it always has.

After all, Yushchenko already HAD BEEN a Prime Minister, and quite recently. And there was no enthusiasm, no support, no happiness, no tears of joy, and lousy economic results, worse than those demonstrated by Yanukovich.

If the elections were fair, it would have made no difference who won, Yushchenko or Yanukovich. Again. After all, Yanukovich is no worse than Ken Lay: just a tough, self-serving, and cynical kind of guy.

What happened? With great help from Yanukovich, and thanks to him, Yushchenko has lit the inner light in the souls of mortally insulted people, the light they did not know was there. Truth, democracy, justice, or heroism mean nothing unless they are sanctified. In one fell swoop, Yushchenko have sanctified them all, and faces of his followers have changed. What happened in Ukraine is that the truth and justice were lost and are now being defended as a newfound, cherished, and fundamental possession of every citizen.

If Yushchenko now represents God, his detractors are with the Devil. Some of them, to be sure, are hellish personalities, gangsters and murderers, such as the Head of the Donetsk Region or the Mayor of Odessa.

TRANSFORMATION

I am more interested in a momentary transformation. There is a woman I know who went on TV to defend Yanukovich. Her eyes looked dead, her hands were shaking, and she had made her worst hairdo. Across from her, there was a woman who defended Yushchenko, and that one grew ten years younger in four days, her back was straight and her eyes were shining. Was the debate about Yushchenko? Absolutely not.

Actually both of these women used to be equally skeptical about him. But inside one woman a tiny flickering light was now almost extinguished, while the other had the light of her soul burning as brightly as it could, just like the bright orange she wore. It was the debate about human dignity, with Yushchenko as a starting point.

Yushchenko is a tall man with a robust face of a peasant. Women here consider him attractive. But after the second round of elections, with his pockmarked and swollen face, he is universally seen as beautiful. This adoration brings a real danger of Yushchenko not being able to live up to it, but this is the case right now.

And let me just mention the designer revolution that happened here: people that used to choose between gray and gray were now proudly wearing bright orange, and 99% of them are doing so for the very first time in their lives.

Ukrainian TV these last four days is beyond description. First, there was Channel 5, a pro-Yushchenko private channel beamed straight to the Independence Square where most of the demonstrations took place. Channel 5 had a constant stream of interviews with intellectuals, artists, politicians, etc, all of them wearing something orange. Most of the times, the orange color looked attractive, stylish, appropriate for a successful, accomplished, strong-willed person that was being interviewed.

But I remember a man in his seventies, in the cheapest brown suit and a pitiful tie. Around his thin wrinkled neck, he was wearing an bright orange woolen scarf they gave him in the studio, and this scarf looked horribly out of place on this frail, poor, sickly creature. Very uncomfortable in front of the camera, the man said, “I am a retired army major, a World War II veteran. I wish to address myself to the soldiers. My sons! Soldiers! I am kneeling before you! Do not shoot at people, the people have made their choice! I want to say… Soldiers… When I was young…”

The old man was searching for words, panicking as he was being broadcasted live to a huge, country-wide audience. “Thank you very much!” said the anchorwoman in a bright and crisp professional voice, eager to end his suffering. The camera zoomed in for a goodbye. For the first time, the old man looked straight into the camera and said, “People just want to be free!” The orange scarf did not look out of place, and I could suddenly tell the guy really was a major. The guy was having his moment, even if a bit late in life.

And this is important. God did not create Man to chew cud for seventy years and then die: God created Man for one, two, or three defining moments, and the old man was having his.

But sometimes official channels were even better than the opposition TV. One report I saw informed the public that “special riot police is always ready to defend the Constitution” and the camera proceeded to get a close-up of fearsome black police dog.

Then I realized that President Kuchma, unwittingly, is a true father of his nation! Im522094136237

There are things in the world, such as trees, oceans, and countries, whose existence depends on all people. And then there are things, such as love, truth, dignity, inspiration, that exist only because of you. If you are not ready to give your all to defend your love and your truth they cease to exist. Again: truth is something that depends solely and exclusively on you; if you fail to defend it, it dies.

There simply is no way to transfer this responsibility on someone else’s shoulders. And from the bottom of my heart I thank God for the existence of President Kuchma, who showed guard dogs to thousands and thousands of Ukrainian students so that they would stand up, put away their Chemistry textbooks, attach their orange armbands and go to the Square.

For truth cannot be defined as a statement that corresponds to reality. Truth is what makes you unafraid of guard dogs. What happens on that Square is no rock concert, people are braving dogs and weapons – and hallelujah! a nation is reborn!

© Matthew Maly, SubmergingMarkets™, 2004

***

December 3, 2004 at 02:30 PM | Permalink | Comments (1) | TrackBack

Monday, September 27, 2004

Democracy in America and Elsewhere:
Part IIIB. Campaigns, Voting, and Representation

Democracy3_1

James S. Henry and Caleb Kleppner**
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As we began to explore in Part IIIA of this election-season series, contrary to the conventional wisdom, the United States of America actually has a great deal to learn from other countries – especially several young democracies -- about designing and operating electoral institutions that are truly democratic. This part of the series continues our comparison with one of those countries, Brazil.

There was perhaps a time when much of the rest of the world viewed the United States of America not just as a militaristic crusader, but as a role model for advocates of liberal democracy everywhere.

These days, however, as former President Carter’s recent caustic comments about the likelihood of continued rigged voting in Florida this year have underscored, the American beacon of liberty is flickering in the wind.
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Increasingly the US is viewed by the rest of the world -- and by some of its most astute internal critics -- as an arrogant, hypocritical, sclerotic plutocracy, whose own electoral institutions, as former President Carter correctly observes, are at risk of no longer meeting even minimal international standards for democratic elections.

Meanwhile, the US has the temerity to lecture other countries (as it did, for example, just this week with respect to Hong Kong) about the meaning of “democracy,” and to selectively intervene in the affairs of other countries in the name of democracy, whenever it suits perceived US interests.
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As shown in Table A, this concern with democratizing the world may be a preoccupation of US policy elites, or it may just be pure rhetoric.

A recent poll by the Chicago Center on Foreign Relations shows that for the American public at large, the goal of bringing democracy to other nations ranks last on a list of fourteen major US foreign policy goals, with only 14 percent believing it to be “very important.” This made it less than one fifth as as important as securing energy supplies, protecting US jobs, or fighting terrorism. Even among policy elites, “democratization” ranked 12th on the list.

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Once again, our aim here is to help Americans understand why their own electoral system has become so anachronistic and dysfunctional. We also hope to encourage them to take more interest in the rest of the world, be a little more modest, and understand that they too live in a “developing country” – one whose own particular version of “democracy” is in dire need of rejuvenation.

CAMPAIGN PROCESSES

Gld_boxCampaign Duration/ Candidate Selection

Brazil. Like the UK and many other democracies, Brazil’s process for selecting Presidential candidates and the political campaigns that follow are relatively abbreviated, with most candidates selected by national parties caucuses, and campaign advertising and other electioneering activities limited to 60 days before the general election. (This is far from the shortest period. Indonesia just held a Presidential election, with 150 million registered voters, about 10 million more than in the US. It limits public campaigning to just 3 days in order to curb political violence, a long-standing Indonesian problem.)
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The US. The US primary process for selecting Presidential candidates is a costly and tedious. It begins up to two-and-a-half years before the general election, wends its way through more than 37 state primaries and party caucuses by mid-March of the election year, and concludes with the main candidates already selected at least 6 months before their party conventions, and 8 months before election day.

The US primary process also gives extraordinary influence to a tiny fraction of voters who turn out for caucuses or primaries in “white bread,” states like Iowa (total primary turnout = just 9 percent of VAP) and New Hampshire (total primary turnout= 29 percent of VAP) that happen to have early primaries.
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Several of these states also follow primary procedures that are only remotely democratic. In Iowa’s bizarre “house party” caucuses, for example, there is no secret ballot, so that one’s corporate bosses or fellow union members can easily observe whether one follows instructions.

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The primary process also has a dramatic impact on campaign costs. With so many primaries bunched together, candidates are compelled to run national campaigns in multiple states. On the other hand, since the order of primaries has nothing to do with each primary’s weight in national totals, the country as a whole is compelled to sit through 9-sided “debates” between pseudo-candidates, over and over again.

All this probably reduces the supply of first-rate candidates who are willing to endure this grueling march. By the time the November election finally rolls around, most Americans are also probably sick and tired of the whole affair. On the other hand, campaign advisors, advertisers, and the news media like the current system -- it generates a prolonged “horse race” and recurrent employment.

Gld_boxCampaign Finance

While most leading democracies, like Germany, France, and Japan, have experienced serious campaign finance abuses, finance has much more leverage in systems like Brazil and the US, where Presidents are selected through expensive direct elections, not parliamentary polls. So far, despite numerous efforts, neither Brazil nor the US has been able to contain the excessive influence of campaign finance directly, but Brazil has made progress indirectly, by providing media access and some public financing.
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In Brazil’s case, the campaign finance issue was highlighted by a recent series of scandals, including the 1992 impeachment and removal of President Fernando Collor, the 1994 “Budgetgate” scandal, the 1997 “Precartorios” scandal in Sao Paulo, the 2002 scandals involving illicit funds raised by Roseanna Sarney and Jose Serra, and the 2004 scandals involving senior Workers Party official Diniz and the “Blood Mafia.”

In the US, this year’s Presidential election will be by far the most expensive in history, nearly twice as expensive as the 2000 election, despite new legislation like the Bipartisan Campaign Finance Reform Act of 2002 (McCain-Feingold), which tried to limit the use of “soft money.”

“Supply-Side” Limits. Both the US and Brazil have repeatedly tried to legislate against the corrosive influence of money on elections by establishing such “supply-side” limits. In the US these efforts date back more than a century. Since the 1980s there have been a string of “reforms of reforms” in both countries to require disclosure of contributions by individual and corporate donors (Brazil), disclose receipts by candidates and parties (Brazil, US), limit the size of individual, union, and corporate contributions (Brazil, US), ban anonymous donations (Brazil, US) limit campaign expenditures (Brazil), and limit the amount that parties can raise (Brazil).
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In the US, virtually all elections at all levels of government are privately funded, with no spending limits unless candidates opt for matched public funding. In federal races, contributions limits are now quite high -- $4,000 per election cycle. And these may be increased if opponents spend their own money. Corporations and unions are prohibited from making campaign contributions, but they have found ways to make huge indirect contributions, by way of Political Action Committees (PACs), state and national political parties, unregulated “in-kind” contributions (like Cisco’s $5 million of free networking services to each party convention) and most recently, virtually-unregulated “527” committees and 501-C4s.

So far, these “supply side” efforts to limit campaign contributions have proved unsuccessful in both countries. Donors and recipients are simply too creative, laundering contributions through “independent” fronts, providing in-kind contributions, spreading contributions across multiple family members, and so forth. Ultimately the reality is that in advanced capitalist societies that have very powerful private interest groups, highly unequal income distributions, sophisticated lawyers, and important government policies up for grabs, the most one can hope for from supply-side regulation is window-dressing – and that the insiders occasionally cancel each other out.

Demand-Side Limits. A much more effective approach is to limit the demand for private campaign funds with a combination of free media, direct controls on campaign spending, and public funding.

In the US, efforts to limit campaign expenditures directly have been throttled by the 1976 Supreme Court decision in Buckley vs. Valeo, which determined that “money is speech” – e.g., that any direct limits on campaign spending by candidates or parties violate the First Amendment.
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US law does allow limits to be imposed on candidates who accept matched public funds, which have been available since 1974. But public funding has been limited, and is getting scarcer – the US matched public funding system is now on the brink of insolvency, partly because voluntary taxpayer contributions on tax returns have plummeted. (Among other reasons, the $3 check-off limits has not recently been increased.)
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So while lesser candidates like Ralph Nader and Al Sharpton relied heavily on public funding for their campaigns, well-funded candidates like Bill Clinton in 1996, George W. Bush in 2000 and 2004, and John Kerry in 2004 have either refused public funding completely, or have limited their use of it to the final few months of the campaign. A few states – Maine, Minnesota, and Arizona, for example – have experimented with providing public funds for state candidates, with positive results, including a sharp reduction in the amount of time politicians devote to fund-raising. But these programs are not expanding, partly because of state budget crises.

As noted, no US-like constitutional limits on campaign spending controls exist in Brazil, or for that matter, in most other democracies, like the UK or Canada, for example. Brazil has adopted some spending limits for political parties and individual candidates, which seem to have been somewhat effective. Brazil has also provided some public funds for all registered political parties to defray campaign and administrative costs.

Gld_boxFree Media

Brazil. By far the most effective measure that Brazil has introduced to level the campaign finance playing field, however, has been the provision of free access to TV and radio for political candidates. TV advertising, in particular, is otherwise by far the most important ingredient in campaign costs. Furthermore, at least in principle, the airwaves are owned by the public. So it is not surprising that Brazil and more than 70 other democracies around the world have adopted such provisions, including most Western European countries, South Africa, India, Russia, and Israel. (Among First World countries that provide free political airtime: the UK, France, Germany, Spain, Italy, Sweden, and Japan.)

In Brazil’s case, ironically, the early adoption of this provision is partly due to the fact that the ownership of radio and TV broadcasting networks in Brazil are even more concentrated than they are in the US, dominated by the Marinho family’s Globo empire and 2-3 other private owners. On the other hand, a majority of Brazilians are poor and semi-literate, and depend heavily on TV and radio for all their news.

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Under Brazil’s free media law, the only forms of paid political advertising permitted are newspaper advertising, direct mail, and outdoor events. Sixty days before an election, 1.5 hours of programming per day - the “horário eleitoral gratuito” - are requisitioned from broadcasters and divided up among political parties in proportion to their seats in the Camara, with a minimum allocation for parties that have no seats. Newscasters and debate broadcasters are required to give equal time to all candidates during this period, punishable by fines. Brazil’s political parties are also entitled to free public transportation, the free use of schools for meetings, and special tax status.

Some broadcasters have complained that these provisions are very costly (to them), that they may reduce news coverage for controversial subjects, and that the viewing public will simply tune out. However, it appears that most Brazilians continue to tune in as usual, and that they actually welcome the concentrated dose of campaigning, as compared with prolonged agony of the US approach.

The US. The US is one of a minority of leading democracies that still provides no free radio or TV access for political candidates. (In addition to Brazil, others that do include the UK, France, Italy, Israel, Hungary, India, Germany, Spain, and Sweden.)

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This is especially important, because in many ways, TV advertising is the key factor underlying the whole campaign finance issue. From 1970 to 2000, US campaign spending on TV ads increased more than 10-fold, faster than any other campaign cost element. This year, the political ad revenues of US broadcasters will exceed $1.4 billion. This makes political advertising second only to automotive advertising as a revenue generator for TV networks. This year, most of this revenue will flow to broadcasting conglomerates like ClearChannel, Cox, and Viacom that are especially well-positioned in the battleground states.

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In theory, since 1971 the Federal Communications Commission – now chaired by Michael Powell, son of the Secretary of State Powell -- has required US broadcasters to sell airtime to political candidates at the “lowest unit rates” available, but in practice this requirement has not been very effective. The 2002 BCRA also tried to limit corporate and labor funding for broadcast advertising to the last 30 days before primaries, but it did nothing about so-called “Section 527” or 501-C4 advertising by issue-oriented groups that are theoretically independent of campaigns.

Among its many other impacts, this policy compels incumbent US politicians to spend a huge portion of their time – at least 28 percent, in one recent study -- raising campaign funds. It also invites incumbents to be unduly empathetic to the media conglomerates that now dominate the US cable, satellite, broadcasting, and publishing markets.

Its key beneficiaries include:

3dbulletClearChannel(1200 radio stations, 37 local TV stations, 103 mm listeners);

3dbullet Cox Enterprises(43 newspapers in Florida, Ohio, Texas, North Carolina, Georgia, Colorado; 9 TV stations; 75 radio stations;

3dbulletDisney (ABC, E!, A&E, History Channel, Lifetime, Tivo (partial), Miramax, ESPN, 10 local TV stations, 66 radio stations);

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GE(NBC, PAX TV Network, MSNBC, CNBC, Universal Pictures, Telemundo, Bravo, Sci-Fi, Vivendi Entertainment, 28 local TV stations);

3dbulletNews Corp/Rupert Murdoch (Fox Network, 20th Century Fox, National Geographic, HarperCollins, The NY Post, Sunday Times (UK), The Times(UK), multiple other Australian and UK newspapers, Avon Books, TV Guide (part), The Weekly Standard, BSkyB, 34 local TV stations);

3dbulletTribune Company(27 TV stations, Newsday, Chicago Tribune, Baltimore Sun, LA Times, 11 other newspapers, 1 radio station, etc.)

3dbulletTime Warner(CNN, HBO, Warner Bros., Court TV, TNT, New Line Cinema, AOL, Netscape, Time Inc. (People, Time, Fortune, Sports Illustrated, Bus 2.0, Life, Popular Science, etc.) Mapquest, Little,Brown);

3dbullet Viacom(CBS, BET, MTV, Comedy Central, 13 other cable channels, Paramount, Simon & Schuster, Free Press, Scribners, Infinity Radio (185 radio stations), 39 TV stations, 5 other radio stations).

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Not surprisingly, under the influence of this tidy little interest group, federal regulation has become more and more lax on a wide range of broadcast- and cable-related issues in the last twenty years, including acquisitions, “lowest unit rate” regulations, “equal time,” digital spectrum, and pricing guidelines for cable network franchise agreements.

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Meanwhile, the detente established between incumbent politicians and this “Sun Valley” alliance has stymied proposals for free political media in the US – and helped to perpetuate the role of money in American politics.

Gld_boxVote Fraud/ Absentee Ballot Abuse/ Missing Ballots

Brazil. Outright vote fraud and vote buying are long-standing problems in Brazil, as in many other developing countries. One recent survey indicated that up to 3 percent of voters – almost 2 million people - may have sold their votes in Brazil’s 2002 election. A new law was adopted in 1999 to increase penalties for buying votes, but evidently there is still much work to do.

On the other hand, one beneficial side-effect of Brazil’s particular approach to electronic voting – which only provides printed copies for a sub-sample of voters – is that most voters aren’t able to prove that they have voted as instructed.

Absentee ballots are also not a problem in Brazil or other countries with centralized voter registration, because they don’t exist – people can vote anywhere, once. Those who happen to be outside the country on Election Day are permitted to cast ballots at Brazilian consulates.
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The US. Outright vote buying is also an ancient American tradition – at least since George Washington bought a quart of booze for every voter in his district when he first ran for the Virginia legislature in 1757. Vote buying still occasionally turns up in the US today, and the Internet has added a new dimension to traditional vote buying, with the appearance in 2000 of sites like www.voter-auction.net and www.winwin.org that permitted voters to swap or even sell their votes in online auctions.

As one of these site’s authors rationalized it, this approach is much more efficient and direct than the standard practice, in which political middlemen like campaign consultants and advertising gurus routinely take 10-15 percent off the top of a campaign’s media spending in exchange for delivering votes.

However, the main areas that are ripe for massive abuse in the US now are probably absentee ballots and “missing/ faulty votes.”

Absentee Ballot Problems. The liberalization of absentee ballot laws since the late 1970s, combined with increasingly lax voter registration laws, and the absence of a national identity system or central voter registration list, have made this a growing problem in the US.

This year, absentee ballots may account for as much as 20 percent of the total US vote, up from 14 percent in 2000. This enables a panoply of specific malpractices, including (1) fraudulent registration and voting in the names of phantom, relocated, or deceased voters; (2) voting by the same individuals in multiple states; (3) gross violations of voter secrecy, including pressuring senior citizens to fill out their absentee ballots in a specific way; and (4) fraudulent voting by Americans civilians or military personnel who are located offshore – that also played a key role in the 2000 Presidential election.

It is not clear which major party has benefited the most from such practices. Bogus registration may have had its finest hour in the notorious 1960 “Chicago miracle,” when thousands of dead people allegedly voted for President Kennedy. This year, however, with the Republican Party in control of all three branches of the US federal government, 28 out of 50 state governorships (including 5 BG states), and 17 state legislatures (including 9 BG states), the Republicans may bear the most watching.

Missing/ Faulty Ballots. Of course the recent US track record with respect to mechanical vote processing is also not encouraging. During the 2000 US Presidential election, the whole country was forced to agonize for months over Florida’s mechanical voting machines, until a highly-politicized US Supreme Court awarded the election to President Bush by a 5-4 vote. CNN and other mainstream media organizations later hired the National Opinion Research Center to conduct a six-month audit of the 2000 Florida vote. Amazingly, when it was concluded, they declared that it showed that “Bush would have won anyway.” In fact a careful reading of the report shows that precisely the opposite was the case.
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Furthermore, subsequent analysis of the 2000 Florida outcome shows that the balloting problems that figured in the Supreme Court decision were just the tip of the iceberg – compared with other glaring problems, like the bogus exclusion of thousands of black “pseudo-felons” from Florida’s voter rolls, and the intentional spoiling of thousands of black ballots.

According to the nonpartisan election monitoring group Votewatch, in the 2000 election Florida’s “hanging chad” problem was dwarfed by other counting problems. An estimated 4 to 6 million voters simply had their votes wasted because of faulty equipment and confusing ballots (1.5- 2 million), registration mix-ups (1.5 – 3 million), and screw-ups at polling places (up to 1 million).
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This year, the US State Department has responded to concerns about a repetition of such behavior by inviting international observers from Vienna’s Organization for Security and Cooperation in Europe to monitor the US Presidential election – for the first time ever.

Gld_boxOther Measures

To prevent public officials in the Executive Branch from abusing their powers to manipulate voters, Brazil’s Constitution also requires them to resign six months before elections if they or their immediate family members intend to run. The US has no such disqualification period for political candidates who have worked in the executive branch.

VOTING SYSTEMS


Gld_boxNational Administration of Elections

Brazil. Like many other emerging democracies, Brazil has an entire separate judicial branch, the Justicia Eleitoral, that is responsible for implementing all campaign finance and voting procedures all levels of government. (1988 Constitution, Articles 118-121).

This system is by no means perfect, but it is far more objective and “party-neutral” than the US system, which is heavily influenced by state and local politics. Brazil’s approach has also contributed to the rapid nation-wide adoption of reforms, like electronic voting.

The US. Since 1974, campaign finance for US federal elections has been administered by an independent regulatory body, the Federal Election Commission. But US voting procedures remain under the control of state and local authorities, even in the case of federal elections. While the National Institute of Standards and Technology makes recommendations concerning voting machines and registration procedures, these are voluntary.

The result is a hodge podge of inconsistent, incompatible and often out-dated paper ballot, machine, and electronic recording procedures that vary enormously among states, and often even within the same states.

Gld_boxDirect Elections/Run-Offs/”Electoral College”

Brazil. In the case of Brazil’s Presidential elections, there is no “electoral college” that stands in the way of the popular will. Article 77 of Brazil’s 1988 Constitution explicitly provides that Brazil’s President is that political party candidate who obtains an absolute majority of bona fide votes. If no candidate emerges from the first round of voting with an absolute majority, a run-off election is to be held within 20 days – as it was in October 2002. Elections for Brazil’s 26 state governors and the mayors of its large cities are also subject to similar runoffs.

The US. Presidential elections are decided by the notorious “electoral college.” As discussed below, this is really just a throwback to the protection of Southern slavery. Currently it serves mainly to protect the influence of “strategic minorities” in a handful of smaller so-called battleground states. (See the discussion in Part I of this series. ) In today’s highly partisan environment, it also (temporarily) gives minority candidates like Nader tremendous destructive power – without, however, affording them any representation at all between elections.
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Indeed, the US’ “winner-take-all” system systematically discourages third party power and minority representation. In a more democratic system with proportional representation, preference voting, or even Presidential run offs (see below), voters could freely vote for candidates like Nader without fear of electing their “third choice.” It is no accident that parties like the Green Party, the Libertarian Party, and the Reform Party are in deep crisis, even as Nader’s stubborn crusade continues. Would that more of his spite were directed at “winner take all” and the electoral college, which has helped to institutionalize a political duopoly.

Technically, under the US Constitution (Article II), Americans don’t even have the right to vote for their President or Vice President. This right is delegated to Presidential electors, who may be selected by state legislatures any way they see fit. Indeed, popular vote totals for President and Vice President were not even recorded until 1824, and most state legislatures chose the electors directly. Since then, most states have chosen them according to the plurality of the popular vote in each state. But South Carolina – always a hotbed of reaction, with the highest ratio of slaves to whites -- continued to ignore the popular vote until the end of the Civil War.
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Nor is the number of Presidential electors per state even determined by the relative population or voters per state. It is fixed at the number of Senators and Congressmen per state, with a minimum of 3 for each state and the District of Columbia. This guarantees that small rural states are over-represented. Because of the winner-take-all system, it also effectively disenfranchises everyone in a state who votes for candidates who lose that state, and partly disenfranchises all those in large states. At least four times in US history – 1804, 1824, 1876, 1888, and 2000 – this anti-democratic system produced Presidents who failed to win a plurality of the popular vote.

In the context of other democracies around the world, the electoral college is a very peculiar institution indeed. Kenya’s former dictator, Daniel Arap Moi, adopted something similar to control the influence of the country’s dominant tribe, the Kikuyu. The Vatican’s College of Cardinals has something similar.

There have been many calls for the electoral college’s abolition, most recently by the New York Times in August 2004. But this would require a Constitutional amendment that would have to be ratified by three-fourths of the states – at least a quarter of whom have disproportionate power under the existing system.

It is course possible for a state to provide that its own electors are awarded to Presidential candidates in proportion to the popular vote within a state -- as Colorado is considering this year. However, unless all battleground states go along with this, which is unlikely, it is unlikely to gain national momentum.


Gld_boxElectronic Voting/ Registration

Brazil. To the surprise of many, Brazil has recently become the world pioneer in electronic voting and registration. When it held national elections in October 2002, 91 million out of its 115 million registered voters turned out – more than 70 percent of those of voting age, and 3 million more than voted in the US elections that same fall. In terms of global electoral history, the number of votes received by the winner, Luis Ignacio de Silva (“Lula”), was second only to Ronald Reagan’s total in 1980.

To handle this heavy turnout, Brazil relied heavily on electronic voting. The Tribunal Superior Eleitoral (TSE) had been experimenting with electronic voting systems since the early 1990s, becoming a real pioneer in the use of “DREs” (“direct recording electronic”) voting machines. Brazil first used DREs on a large scale in its 1996 elections, with 354,000 in place by 2002. For that election, it deployed another 52,000 “Urnas Eletronica 2002,” a state-of-the-art DRE that had been designed by Brazilian technicians with the help of three private companies – Unisys and National Semiconductor, two US companies, and ProComp, a Brazilian assembler that has since been acquired by Diebold Systems, the controversial American leader in electronic voting systems.
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Because Brazil has been willing to commit to such a large-scale deployment, each Urna costs just $420, less than 15 percent of the cost of the $3000 touch-screen systems that Diebold features in the US. The Brazilian system lacks a touch screen; voters punch in specific numbers for each candidate, calling up his name and image, and then confirm their selections. The numerical system was intended to overcome the problem of illiteracy, which is still a problem in parts of the country. To handle operations in remote areas like the Amazon, the machine runs on batteries up to 12 hours. Initially there were no printed records, but the Electoral Commission decided to retrofit 3 percent with printers, to provide auditable records.

Like any new technology, Brazil’s approach to electronic voting is by no means perfect. Indeed, significant concerns have been voiced about the system’s verifiability and privacy – especially about the TSE’s recent move to eliminate the printers, supposedly because they slowed voting.

Among the most important proposed improvements are a requirement that all voting machines produce both electronic and paper records, in order to leave an audit trail and increase voter confidence in the system; that system software be based on “open” standards and available for audit; and that the system for identifying eligible voters be separated from voting, to insure privacy.

Despite these concerns, most observers agree that Brazil’s system performed very well in 2002. In Brazil’s case, within a couple days, winners were announced almost entirely without dispute, not only for the Presidential race, but also for the 54 Senate races, 513 Congressional races, 27 state governorships, 5500 mayors, 57,316 councilmen, and many other local contests – all told, races involving more than 315,000 candidates.

Given this success story, many other countries that have traditionally had serious problems with paper ballot fraud are also considering its use, including Mexico, Argentina, the Dominican Republic, India, the Ukraine, and Paraguay.

The US. This country, where the choice of voting technology is localized and highly political, still relies very heavily on paper ballot-based and mechanical voting system – while 42 states will have new voting machines in 2004, only about 29 percent of US voters (at most) will cast electronic ballots this year. And with each state free to adopt its own local variant on the technology, it is not surprising that implementation has been problematic -- recent experiments with electronic voting in New Mexico, California and Florida have all been riddled with problems.
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In 2002, the US Congress passed the “Help America Vote Act” (HAVA), which authorized $3.9 billion to be spent by 2006 to help state and local governments upgrade their election equipment. Given the fragmented nature of US election administration, however, this has produced a competitive scramble for government contracts among 3-4 leading US electronic voting firms, including Diebold Election Systems, ES&S, and Smartmatic, the Florida-based company whose 20,000 electronic voting machines successfully handled Venezuela’s Presidential Recall referendum this summer.

But with no mandatory national standards and the numerous operating problems that we’ve already seen at state and local levels, it is not surprising that there is widespread, perhaps exaggerated, concern about the potential for hacking and manipulation. In this highly-politicized context, with no adequate checks and balances over the procedures, some observers have argued that computerizing US voter registration and electronic voting will actually make things worse.

Relative to more basic problems like absentee ballots, phony registration, malapportionment, and misrepresentation, we believe that these concerns are exaggerated. However, like many other elements of our “pseudo-democratic” political system, it is very hard to argue that the US track record with respect to electronic voting is an achievement.

REPRESENTATION


Gld_boxProportional Representation

Brazil. Brazil’s 81 Senators are elected by simple plurality for eight-year terms. But Article 45 of Brazil’s Constitution provides that the 513 members of Brazil’s House of Deputies are elected for four year terms according to a voting system called “proportional representation” (PR). Brazil also uses PR to elect city councils and state legislatures.

Unlike the “plurality/single member district/ “first past the post” system that is used in most US federal and state elections, this approach insures that the overall mix of elected representatives more accurately reflects voter preferences. It also represents a wider range of opinions, since party candidates compete with each other. Indeed, various forms of PR are now used for the election of “lower houses” by all other countries in Latin America, almost all European countries, all the world’s largest democracies, the new democracies in Iraq and Afghanistan, and, indeed, the vast majority of democracies in the world today -- except for the US, Canada, the UK, and former British Caribbean colonies like Jamaica and the Bahamas.

Indeed, many of the world’s leading corporations have also turned to proportional representation, cumulative voting, or other forms of preference voting for purposes of electing their corporate boards.

Brazil uses what’s known as the "open list d’Hondt” version of PR. Here, political parties or coalitions register proposed lists of congressional candidates with the Electoral Court. There are no single-member congressional districts – rival candidate lists are drawn up by each party for each of Brazil’s 26 federal states, with the number of representatives per state determined by population, subject to minimums and maximums. Voters can opt for a party’s entire list, or select among individual candidates – unlike a “closed list” PR system, where candidates don’t compete with each other.

Of course Brazil’s proportional representation system is by no means perfect. Some have argued, for example, that using its 26 states as electoral districts has made Brazil’s legislators too remote from voters, and that smaller districts, or even a “mixed” PR system like that used in Mexico, Germany, or Venezuela may be preferable. Some voters may also find it too difficult to choose among so many different candidates, leading them to opt for party slates.

However, when it comes to buying shampoo or automobiles, most consumers believe that increased variety is a good thing – why should politics be any different? And it is hard to imagine an elected official who is more remote from minority voters than one who is elected – as more than 95 percent of US Congressmen now are – in a district that predictably goes either Democrat or Republican, year after year. This system, in turn, encourages the country to divide into polarized sectarian camps, where even majority voters feel less well-represented because incumbents can take them for granted.

Some have argued that the Brazil’s open list version of the PR system has contributed to a weaker party system, and to competition among a party’s own candidates. For example, any political party in Brazil can put forth candidates without having to obtain a minimum of the national vote. Party weakness may also be encouraged by the fact that incumbents can change parties without losing their spots on the ballot, one of several measures that favors candidates over parties. This may indeed have encouraged a proliferation of political parties – in Brazil’s 2004 Camara dos Deputados and Senado Federal, for example, 16 different ones are represented. Even with stable coalitions among the top 3-4 parties, the concern is that all this can substantially increase the negotiation costs of legislation, block Presidential initiatives, and lead to deadlock.

On the other hand, such negotiations may also produce outcomes that are more reflective of the popular will. And recent studies of the actual operation of Brazil’s Congress suggest that the concerns about fragmentation and policy deadlock have been overstated. Furthermore, the fact that delegate turnover in Brazilian elections since democracy has averaged more than 50 percent may be viewed as a good thing – especially compared with the “dynastic legislature” that the US has acquired.

The US. There is actually a long history of preference voting and proportional representation in the US at the state and local level. For example, a majority of the original 13 colonies’ legislatures were elected using multi-member candidate slates, and more than 60 percent of city councils in the US are still elected with at-large slates. There have also been numerous proposals to expand their use at the federal level, especially for the US House, which could be done without a Constitutional amendment.

However, currently, delegates to the House and Senate and almost all state legislatures are chosen in single-member-district “first one past the post” contests, where voters each district choose just one candidate for each office. Those voters whose candidate wins a plurality of counted votes (e.g., less than or equal to 50.1%) are awarded 100 percent of a district’s seats; all other voters get zero representation. This implies two kinds of inefficiency – “over-represented votes,” those that a winning candidate didn’t need in order to prevail, and “under-represented votes,” those cast for losing candidates.

Compared with a PR system like Brazil’s, the US is monumentally inefficient – in two-way races, 49.9 % of all votes in “winner take all” races are always wasted, in the sense that they are either more than winners need to prevail, or are votes for the loser that receive no representation.

There is a huge literature on the merits and demerits of proportional representation, which contrast its increased representation for minority interests with its alleged tendency to produce unstable coalition governments (the classic cases being Italy and Israel.) At the end of the day, there are undoubtedly some empirical trade-offs to be made. But the fact is that the vast majority of the world’s democracies, as well as many of the world’s leading private companies, have opted for various forms of PR systems for representation – with the exceptions of the US, Canada, and the UK. And among those that have opted for PR systems are all of the world’s newest democracies, including Brazil, South Africa, Indonesia, East Timor -- and even our own favorite new Middle Eastern democracies, Afghanistan and Iraq. Is there no content in this signal?

Gld_boxApportionment/Gerrymandering/ “Safe Seats”

Like other countries with federal systems, Brazil and the US have struggled to (1) provide representation that is proportional to the actual number of voter-aged residents in all regions of the country, while at the same time (2) providing at least a minimum degree of representation for all regions, no matter how heavily populated.

In Brazil’s case, significant “malapportionment” – departures from representation that is strictly proportional to population -- continues exist, mainly in the form of overrepresentation for rural states in the National Camara and Senate. This is because Brazil’s Constitution guarantees each of its 26 states, plus the Federal District, at least 3 Senators regardless of population, and because representation in Brazil’s Camara is a truncated function of population, with each state guaranteed a minimum of 8 representatives and a maximum of 70, regardless of population.

However, as shown in Table 6,the overall degree of “mal-apportionment” -- defined as the median ratio of a state’s share of representatives to its share of VAP – is only slightly higher for Brazil’s Camara than in the US House, while the degree of mal-apportionment for Brazil’s Senate is much lower.

Furthermore, unlike the US, Brazil permits its federal district – Brasilia – to elect both Senators and Congressmen. In contrast, the US has stubbornly refused to permit the 563,000 residents of the District of Columbia to have any voting representation in either the House or Senate.

Finally, the total number of elected national representatives in Brazil – 513 deputies for the Camara and 81 Senators – is more than twice as high per voting age resident in Brazil than the US. Since the US has been slow to adjust the total number of House and Senate members in response to increases in population, it now has one of the lowest ratios of members to voters among leading democracies – more than six times the ratios in the UK, Canada, and South Africa.

Compared with countries like Brazil that elect their Congressmen from multi-candidate lists for fixed states, the US political system’s focus on “single-member districts” is also far more open to partisan gerrymandering. There is a long history of dominant parties drawing district lines to favor their own candidates or create safe seats. Traditionally, every ten years, state legislatures in the US redraw their district boundaries to the fit the latest Census data.

Several other factors have also exacerbated this trend toward the creation of careerist legislators in the US. As one recent analysis concluded,

…(T)he incidence and extremism of partisan redistricting have escalated. Voting patterns have become more consistently partisan, enabling political mapmakers to better predict how voters will vote. And advances in computer technology and political databases allow cartographers to fine- tune district boundaries to maximize partisan advantage.


In addition, in its recent decisions, the US Supreme Court has relaxed its constraints on gerrymandering. So state legislatures that are dominated by single parties have recently become much more aggressive. In the last decade, for example, Republican-dominated legislatures in Pennsylvania, Colorado, and Texas decided not to wait for a new Census, but to exert their muscles during the middle of the decade. The results were extraordinary power grabs, especially in Texas, where 5 new Congressional seats were created by the Republican-dominated legislature. And this aggressive redistricting, it now turns out, was also fueled by campaign finance abuses –- completing the circle.

More generally, districting isn’t an issue that necessarily favors either main party. But one consequence of it is a clear trend toward more safe seats for incumbents of both parties, fewer competitive races, and a growing geographic polarization into “red” and “blue” districts – the so-called “Retro-Metro” divide.

In this fall’s US Congressional races, for example, out of 435 US House races, only about 30 will be decided by margins of less than 10 percent, and just 5-6 percent, or 20-25, that will be “effectively contested,” with a serious possibility that seats may change party hands. Many of these involve seats where incumbents are voluntarily retiring. For the US Senate, where redistricting is not an issue, the incumbency advantage is only slightly lower -- only 4-5, or 10-12 percent, of this year’s 34 Senate races will be effectively contested.

So regardless of who wins the Presidency this year, the reality is that the US House and Senate are both likely to remain under Republican control.

This is consistent with a trend toward increased advantages for incumbents in US elections. In 2002, for example, just 4 out of 383 US House incumbents lost their seats to non-incumbent challengers. This was the highest rate of incumbent reelection since 1954. Of 435 races in 2002-04 (including special elections), 81 percent were won by incumbents with margins of more than 20 percent. Of the 379 incumbents who were reelected in 2002, the median margin of victory was 39 percent. (See Table 7.)

Among the 56 non-incumbents who were elected, 11 won in newly created “safe” districts, by a median margin of 19 percent. Thirty-two were elected from the same parties that had represented their districts before, by a median margin of 15 percent. Just 13 were new non-incumbents who managed to oust the prevailing party in their districts, mostly by defeating other new non-incumbents. In fact, in 2002, more US Congressmen were elected in uncontested races, with 100 percent of the vote (n=31), than in “close” races where the winning margin was 10 percent or less.

Given these trends, it is not surprising that the average lifespan of Congressmen has been increasing -- apart from voluntary resignations. As of 2004, the median Congressman had served 8 years, and 20 percent had served at least 16 years or more. The main source of turnover in this increasingly entrenched, carefully-districted, careerist “people’s house” is now retirement, death, or incarceration, not voter decisions.
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Similar trends are evident for the US Senate and the Presidency, although the advantages of incumbency are less than for House races. In the case of 2002 Senate races, 16 of 33 races (48%) were won by more than 20 percent, and 67 percent were won by more than 10 percent. Incumbents were reelected in 23 (88 percent) out of 26 races where they decided to run. As in the House, the main source of turnover was retirement or death. As of 2004, the median Senator had been in office 10 years, and the top 20 percent had median tenures of 28 years.

As for the Presidency, out of 42 Presidents through Clinton, 25 ran for reelection, and 16 (64 percent) were reelected. Whether or not President Bush can take comfort in these odds is less clear, however – among the ten post-War Presidents that preceded him, just four (Eisenhower, Nixon, Reagan, and Clinton) were reelected.

At least at the Congressional level, there appear to be strong interdependencies between incumbent advantage and the existing systems for financing campaigns, conducting elections, representing voters, and defining districts. Finance not only strengthens incumbent advantage; it also follows from it, in the sense that incumbency makes it much easier to raise money.

Having once established this interdependent system of interests, it is very hard to unravel. Is it any wonder that more and more Americans have simply decided that they have better things to do with their time than vote – even though the issues at stake have never been more important, not only for Americans, but for the world at our mercy?

SUMMARY - BRAZIL V. US, DEMOCRACY 101
As we’ve argued here and in Part IIIA, compared with the Unite States, Brazil’s new developing democracy has a much fairer, more efficient, more trustworthy system for administering elections, qualifying voters, conducting campaigns, curbing the influence of private money on campaign outcomes, making sure votes count, providing representation in proportion to voter sentiments at both the Presidential and legislative levels, and defining geographical boundaries for election districts. 811a

All this adds up to an electoral system that is, on the whole, much more democratic than that in the United States.

OTHER THIRD WORLD ROLE MODELS?

Nor is Brazil alone in providing a potential role model for those in the US who are serious about revitalizing democracy at home:

Sign_up_for_democracy

3dbulletIn April 2004, South Africa held its third national election, with 15.9 million South Africans, or 76.7 percent of registered voters, turning out. While the ANC won a commanding 69.7 percent of the vote, 20 other parties also participated, and 11 of them won seats in Parliament. Compared with 1994, when South Africa held its first post-apartheid election, public confidence in the political system and the future have both risen substantially.

This 2004 turnout, while impressive, was below the record level set in 1994, when more than 19 million South Africans voted in the country’s first democratic elections ever. However, the difference may be explained by the fact that in that first election, no formal registration was required -- South Africa wisely considered it far more important to hold national elections as soon as possible, rather than worry too much about registration niceties. In subsequent elections, as it implemented formal registration, voter turnout has declined somewhat. (The new US-backed regime in Iraq and Afghanistan, which have devoted an inordinate amount of time to preparing for national elections and registering voters, might well have learned from this example.)

To reinforce confidence in its electoral processes, South Africa has adopted special procedures to insure that independent international observers are present at its elections; in 1999 its elections were attended by more than 11,000 observers, including representatives from the OAU and the Commonwealth.

3dbulletIndia, the world’s largest constitutional democracy, also held a successful parliamentary election in April-May 2004. More than 387 million people, or 56 percent of registered voters, voted, choosing among 220 parties and 5400 candidates, using more than 1 million electronic voting machines to register their preferences.

3dbulletIndonesia, the world’s largest Muslim country, and its second largest democracy, held its first-ever Presidential election, as well as parliamentary and local elections, in May-September 2004. More than 155 million people, or 75 percent of registered voters,turned out to choose among six different Presidential candidates, for the most part by driving nails through the pictures of their favorite candidates on paper ballots. With few exceptions, the voting proceeded peacefully, and although there was substantial vote-buying on all sides, about 9 percent invalid votes, and some intimidation, independent monitors like the Carter Center and the LP3ES-NDI found the election generally fair.

3dbulletVenezuela’s President Chavez is undoubtedly a very divisive leader – not unlike some recent US Presidents that we have known. But at least his opponents have been able to make use of a right that no Americans have – the constitutional right to initiate a recall petition half-way through a President’s term, and if 20 percent of registered voters agree, to demand a recall referendum. Fig_35_hugo_chavez_frias

After a prolonged efforts by the opposition to gather the necessary signatures, in May 2004 Venezuela’s Supreme Court – albeit, like the US Supreme Court, populated with supporters of the President -- certified that there were indeed enough signatures to require a referendum on whether Chavez could serve out his current term until 2007.

In August 2004, in a national referendum that was conducted with electronic voting machines, Chavez won by an overwhelming 59-41 percent margin. While diehard opposition leaders, as well as the Wall Street Journal and the US Government -- which had supported a 2002 coup attempt against Chavez -- expressed doubts about the margin, the referendum was validated by independent observers like President Carter, the OAS, and a team of Johns Hopkins/Princeton political scientists.

This means that Chavez has now held five free elections and referenda in seven years, more than any other Venezuelan President. He won them all by commanding margins.

We recall the fact that in 2000, the hapless Al Gore captured a plurality of the US popular vote (48.4 percent), despite all the games played with ex-felons, absentee vote abuses, and lost ballots discussed above, and even with third- party candidates taking another 3.7 percent of the vote.
Democracy

Since it is hard to believe that President Bush’s absolute popularity has increased very much since then, one wonders what the results might have been if only the US were as democratic as Venezuela – e.g., if only Americans had been able to initiate such a Presidential recall referendum, and like our good Latin neighbor to the south, determine the outcome by popular vote of the nation as a whole, under the watchful eyes of international observers.

Instead, as we've argued here, the US is still captive to age-old anti-democratic contraptions, superstitions, and subterfuges, and its particular version of "democracy" still labors in the long dark shadows cast by venerable institutions like states rights, felon disenfranchisement, and white supremacy. Eagle_in_war_paint_1

We can try to impose our self-image on to the world if we like, but we should not be surprised if the world asks us to hold up a mirror.

***
(Next: Democracy in American and Elsewhere, Part IV: Four Years Later, Four More Years?)

**

Credos to Inter-Brasil's Lourival Baptista Pereira Jr. for the inspiration for this piece.


©James S. Henry and Caleb Kleppner, SubmergingMarkets™, 2004


September 27, 2004 at 12:07 PM | Permalink | Comments (0) | TrackBack

Wednesday, September 22, 2004

Democracy in America and Elsewhere:
Part III: How the US Stacks Up:
-
A. Qualifying Voters

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James S. Henry and Caleb Kleppner
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These are curious times, with President George W. Bush, long an outspoken critic of “nation-building” and the UN, now become a radical Wilsonian, declaring to the General Assembly this week his intention to establish a “UN Democracy Fund” to propagate democracy around the world.

We certainly wish President Bush much greater success than President Woodrow Wilson, who saw his own favorite proposal to “make the world safe for democracy,” the Versailles Treaty, throttled by Republican Senators who opposed the League of Nations, and suffered a stroke in the ensuing battle.

Knowing President Bush, he will probably not be dissuaded from his mission by this unhappy history, or by the fact that many other world leaders, like France's Chirac and Brazil's Lula, are now much more concerned about fighting global poverty and taxing "global bads" like arms traffic, anonymous capital in offshore havens -- an idea we first proposed in the early 1990s -- and environmental pollution than they are about neo-Wilsonian evangelism.

But of course any suggestion by the US that democracy can actually be propagated by multilateral consensus rather than by unilateral military aggression is always to be welcomed.
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Before proceeding any farther with this latest American crusade to sow democracy abroad, however, it may be helpful to examine how the US itself really stacks up as a “democracy," relative to "best democratic practices" around the world.

One approach to this subject would be to start off with a comparison with other leading First World democracies like the UK or France. After all, at the outset, one might think that only such countries have the well-educated, politically-engaged citizenry, political traditions, affluence, and technical know-how needed to implement truly state-of-the-art democratic processes.

However, following the lead of former President Jimmy Carter’s brief comparative analysis of Peru in 2001, we find it more interesting to see how the US compares with younger developing democracies that lack all these advantages – much less access to the yet-to-be-created UN Democracy Fund.

In our case, we’ve chosen Brazil, the world’s sixth most populous country, with 180 million inhabitants, two-thirds of South America’s economic activity, a federal system and a long history of slavery (like the US).

As we’ll see, our overall finding is that while Brazil’s democracy has plenty of room for improvement, it already boasts a much more democratic electoral system than the United States of America.

BRAZIL VS. THE US -- AND THE WINNER IS.....
From 1937 to 1945, and again from April 1964 until early 1985, Brazil was ruled by (US-backed) military dictatorships. Since then, however, Brazilians have freely voted to elect their President three times. They’ve also elected their bicameral National Congress, 26 state governors and legislatures, and thousands of city mayors and councilmen every two years.
Brazil

While Brazil’s electoral institutions are by no means perfect, and its campaign finance laws and federal structure have many of the same drawbacks as the US, it has recently been working very hard to improve these institutions. I

Indeed, it turns out that Brazil is making remarkable progress toward effective representative democracy, especially for a country with enormous social problems, a high degree of economic and social inequality, and a per capita income just one third of the US level
Brazil_flag

Brazil’s new democracy provides a striking contrast along many dimensions – in particular, the processes and structures by which it (1) qualifies voters, (2) conducts campaigns, (3) administers voting, and (4) provides fair representation of voter preferences. The following essay focuses in on the first of these elements; the sequel will deal with the others.

QUALIFYING VOTERS

Gld_box 1. Mandatory Voting/Registration
To begin with, Brazil treats voting as a civic duty, like military service (which is obligatory, with alternative service available) and paying taxes. Voting is mandatory for all citizens age 18 to 70, except for illiterates.

Actually “mandatory voting” is a misnomer – people are just required to show up at a polling station or consular office and submit a vote, which can be blank. There are fines for violators who lack valid excuses, like illness.

Brazil adopted mandatory voting in part to overcome the apathy induced by more than two decades of military rule. It is just one of many countries that have mandatory voting, including Australia, Belgium, Cyprus, Greece, Luxembourg, Liechtenstein, one Swiss canton, Egypt, Fiji, Singapore, Thailand, Argentina, Bolivia, Costa Rica, the Dominican Republic, Ecuador, Uruguay, and Venezuela.
Brazil1003
Mandatory voting in Brazil is facilitated by the fact that, as in 82 other countries, all Brazilians age 18 or over are required to obtain a national identity card, with their photo, fingerprint, signature, place and date of birth, and parents’ names.

These cards, which are now becoming digital, are needed to qualify for government services and to conduct financial and legal transactions. They also enable cardholders to vote at polling booths anywhere in the country, eliminating the need for a separate, costly voter registration process.

To encourage voter turnout, Brazil also makes Election Day a national holiday, and often holds its elections on Sundays. Any eligible voter may be required to assist for free at the polls.

Mandatory voting, plus Brazil’s proportional representation system (See Part IIIB), have yielded voter turnouts in recent national elections that have routinely exceeded 75 percent of the voting-age population (VAP).

By comparison, US voter turnouts have recently averaged less than 45 percent of the VAP.

Brazil’s mandatory system has also had many other benefits. It has probably increased turnout the most among social groups that have much less access to education and income, thereby boosting their “voice” in the political system. It has also placed pressure on public authorities to implement efficient voting procedures, and shifted responsibility for registration and turnout away from Brazil’s political parties, allowing them to focus on campaigning.
Lula

As one might expect, mandatory voting does produce slightly more blank votes as a proportion of all votes than we see in US elections. But the system also seems to have made voting more habitual.

Some countries, like Austria and the Netherlands, have recently abandoned the practice, and Brazil is also considering this, now that the population has re-acquired the voting habit. As Brazil matures, especially given its use of proportional representation, it may well be able to follow in the footsteps of these other countries and eliminate mandatory voting without sacrificing high turnout.

The US. Voting is entirely voluntary in the US, and there are no national identity cards or centralized voter registration systems. Originally, many states viewed voter registration as undemocratic. But in the course of the 19th century, growing concerns over vote fraud, combined with the desire in some states to curb voting by blacks and the lower classes, led to the widespread adoption of stricter voter registration laws. By now, every state but North Dakota requires voters to “register” before they can “vote.” US elections are also never held on Sundays, nor is Election Day a national holiday.
Florida

As we’ll examine closer in Part IIIB, the US’ “winner-take-all” electoral system is also highly inefficient, with more than 95 percent of all Congressional incumbents now re-elected, and almost all US House and Senate races now a foregone conclusion. So US voters are naturally not eager to participate in such “Potemkin” elections, which are approaching Soviet-like party reelection rates (though the US does have TWO Soviet-like parties.)

None of this has helped to encourage voter turnout. Not surprisingly, therefore, for the entire period 1948-1998, US voter turnout averaged just 48.3 percent as a share of VAP, and ranked 114th in the world. This was the lowest level among all OECD countries -- forty percent lower than the average turnouts recorded in First World countries like Germany, Italy, Sweden, and New Zealand. Even if we omit the 17 countries like Brazil with mandatory voting, it is hard to make this track record look like an achievement.

One can argue that relatively low turnout is precisely the point. Indeed, participation by ordinary Americans in their political system has always been a bit trifle unwelcome. For example, just 6 percent of all American citizens – 20 percent of whom were slaves -- participated in George Washington’s election in 1789. This was mainly because most state legislatures at the time had decreed that voters had to be white, propertied, male, Protestant and at least 21 years old. Studies of 19th century voter turnout in the South also show that turnout, which once exceeded 60 percent in the 1880s, plummeted sharply in the next 30 years under the impact of tougher registration laws that targeted black voters. To this day, the Neo-Republican South still boasts the lowest turnout rates and highest black population shares in the country.

Some cynics argue that low US turnout rates are just a sign of how deeply “satisfied” American voters are with the way things are. However, these turnout rates have declined sharply over the last three decades, at a time when it is hard to believe that Americans have become more and more satisfied with their political system.

In 1968, for example, 73.2 million Americans voted, a 61 percent turnout level. Thirty years later, in 1998, the number of Americans who voted was still just 73 million -- despite the fact that US population had increased by 40 percent.

Beyond voting, as of 2002, one US citizen in three (33.6 percent) did not even bother to register to vote. And that proportion was higher than it was in 1993, when Congress passed the National Voter Registration Act, which was intended to facilitate voter registration.

Evidently a majority of American voters have now become so “satisfied” that they no longer choose to participate in it at all. According to this bogus "apathy" theory of non-registration, the most “satisfied” groups of all must be blacks, other minorities, youth, the poor, and residents of Southern states, whose turnout rates are all miserably low.

In 2002, in four states (Texas, West Virginia, Indiana, and Virginia), less than 40 percent of all eligible citizens of voting age voted. Of 24 million Americans between the ages of 18 and 24, 38 percent registered, and 4.7 million, or 19.3 percent, voted. Just 27 percent of unemployed citizens, 30 percent of Hispanic citizens, 30 percent of Asian American citizens, 30 percent of the 35 million disabled Americans, 35 percent of all women ages 18 to 44, 37 percent of high school graduates, and 42 percent of all black citizens voted.

In fact, as we’ll examine later, there are very important structural reasons that help to explain why these groups fail to register or vote.

In the case of black males, for example, prisoner and ex-felon disenfranchisement may account for a substantial fraction of their relatively low participation rates. And 70 percent of those who registered and didn’t bother to vote in 2002 blamed logistical problems – transportation, schedule conflicts, absence from home, registration problems, homelessness (2.3-3.5 million adult Americans, depending on the year), the failure to get an absentee ballot on time, inconvenient polling places, or illness (including 44% of non-voting registrants age 65 or older).

All these obstacles affect poorer, less educated, older voters more than others. Most of them might easily be addressed with improved voting technology, if this country’s leaders, despite their putative concern for democratization around the world, were really serious about implementing democracy at home.

Meanwhile, in 1998, some 83 million Brazilians voted – 5 million more than in the entire US, which has about 100 million more citizens. Brazil’s voter turnout increased dramatically since the 1960s, from 37 percent of VAP in 1962 to an average of more than 80 percent in 1994-2002. In 2002, while 88 million Americans were proudly exercised their right to vote, so were 91 million Brazilians – for an 81 percent turnout. On the “satisfaction” theory, all these Brazilians must be nostalgic for the dictatorship.

After the 2002 Congressional elections, some US political pundits were impressed because voter turnout had increased slightly, from 41.2 percent in 1998 to 42.3 percent (46.1 percent of all citizens).

From an international perspective, however, that merely put the US on a par with Haiti and Pakistan –- just half of Brazil’s level.

Overall, the US trends described here are hardly indicative of “voter satisfaction.” Rather, they are a very disturbing sign that there are deep structural impediments to voting in America. Furthermore, the grass roots organizing power that has always been essential for getting out the vote in this country, much of it supplied by parties and unions, may have been waning.

From this angle, it will be very interesting to see whether this November’s contest, and the elaborate new organizing drives that have been mounted to increase US voter turnout and registration, will reverse these trends. No doubt turnout will be higher than it was in the dismal 2002 off-year election, but that's not saying very much. A more telling indicator will be to see whether turnout surpasses the (relatively modest) 59 percent median VAP turnout rate that the US recorded in nine Presidential elections over the whole period 1968-2000. We would love to see it happen, but since that would amount to a 10 percent improvement over the turnouts recorded in 1996 and 2000, we doubt it will happen.



Gld_box2. Voting Rights for Prisoners and Ex-Felons

Brazil. Disenfranchising prisoners and ex-felons is unfortunately a longstanding, widespread departure from “one person, one vote” -- a legacy of the age-old practice of ex-communicating social outcasts. Worldwide, there is a growing trend toward discarding this medieval practice, with 32 countries now allowing all prisoners to vote and 23 more that allow certain classes of them to do so.
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Brazil is one of 54 countries that prohibit prisoners from voting while they are in jail, but it permits them to vote after they are released, or are on parole or probation.

The US. The American approach to prisoner voting is much more restrictive than Brazil's. All but 2 (Vermont and Maine) of the 50 states disenfranchise all incarcerated prisoners, including those awaiting trial. Thirty-four states disenfranchise all felons on parole, while thirty disenfranchise those on probation.

Furthermore, the US is one of only 8 countries where ex-felons are temporarily or permanently disenfranchised even after they have completed their sentences, unless they successfully petition the authorities to have their voting rights restored. In 7 US states, felons are disenfranchised for several years after serving their sentences – for example, 5 years in Delaware, or 3 years in Maryland. In 3 states – Arizona, Maryland, and Nevada -- recidivists are permanently disenfranchised. And in 7 other states – Alabama, Nebraska, Kentucky, Mississippi, and the “battleground states” of Iowa, Florida, and Virginia – all ex-felons are permanently disenfranchised.
Convictsm

Many of these rules date back to the Ante-Bellum period of the 1880s, when they were enacted by Southern and border states to maintain control over the newly-freed blacks -- contrary to the spirit of the 15th Amendment.

The impact of prisoner and ex-felon disenfranchisement on electoral outcomes is much greater in the US than Brazil, because of the electoral college system and the size, composition and location of the US convict population. Indeed, while Brazil's prison system is horribly overcrowded, its entire prison population is just 285,000 inmates -- .2% of Brazil’s voting-age population.

The US, in contrast, now has the world’s highest proportion of its population in prisons, jail, on probation or parole, or under correctional supervision, outside jail. As of August 2004, this “correctional population” totaled 7.2 million adults, 3.3% of the US VAP. Relative to population, as well as in absolute terms, this is the largest US prison population ever. It is also by far the largest prison population in the world, well ahead of the US’ closest competitors, China and Russia.

There are also another 3.2 million American citizens – 1.4% of the US VAP -- who have served time in state or federal prison for felonies and are no longer in correctional programs. Depending on their states of residence, they may be subject to the voting restrictions imposed on former felons in the US.

Both these totals have soared since 1980 because of stiffer drug laws and sentencing laws -- the “correctional” population as share of VAP has almost tripled, from 1.17% to 3.3%. (See Figure 3A-1.) (See Figure 3A-1.)
Druglaws2003lg_1
Furthermore, compared with 1980, when a majority of state and federal prison inmates were serving time for violent crimes, a majority are now either awaiting trial because they cannot afford bail, or are serving time for non-violent offenses, more than a quarter of which were relatively minor drug-related offenses.

Drug Offenses and Disenfranchisement. As other analysts have recently noted, such drug offenses rarely involve “victims,” and there is a high degree of prosecutorial discretion. This makes them especially vulnerable to racially-discriminatory arrest practices. For example, recent studies of drug arrest rates show that black arrest and conviction rates for drug-related offenses are way out of proportion to drug use in the black community, and that the disparity between black and white arrest rates for drug use has been soaring because of policing practices, not because of greater underlying criminality.
Prisons
The resulting steep rise in the US prison population since the 1980s provides a strong contrast with European countries and leading developing countries, where per capita prison populations have been stable or even declining. Not surprisingly, the disparity is also consistent with the fact that Europe’s drug laws are much less punitive.

Unemployment Impacts.The increase in the US correctional population as a share of the population since 1980 has not only reduced the ranks of poorer voters. It has also reduced the size of the “observed” civilian labor force and the official US unemployment rate by 18-20 percent. In other words, the US unemployment rate in July 2004, for example, would have been 6.43 percent, not the official 5.43 percent reported by the Bureau of Labor Statistics. So without this swollen prison population, there would now be more than 10 million unemployed in the US – at least 2.2 million more than the official statistics show, and more than enough to swamp any alleged “job growth” in the last year.

So US penal policies have not only removed a huge number of prisoners from the ranks of potential voters. They have also helped to disguise the seriousness of the US economy’s rather tepid recovery.

And some of us thought the point of the US’ punitive drug laws was to reduce drug trafficking! (Note to reader: US real retail cocaine prices have plummeted since the 1980s. See Figure 3A-2.)

While it is not easy to measure the impact that US prisoner disenfranchisement has had on recent elections, it may have been substantial, as several analysts have recently noted. For example, one recent study estimated that in 2000, more than 3.0 million prisoners, parolees, and probationers, plus 1.5- 1.7 million ex-felons, were formally disenfranchised – 2.1% of the US voting age population. Another recent study of prisoner disenfranchisement in the state of Georgia found that 13% of adult black males were disenfranchised by this policy, and that it explained nearly half the voter registration gap between black males and non-black males.

There were also another 358,000 who had been jailed awaiting trial, and 218,000 more who had been jailed on misdemeanor charges. All these people were also effectively disenfranchised.

All told, during the 2000 Presidential race, the total number of potential American citizen/voters who were disenfranchised because of the US penal system and its archaic laws was about 5 million. Since the numbers have continued to grow since then, by now they have reached 5.5 – 5.8 million.

As other commentators have noted, this policy is also practically unique -- no other putative “democracy” comes anywhere close to this kind of systematic vote deprivation.

No doubt there are some determined ex-felons, parolees, and probationers who manage to slip through and vote even in states that prohibit them from doing so. Many others would not vote even if given the chance. However, even apart from the question of whether such harsh treatment encourages better behavior, this disenfranchisement policy is far from politically neutral:


  • About 45 percent of the 4.9 million convicts on probation and parole, and 67 percent of the current US prison population, are black or Hispanic, and more than ninety percent are from poor families. So the impact of these prisoner voting rules falls disproportionately upon groups whose real “crime” is to be black, Hispanic, or poor. These laws currently disenfranchise at least 13 to 18 percent of all adult black males and 4-6 percent of all adult Hispanic males in the US.
  • These disenfranchisements are the modern equivalent of white supremacist Jim Crow laws.Their impacts are concentrated in a handful of mainly Southern states – including half the “battleground states” -- that have an unusual combination of large black or Hispanic populations, relatively punitive criminal justice and penal systems, a long history of racist practices, and disproportionate influence on the US electoral college.
  • While US incarceration rates have increased dramatically in almost all states since the 1980s, the 15 original Southern “slave states,” for example, have consistently maintained rates of incarceration at least 25 to 98 percent higher than the US median, and 45 percent higher than those in the original 18 “Union” States.

Texas alone has at least 500,000 ex-felons and more than 200,000 prisoners and other inmates who have been disenfranchised, the overwhelming majority of whom are black or Hispanic.

Of Florida’s 13.4 million people of voting age, at least 600,000 to 850,000 prisoners, parolee/probationers, and ex-felons, have been disenfranchised by such voter registration laws, including at least one-fifth of all adult black males who reside there. Other battleground states, including New Mexico, Virginia, Iowa and Washington, have also used such laws to disenfranchise 15-25 of their adult black male populations.

All told, the top 15 battleground states account for at least 1.4 to 1.6 million excluded potential prison/ ex-felon votes this year. Combined with US’ knife-edged “winner take all” electoral system, this is clearly a very important policy choice.

Furthermore, in states like Florida, Texas, Mississippi, and Virginia, the opportunity to purge thousands of minority voter from the polls in the search for “ex-felons” has opened the doors to many other abuses.

For example, in 2000, there was the notorious purge by Florida’s Republican Secretary of State of 94,000 supposed “felons.” It later turned out that this number included more than 50,000 blacks and Hispanics, but just 3,000 actual ex-felons.

One might have hoped that one such flagrant anti-democratic maneuver would have been enough. But that was followed attempts by Florida’s Republican state administration to do the very same thing again in 2002 and again this year, when Florida tried to use another “bogus felons” list with another 40,000 names.

From this angle, all of the many arguments over Nader’s candidacy, “hanging chads,” and the narrow 537 vote margin by which Bush carried that state in 2000, were side-shows.

We are reminded of the Reconstruction period from 1867 to 1877, when Florida and 8 other Southern states had to be put under military occupation by the US Government, to prevent the white elites’ systematic attempts to deprive freed slaves of their voting and other civil rights. By the late 1870s, Northern passions toward the South had cooled, the Union troops left, and white-supremacist governments reacquired power. Unfortunately, unlike the 1860s, the “Radical Republicans” in Congress now side with the closet supremacists.

Counting Prisoners for Apportionment.The punitive US policy toward current and former prisoners appears even more bizarre, once we take into account the fact that for purposes of redistricting, the US Census – unlike Brazil – counts prison and jail inmates as residents of the counties where the prisoners are incarcerated, rather than the inmates’ home towns.

In general, this approach to counting prisoners for districting purposes tilts strongly in favor of rural Southern and Western states – areas that also now happen to vote Republican. (See Figure 3A-3), It has an important impact on the apportionment of Congressional seats and seats in state legislatures, the allocation of federal funds to Congressional districts, and the total number of electoral college votes that each state receives. It also creates a huge, influential, coalition of interests -- construction companies, prison administrators and guards, and politicians -- that mounts to a “politician-prison-industrial complex,” with powerful selfish motives to support tough sentencing laws and the construction of new prisons and jails.

The resulting combination of disenfranchisement and malapportionment recalls the “three-fifths compromise” that was built into the US Constitution in 1787, to accommodate the original six Southern slave states, where slaves constituted more than forty percent of the population. Under this provision, even though slaves could not vote, they were counted as three-fifths of a person, for purposes of determining each state’s Congressmen and Presidential electors.
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Given this provision, it was no accident that 7 of the first 8 US Presidents were Virginian slave owners. This exaggerated Southern political power, entrenched by the anti-democratic electoral college, had disastrous consequences – it made resolving the problem of slavery without a regional civil war almost impossible. (Contrast Brazil’s relatively peaceful abolition of slavery.) From this perspective, the electoral college and prisoner disenfranchisement are both just throwbacks to America’s “peculiar institution,” slavery. As John Adams wrote in 1775,

All our misfortune arise(s) from a single source, the reluctance of the Southern colonies to republican government….The difficulties lie in forming constitutions for particular colonies and a continental constitution for the whole…This can only be done on popular principles and maxims which are so abhorrent to the inclinations of the barons of the South and the proprietary interests of the middle colonies…..

In a sense, the modern analog is even worse: prisoners can’t vote either, but they count as one whole person in the districts where they are imprisoned, for purposes of redistricting. In general, this approach to counting prisoners for districting purposes tilts strongly in favor of rural Southern and Western states – areas which also now happen to vote Republican.

Surprisingly, illegal immigrants are also included in the US Census count for redistricting purposes. Depending on where immigrants locate, this may reinforce the prisoner effect in some key states. The US illegal immigrant population has also been growing rapidly, with a Census-estimated 7.7 - 8.9 million illegals in the US by 2000, compared with about 3.5 million in 1990. According to the INS, two-thirds are concentrated in just five states – California, Texas, New York, Illinois, and Florida. However, unlike prisoners, estimating where illegal immigrants are located is much more uncertain. So the US policy of including non-voting illegals in the Census for purposes of drawing voting districts is also very peculiar.



Gld_box3.Teen Voting

Brazil. To encourage young people to get involved in politics, Brazil gives those who are 16 or 17 the right (but not the duty) to vote. This measure increases Brazil’s VAP by abou 6 percent. Brazil argues that a relatively low voting age is consistent with the spirit of the UN’s Convention on the Rights of the Child. It also argue that this youth vote acknowledges the basic fact that a majority of 16-17 year olds (in both Brazil and the US) pay taxes and can marry, drive, and be tried as adults, so they ought to be able to vote. So far Brazil has only been joined in this experiment by a handful of other countries, including Indonesia (age 17), Cuba (16), Iran (15), and Nicaragua (16). But the UK is now also seriously considering teen voting.
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The US. The minimum voting age in the US has been 18 since 1971, when the 26th Amendment was adopted. A few states (Maine, California) have recently considered reducing the voting age below 18, but so far voting rights for 16-17 year-olds, much less the more radical proposal to let children of all ages vote, has not taken off. Obviously this cause has not been strengthened by abysmal voter turnout levels by 18-24 year old Americans in recent elections.

***
(Next: Democracy in American and Elsewhere, Part IIIB: Campaigns, Voting, and Representation)
©James S. Henry and Caleb Kleppner, SubmergingMarkets™, 2004

September 22, 2004 at 02:50 PM | Permalink | Comments (1) | TrackBack

Thursday, September 16, 2004

Democracy in America and Elsewhere:
Part II: Recent Global Trends Toward Democracy

James S. Henry and Caleb Kleppner
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Iraq_postcard_front_medium W4
Most Americans are probably used to thinking about their own political system as a shining example of “representative democracy” – not only one of modern democracy’s original pioneers, but also a contemporary role model for other emerging democracies around the globe.

Of course we are also very proud of our free markets, our relative affluence, and our occasional ambitions -- at the moment perhaps a bit muted -- to provide equal opportunities for all our citizens.

However, when we try to market our country’s best features to the rest of the world, or teach our children to be proud of their country, it is not the economy that we brag about.

Even self-styled “conservatives” usually lead, not with glowing descriptions of perfect markets and opportunities for unlimited private gain, but with our supposedly distinctive commitment to defending and expanding political democracy and human rights at home and abroad.

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Indeed, one of the most important official justifications for recent US forays into the Middle East, as well as our many other foreign interventions, has been to help bring “democracy” to supposedly backward, undemocratic societies like Iraq and Afghanistan (…and before that, Haiti, Colombia, Panama, Nicaragua, Grenada, Panama, the Dominican Republic, Cuba, Guyana, Guatemala, Iran, Laos, Vietnam, the Philippines, etc. etc. etc.)

Even though, time and again, this noble commitment has turned out to be pure rhetoric, it provides such an elastic cover story for all our many transgressions that it keeps on being recycled, over and over and over again.

THE EMERGING DEMOCRACY GAP

Whatever the truth about US motives for such interventions, it may come as a surprise to learn that in the last two decades, the United States itself has actually fallen behind the rest of the democratic world in terms of “best democratic practices” and the overall representativeness of our own domestic political institutions.

Meanwhile, many developing countries have recently been making very strong progress toward representative democracy, without much help from us.

Indeed, in some cases, like South Africa, this progress was made in the face of opposition from many of the very same neoimperialists who have lately voiced so much concern about transplanting democracy to the Middle East.

While we have been resting on our democratic laurels, or even slipping backwards, the fact is that emerging democracies like Brazil, India, and South Africa, as well as many of our First World peers, have been adopting procedures for electing governments that are much more democratic at almost every stage of the electoral process than those found in the US.
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The institutions they have been developing include such bedrock elements of electoral democracy as the rules for:


  • (1) Apportioning geographic boundaries for congressional districts;

  • (2) Selecting candidates and conducting campaigns;

  • (3) Qualifying and registering voters;

  • (4) Establishing effective controls over campaign finance;

  • (5) Providing equitable access to the public airwaves for campaign advertising;

  • (6) Encouraging voter turnout;

  • (7) Preventing outright vote fraud;

  • (8) Insuring that votes are accurately and quickly counted – and, if necessary, recounted;

  • (9) Insuring that voter preferences are fairly and proportionately represented in the legislative and executive branches of government; and

  • (10) Enforcing other helpful provisions, like run-off and recall provisions.

Of course effective democracy has many other crucial elements beside electoral processes alone. These include (1) the relative influence of legislative, executive, and judicial branches; (2) the concrete opportunities that ordinary citizens have -- as compared with highly-organized special interests and professional lobbyists -- to influence government decisions between elections; (3) the respective influence of private interests, religious groups, and the state; (4) the degree to which the rule of law prevails over corruption and "insider" interests; and (5) the overall degree of political consciousness and know-how.
Bond_comic_frame_15

However, fair and open electoral processes are clearly a necessary, if not sufficient, condition for effective democracy -- all these other elements simply cannot make up for their absence.

We hope that increasing the recognition of this “electoral democracy gap” between the US and the rest of the democratic world will be helpful in several ways:



  • It may make Americans more modest about our own accomplishments, and less patronizing toward other countries;
  • It may spur us to consider that we may actually have something to learn about democracy from other countries.
  • It may provide an antidote for the recent revival of anti-democratic doctrines in the US, some of have acquired a disturbing level of influence among our political elites.
  • It may help to show how our own idiosyncratic version of democracy is exerting a profound influence on this year’s profoundly dissatisfying Presidential race.

DEMOCRATIC PRAXIS - WHAT CAN WE LEARN FROM THE THIRD WORLD?
One useful place to start is with an assessment of best practices among the growing number of democracies around the globe.

This used to be much easier than it is now. As of the early 1970s, there were only about 40 countries that qualified as “representative democracies,” and most were First World countries.


Mandela50

Since then, however, there has been a real flowering of democratic institutions in the developing world. This was partly due to the collapse of the Soviet Empire in the late 1980s. But many more people were in fact “liberated” by the Third World debt crisis, which undermined corrupt, dictatorial regimes all over the globe, from Argentina, Brazil, and Chile to Indonesia, the Philippines, South Africa, and Zaire.
StoryphilippineselectionsVoting in the Philippines, 2004

Assessments of the degree of “freedom” of individual regimes by organizations like Freedom House or the UN Development Program’s Human Development Indicators, are notoriously subjective. However, while there is plenty of room for disagreement about specific countries, there is little disagreement on the overall trend. (See Table 3.)

By 2004, about 60 percent, or 119, of the nearly 200 countries on the planet could be described as “electoral democracies,” compared with less than one-third in the early 1970s. Another 25-30 percent have made significant progress toward political freedom.
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Voting in South Africa, 1994

Indeed, notwithstanding our present challenges in Iraq and Afghanistan, from the standpoint of global democracy, this has been a banner year. As of September 2004, 32 countries had already held nationwide elections or referenda, with 886 million people voting. (See Table 4.) By the end of 2004, another 33 countries will join the US in doing so – nearly three times as many national elections as were held each year, on average, in the 1970s.

All told, this year, more than 1.7 billion adults – 42 percent of the world’s voter-age population -- will be eligible to vote in national elections, and more than 1.1 billion will probably vote. That that will make American voters less than 10 percent of the global electorate.

Of course, some of these elections will be held in countries where democratic institutions and civil liberties are still highly imperfect. And some developing countries like Russia and Venezuela have recently been struggling to find a balance between democracy and national leadership, partly to undo the effects of neoliberal policies in the 1990s, or in response to terrorist threats.

But the good news is that democracy is clearly not a “luxury good.” The demand for it is very strong even in low-income countries like Bolivia, Bangladesh, Mozambique, Guatemala, and Botswana. And while self-anointed dictators, military rulers, and one-party elites or theocracies are still clinging to power in 50-60 countries that have more than 2.4 billion residents, such regimes are more and more anachronistic. (See Table 5.)

Interestingly, Asian dictatorships, especially China and Vietnam, now account for more than three-fifths of the portion of the world’s population that still lives under authoritarian rule. While several Islamic countries appear on the list of authoritarian countries, they account for just one fifth of the total. Furthermore, by far the most important ones happen to be close US “allies” like Pakistan, Egypt, Morocco and Saudi Arabia.

Evidently the simple-minded neoconservative “clash of cultures” model, which pits supposedly democratic, pluralist societies against an imaginary Islamic bloc, doesn’t have much explanatory power.

Furthermore, the US also clearly faces some very tough choices, if it is really serious about promoting non-discriminatory, secular democratic states that honor the separation between church and state among its Islamic allies, as well as in Palestine, and, for that matter, Israel.
Coseasttimor Voting in East Timor. 2001

A more encouraging point is that many developing countries are already providing useful lessons in democratization. Indeed, as we will see in Part III of this series, there is much to learn from the experiences of new democracies like Brazil and South Africa.

These countries are undertaking bold experiments with measures like free air time for candidates, “registration-free” voting, direct Presidential elections, electronic voting, proportional representation, and the public finance of campaigns. While not all these experiments have worked out perfectly, the fact these countries have already demonstrated a capacity to innovate in “democratic design” is very encouraging.

Of course there is a long-standing tension between the US dedication to Third World democracy and its tolerance for the independence that democratic nationalism often brings. By renewing and deepening our own commitment to democracy at home, we will also protect it abroad -- even though (as in Venezuela, Russia, Iran, and perhaps eventually also Iraq) it does not always produce governments that we agree with.

(Next: Part III: "Brazil Vs. the US -- And the Winner Is....")

***

©James S. Henry and Caleb Kleppner, SubmergingMarkets™, 2004

September 16, 2004 at 09:08 PM | Permalink | Comments (2) | TrackBack

Tuesday, June 22, 2004

"Farmingville"
A New Film About Agro-Business, Globalization, and Poor Mexican Farmers

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This week marks the television premier of Farmingville, an outstanding documentary on the devastating impact that a really quite lethal combination of globalization plus First World farm subsidies is having on developing countries like Mexico.

Produced and directed by fellow Long Islanders Carlos Sandoval (Amagansett, NY) and Catherine Tambini (Hampton Bays, NY), Farmingville won this year’s “Special Award for Documentary” at the Sundance Festival, and it has also received many other prestigious awards. (For those of you in Long Island, it will also be shown on Thursday June 24 on Ch. 21, accompanied by a discussion with Sandoval and several of the film’s participants, moderated by OLA’s outstanding local leader, Isabel Spevedula de Scanlon.)

The social crisis described by Farmingville is a striking example of one of neoliberalism’s more disturbing patterns – the combination of “socialism for the rich” with “free trade for the poor.” Each year the US government provides more than $10 billion in subsidies to American corn farmers in politically-influential states like Iowa, Minnesota, Nebraska, and Kansas. From a political standpoint, these subsidies are usually justified in the name of preserving the “American family farm.” In fact the vast bulk of the subsidies goes to a handful of incredibly rich US agro-conglomerates, such as Cargill and Archer Daniels, Midlands (“ADM”).Together, these corporate giants now account for more than 70 percent of domestic US corn production.

These subsidies have not saved America’s family farmers, who continue to disappear at a rapid rate. But the $10 billion a year in subsidies has the giants to overproduce, resulting in surpluses that have been dumped onto world markets at artificially-low prices.

As documented in Farmingville, combined with the “free trade” policies adopted by the US and Mexico in the last decade, these surpluses have devastated family farmers throughout Mexico.

Of course Mexican farmers were the original source of “corn” – they’ve been growing it for at least 10,000 years. Until recently, corn accounted for at least half of the acreage they planted. In fact corn is not just a product in Mexico; it is also at the core of a whole cuisine and culture.

Since the adoption of the North American Free Trade Treaty (NAFTA) in 1993, however, the real price of corn has dropped more than 70% in Mexico. even as domestic non-labor production costs have risen dramatically.

Most of the price declines are due to escalating US corn imports. Recent estimates by an Oxfam study of “The Mexican Corn Crisis,” for example, show that US corn is dumped in Mexico at between $105m to $145m a year less than the cost of US production.

As a result, many campesinos are being forced out of business -- the country has lost the majority of its corn farmers in just the last 10 years. This has caused havoc in the entire rural economy, produced mass unemployment and forcing a mass migration to Mexico’s already overstuffed cities. And that, in turn, has accelerated emigration, with thousands of desperate, hungry people trying to leave Mexico every day, and dozens of them literally dying in the desert wastelands along the border, trying to get to
“El Norte.”

Indeed, according to the latest statistics from the US Bureau of Immigration and Naturalization, illegal immigration along the Mexican border is now at an all-time high.

Meanwhile, US agricultural conglomerates like ADM and Cargill have become more profitable than ever. They are using their fat profits to extend their dominance abroad. For example, Cargill now owns 30 percent of Maseca, the giant Mexican food distributor that dominates the Mexican tortilla market.

As Oxfam’s recent report on this neoliberal debacle concludes,


"The Mexican corn crisis is yet another example of world trade rules that are rigged to help the rich and powerful, while destroying the livelihood of millions of poor people.”

Indeed, the story that Farmingville relates is an especially graphic example of the perverse consequences that neoliberal policies can have once powerful interests get hold of them -- when US corporate giants are able to have their way with free trade, wide-open capital markets, lavish government subsidies, political leaders on both sides of the border, and poor farmers all at once.

Obviously this is tough time for leading US politicians to take on the powerful farm lobby, much less propose policies that might trim US exports at a time of massive trade deficits. But are there no US or Mexican political leaders with longer-term vision, willing to tackle this grossly-inequitable, morally-reprehensible situation?

***

© James S. Henry, Michael O'Neill, SubmergingMarkets™, 2004


June 22, 2004 at 02:05 PM | Permalink | Comments (0) | TrackBack

Thursday, June 17, 2004

The "Reagan Revolution," Part Two:
The View from Developing Countries

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"Man wants to forget the bad stuff and believe in the made-up good stuff. Its easier that way."
--Rashomon, Kurosawa
"He (Reagan) may have forgotten us. But we have not forgotten him."
-- Angolan refugee and landmine victim
"Folly is a more dangerous enemy to the good than evil. One can protest against evil; it can be unmasked and, if need be, prevented by force....Against folly we have no defense. Neither protests nor force can touch it; reasoning is no use; acts that contradict personal prejudices can simply be disbelieved. Indeed, the fool can counter by criticizing them, and if they are undeniable, they can just be pushed aside.... So the fool, as distinct from the scoundrel, is completely self-satisfied. In fact, he can easily become dangerous, as it does not take much to make him aggressive...."
--Dietrich Bonhoeffer

Following last week's prolonged national memorial to President Reagan, the most elaborate in US history, most Americans have turned their attention back to the troubled present. But we cannot resist continuing down the revisionist path that we started on in Part One of this series.

Contrary to Henry Ford, history is not "bunk," nor is it "just one damn thing after another." In fact, it is one of our most valuable possessions. But unless we take the time to learn from it, it can easily come back to haunt us -- as it is doing right now. At the very least this exercise will prepare us to evaluate President Clinton's new autobiography, which is due out next week.

As noted in Part One, most recent discussions of Ronald Reagan's foreign policy legacy have focused almost entirely on the Cold War. Even there, as we argued, his legacy is decidedly mixed. While he may have helped to pressure the Soviets to reform, he also took incredible risks with the balance of nuclear forces, including some risks that we are still living with to this day.

When we turn from superpower relations to Reagan's impact on developing countries, the legacy is even starker. In The Blood Bankers, we've detailed how the Reagan Administration's lax policies toward country lending and bank regulation exacerbated the 1982-83 Third World debt crisis. And then the administration did very little to help developing countries fundamentally restructure their debt burdens and recover. By the end of the 1980s, most country debt burdens were higher than ever.

Here we will focus on another long-term legacy of Reagan's relations with the developing world -- the consequences of his support for a plethora of reactionary dictatorships and contra armies all over the globe.

Most Americans are probably not aware of it, but this bloody-minded policy fostered several nasty wars in developing countries that have cost literally millions of lives -- and are still producing fatalities every day, by way of wounds, continuing conflicts, unexploded ordnance, and landmines.

Furthermore, as described below, the Reagan Administration was also responsible for several of the clearest examples in history of state-sponsored terrorism.

Unfortunately, it turns out that very little of this was really necessary, either from the standpoint of defeating the Soviets, pushing the world toward democracy and free markets, or enhancing US security.

Indeed, in the long run, Reagan's policies basically destabilized a long list of developing countries and increased their antagonism towards the US. Combined with the policies of "benign neglect," stop-go intervention, and ineffective neoliberal reforms that characterized the Clinton Administration's policies toward developing countries, and the neoconservative policies pursued by both Bushes, it is no accident that America's reputation in the developing world is now at a record low.

Unfortunately, like some of the risks that Reagan's policies introduced into the nuclear balance, these effects may have a very long half-life. Surely they will be with us long after Ronald Reagan has met his Maker. We just hope for the Gipper's sake that his Maker does not read this article before pronouncing judgment upon him.

THE INDICTMENT

There is an abundance of examples of the Reagan Administration's strong negative impacts on developing countries. To cite just a few:

fig. 2.1. Ferdinand and Imelda

In the case of the Philippines, the Reagan Administration was a staunch ally of Ferdinand and Imelda Marcos right up to their last helicopter ride to Hawaii in February 1986. Vice President George H.W. Bush visited Manila in March 1981, soon after Reagan was elected, to thank him for his generous support. He toasted Marcos in glowing terms: "We love your adherence to democratic principles and democratic process....." The thousands of political opponents who were tortured, imprisoned, or died fighting this corrupt conjugal dictatorship and the millions of Filipinos who have spent the last twenty-five years servicing the couples' unproductive foreign and domestic debts would probably disagree.

fig. 8.15. Donald Rumsfeld and Saddam Hussein, 1983
fig. 8.14. Iran-Iraq War scene, early 1980s

In the case of Iran and Iraq, Reagan helped arm and finance Saddam Hussein throughout the 1980s, encouraged the Saudis and Kuwaitis to finance his invasion of Iran when it bogged down, helped to equip him with chemical and biological weapons, sent Donald Rumsfeld to Baghdad to assure close relations and propose a new pipeline to Saddam to help him export his oil, and even provided a team of 60 Pentagon analysts who sat in Baghdad, using US satellite imagery to target Saddam's chemical weapons against the Iranians.

At the same time, as the Iran-Contra arms scandal later disclosed, Reagan also helped Iran buy spare parts and advanced weapons for use against Iraq. He also looked the other way when Saddam decided to turn his US-supplied Bell Helicopters and French-supplied Mirage jets and chemical weapons on the defenseless Kurds at Halabja. Of course, the fact that the UN, under strong US pressure, did nothing at the time to condemn Saddam for this behavior did not exactly discourage further aggression.

This bipolar policy contributed to prolonging the 1980-88 Iran-Iraq War, one of the largest and bloodiest land wars since World War II. It cost 500,000 to 1 million lives and 1-2 million wounded, and created more than 2.5 million refugees. It also caused a huge amount of damage to both countries' economies, and left Iraq, in particular, broke and heavily indebted. As we've argued in The Blood Bankers, that destabilization, in turn, contributed significantly to Saddam's 1991 decision to invade Kuwait in 1991 -- and ultimately, our current Iraq fiasco.

jack

In the case of South Africa, the Reagan Administration steadfastly opposed any US or UN sanctions on international trade and investment. Indeed, it continued to work closely with the apartheid regime on many different fronts, including the civil wars in Angola (see below), Namibia, and Mozambique.

It also now appears that both Carter and Reagan turned a blind eye to South Africa's development of nuclear weapons and ballistic missiles, in collaboration with Israel, which purchased its uranium from the Pretoria regime. Fortunately, no thanks to Reagan, Bush I, or for that matter, Bill Clinton, apartheid came to an end in the early 1990s, and South Africa became the first nuclear power ever to dismantle its nuclear weapons.

fig. 1.26. Gen Jose Efrain Rios Montt

Rios Montt

In the case of Guatemala, Reagan gave a warm embrace to the brutal dictatorship of General Efrain Rios Montt in the early 1980s. Rios Montt, a graduate of Fort Benning's School for the Americas, was also an ordained "born-again" minister in California-based Gospel Outreach's Guatemala Verbo evangelical church. Evidently that combination endeared him to the Reagan Administration -- US Assistant Secretary of State Thomas Enders praised him for his "effective counter-insurgency," and President Reagan called him "a man of great personal integrity," "totally dedicated to democracy," someone who Amnesty International had given "a bum rap."

This cleared the way for hundreds of $millions in World Bank loans and US aid that helped to make Rios Montt and his generals rich. Meanwhile, the junta implemented a genocide that a UN-backed Truth Commission later found was responsible for the deaths of 200,000 Guatemalan peasants, mainly Mayan Indians.

fig. 6.3. Jeane Kirkpatrick

fig. 6.2.General Leopoldo Galtieri

General Galtieri

In the case of Argentina, Reagan turned a blind eye to the "dirty war" waged by the military junta against its opponents, at a cost of 30,000 lives and many more destroyed families.

When this junta launched the April 1982 invasion of the Falkland Islands to deflect public attention from its political and economic woes, Reagan and Secretary of State Al Haig ultimately decided to side with the UK's Margaret Thatcher, a fellow neoconservative. However, key Reagan aids Jeane Kirkpatrick and Michael Deaver worked behind the scenes to support the fascist junta, encouraging it to believe that the US might stay neutral. The very evening that the invasion was launched, Kirkpatrick was the guest of honor at an elaborate Washington D.C. banquet that was sponsored by the junta.

In the case of Panama, Reagan's CIA subsidized and promoted the rise of General Manual Noriega, another graduate of the notorious US School of the Americas. The US made extensive use of Noriega's intelligence gathering capabilities during the contra war with Nicaragua (see below).
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This encouraged Noriega to believe that he could get away with anything. For a while he did: in the early 1980s, he became one of the most important cocaine wholesalers in the region, shipping a ton of coke per month to Miami on INAIR, a Panama airline that he co-owned, literally under the US Customs' nose. By 1989, even George H.W. Bush was embarrassed, and he had the dictator forcibly removed -- at a cost of the lives of 23 US troops, 314 Panamanian Defense Forces, and several hundred Panamanian civilians.
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In the case of tiny Honduras, the poorest country in Central America, the Reagan administration turned another of its many blind eyes to the rise of death squads in the early 1980s. John Negroponte, the former US Ambassador to the UN and our new "proconsul" in Iraq, served as Ambassador to Honduras from 1981 to 1985. As this author knows from first-hand experience, reports of human rights abuses in Honduras were rampant during this period. It is hard to believe that Negroponte, who cultivated close relations with the Honduran military, was simply unaware of all these reports.

One of the key offenders was Battalion 3-16, the CIA-trained and funded Honduran military unit that was responsible for hundreds of disappearances and torture cases, including several that involved Americans.

One US embassy official later reported that in 1982, Negroponte had ordered any mention of such abuses removed from his annual Human Rights reports to Congress. Negroponte has denied any knowledge of this, and has skated through several confirmation hearings to arrive at the very top of the US diplomatic corps, where he will soon be running the world's largest US embassy. vert.un.negroponte.ap

In the case of El Salvador, the Reagan Administration also sharply increased economic and military support to a brutal oligarchical regime that was also deeply involved in death squads. President Carter had also provided military aid to the regime -- indeed, Archbishop Oscar Romero's condemnation of that aid was one key factor in his assassination in March 1980. After Reagan's November 1980 election, the Salvadoran military felt it had a "green light" to become even more aggressive with its opponents in the Church and unions, as well as the FMLN rebels.

One immediate byproduct of the "green light" was the murder of four US Maryknoll nuns in December 1980. Reagan's first Secretary of State, Al Haig, later suggested that the nuns might have been killed in a "crossfire" when they "ran a roadblock. " But their murders were later attributed to five Salvador National Guard members, who, in turn, appear to have acted on orders from senior members of the Salvador military.

A law suit was eventually brought on behalf of the nuns against the commanders to whom these guardsmen ultimately reported -- Jose Guillermo Garcia, El Salvador's Minister of Defense from 1979-1983, and Carlos Eugenio Vides Casanova, the former head of the National Guard. These were the Reagan Administration's key Salvadoran allies in the early 1980s, and they'd been rewarded with retirement in Florida.

In 2000 a jury ruled that even though they had given the orders, they did not have "effective control" over their subordinates, given the instability in the country. However, in July 2002, another jury in West Palm Beach found the duo liable for torture and other human rights abuses against three other victims, and ordered them to pay $54.6 million in damages.

Meanwhile, their paymasters and other collaborators in the Reagan Administration have gotten off scot free. Reagan's insistence on a military solution to the conflict in El Salvador helped to perpetuate the civil war throughout the 1980s, at a cost of more than 75,000 lives. Ultimately, under Bush I and Clinton, the long-delayed negotiated solution was achieved.
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As for Archbishop Romero's assassin, he has never been found. There are credible reports, however, that the actual triggerman now lives -- naturally enough -- in Honduras.

In the case of Lebanon, Reagan was responsible for a broken promise to the Palestinians that ultimately contributed to the 1982 massacres at the Sabra/ Shatila refugee camps. To get the PLO to withdraw from Beirut, Reagan promised to protect Palestinian non-combatant refugees in those camps. Indeed, the PLO fighters left on August 24, 1982, and US Marines landed on August 25. But they were withdrawn just three weeks later, on September 10, after the PLO fighters left. Ariel Sharon,Israel's Defense Minister at the time, promptly ordered the Israeli Defense Forces to surround the camps. They refused to let anyone leave, and then permitted his Lebanese allies, the rightist Christian Phalangists, to move in.

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The result was the slaughter of at least 900 to 3000 unarmed Palestinians, including many women and children, on September 16-18, 1982. As former Secretary of State George Schultze later commented, "The brutal fact is, we are partially responsible." Israeli's own Kahan Commission later found Sharon "indirectly responsible" for the massacre, but imposed no penalties, other than forcing him to resign as Defense Minister.

In the case of Angola, Reagan, in cooperation with South Africa's apartheid regime and Zaire's dictator Mobutu, helped to sponsor UNITA, Joseph Savimbi's rebel band, against the left-leaning MPLA, which also happened to have far stronger support from the Angolan people. Reagan hailed the power-hungry Savimbi as a "freedom fighter," and enlisted wealthy arch-conservatives like beer merchant Joseph Coors and Rite-Aid owner Lewis E.Lehrman to organize assistance and lobby Congress for millions in aid.
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In fact Savimbi turned out to be one of the world's most lethal terrorists. Even after UNITA lost UN-supervised elections in September 1992, he continued the war, financing his operations by trafficking in "blood diamonds."

The resulting guerilla war cost the Angolan people up to 1 million dead, turned a quarter of Angola's 12 million people into refugees, and devastated health and education programs and the domestic economy. It also left an estimated 6 to 20,000,000 land mines scattered all across the country, one of the world's most heavily mined countries, with more than 80,000 amputees as a byproduct. Only with Savimbi was finally killed in May 2002 was the country finally restored to peace.
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Savimbi

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In the case of Afghanistan, Reagan considerably expanded aid to the Afghan rebels in the early 1980s, providing them more than $1 billion in arms and sophisticated weapons like Stinger missiles to fight the Soviets. The resulting battle ultimately cost the Soviets 15,000 lives. But the price to Afghanistan was much higher -- the Afghan people lost more than 1 million dead and wounded, plus millions of refugees. Furthermore, after the Soviets finally left in the 1989, the country became a stomping ground for opium-dealing warlords, religious fanatics like the Taliban, and al-Qaeda's global terrorists.
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Furthermore, we now know that Gorbachev had offered to pull Soviet troops out of Afghanistan in 1987, in exchange for reduced US arm shipments to the rebels. However, he was rebuffed by the Reagan Administration, which wanted to prolong the Soviets' agony. This not only cost a great many more Afghan (and Soviet) lives, but also helped turn Osama Bin Laden from a nobody into a folk hero. All this helped to pave the way to 9/11, the continuing war in Afghanistan, and the even more dangerous global terrorist war.

All told, then, the Reagan Administration clearly has a lot to answer for with respect to the developing world. And this is even apart from one of the most perfidious examples of Reagan's brutilitarian policies, that of Nicaragua -- as the following excerpt from The Blood Bankers makes clear.

NICARAGUA'S COUNTERREVOLUTION

By the end of 1980, with Nicaragua's civil war concluded, General Anastasio Somoza deBayle dead in Paraguay, and the country''s debt settlement with its foreign banks concluded, many Nicaraguans were looking forward to rebuilding their economy and finally achieving a more peaceful society. Alas, it was not to be.

Undoubtedly the Sandinistas deserve some of the blame for the way things turned out, though, as we will see, the odds were clearly stacked against them. As the strongest faction in the winning coalition, and “the boys with the guns,” at first they commanded overwhelming popular support for having rid the country of the world’s oldest family dictatorship outside of Saudi Arabia and Paraguay. However, like Venezuela’s Hugo Chavez in the 1990s, they were torn between leading a social revolution and building a multi-party democracy.

Their hero, Augusto “Cesar” Sandino, “the general of free men,” had fought the US military and the Nicaraguan army for six years to a standstill, before he was betrayed and murdered by General Anastasio Somoza Garcia in 1934. After a decade of insurgency in the 1970s, the Sandinistas’ most important experiences to prepare them for the job of running the country were limited to armed struggle, clandestine organizing, and some very rough times in Somoza’s jails. Unhappily, one of their most accomplished political leaders, Carlos Fonseca, had been murdered by the National Guard in 1976.
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Sandino

On the other hand, as South Africa demonstrates, it is not impossible for committed revolutionaries to lead a fairly peaceful transition to a multi-party democracy. After all, the ANC had waged just as long a struggle against a state that was no less repressive as Somoza’s. Many of the ANC’s supporters were also just as radical as the Sandinistas, and it also sourced most of its weapons and advisors from radical watering holes like the Soviet Union, East Germany and Libya.

However, ironically, South Africa was not as easy for the US to push around as Nicaragua. South Africa accounted for two-thirds of sub-Saharan Africa’s economy and most of the world’s gold, diamonds, platinum, and vanadium. By 1982, with some help from the UK and Israel, it had acquired nuclear weapons. Compared with Nicaragua, South Africa’s economy was actually in pretty good shape when the ANC came to power. While there had been a protracted low-intensity war against apartheid, South Africa managed to avoid the full-blown civil war that Nicaragua was forced to undertake in the 1970s to rid itself of the Somoza dictatorship.
fig. 5.5. Managua July 1979

Nicaragua was also objectively a far less strategically important target. To Washington’s national security planners, however, that made it an ideal opportunity for a relatively low-cost “demonstration." Its population was the same as Iowa’s. Its entire economy was smaller than Des Moines’s. It had few distinctive natural resources. Its only “weapons of mass destruction” were volcanoes, earthquakes, and hurricanes. It was surrounded by other countries that were also of modest strategic value – except for whatever symbolic value was associated with repeatedly crushing the aspirations of impoverished peasants into the dirt.

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During the late 19th century, Nicaragua had been selected several times over by US Canal Commissions for a canal across Central America, until Teddy Roosevelt finally opted to create Panama and build a canal across it in 1902, for reasons that had more to do with Wall Street than engineering. After that, Nicaragua’s canal plans went nowhere, especially after the US Marines landed in 1910 to collect debts owed to British and US banks and to depose a nationalist leader who, among other things, made the fatal mistake of seeking European funding for an alternative to the Panama canal.

The ANC also had one other weapon that the Sandinistas clearly lacked. This was the extraordinary wisdom and good fortune of 72-year old Nelson Mandela, who had earned everyone’s respect during his 27 years in prison. He had also learned survival skills like patience, diplomacy, and the capacity for making adroit compromises with bitter enemies. Under his influence, the ANC set out to build a mass party. It agreed to hold new elections within two years of his release. It went out of its way to commit itself publicly to multi-party democracy, a market economy, civil liberties, and peaceful reconciliation.

Most of the Sandinistas’ top leaders – the so-called cupola -- were not really interested in building a mass party, much less a multi-party democracy, at least not initially. They saw themselves as a vanguard party, leading the masses toward a social revolution. As Sergio Ramirez, a leading FSLN member who served as Nicaragua’s Vice President under Daniel Ortega from 1984 to 1990, wrote in his 1999 book, Adios Muchachos,

The FSLN was not prepared...to assume its role of party of opposition inside a democratic system, because it had never been designed for this. Its vertical structure was the inspiration of Leninist manuals, of the impositions of the war and of caudillismo, our oldest cultural heritage.

To be fair, the FSLN leadership also believed that the first priority was to attack the country’s dire health, literacy, land ownership, and education problems, and to build “direct democracy” through civic organizations, not through party politics and national elections. Given the country’s emergency and the need to recover from the civil war, this was entirely understandable. But it did provide cheap shots for the FSLN’s opponents and the mainstream US media, which basically wrote Nicaragua off very early as a reprise of Castro’s Cuba.
fig. 5.7. Daniel Ortega Saavedra
The Sandinistas were also widely criticized for lacking the soft touch when it came to domestic politics. Among their many ham-handed moves was their May 1980 decision to expand the Council of State to include “mass organizations,” the August 1980 decision to postpone elections until 1984, the rough way they dealt with the Miskito Indians, the 1986 decision to shut down the (by then, CIA-subsidized) La Prensa, and Daniel Ortega’s various high-visibility trips to Havana, Moscow, Libya and Gucci’s eyeglass counter in New York They were also criticized for implementing a compulsory draft, detaining alleged contra sympathizers without trial after the contra war heated up, permitting the FSLN’s National Directorate (Daniel Ortega, Tomas Borge, Victor Tirado, Henry Ruiz, and Bayardo Arce) to remain an unelected (all-male) body until 1991, and seizing a huge amount of property from ex-Somocistas, even middle-class ones, for their own use during the “pinata” period after Ortega lost the 1990 election -- including more than a few beach houses.

At the same time, they were not given much credit for preserving a mixed economy, reforming the health and education systems, pursuing aid from numerous non-Communist countries in Latin America and Europe, implementing a badly-needed land reform, tolerating the virulent La Prensa, which supported the contras and called for their overthrow, until they finally reached the limit and shut it down in 1986, ultimately holding free elections in November 1984 and February 1990, and respecting the outcome of those elections even when, as in 1990 (...and 1996, and 2001..) they lost.

The basic reality is that from at least 1981 on, Nicaragua’s new government was operating in an increasingly hostile international environment, where the Western media and the USG, as well as the Miami-based Somocistas, were predisposed to seize upon the slightest departures from Roberts’ Rules of Orders to consign them to hell – and if no such departures were readily at hand, to invent them out of whole cloth. These hostile attitudes had much less to do with the FSLN’s behavior than with the USG’s new aggressive stance with respect to the Soviet Union – actually dating back at least to President Carter’s initiation of a contra-like war against the Soviet-backed government in Afghanistan in July 1979.

STATE-FUNDED TERRORISM - REAGAN STYLE

So, despite all the FSLN’s undeniable missteps, it would probably have taken divine intervention to save Nicaragua from the wrath of Ronald Reagan, who decided almost immediately upon taking office to single tiny Nicaragua out for a replay of the Carter/ Brzezinski strategy in Afghanistan.

As former CIA analyst David MacMichael testified at the International Court of the Hague’s hearings on a lawsuit brought by Nicaragua against the US in 1986, from early 1981 on, the US Government set out to create a “proxy army” that would “provoke cross-border attacks by Nicaraguan forces and demonstrate Nicaragua’s aggressive nature,” forcing the Sandinistas to “clamp down on civil liberties.....arresting its opposition, (and) demonstrate its allegedly inherent totalitarian nature.”

In other words, if they were not totalitarian enough to begin with, we would see to it that they became totalitarian – and then blame them for making the switch.

President Reagan offered several different justifications for this ultimately rather bloody-minded policy. In March 1983, in a speech to Congress, he presented his subversion theory, Congress, warning that the Sandinistas had already “imposed a new dictatorship…supported by weapons and military resources provided by the Communist bloc, (that) represses its own people, refuses to make peace, and sponsors a guerrilla war against El Salvador. (emphasis added).”

At other times, he emphasized the beachhead theory, according to which the Sandinistas provided a “Soviet beachhead… only two hours flying time away from our borders…with thousands of Cuban advisors…camped on our own doorstep…close to vital sea-lanes.” He offered similar characterizations of the threat posed by left-wing guerillas in El Salvador, Honduras, and Guatemala. In 1982, Jeane Kirkpatrick, Reagan's hawkish UN Ambassador, also promoted this beachhead theory with her own profound geographical analysis:

I believe this area is colossally important to the US national interest. I think we are dealing here not...with some sort of remote problem in some far-flung part of the world. We are dealing with our own border when we talk about the Caribbean and Central America and we are dealing with our own vital national interest.

Other elements were also sometimes thrown into the mix. On November 6, 1984, just two days after the Sandinistas won a decisive 67-percent victory in the country’s freest elections in history, there was a huge media flap in the US press over their alleged attempt – later proved false – to buy Soviet MiGs for air defense. This story later turned out to be a wholesale concoction of the State Department’s “Office of Public Diplomacy,” and of Oliver North, Otto Reich, and Robert McFarlane in particular, just one of many US propaganda efforts that were designed to distract attention from the FSLN’s victory in those elections.
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Together, the subversion theory and the beachhead theory added up to a revival of the time-worn domino theory, transposed from Southeast Asia to Central America. Apparently, the notion was that since Nicaragua bordered on Honduras and El Salvador, which bordered on Guatemala and Belize, which bordered on Mexico, the Red Army might soon be drinking margaritas on the banks of the Rio Grande. Or the Reds might just jet in to El Paso in their MiGs from Managua, “only two hours away.” The fact that “they” were already 90 miles away in Havana, armed with brand new MiG 23 Flogger bombers and MiG 29s, did not get much mention from the Gipper. After all, Cuba had already demonstrated that it could stand up to a US invasion, and the Bay of Pigs was not a happy memory.

This rather strained analysis of Nicaragua’s purported threat to US national security was later endorsed, with only slight variations, by the January 1984 Bipartisan National Commission on Central America chaired by Dr. Henry Kissinger. One might have expected Kissinger to reach a different conclusion, given his long personal experience with Vietnam, Laos, Cambodia, and China, whose leftist regimes spent most of the 1970s fighting with each other, demonstrating conclusively the power of nationalism over solidarity. But he was performing the assignment to ingratiate himself with the Republican Party’s conservative wing. And unlike the National Commission on Terrorist Attacks, which he resigned from in December 2002, it did not require him to identify his consulting firms’ private clients.

In any case, well into the 1990s, long after there were peace settlements in Nicaragua, El Salvador, and Guatemala, and long after the Sandinistas had handed over political power to their opponents, hawkish Republicans like Senators John McCain and Jesse Helms were still seeing ghosts in Nicaragua, trying to make hay out of the Sandinistas’ potential subversive threat. Indeed, as we’ll see, these charges even played a role in Daniel Ortega’s defeat in Nicaragua’s Presidential elections in 2001, even when his running mate was Violeta Chamorro’s son-in-law!
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AUC paramilitary

Eventually, in fact, all the stockpiles of AK47s, landmines, rocket launchers, and surface-to-air missiles acquired by the Sandinistas to defend Nicaragua against the contras did end up posing a security threat to the US. But it was not precisely the one that that the Sandinistas' right-wing critics had predicted. In November 2001, Colombia’s 11,000-strong nasty, right-wing, drug-dealing paramilitary group, the AUC, procured 3,500 AK47’s from Nicaragua’s military stockpiles, by way of Israeli arms merchants based in Panama and Guatemala. The arms were part of a five-shipment package that included 13,000 assault rifles, millions of bullets, grenade and rocket launchers, machine guns, and explosives. The AUC, which was on the G.W. Bush’s administration’s official list of terrorist groups, was supported by landlords who wanted to combat Colombia’s leftist guerillas, the ELN and the FARC. The AUC was also supposedly fighting Colombia’s Army. From 2000 to 2003, Colombia received $2.5 billion of US military aid, plus more than 400 Special Forces troops, making it the world’s third largest recipient of US aid. The AUC also reportedly purchased arms from army stockpiles in El Salvador and Guatemala. In 2002, a OAS study also revealed that a Lebanese arms broker with al Qaeda links had tried to purchase 20 SA-7 missiles from Nicaragua’s stockpiles. The US starting pressuring Nicaragua’s President Bolanõs, a neoliberal businessman, to reduce these stockpiles – but hopefully not by selling more of them to the AUC.

In the long run, therefore, by forcing the comparatively-harmless Sandinistas to stockpile all these weapons to defend themselves, and by also arming the right-wing militaries of El Salvador and Guatemala to the teeth, the US had set a trap for itself.
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In reality, of course, Nicaragua’s leftists, even if they had been so inclined, were neither necessary nor sufficient to “subvert” their neighbors. Those neighbors with the most serious liberation movements, like El Salvador, Guatemala, and Colombia, had long since done a perfectly good job of subverting themselves. Their rebel movements developed over many decades from within, on the basis of incredibly-unbalanced social structures. For example, El Salvador’s catorce, its top 14 families, controlled 90-95 percent of that country’s land and finance capital, while in Guatemala, just 2 percent of the population controlled more than 70 percent of arable land. These situations were only a slightly more anonymous version of Nicaragua, where the Somoza family alone had laid claim to a quarter of the country’s arable land. And the resulting social conflicts were similar -- in the 1980s, El Salvador’s class war claimed more than 80,000 lives, while Guatemala’s claimed 200,000, with the vast majority due to their own brutal armed forces and paramilitaries.

On the other hand, Costa Rica, Nicaragua’s good neighbor to the south, had long since inoculated itself against revolution by developing an old-fashioned middle-class democracy, with lots of small farms and more teachers than police, having completely abolished its military in 1948.

Furthermore, while the Reagan Administration asserted over and over again in the early 1980s that the Sandinistas had shipped arms to leftist guerillas in El Salvador, two decades later, these allegations have been shown to be as spurious as the MiG purchases. In fact, the Sandinistas’ aid to El Salvador’s rebels, the FLMN, was miniscule, and it was terminated in 1981, as the World Court concluded in 1986. The claim that El Salvador’s FLMN had acquired several hundred tons of weapons from the East Bloc, Arafat and Libya (!), had also been pulled out of thin air. In fact, the rebel armies in El Salvador and Guatemala were poorly armed, except for Galil rifles and rocket launchers they managed to steal or purchase from corrupt army officers. Leading Sandinistas like Tomas Borge also explicitly rejected the notion of “exporting revolution,” except by way of the FSLN’s own example. After all, the FSLN had not needed Soviet or Cuban backing for their own revolution. They also had their hands full rebuilding Nicaragua. The last thing they needed was another war with El Salvador or Guatemala, in addition to the contra war.

Finally, while the Sandinistas were not liberal democrats, and, as noted, committed many political blunders, they were scarcely in a position to run a “dictatorship,” even within Managua’s city limits. To their credit, they had greatly increased the amount of popular involvement in the country’s governance. In November 1984, they held national elections that most international observers, including Latin American scholars and Western European parliaments, agreed were reasonably clean, despite the Reagan Administration’s provision of $17 million to opposition candidates, its systematic efforts to discredit the elections, and the fact that by then Nicaragua was already under steady assault from US-backed contras. Certainly by comparison with the Somozas’ rigged elections, other countries in post-war situations, and El Salvador and Guatemala in particular, Nicaragua’s degree of political freedom was tolerable, if not beyond reproach.

Yet when 75 percent of registered voters turned out for the November 1984 elections, and the FSLN received a commanding 67 percent of the vote, capturing the Presidency and 61 of 96 seats in the new National Assembly, Nicaragua was again accused by the Reaganites of being a “dictatorship.” As former New York Times Editor John Oakes remarked at the time, “The most fraudulent thing about the Nicaraguan election was the part the Reagan Administration played in it.”

The other troubling fact for Reagan’s Nicaraguan policy was that, objectively, the Soviet Union really did not have much interest in acquiring yet another dependent, state-socialist backwater like Vietnam, Afghanistan, or Cuba -- which by the early 1980s was already costing the USSR about $3 billion a year in aid. In hindsight, we now know that, far from being an expansionist Evil Empire, at this point, the USSR was really just hanging on for dear life -- a wounded giant, obsessed with its own serious economic problems, which were even forcing it to import grain from Argentina’s fascist junta! Internationally, it had its hands full just trying to stave off an embarrassing defeat in Afghanistan on its own southern border. It was also pressing existing client states in Eastern Europe and Southeast Asia hard to practice self-reliance.

Finally, in 1980-81, before the US made it absolutely clear that it was seeking “regime change” in Nicaragua, the Sandinistas tried to restore good economic relations, plus access to World Bank and IDB loans. But for the US intervention, this access would have been maintained. And that, in turn, would have significantly reduced Nicaragua’s dependence on East-Bloc aid. After all, as a senior World Bank official noted in 1982, “Project implementation has been extraordinarily successful in Nicaragua, perhaps better than anywhere else in the world.”

About that time, Nicaragua also sought aid from many non-Soviet countries, including Venezuela, Mexico, and France. It was most successful with Mexico, which resisted US pressure and became Nicaragua’s largest aid provider until 1985. Nor did Nicaragua turn immediately to the Soviet Bloc for aid. When it tried to buy $16 million of arms from France in early 1982, however, President Reagan got the French President, Francois Mitterand, to delay the sale “indefinitely.” Only then – under increasing attack from the contras -- did Nicaragua turn to the Soviet Union and Cuba for significant quantities of arms and advisors.

Of course, as noted, many Sandinistas were undoubtedly committed radicals, dedicated to policies like land reform, free health and education, and the seizure of Somocista-owned properties. But these policies were entirely defensible, given Nicaragua’s economic conditions and its need to play catch-up with basic social justice. These are, after all, policies that the US has itself supported, or at least tolerated, in other times and places, when they happened to serve its interests.

The Sandinistas may have been mulish and full of radical bravado, but they were far from anyone’s pawns. These characterizations were 1950-vintage hobgoblins, left over from the days when Ronnie ran the Commies out of the Actors Guild in LA. At best, they reflected a desire to show the Evil Empire who was boss, by making an example of some weak little pinko regime.

On this view, then, in the early 1980s, the USG basically succeeded in pushing tiny Nicaragua into relying heavily on Soviet and Cuban arms and economic aid for its own survival– as, indeed, the USG may have also done with Fidel’s Cuba back in 1959-60. The USG then used that reliance as an excuse to expand its own provocations into a full-scale war that ultimately claimed 30,000 lives. In the historical record books, this is surely one of the clearest examples of state-funded terrorism ever.

SAYING "UNCLE"?

All these inconvenient little details were brushed aside by the Reaganites when they took office in January 1981, raring, in President Reagan’s words, to make the Sandinistas “say uncle.” Say uncle they never did -- in fact, by 1988, they’d “whupped” Olly North’s contras pretty good. But that was not for want of US efforts.
fig. 5.9.Contras
In March 1981, President Reagan signed an Executive Order that mandated the CIA to undertake covert operations in Central America, to interdict arms shipments “by Marxist guerillas.” By November 1981, the US focus had shifted from arms interdiction to regime change. That month, the Administration provided an initial $19 million to mount a pretty transparent “covert” effort to destabilize Nicaragua. The strategy, implemented by the now-famous gang of Presidential pardonees, was the classic scissors tactic that had been employed by the US and its allies in many other 20th century counterrevolutionary interventions, notably Russia (1918), Guatemala (1954), Cuba (1959-60), and Chile(1973).

On the one hand, the USG tried to cut off Nicaragua’s cash flow, reducing access to new loans from the IMF, the World Bank, and the IDB, as well as all EXIM Bank funding and OPIC risk insurance. In September 1983, the US slashed Nicaragua’s sugar quota. In November 1985, it added a total embargo on all trade with the US, Nicaragua’s main trading partner and foreign investor up to then. Given the country’s dire economic straits, this had the practical effect of cutting off all US private investment and bank lending.

At the same time, the Reagan Administration was stubbornly opposing all efforts to embargo trade or investment with respect to South Africa’s racist apartheid regime. In September 1983, for example, the State Department approved a Westinghouse application to bid on a $50 million ten-year contract to maintain and supply South Africa's two nuclear power stations. The US also continued to support World Bank and IDB loans to the right-wing regimes in Guatemala and El Salvador throughout the 1980s.

The other half of the scissors strategy was the USG’s effort to create, finance, arm, and determine strategy and tactics for an 18,000-person contra army, financed with $300 million of taxpayer money, in-kind military assistance, another $100-$200 million raised from private donors like the Sultan of Brunei, and an untold amount of cocaine proceeds. The main faction, the Frente Democrático Nacional (FDN), consisted of 3,000 ex-Somocista National Guard members and another 12-13,000 assorted mercenaries, anti-Castro Cubans, Israeli trainers, Argentine interrogators, and cocaine traffickers of several different nationalities. The Reaganites knew they were not dealing with angels here. As the CIA’s Inspector General later admitted in 1998, the agency made sure to get a statement from the US Department of Justice in 1982, waiving the CIA’s duty to report drug trafficking by any contra contractors.

From 1982 to 1989, this murderous scalawag army stoked a war that ultimately took about 30,000 lives, including those of 3,346 children and more than 250 public school teachers. Another 30,000 people were wounded, and 11,000 were kidnapped, according to the National Commission for the Protection and Promotion of Human Rights. Another half million fled the country to avoid the chaos. With the help of Harvard Law School Professor Abram Chayes, Nicaragua later successfully sued the US for launching these and other terrorist attacks and causing all this damage. In November 1986, the International Court at the Hague found the US liable for several clear violations of international law – notably, for launching an unprovoked war that was not justified by any “right of self defense.” The Court suggested that appropriate damages for the resulting property damage were on the order of $17 billion. But the Reagan Administration declined to appear in court, and refused to recognize the judgment.

THE WORLD'S HEAVIEST DEBT BURDEN

The detailed history of Nicaragua’s contra war has been told elsewhere, at least those parts of it that are not still classified, like much of the record of US knowledge about the contras’ extensive cocaine trafficking activities, and President Reagan’s confidential discussions with his aides, kept off limits for an indefinite period by a Executive Order signed in 2001 by President G.W. Bush.

Our main interest here is in the war’s devastating impact on Nicaragua’s economy and its crushing foreign debt burden. Ultimately, the FSLN soundly defeated the contras with a combination of adroit military tactics – for example, heavily-mined “free-fire” zones along its northern border with Honduras – and a large standing army, raised by draft. To pay for all this, however, the FSLN had to boost military spending, from 5 percent of national income in 1980 to 18 percent in 1988, when the first in a series of armistices was finally signed. By then, more than half of Nicaragua’s government budget was devoted to paying for an army that numbered 119,000 regular soldiers and militia – 7 percent of all Nicaraguans between the ages of 18 and 65.

Early on, the Sandinistas had made a strong commitment to building new health clinics and schools in the county. These social programs, plus land reform, were among their most important accomplishments. Even in the midst of the war, with the help of 2500 Cuban doctors, they managed to increase spending on health and education, open hundreds of new medical clinics, and sharply reduce infant mortality, malnutrition, disease, and illiteracy. They also implemented a land reform that redistributed more than 49 percent of Nicaragua’s arable land to small farmers.

But the war made it very hard to sustain these undeniable social accomplishments Despite the FSLN’s military “victory,” Nicaragua’s regular economy took a direct hit. Trade and investment plummeted, unemployment soared to 25 percent, and inflation reached more than 36,000 percent by 1988-89. From 1980 to 1990, Nicaragua’s average real per capita income fell 35 percent, and the incidence of poverty rose to 44 percent. To deal with shortages in the face of soaring inflation, the FSLN had to implement a rationing system for food and other basic commodities. As the Nixon Administration had done to the Allende regime in Chile a decade earlier, so the Reaganites did to Nicaragua – they made the economy “scream.”

All told, by 1990, Nicaragua had displaced Honduras as the poorest country in Central America. It had also become the world’s most heavily indebted country. To fund the defense budget and their other commitments in the face of declining tax revenues, trade, investment, and multilateral funding, the FSLN partly relied on inflationary finance, by having the Central Bank just print more cordobas. But for vital foreign purchases, including oil and weapons, it required dollar loans from sympathetic countries, mainly the Soviet Union ($3.3 billion), Mexico ($1.1 billion), Costa Rica, Germany, Spain, Venezuela, Brazil, and Guatemala (!), plus more than $500 million from the Central American Bank for Economic Integration, one multilateral institution that the US did not control.

When the newly-elected government of Violeta Barrios de Chamorro took office in April 1990, the debt stood at $10.74 billion – more than 10 times its level in 1980, and nearly 11 times Nicaragua’s national income.

This was by far the highest foreign debt burden in the world, thirty times the average debt-income ratio for all developing countries. And it was not derived from “technical policy errors,” “economic accidents,” or “geographic misfortune. ” Part of it was the $1.5 billion of dirty debt left over from the Somoza years. The rest derived from the ruthless persecution by world’s most powerful country of a tiny, stubborn Central American nation that was determined to finally make its own history.

CONCLUSION - REAGAN'S IMPACT ON NICARAGUA

In the 1980s, against all odds, and woefully ignorant of economics, politics, business, and diplomacy, a handful of rather foolhardy Nicaraguans dared to challenge the Reagan Administration's attempt to prevent them from controlling their own destiny.

They made many mistakes, and they required much on-the-job training. But at least they tried to stand up.

When they did so, they were attacked, and when they defended themselves, they were portrayed as the aggressors. Ultimately they won a victory of sorts, but it left their country a shambles.

Then their successors, worshipers of the latest fashions in neoliberal economic theology, came to power promising reform and freedom, and ended up turning the country into a bantustan.

Perhaps Nicaragua will need another revolution.

***

(c) James S. Henry, SubmergingMarkets.com(tm) 2004. Not for reproduction or other use without express consent from the author. All rights reserved.

June 17, 2004 at 08:05 PM | Permalink | Comments (2) | TrackBack

Wednesday, June 02, 2004

"Letters from the New World" (Ukraine):
#1.""Schwartzennation" - Microwave Democracy"

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About Matthew Maly

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(Editor's Note: The following is the first in a series of essays by Matthew Maly, a leading Russian-born American free-lance journalist and business consultant who is based in Kiev, Ukraine. He is the latest addition to Submerging Markets' growing list of Contributing Editors. In this essay, Matthew provides an interesting non-US perspective on the limits of America's technocratic approach to exerting influence on other countries around the world. Matthew's latest book is the highly-acclaimed How to Make Russia a Normal Country. (St Petersburg: Bulanin, 2002). An English language version, Russia As It Is: Transformation of a Lose-Lose Society, is available in the US from Booklocker.Com.)


"SCHWARTZZENATION" - MICROWAVE DEMOCRACY

From where I sit, here in Kiev, it seems that the United States of America has become a nation of super-people. At the cost of a very few lives it has defeated an army of hundreds of thousands in Iraq, and occupied a country of 25 million. Like the Spanish conquistadors facing the Incas, America appears to be an era ahead of the rest of the world. And just like the Incas facing the conquistadors, the world is ambiguous towards America, fascinated yet fearful, trying democracy and Wrigley's Spearmint Gum for the first time.

If an American soldier dies in Iraq, every inhabitant of our planet learns about his death almost instantly: a giant falls with a thud. When a crowd of Iraqis carried the helmet of a dead American soldier it seemed like it took fifty of them to carry it. Yet like every giant from a fairy tale, the American giant has a vulnerability that may prove its undoing.
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Historical eras are often distinguished from one another by technology, both industrial (how things are made) and social (how people interact). A key secret of America's economic and political advantages lies in its use of pioneering social technology, especially the concept of “win/win.”

There are countries where for every ten people who enable there are eight, ten, or twenty of those who destroy or impede. Per capita productivity in Russia is one tenth that of the US. Does this mean that a Russian can’t lift a five-pound sack of potatoes? No, it means that if a Russian wants to open a hot dog stand, a bandit and a tax collector immediately visit him. In America, one of your neighbors works to feed you and another to educate you. In Iraq, one neighbor spies on you and another teaches you hatred instead of arithmetic.

It is “win/win” social cooperation, supported by social values and a legal system that Americans often take for granted that opens the way for the introduction of new technology, not the reverse: industrial technology can be used only if your neighbors realize that your personal success will in turn help them advance their goals. America has long since accepted the basic premises of “win/win,” and this is what helps to make the American soldier grow a hundred feet tall.

But technology is a human attribute, not the essence of what a human being is all about. Technology, both social and scientific, has helped to make America successful, but America is in danger of neglecting human character, proposing solutions that are purely technical, and thus may well be inadequate.

This danger is nothing new. Paganism was a fascination with the technologies of nature: to be strong, people wore wolf's teeth or feather head-dresses. The Industrial Age worshiped the Machine Tool, a new God that produced everything, and people wanted to be like the Machine Tool's products: unanimous, marching in step, and wearing steel helmets. The Information Age proclaims: you are what you appear to be; ultimately it is all “bits and bytes.” If the celluloid Terminator can save the world, it follows that a human Arnold Schwarzenegger can save California. But is it really just a matter of technique and force?
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If we compare a McDonald's to a French restaurant, we are likely to conclude that the McDonald's is cheaper, cleaner, faster, and friendlier. It is a triumph of technology, research, and training. The French restaurant has only two things going for it: you will not remember a McDonald's meal for the rest of your life, and you cannot propose at McDonald's. McDonald's stands for a satisfying technologically-assured result, but the French restaurant stands for life, whatever it is. McDonald's has a very useful role to play, but when it proposes itself as a substitute for a sit-down meal, there is a problem.

Too often, America says to the world, "Accept our technology because it is really works." And indeed it does usually “work”, but the world does not want to accept it - it prefers to keep its old ways of life. People want to be, not just to appear. America wants the world to wear a mask of "nice" and “new,” but the world wants to keep its tastes and traditions, its blemishes, its uncertainties, and even its vices. It is not that the world wants to remain "bad": the world simply resists the notion that every problem has a technological solution. The world may not be ready for such “solutions,” or it may believe that there are problems that await spiritual rather than technological solutions. The technocratic side of America seems to be saying, "If your marriage is unhappy it could only mean that your marriage contract was not elaborate enough," but the world sees this as technocratic madness, the worship of a new false pagan god, even in the midst of America’s purported “spiritual revival.”

Of course democracy can be a reasonable goal, be it for Canadians or for Afghans or Iraqis. But when democracy is presented as a ready-made technological solution – three minutes in the microwave, with a pickle and a smile - then people will refuse to swallow this prepackaged sandwich. The world wants to slaughter the lamb, skin it, and eat it with their hands.

The world resists American idea that politics (and art) are no longer about people, but about the application of various technologies – a democratic system of government being one of them. The Terminator saves the world not because he has the largest heart, but because, at the right moment, his guns make the greatest holes. The world sees this exclusion of people, with their hot beating hearts and their imperfect histories, as a serious threat.

India invented quiet contemplation and has congested, noisy streets; Britain invented good manners and reads the stolen letters of royalty; Russia stood for the soul elevated by beautiful literature, and so Russian prostitutes are the best-read in the world. The world abandons its values, and American culture pours in and rules. But the world understands that the American version of good is not good, and the stronger America becomes, the more it tries to impose its will, the more it will be resisted.

America should be extending its "win/win" spirit, which has been so successful at home, to its (belated) efforts to spread democracy abroad. It should not be turning itself into a fearsome giant that pretends that technology has made love, identity, and history obsolete. Just like in every fairy tale, at the end a single human child will defeat it.

***
© Matthew Maly, SubmergingMarkets™, 2004

June 2, 2004 at 07:30 PM | Permalink | Comments (0) | TrackBack

Sunday, April 11, 2004

412.The Coffee Connection:
Globalization's Long Reach, From Vietnam To Nicaragua To Starbucks

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INTRODUCTION – THE "G" WORD

I remember the first time I heard the “G” word - “globalization.” It was 1985, and I was interviewing a new McKinsey recruit, a former assistant Harvard Business School professor who had decided to exchange the classroom lectern for a larger bank balance. He was about as excited as business intellectuals ever get about the latest HBS paradigm. This was the notion that, in the wake of the 1980s debt crisis, countries would soon be forced to “globalize.” According to him, this meant that they would soon dramatically reduce all barriers to trade, investment, and labor migration, so that, over time, the world would become one great big happy marketplace.

I reacted with the economist’s usual disdain for business school paradigms. While “globalization” might be a new term, surely the basic concept was not new. For example, the world had also experienced a dramatic rise in trade and investment in the late 19th and early 20th centuries. Nor was it nirvana. As I recalled, this earlier period of free trade been marked by numerous speculative bubbles, debt crises, and even some devastating famines in India, China, and Ireland. Then, during the 1930s, many countries had retreated from the winds of global competition behind tariff barriers, import controls, exchange controls, and fixed exchange rates. At the time these “beggar thy neighbor” policies were damaging to the world recovery. But after the world economy was revived by World War II, it did pretty well during the period from 1950 to 1973. Indeed, many economic historians now refer to that distinctly “un-global” period as the 20th century’s “Golden Era,” the only prolonged period in the 20th century when global growth and income equality have both improved dramatically at the same time.

So I could not help but tweak the young professor's nose a bit about the fact that “globalization,” as he called it, was not new, and was evidently neither necessary nor sufficient for strong performance by the world economy.

TWENTY YEARS LATER…

I t is now twenty years later, and many neoliberal pundits are still discussing “globalization” as if it were something strange and new – and as if it did not already have a very long and really quite problematic track record, including its very mixed record since the early 1990s.

What should by now be clear to any careful student of the subject is that in fact there really is no such thing as “globalization” per se. Its effects cannot be assessed or even measured apart from specific historical contexts. In other words, the liberalization of trade and investment is never implemented across all markets or trading partners at once. Its impact depends crucially on the precise sequence of deregulation, initial conditions, and on complex interactions with all the other market and regulatory imperfections that remain after specific barriers have been removed.

EXAMPLE - MEXICO Vs. CHINA

Just to take one specific example – in 1993, Mexico signed the NAFTA, giving its export sector much more access to the US market. However, the gains reaped by Mexican exports have been somewhat disappointing, because it discovered that just as NAFTA was being implemented, China was also dramatically expanding its exports to the US. This was partly just a reflection of China’s lower labor costs. However, for capital intensive sectors, it also reflected China’s artificially lower cost of capital. Unlike Mexico, where the banking sector had been privatized, China’s banking sector remained entirely in state hands, and it provided $billions in subsidized credit to the export companies that Mexico had to compete with. Having liberalized its capital market at the same time that it liberalized trade, Mexico had essentially given up one of its main weapons in its competitive battle with China.

The following case study of the global coffee market provides another example of “globalization’s” complex side effects. In the early 1990s, the World Bank and the IMF, which have been two of the most fanatical sponsors and promoters of “globalization” around the world, decided to encourage the Socialist Republic of Vietnam to boost its exports and growth rate by aggressively entering the world coffee market. Millions of poor coffee farmers around the world are still suffering from the effects of this grand strategy.

THE COFFEE BARRONS

If one is looking for a good example of the unintended impacts of “globalization,” a good place to start is with the world’s second most globalized commodity -- coffee, which is consumed almost everywhere, produced in 70 countries by more than 25 million farmers, and second only to oil as a share of world trade.

Coffee has certainly has had its ups and downs in the health literature, although the latest scientific evidence is apparently that, at least in moderation, it can do some good, at least if one is prone to gallstones, asthma attacks, cirrhosis of the liver, headaches, or heart trouble. But it has been undeniably beneficial to the shareholders of leading First-World companies like Nestle, Kraft, Sara Lee, P&G, and Germany’ Tchibo, the giant conglomerates that dominate the international business of roasting, processing, wholesaling, and at least in Starbucks’ case, retailing gourmet coffee to millions of First World customers.
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In the last decade, all these coffee conglomerates have prospered, and Starbucks, in particular, has struck a veritable gold-mine. Founded in 1985, since its 1992 IPO, Starbuck’s share price has risen at an astounding average rate of 28 percent a year, with four 2-1 stock splits along the way. In February 2004 its market value reached a 12-year high of almost $15 billion, and its revenues now exceed $4.4 billion, growing at 32 percent a year. Entering the vaunted ranks of truly global brands like IBM or Coca-Cola, Starbucks now has more than 74,000 “partners” (actually, employees) and more than 6000 stores in over 30 countries, and it expects to add another 1300 stores this year. Indeed, it is even opening stories in markets that one might have thought would be difficult to crack, like Paris, Saudi Arabia, Mexico, the Philippines, Indonesia, and Lima, Peru, where a cup of Starbucks java reportedly two-thirds of the minimum wage.

One might have hoped that the folks at the other end of the pipeline who actually grow all the coffee might have benefited a bit from all this downstream prosperity. But in fact it would actually come as a something of surprise to the world’s 25 million coffee farmers around the globe, most of whom exist at the very bottom of the income distribution in developing countries like Vietnam, Brazil, Nicaragua, Kenya, and Ghana. Even as the processors, roasters, and retailers were cashing in, conditions for these farmers became more fiercely competitive than ever before. Indeed, from 1997 to 2001, composite world coffee prices fell by two-thirds, reaching the lowest levels in 30 years. Since then, average prices have recovered slightly, but they still remain at just half their (real) 1997 levels.

Since the demand for coffee beans is price-inelastic, the result was that coffee bean exports and the incomes of coffee farmers all over the world just collapsed. The result was one of the most socially -devastating commodity market crashes in modern history, with millions of poor coffee growers from Mexico’s Chiapas region, Guatemala, and Nicaragua to Kenya and Ghana to Indonesia and Vietnam all suffering the effects.

"FAIR TRADE" - MORE OR LESS

As one of the younger, less diversified companies in the industry with a retail brand to protect, Starbucks was perhaps more sensitive to the growing contrast between its own prosperity and the farmers’ desperate situation. In the late 1990s it responded with a new emphasis on “corporate responsibility.” This included support for “fair trade-certified” and “organic” farming, the implementation of sourcing guidelines that emphasized “sustainable” farming practices, paying premium “fair trade-like” prices above market averages, providing a certain amount of credit to coffee farmers and financial aid to poor farming communities, and other measures. In 2003, for example, Starbucks’ paid an average of $1.20 per pound for its Arabica beans, at a time when the open market price was less than half that much.

True, this amounted to just 4-5 cents per cup at most for the farmers, compared with a “vente” coffee based drink that might go for $2.50 to $4.50, depending on what’s in it. True, much of the $1.20 per pound did not get through to the farmers, but was digested by middlemen – even in 2003, at least half of Starbucks’ coffee was purchased through brokers and short-term contracts.

True, the 2.1 million pounds of “fair-trade certified” coffee that Starbucks purchased in 2003 amounted to less than 1% of its bean purchases. And true, the social programs and credit that Starbucks distributed to poor coffee farming communities in 2003 amounted to just $1 million and $2.5 million, respectively, scattered across nine countries – less than 1 percent of its operating income that year. But at least Starbucks deserves credit for making an effort, which the other giants in the industry have failed to do.

However, if Starbucks had really wanted to assist poor coffee farmers around the world, it would not have wasted time with all the “fair trade” and “green farming” activity, as valuable as these symbolic gestures might be in the abstract.

As the following tale explains, Starbucks and the fair traders would have had far more social impact if they had simply persuaded the World Bank to keep its mitts off coffee production.

GLOBALIZING COFFEE PRODUCTION

In 2000-2002, an acute coffee market crisis hit poor countries like Nicaragua, Guatemala, and Kenya broadside. The tale of this fiasco is worth telling just because of its dire impact on such countries, which depend on coffee for 25 to 30 percent of their exports. But it is also a striking example of the unintended side-effects of globalization, and of neoliberal development banking at its worst. After all, as noted, coffee is grown by more than 25 million small farmers in more than 50 developing countries, including several of the world’s most heavily-indebted nations. Indeed, it is second only to crude oil as a developing country export. So if you wanted to pick one global commodity market not to screw up, this would be it. But that did not stop the World Bank, the IMF, and the Asian Development Bank from doing so.

As this story also demonstrates, even in the 21st century, countries like Nicaragua not only remain at the mercy of intransigent rightists, corrupt elites, and egomaniacal leftists. They are also at the mercy of massive screw-ups by half-baked neoliberal experiments located half-way around the globe – and by fellow “former socialist countries!”

In 1986, the Socialist Republic of Vietnam’s Communist Party leadership decided to switch from central planning to a liberalization policy called “doi moi” – “change and newness.” This was partly just because, like Cuba, Vietnam could no longer depend on the (crumbling) USSR for huge subsidies. It was also because senior economists at the IMF, UNDP, World Bank, and ADB were preaching the glories of free markets, and holding out the prospect of billions in aid.

The resulting program, designed with extensive assistance from the world’s leading development banks, was a controlled version of a standard orthodox adjustment program. It set out a 10-year plan – oops, “strategy” - for export-led growth, based on opening up Vietnam’s heretofore-closed economy to trade and investment, allowing state-owned banks freedom to lend to individual borrowers, decollectivizing the farm sector, and – in particular -- encouraging small farmers and state-owned companies to develop new cash crops for export.

At the same time, political power was to be kept firmly in the hands of the Communist Party’s Politburo. Despite that slightly-illiberal grace note, from 1993 on, this doi moi economic liberalization package was generously supported with plenty of advice and more than $2 billion a year of foreign loans and grants from the Asian Development Bank, the UNDP, Japan’s JIBC, the France’s Development Fund (AFD), the World Bank, the IMF, and the aid agencies of the US, Sweden, France, and several other Western governments.

Nicaragua’s 44,000 small coffee farmers, the 6 million small farmers in 49 other countries who collectively produced more than 80 percent of the world’s coffee beans, and the more than 100 million people whose jobs and livelihoods depended on coffee beans, had probably never heard of doi moi. But they became one of its first targets. Right from the start, evidently without much thought about collateral damage, Vietnam and its neoliberal wizards decided to embark on a brave new coffee export business.

While coffee had been grown in Vietnam ever since the 1850s, production and exports had been limited. The domestic market was small, and there were few facilities to process the raw beans. As of 1990, green bean exports were a mere 1.2 million 60-kilo bags per year. But Vietnam’s central highlands did have rich hilly, lots of rainfall, and low labor costs, which were ideal conditions for achieving high yields and low prices.

This was especially true for low-grade, easy-to-grow robusta beans. From a consumer’s standpoint, this species was inferior to the Arabica beans grown by Nicaragua and most other Central American producers, as well as big producers like Brazil and Colombia. Arabica had traditionally accounted for more than three-fourths of the world’s coffee production. But robusta had twice the caffeine content of Arabica at half the price, and it could also be used as a cheap filler and blending ingredient.

By the 1990s, bean quality was no longer an absolute barrier to entry in coffee farming. The global market was increasingly dominated by a handful of giant First World coffee processors, roasters, and grinders, including Nestle, Kraft, Sara Lee, P&G, and the German company Tchibo, as well as retail store owners like Starbucks, which generated their own blends. Increasingly, these companies sourced coffee beans from all over the planet, mixing and matching them to produce blends that not only satisfied customer tastes, but also minimized costs. These global buyers had been working overtime on new technologies that took the edge off the cheaper robusta beans and allowed them to be used for extra punch and fill. With the help of commodity exchanges, the giants had also defined standardized forward and futures contracts that allowed them to hedge against price fluctuations – making for a much more “perfect” global coffee market.

From the standpoint of small farmers, most of whom did not have easy access to such hedging devices, “market perfection” was in the eyes of the beholder. The changes introduced by the giant buyers amounted to a radical commoditization of the market that they depended upon for their livelihoods, a sharp increase in direct competition. Accordingly, even as downstream market power became more and more concentrated in the hands of the First World giants, the farmers’ share of value-added plummeted. In 1984, for example, raw coffee beans accounted for more than 64 percent of value-added in the US retail coffee market. By 2000, this share had dropped to 18 percent. From 1990 to 2000, while global retail coffee revenues increased from $30 billion to $60 billion, the revenues earned by bean-growing countries dropped from $10 billion to $6 billion. By then, for every $3.50 café latte sold by Starbucks, the farmers earned just 3.5 cents.

The farmers’ shrinking role was due in part to the basic structure of the global coffee industry. On the supply side, as noted, by the 1990s, raw beans were being exported by more than fifty countries, who were competing head-to-head. But while a few growers like Brazil and Colombia had tried to break into foreign markets with their own processed brands, a handful of global First World buyers still dominated processing and marketing. Indeed, many of the world’s leading exporters of processed coffee, like Germany and Italy, grew no coffee at all.

This long-standing First World control over global coffee processing is partly due to technical factors. There are economies of scale in processing, but not in coffee farming. Unlike petroleum or natural gas, which can be warehoused for free in the ground, coffee beans are costly to store. Unlike wine, aged beans also have no incremental value. Furthermore, most small coffee farmers depend on coffee sales for their current incomes. Global coffee demand is actually not very price-sensitive, and it is only growing at a modest 1 percent per year. All this means that prices tend to fluctuate wildly with current production, so there is an incentive for processors to stay out of farming, shifting market risks to millions of poorly-diversified producers. The fact that coffee beans be stored 1-2 years, while roasted or ground products have a much shorter shelf-life, also favors locating processing facilities close to the final consumer markets. And anyone who has been to France, Italy, or Brazil knows that tastes for particular kinds of coffee vary significantly across countries.

But the coffee industry’s international division of labor is not only based on such technical factors, many of which are actually declining in importance. It is also based on long-standing trading patterns and colonial relations – for example, the 16th century role of the Dutch in smuggling coffee plants out of Yemen to their colony in Java, which fostered Indonesia’s entire coffee industry; the role of French, British, Portuguese, and Japanese trading companies in Africa, Jamaica, Guyana, Brazil, and Asia, and the role of American companies in Colombia, Central America, and Southeast Asia. The First World’s dominance has been reinforced by trade barriers that favor the importation of raw beans over processed coffee.

The net result of all this is as if France, Italy and California were compelled to export all their grapes to Managua, Nairobi, and Jakarta, in order to have them processed into wine.

Along these lines, given the importance of small coffee farmers to debtor countries, and the World Bank’s supposed commitment to “poverty alleviation,” it may seem surprising that the World Bank, the IMF, and other development lenders devoted zero energy in the 1990s to designing a monopsony-breaking strategy for coffee growing countries, to help them break down this division of labor its supporting trade barriers.

Instead, the development bankers did just the opposite, helping Vietnam implement an anti-producer-cartel strategy that ultimately helped to drive the coffee- countries’ association, a rather pale imitation of OPEC, completely out of business in 2001. Could it be that these First World development banks were not influenced by the fact that the world’s leading coffee conglomerates also happen to be based in countries like the US, Japan, France, Switzerland, and Germany, not far from the development banks’ headquarters?

COFFEE CONTRAS

Vietnam’s decision to push coffee bean exports as a cash generator in the 1990s was not just based on rational economics. Like most critical decisions in economic development, it also had a crucial political motive. Vietnam’s best region for growing coffee turns out to be the Central Highlands, along the border with Cambodia and Laos. This region is inhabited by about 4 million people, including 500,000 to 1 million members of non-Buddhist ethnic minorities who are known collectively as the Montagnard/Dega hill tribes. These fiercely independent peoples have battled the Communist Party, and, in fact, most other central authorities, for as long as anyone can remember. In the 1960s, 18,000 of them joined the CIA’s Village Defense Units and fought hard against the NLF. They had many run-ins with South Vietnam’s various dictators. After the war ended in 1975, some Montagnard tribes continued armed resistance at least until the late 1980s.

To shore up control over this volatile region, in the early 1980s Vietnam’s government embarked on its own version of ethnic cleansing – or at least dilution. It actively encouraged millions of ethnic Kinh – Vietnam’s largest ethnic group – plus some other non-Montagnard minorities, to migrate from the more crowded lowlands to the Central Highlands. At first, these migrations were organized directly by the government. But by the 1990s, they were being driven by a combination of market forces and government subsidies. On the one hand, the migrants sought to escape the poverty and resource exhaustion of the lowlands. On the other, they were attracted by the prospect of obtaining cheap land and credit to grow coffee, the exciting new cash crop, which became known to the peasants as “the dollar tree.”

The result was an influx of up to 3 million people to the Central Highlands provinces in less than two decades. In 1990-94 alone, some 300,000 new migrants arrived in the provinces of Dak Lak, Lam Dong, Gia Lai, and Kontum, looking for land. By 2000, these four provinces alone accounted for 85 percent of Vietnam’s coffee production. This reduced the Montagnard tribes to the status of a minority group in their own homelands. They watched in anguish as their ancestral lands were reassigned to outsiders, including state-owned companies, controlled by influential Party members in Hanoi who had close ties with leading Japanese, American, and Singaporean coffee trading companies. Many Montagnards were forced to resettle on smaller plots, without compensation. Over time, as the local economy became more vulnerable to fluctuations in world coffee prices, this contributed to explosive social conflicts.

From the standpoint of Nicaragua’s campesinos, the key impact of all this was on world coffee prices. In Vietnam, the migrants and Montagnards alike turned to coffee for support on increasingly-crowded plots. At the time, in the early 1990s, coffee still offered greater revenue per unit of land, compared with other cash crops like rice or peppers, and it was also being actively promoted as a cash crop by state banks, trading companies, and the government.

It took three to four years for a new coffee bush to mature, so the real surge in exports did not occur until 1996-2000. Then, in just a four-year period, Vietnamese exports flooded the market. From 1990 to 2002, they increased more than ten-fold, from 1.2 million 60-kilo bags to more than 13.5 million bags. By 2000, Vietnam had become the world’s second largest coffee producer, second only to Brazil and ahead of Colombia. In the crucial market segment of cut-rate green robusta beans, the blenders’ choice, Vietnam had become the world leader. While other producers like Brazil also increased their robusta exports during this period, Vietnam alone accounted for more than half of all the increased exports. This helped to boost robusta’s share of all coffee exports to 40 percent.

In pursuing this strategy, Vietnam did not bother to join coffee’s OPEC, the Association of Coffee Producing Counties. Indeed, it acted rather like a scab, providing an incremental 800,000 metric tons of low-priced coffee by 2000, roughly equal to the world market’s overall surplus. The giant coffee buyers were quite happy to buy up all this low-priced coffee and swap it into blended products like “Maxwell House” and “Tasters’ Choice,” using it to discipline other leading supplier-countries. At the same time, foreign debt-ridden countries like Indonesia, Brazil, Uganda, Peru and Guatemala also boosted their coffee sales, in order to generate more exports. In September 2001, partly because of this beggar-thy-neighbor strategy, the ACPC completely collapsed and was disbanded.

The resulting export glut caused world coffee prices to tumble to a 33-year low by 2002. According to the World Bank’s own estimates, this caused the loss of at least 600,000 jobs in Central America alone, and left more than 700,000 people in the region near starvation.

Worldwide, the effects of the coffee glut were even more catastrophic, because the world’s fifty-odd coffee producing countries included many of the world’s poorest, most debt-ridden nations. Ironically, just as they were supporting Vietnam’s rapid expansion into exports like coffee, in 1996 the World Bank and the IMF had launched a new program to provide debt relief to the world’s most “heavily-indebted poor countries” -- the so-called HIPC program. By 2001, indeed, the HIPC program had made some progress in debt reduction, cutting the “present value” of the foreign debts for those countries that completed the program by a median of thirty percent. However, of the 28 heavily-indebted poor countries that had signed up for the World Bank’s HIPC program by 2003, no less than 18 of them were coffee growing countries – including not only Nicaragua, but also desperately poor places like Bolivia, Honduras, Uganda, the Congo, Cameroon, Rwanda, the Ivory Coast, and Tanzania.

Indeed, for the larger coffee exporters in this group, even when they managed to wend their way through HIPC’s complex program and qualify for debt relief, they found that most of its benefits had been offset by the coffee crisis! For example, Uganda, the very first country to qualify for HIPC relief, discovered that by 2001, just one year after qualifying for HIPC, its foreign debt was higher than ever -- mainly because it had to borrow abroad to offset the impact of the coffee crisis on exports!

Furthermore, many other “not-quite-so-heavily indebted” developing countries that produced coffee, like India, Indonesia, Peru, Guatemala, Kenya, Mexico, and El Salvador, were also hurt badly. Overall, if one had set out to create destitution and suffering in as many of the world’s developing countries as possible at one fell swoop, one could hardly have devised a better strategy than to encourage Vietnam to thoughtlessly expand its commodity exports in general, and coffee in particular – free markets be blessed, all other developing countries be damned.

In Nicaragua’s case, the average wholesale price for its Arabica beans fell from $1.44 a pound in 1999 to $.51 cents a pound in 2001 and less than $.40 a year later, compared with typical production costs of $.83 a pound.

Among the hardest hit were Nicaragua’s 44,000 small producers, who accounted for two-thirds of Nicaragua’s production and provided jobs that supported another 400,0000 Nicaraguans, most of them landless campesinos in the rural northwest around Matagalpa, north of Managua. They depended upon Nicaragua’s annual coffee harvests for most of their employment and income. The resulting crisis in the countryside set off a migration to Managua and other cities, with thousands of hungry, landless people crowding into makeshift shacks on the edge of town.

Obviously all these developments begged many questions so far as the role of the World Bank and Vietnams’ other international lenders and advisors was concerned. After all, Vietnam was just a very poor state-socialist country that was undertaking all these free-market reforms for the first time – after fighting and winning a thirty-years war of its own with the US. The World Bank, IMF, and the ADB, on the other hand, were supposed to be the experts – they had implemented such reforms all over the world, backed by billions in loans and boatloads of Ivy-League economists. And Vietnam was intended to be one of their poster stories for de-socialization, and for the claim that growth, free markets, and “poverty alleviation” could go hand-in-hand.

In April 2002, sensitive to NGO charges that the World Bank and the other development lenders might actually bear some responsibility for this fiasco, the World Bank went out of its way to issue a press release denying any responsibility for the crisis whatsoever. Or more precisely, it denied having directly provided any financing to expand coffee production in Vietnam. It also maintained that its $1.1 billion of lending to Vietnam since 1996 had tried – though evidently without much success – to diversify farmers away from cyclical crops like coffee. It also argued that, after all, its lending to Vietnam’s rural sector had only started up after 1996, while coffee production had increased since 1994, and that none of its investments had been “designed to promote coffee production. (emphasis added) ” It did identify two World Bank projects that “could be linked” to coffee production – a 1996 Rural Finance Project that helped Vietnamese banks lend money to farmers, and a Agricultural Diversification Project. But for these projects, the Bank simply observed that it didn’t dictate how Vietnamese banks re-loaned the funds that it had loaned to them.

Overall, then, World Bank basically washed its hands of the coffee crisis -- one of the worst disasters to strike small farmers, their dependents, and debtor countries in modern times. The World Bank did assure the public that it was extremely concerned about the plight of these farmers, and promised to address their woes.

On closer inspection, this defense had more than a few holes. First, whether or not the Bank financed any new coffee farms, clearly the World Bank and its cousins at the IMF, the UNDP, and the ADB were up to their elbows in designing, managing, and financing Vietnam’s economic liberalization program. In the first place, they played a key role in pushing Vietnam to liberalize trade, exchange rates, and banking quickly. To set targets for Vietnam’s macroeconomic plans, they had to have known which export markets the government planned to go after. After all, coffee was not just another export. After the removal of Vietnam’s quotas on coffee and other exports in 1990, partly at the request of IMF, coffee quickly became the country’s number-two export, second only to oil. It continued to be one of the top ten exports even after prices cratered. The ADB and the World Bank also worked closely with Vietnam’s Rural Development Bank, the country’s largest rural lender, to improve management and structure new lending programs. They also advised Vietnam on how to set up a Land Registry, so that rival land claims could be settled and farms – at least the non-Montagnard claimants who found it easier to get titles -- could borrow to finance their new crops more easily.

At the same time, far from encouraging Vietnam to work with other coffee producers to stabilize the market, or design an overall long-term strategy to break up the buy-side power in the market, the development banks bitterly opposed any such interference with “free markets” – no matter how concentrated the buyers were, or how many artificial restrictions had been placed by First World countries on the importation of processed coffee. As one senior World Bank economist remarked in 2001, at the very depths of the coffee glut:



Vietnam has become a successful (coffee) producer. In general, we consider it to be a huge success...It is a continuous process. It occurs in all countries - the more efficient, lower cost producers expand their production, and the higher cost, less efficient producers decide that it is no longer what they want to do.

So, despite its 2002 press release, the World Bank’s true attitude about this whole fiasco appears to have been a combination of “not my problem,” sauve qui peut, and Social Darwinism.

Meanwhile, back in Vietnam, the small farmers in the Central Highlands learned the hard way about the glories of global capitalism – thousands of them had decided that it was “no longer what they wanted to do,” but were finding few easy ways out. After the 1999-2002 plunge in coffee prices, Vietnam’s export earnings from coffee fell by 75 percent from their level in 1998-99, to just $260 million in 2001-02. In 2002-03, they fell another 30 percent. In the Central Highlands, thousands of the small farmers – low-lenders and Montagnards alike -- had gone deeply into debt to finance their growth, and were struggling to feed their families and send their children to school, because market prices now covered just 60 percent of their production costs.

In short, ten thousand miles from Managua, on the opposite side of the globe, these highland farmers were facing the same bitter truths that Nicaraguan campesinos were facing -- that they had more in common with each other than with the stone-hearted elites who governed their respective societies, and designed futures that did not necessarily include them.

In Vietnam, the resulting economic crisis severely aggravated social and political conflicts in the Central Highlands. In February 2001, several thousand Montagnards held mass demonstrations in Dak Lak, demanding the return of their ancestral lands, an end to evictions for indebtedness, a homeland of their own, and religious freedom ( since many Degas are evangelical Christians). Vietnam responded with a harsh crackdown, sending thousands of elite military troops and riot police to break up their protests. They arrested several hundred of them, and then used torture to elicit confessions and statements of remorse. They also destroyed several local churches where the protestors had been meeting. Those protest leaders who did not manage to escape to Cambodia were given prison sentences up to 12 years.

From one angle, this repressive response was the typical handiwork of a Communist dictatorship. From another angle, however, it was just another example of the repressive tactics that neoliberalism required to implement free-market “reforms” by non-Communist regimes, in countries like Venezuela, Ecuador, Bolivia, Egypt, Indonesia, the Philippines, Argentina, and post-FSLN Nicaragua.

In Vietnam’s case, far from helping to solved its political problems in the Central Highlands, the Politburo discovered that their neoliberal reforms had inadvertently helped to revive the Dega separatist movement. Evidently, economic and political liberty did not always go hand in hand.

At least the Politburo and their foreign advisors did have something to show for the coffee strategy, however. In 2000-2002, the profit margins earned by the five giant companies that dominated the global coffee market were higher than ever. Furthermore, cocaine producers in the Andean region no longer had to worry about small farmers substituting coffee for coca. In Colombia’s traditional coffee-growing regions, just the opposite started to happen in the late 1990s, as many farmers converted coffee fields to coca, in the wake of the coffee glut.

Indeed, from 1995 to 2001, coca cultivation more than tripled in Colombia, including a 20 percent increase in 2000-01 alone. This occurred despite hundreds of millions of dollars spent by the USG on coca eradication efforts, the so-called “centerpiece” of its “Plan Colombia.” In 2000-01, coca production started to increase again in Peru, Bolivia, Ecuador and Venezuela. There were also reports that farmers were even turning away from coffee and towards coca in areas that had never before seen coca, like the slopes of Kenya’s Mount Kilimanjaro. Cocaine production from the Andean countries also rose sharply from 1998 to 2002.

After all, unlike coffee, at least coca and cocaine were products for which both the farming and the processing could be done at home.

EXAMPLE - THE IMPACT ON NICARAGUA

Overall, by 2003, Nicaragua’s real per capita income had fallen to $400 (in real $1995), roughly its 1951 level. With population growth averaging 2.4 percent a year in this overwhelmingly Catholic country, the economy would have to grow at 5 percent a year for 30 years just to recover the 1977 per capita income level – compared with the actual average growth rate of 1.3 percent during the 1990s. By now, the country’s entire national income is just $11.2 billion, less than three Starbuck’s annual revenues.

By 2003, underemployment levels exceeded 60-70 percent in many parts of the country, and the overall proportion of people living in poverty was 67 percent, second only to Honduras in Latin America. This means that there were some 1.6 million more Nicaraguans living on the borderline of existence than in 1990, at the end of the contra war.

Earlier, in the 1980s, the Sandinistas had been justifiably proud of their health, education, and literacy programs. Even in the depths of the contra war, rates of infant and maternal mortality, malnutrition, and illiteracy had declined. Infant mortality fell sharply from 120 per 1000 live births in 1979, immunization coverage rose, and the share of the population with access to health care increased from 43 percent to 80 percent.

fig. 5.7. Daniel Ortega Saavedra.jpg

In the 1990s, however, there were sharp increases in all these maladies, aided a 75 percent cut in public health and education spending by 1994. By 2000, Nicaragua was spending four times as much on debt service as on education, and a third more than on public health. The infant mortality rate was still 37 per 1000, and the under-age-five mortality rate was 45 per thousand, among the highest in Latin America. (Cuba’s equivalent rates, for comparison, were 7 and 9 per thousand.) As of 2000, 12 percent of Nicaraguan children were underweight, and 25 percent were under height. More than 22 percent of children under the age of 9 – 300,000 children -- were malnourished. By 2000, 37 percent of school-age children were not enrolled in classes, and illiteracy, which an intense campaign by the Sandinistas in 1980-81 had reduced to 15 percent, had climbed back up to 34 percent, and was even higher in rural areas. Women’s rights also suffered, as the Church conspired with the new conservative governments to drive abortion underground, even at the cost of higher maternal mortality rates because of botched illegal abortions.

Coincidently, Nicaragua’s $400 per capita income was almost exactly the same as that of the Socialist Republic of Vietnam, its new direct competitor on the other side of the planet. Indeed, in one of history’s many ironies, these two formerly “leftist” countries were now passing each other on the globalization escalator, heading in opposite directions. By 1998, if we believe the statistics published by the UNDP, Vietnam’s poverty rate had dropped to 37 percent, below Nicaragua’s, while adult literacy had reached 94 percent, above Nicaragua’s (declining) rate of 63 percent. Vietnam’s average life expectancy had also matched Nicaragua’s 68.3 years. And far from having a chronic foreign debt crisis, which Nicaragua has had since 1979, Vietnam became one of the development banks’ darlings, as we saw earlier, drawing down $2 billion a year in concessional finance throughout the decade, plus more than $30 billion in foreign investment. Yet Vietnam’s ratio of debt to national income was just 35 percent – not exactly low, but only one-tenth that of Nicaragua’s.

Furthermore, with all the outside help, on top of its entry into the coffee export market, Vietnam’s growth rate averaged more than 9 percent a year in the 1990s, even as Nicaragua’s growth stagnated. In 2001, when Vietnam’s Ninth Communist Party Congress adopted its “Tenth Ten Year Strategy” for the period 2001-10, the World Bank and the IMF were both on hand in Hanoi to celebrate with yet another generous structural adjustment loan program – carefully shielded, of course, from any angry Montagnards who might wish to complain.

All told, by the New Millennium, out of 173 nations ranked by the UNDP according to their “human development” metrics, by the year 2000, Nicaragua had dropped from 68th in 1980 to 118th. It passed Vietnam on the way down, which was in 101st place and rising. The responsibility for Nicaragua’s decline appears to have been almost evenly divided between the contra war of the 1980s and the neoliberal war of the 1990s. Relative to more prosperous (haven) neighbors like Panama and Costa Rica, as well as to the pro-US, military-dominated abattoirs to the north, Guatemala and El Salvador, Nicaragua’s relative decline has been even more striking.

So evidently it wasn’t enough to pull off a revolution and defeat a US-backed puppet army, as both Vietnam and Nicaragua had succeeded in doing. Daniel Ortega and his comrades must have occasionally wondered a little wistfully, “If only we had managed to install a full-fledged, centrally-planned Communist dictatorship, as we were accused of trying to do! Maybe the world would have been as generous to us as it has been to the Socialist Republic of Vietnam!”

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© James S. Henry, SubmergingMarkets™, 2004. All rights reserved. No reproduction without express consent of the author.

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