Saddam's Demise - Do You Really Feel Safer?

Printable PDF Version Cynics say it was always just a matter of time. Indeed, the real story is not about Saddam Hussein’s capture, but about how he managed to survive so long, given all the forces that were arrayed against him.

There is also the dismal possibility that, despite his capture, the Iraqi resistance will continue to escalate its attacks, especially on other Iraqis. (Indeed, at least in the first few days after Saddam's arrest, this is precisely what has happened. The arrest has, however, resulted in some short-term gains against the resistance. We can only hope that these prove to be longer-lasting than the impacts of the deaths of Saddam's sons last summer.)

Furthermore, the tactics that were applied to "get him" may be largely inapplicable to "real terrorists" like Osama bin Laden and Ayman Al-Zawahiri, who have already targeted thousands of US civilians, yet remain free. From their standpoint, on the one hand, they never got very much (or perhaps any -- the evidence is very sketchy) support from Saddam, and as President Bush has admitted, there is no evidence that he was involved in 9/11. On the other hand, they are probably delighted to see the US tied down in this costly military venture in Iraq, rather than focusing on them. (The recent upgrade of the US terror alert status to "high" (orange) is not inconsistent with this interpretation. We hope that we are proved wrong.)

Finally, of course, the direct costs of this "arrest" have indeed been astronomical. As of this week, this most recent US-backed effort to invade Iraq and eliminate Saddam has, according to most recent estimates, cost the lives of more than 543 Coalition troops, 8-10,000 Iraqi civilians, another 8-10,000 Iraqi combatants during the first month of battle, and at least that number of combatant lives since then. The number of Coalition wounded is now at least 3100, while the number of Iraqi wounded may be conservatively estimated at 50,000 (about 2 times the minimum number of fatalities).

In addition, it now looks as if former Bush economic advisor Larry Lindsey was absolutely right: the cost of the Second Iraq War and the reconstruction to follow will easily reach $166-$200 billion by the end of 2004. By comparison, the USG's entire foreign aid budget in 2004 for all other countries is less than $20 billion.

Compared with all these costs, it is now clear that the best way to have avoided Saddam's menace would have been to have not assisted his rise to power in the first place in the 1960s and 1970s, or at least to have not armed him to the teeth in the 1980s, or at least to have not prevented UN coalition forces from removing him in 1991, after the Gulf War.

In short, while it would be perverse not to celebrate Saddam's capture, this development is surely no panacea, and the "opportunity costs" of abetting Saddam's rise and fall appear to have been very high. Let's hope that the US at least learns something from this very expensive tutorial about the long-run costs of coddling dictatorships.

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In hindsight, it really does appear incredible that Saddam has lasted as long as he has. After all, it is not as if he is without enemies in Iraq, even apart from the US. And the effort that the US has devoted to "getting him" has been truly stupendous:

At the war’s outset, in March 2003, Saddam was targeted by several "decapitation" air strikes that employed the latest “smart bombs,” eavesdropping equipment, remote-controlled flying drones, and satellite intelligence. On March 19, for example, one of his compounds near Baghdad University was hit by four 2000-lb. bunker-busters and 40 cruise missiles. President Bush rejoiced that “Saddam at the very minimum was severely wounded,” but that remark proved to be premature. On April 7, a B1 bomber dropped four more 2000-lb. bombs on a Baghdad restaurant where Saddam was supposed to be hiding with his two eldest sons. US investigators spent weeks going through the rubble, searching in vain for Saddam’s DNA. They did find the DNA of 14 deceased Iraqi civilians.

After the war’s official end on April 9, Saddam was pursued for nine months by up to 1500 US “elite” troops who were members of black ops” units like "Task Force 20," “Gray Fox,” and “Task Force 121.” They moved pretty freely throughout the country, carrying out more than 400 raids and detaining several thousand Iraqis for questioning, including several dozen members of Saddam’s extended family. Last July they succeeded in killing two of his three sons, Uday and Qusay. (No one says much about Ali, the third son born out of wed lock.) These elite forces also managed to kill at least a half dozen more Iraqi civilians and 25-30 gasoline smugglers who were chased 25 miles into Syria on a false tip.

It is worth noting that, contrary to the expectations of senior US military officers, killing Uday and Qusay had no noticeable effect on the Iraqi resistance – indeed, it grew rapidly after their demise.

From July 3 on, Saddam had a $25 million bounty on his head – about 20,000 times the average Iraqi’s annual income. Apparently such bounties may have helped produce information that helped to locate Saddam’s sons. But it is doubtful that the bounties had anything to do with Saddam’s capture. Just last week in Baghdad, Defense Secretary Rumsfeld admitted that the reward had not produced any useful information, and conceded that he was “dumbfounded.” And US General Ricardo Sanchez’’s report on Saddam’s capture also suggests that US troops did not rely on big bounties – though they probably made use of smaller payments.

So after months of the big bounty/ special ops approach, as of mid-November the hunt for Saddam had stalled. When Bush visited the UK on November 18, he got lots of caustic comments about precisely this issue – Glenda Jackson, the former minister and actress, asked, 'Why is George Bush being given a triumphal ride down Whitehall when Saddam is still roaming free?' And Air Marshal Sir Timothy Garden, of the Institute of Strategic Studies, hardly a screaming loony, declared that it was 'totally unacceptable” and “down to incompetence” that Saddam was still at large.

Meanwhile, the Iraqi resistance took off. November saw 109 fatalities and nearly 400 wounded among coalition forces, the worst month since March. Even more important for the country's stability and the resistance's future, the number of Iraqi civilian casualties was soaring.

Moreover, with less than a year to go until the 2004 US Presidential election, the proportion of Americans who felt the war was going well had fallen from 86 percent in May to 42 percent. Fully 55 percent disapproved of Bush’s “post-combat” management of Iraq situation. Despite the fact that the economy was showing signs of recovery, several polls taken during the first two weeks of December, showed that Bush’s approval rating had fallen to just 50 percent, its lowest level since before 9/11, with record disapproval levels.

Responding to all these developments, the US military, under strong pressure from Washington, decided to unleash much more aggressive tactics on the ground, especially in the Central Provinces around Tikrit. Ultimately it was these harsher tactics that turned the trick.

To begin with, according to Seymour Hersch’s report just this week, US special forces like “Task Force 121” were recently authorized to engage in proactive tactics that resemble the CIA’s Phoenix Program in Vietnam and Israel’s tactics against the Palestinians, including the use of assassination, kidnapping, and torture against civilian insurgents.

Even more important, in mid-November, the 4000-person First Brigade of the US Army’s 4th Infantry Division in Tikrit, under the command of Colonel James Hickey, started to resort to the use of West Bank/Gaza -like tactics, complete with giant Israeli D-9 bulletproof bulldozers and Israeli advice on counter-insurgency tactics. These new tactics included late-night house-to-house searches, military checkpoints, razor wire cordons, curfews, the detention of suspected insurgents’ relatives, and house demolitions.

It appears that these strong-arm tactics, especially the mass roundups and family interrogations, helped to produce the information that finally resulted in Saddam’s capture. In particular, it now appears that the critical information that led to Saddam's capture was produced not by voluntary cooperation, but by the interrogation of a detainee.

Whether the benefits of flushing Saddam out of his spider hole are ultimately worth the undoubted damage that such tactics may have rendered to US relationships in Iraq and the Middle East in general is debatable. But one point is clear -- unless the US invades Pakistan, these strong-arm tactics will not be available to use in the lawless regions of Pakistan’s Northwest Frontier Province, where Osama bin Laden, Ayman Al-Zawahiri, and former Taliban chief Mullah Omar are reportedly holed up.

In other words, even if the bounties on these proven terrorists in Pakistan are increased (the bounties on Osama and Al-Zawahiri are already $25 million each) , and even more “special ops” units are diverted to search for them, Osama and his associates are unlikely to ever be captured. Of course these folks are the only ones who have ever been shown to have launched catastrophic attacks against US civilian targets -- unlike Saddam Hussein. And they are all holed up in Pakistan, an unstable country that really does have weapons of mass destruction - plus instability, and tens of thousands of religious fundamentalists. Indeed, just yesterday, while Saddam was being processed after his arrest, Pakistanalmost lost President Musharraf to a terrorist attack.

But the day after Saddam's capture, President Bush was in no mood to focus on such complexities. He lost no time in trumpeting Saddam’s capture, pledging that it meant that "a dark and painful era in the history of Iraq is finally over.” Characteristically, Donald Rumsfeld was even more hyperbolic, asserting that “The Iraqi people have now been liberated in spirit, as well as in fact.”

They might eventually prove right, but their ability to predict Iraq’s future has so far not exactly proved to be spot -on. In particular, there’s no evidence that Saddam exerted anything like the influence that Bush and Rumsfeld imply he did with respect to the Iraqi resistance. He was widely detested, even by his fellow Ba’athists. He had no communications equipment with him when he was captured, so it is doubtful whether he could have played much of a role in coordinating the resistance. Most important, the resistance is likely to continue until there is a genuine representative government in Iraq – sometime that will not happen until next summer, at the earliest. With Saddam gone, however, and just 13 people left on the Coalition’s “top 55” most-wanted list, at least this theory of the resistance can now be decisively tested.

One of the more surprising aspect of Saddam's capture, by the way, was its pacific character. Actually, we should all feel grateful for the fact that this putative “monster” was captured alive. Apparently Saddam’s faith in the afterlife did not rival that of other members of the Iraqi resistance. This will permit him to receive a fair trial -- a salutary exercise for Iraq's first post-Saddam government. And he may also be able to use his brief remaining time on this earth to help us solve a few riddles about the past, such as what really became of all his WMDs, his alleged connections with al-Queda, and the history of his relationships with foreign powers during the 1980s. Naturally we trust the Bush Administration to share all his candid responses with us. (According to Time, Saddam has reportedly already told American interrogators that Iraq never had weapons of mass destruction.)

So good riddance to Saddam! One cannot but hope that this will indeed prove to be a turning point in Iraq’s struggle for democracy, peace, and independence.

To the triumphalists in the Bush II Administration, however, we also need to insist that Saddam’s capture really becomes a turning point for the First World-- it should henceforce be unwilling to help such dictators rise to power in the first place. In particular:

• Saddam's removal might have been undertaken 13 years ago, at much lower cost, by the UN-backed international coalition that was assembled by Bush I.
• Even before that, during the first Reagan Administration, in which Rumsfeld served, and in the last year of the Carter Adminstration, Saddam might have been discouraged from invading Iran, and he might have been provided with far fewer weapons and key ingredients for WMDs.



• Long before that, the Nixon Administration and Henry Kissinger might have refused to betray the Kurds when they tried to resist Saddam.
• Before that, in the 1960s, the Kennedy /Johnson Administrations and the CIA might have declined to help install Saddam’s Ba’athists in Iraq in the first place.

Of course all these were complex judgments, made under the acute pressures of the time. But it is important for us to be reminded of our own deep responsibility for the Saddam "monster" -- if only to avoid making such mistakes again.

For the moment, however, conventional news coverage will probably just continue to celebrate Saddam’s capture like some medieval morality play. This doesn't do justice to history, but at least it helps television news compete with its increasingly close substitutes -- the all-movie and all-wrestling channels.

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© James S. Henry, Submerging Markets, 2003

December 15, 2003 at 06:02 AM | Permalink | Comments (0) | TrackBack

Friday, December 05, 2003

Restructuring Iraq's Foreign Debt - Let's Hope This "Baker Plan" Is More Successful!

Printable PDF Version

On December 5, 2003, President George W. Bush announced that he is appointing James A. Baker III to
to be his “debt envoy,” in charge of renegotiating Iraq’s huge foreign debt. To many, this is a welcome move -- Baker appears to be a savvy, affable fellow with strong diplomatic skills and multilateralist inclinations, which this administration sorely needs. And Iraq’s debt now stands at $128-$200 billion or more, depending on whose claims are recognized. (See below.) Since this is at least several times Iraq's entire national income, a debt restructuring is certainly long over due.

Indeed, as I’ve argued elsewhere, if Iraq’s foreign debt had been restructured in the late 1980s, when Baker was Secretary of State, many of our difficulties with Iraq -- including Saddam’s 1990 invasion of Kuwait, the prolonged embargo, and our most recent invasion of Iraq -- might well have been avoided entirely.

Those who are old enough to remember James Baker's terms as Secretary of the Treasury from January 1985 to August 1988 and Secretary of State from January 1989 to August 1992 may be struck by several other ironies.

As we’ll remind ourselves below, not only did his "Baker Plan" utterly fail to reduce the Third World debt when he was Treasury Secretary, but when he was Secretary of State, he actually encouraged the US Department of Agriculture and leading US and foreign banks to lend billions of dollars to Iraq -- despite its credit unworthiness. His motive back then was evidently to help Saddam continue to be able to import weapons from abroad and manufacture even nastier weapons back home. It seemed like a good idea at the time.

So, in a sense, this recent appointment shows that our policies have come full circle. It must be profoundly satisfying for 73-year old Jim Baker. His last hurrah in government may be to finally successfully restructure a Third World country's debts -- indeed, in this case, the same very country whose debts he helped to increase substantially fifteen years ago. We may not be able to find Bin Laden, but we certainly have located another enemy, Pogo……

THE BAKER PLAN’S TRACK RECORD

To begin with, Jim Baker’s credibility in debt restructuring is not exactly unsullied. In 1985, as President Reagan’s second Treasury Secretary, he launched his so-called "Baker Plan," the first of several attempts by the US Government to tackle the exploding Third World debt problem. It was managed day-to-day by Baker’s close associate, former Undersecretary of the Treasury Dr. David C. Mulford, who later became Chairman of Credit Suisse First Boston's International Group, and just last month was designated by President Bush II as the new Ambassador to India.

The “Baker Plan,” which relied heavily on a combination of tougher IMF/World Bank conditions in exchange for a modest amount of new loans, basically assumed that with the right policies, developing countries could grow themselves out of their excessive debts. Unfortunately this assumption proved to be wrong – with disastrous consequences for the countries. The Baker Plan, together with its successor, Treasury Secretary Nicholas Brady’s so-called "market-oriented," voluntaristic approach to debt reduction, were utter flops. The conditions that were imposed on debtor countries threw them into even deep recessions, provoking bloody riots (Venezuela, 1989) and debt moratoria (Brazil, 1987; Argentina, 1988). By the year 2000, the real level of Third World debt was 150 percent higher than it had been in 1985. (See Chart 1.1)

However, the Baker Plan, the Brady Plan, and other such “market-based” approaches to debt reduction that succeeded them did at least have one beneficial effect. They provided lots of opportunities for leading First World investment banks -- like Mulford’s former employer Credit Suisse First Boston, and Nick Brady’s investment bank Darby Overseas Investments Ltd., but unlike Baker’s own Carlyle Group, which has generally avoided developing countries -- to make a ton of money by structuring and syndicating privatizations and debt swaps, and by advising developing countries on the intricacies of how these plans really worked. (See my book for more juicy details -- including Dr. Mulford's involvement in Argentina's 2001-02 debt debacle.)

Mulford

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THE ORIGINS OF IRAQ’S DEBT AND THE KUWAIT INVASION

In announcing Jim Baker's new appointment, President Bush explained that "the future of the Iraqi people should not be mortgaged to the enormous burden of debt incurred to enrich Saddam Hussein's regime.(emphasis added.)" It is hard to quarrel with that statement – up until the last five words. If Mr. Bush had actually bothered to examine the origins of Iraq's foreign debt, he would have quickly realized that "enriching Saddam" was a very minor part of the story.

Indeed, the vast bulk of Iraq's foreign debt today is supposedly “owed” to Kuwait, Saudi Arabia, and the other Gulf States. Most of this was incurred to help fight the Iran-Iraq War and defend the autocratic dynasties that rule these oil emirates against the Ayatollah Khomeini's brand of populist fundamentalism in the 1980s.

One of the main reasons why Saddam invaded Kuwait in August 1990, in fact, was that Kuwait and Saudi Arabia refused to restructure these "Iraqi debts" – at the same time they were accelerating oil production, driving oil prices down and decimating Iraq's oil revenues (and their own -- but they had much less need for the revenue back then.) By 1989, as it emerged from an eight-year war, Iraq's economy was a complete mess, with hundreds of thousands of war casualties, more than a million soldiers under arms, declining oil revenues, and this huge war debt.

Iran-Iraq War

Yet for reasons that are still very unclear to this day, the Kuwaitis and the Saudis insisted on being repaid in full, and actually accelerated their oil production.

If James A. Baker III, who was Secretary of State at that point, had really wanted to avoid Iraq’s subsequent invasion of Kuwait, he (and Mulford/ Brady) might easily have exerted pressure on these two US allies, who were completely dependent on the US military for their protection. Given that pressure, they might well have restructured Iraq's excessive debts back then, at a fraction of the cost that will be required in 2003 -- even ignoring all the other side effects of this delay.

Instead, Baker choose to adopt what might be termed a “Weimar” response with respect to Saddam’s debts. It was nothing less than a throwback to the hard-hearted policy that the US, France, and the UK adopted with respect to Germany’s war reparation debts after World War I – with somewhat similar long-term consequences.

Please don’t take my word for this, however. Instead, examine the detailed history of the “lessons learned” from the Iran-Iraq war that was published in December 1990 by the US Army War College’s own Strategic Studies Institute, just a few months after Saddam invaded Kuwait. On the subject of why Saddam had chosen to do so, the study had this to say:

Conventional wisdom maintains that Iraq always was covetous of Kuwait, and that, indeed, the nature of the Ba’athists is to be expansionists; in invading, the Iraqis were merely following their instincts. This explanation does not hold water. Why, for example, if they desired territory, didn’t they seize Khuzestan at the end of the war when Iran was prostrate? Why did they not at least insure themselves control of the Shatt Al Arab? By withdrawing completely from Iran, and turning the issue over to the UN for settlement, the Iraqis behaved as a responsible member of the world community.

Nor does it seem reasonable to argue that Iraq invaded Kuwait because it thought it could get away with it. Throughout the war, the Iraqis had ample evidence of the importance of Kuwait to the superpowers….M/font>

Taking all this into account, it seems obvious that Iraq invaded its neighbors because it was desperate. (Emphasis added.) It had a million man army that it could not demobilize, because it had not jobs to send the men home to. It had no jobs because its economy had been ruined by the war. It could not get its economy going again until it demobilized. Thus the Iraqi leadership saw itself in a vicious dilemma. At the same time, Kuwait was fabulously wealthy, and Iraq – by seizing it – could hope to exploit its wealth to resolve its economic problems….The lesson would appear to be, never make war until you have assessed the potential of your opponent. Iraq’s initial mistake in attacking Iran was in failing to appreciate the vast human potential that Tehran could exploit…And in the end, although it emerged “victorious,” it practically bankrupted itself.

In this view, then, Saddam was not so much a crazed madman, an expansionist bent on regional domination, or even an undeterrable, diehard anti-Zionist, as much as he was a desperate bungler, driven into the corner by his country’s own economic situation.

THE COSTS OF NOT RESTRUCTURING IN 1990

Was this view correct? We may never know. What is clear is that the cost of not bothering to find out has been enormous – especially compared with the cost of the mere $27 billion settlement that Iraq proposed and Kuwait rejected in July 1990, on the eve of the war.

Among the subsequent costs of failing to restructure Saddam’s debts” back then, we can include:

>The direct costs of the 1991 Gulf War. These include at least $100 billion of damage to non-oil infrastructure in Kuwait and $50 billion in Iraq, plus $61 billion of direct military expenses for the US-led coalition forces, an estimated $600 billion in longer-term reductions of the region’s gross domestic product; 2500 to 3500 civilians, 50,000 to 100,000 Iraqi soldiers, and 350 coalition forces killed; about 111,000 indirect civilian deaths during the wartime period, including 70,000 children, due to a breakdown in sanitation, the spread of infectious diseases, the disruption of hospital care caused by power outages, and the side-effects of more than 300 tons of depleted uranium ordinance used by the coalition in southern Iraq; up to 25,000 coalition troops who complained after the war of “Gulf War” syndrome, a mysterious “illness” that many believed might have been caused by exposure to chemical weapons; nearly 700 oil wells that were set afire, burned for a year, and caused an environmental disaster and another $20 billion of damage; and 11,000,000 barrels of oil that were released into the Persian Gulf, about twenty times the size of the 1989 Exxon Valdez spill. (See the PDF Version for footnotes to sources.)

>Compensation Claims for Gulf War Damage. As a result of the 1991 war, Iraq was also saddled with about $320 billion in claims for damage compensation, which it was supposed to pay out of oil revenues, channeled through the UN under the terms imposed by the Coalition. These claims included $117 billion claimed by Kuwait’s Public Authority for Assessment of Compensation.

By 2003, $148 billion of these Gulf War claims had been settled for about $.30 on the dollar, or $43 billion. Assuming conservatively that the remaining claims will be settled for an average present value of $.20 cents on the dollar, the remaining claims would be worth $36 billion. At that rate, Iraq will ultimately have paid out about $79 billion, in present value, for Gulf War damage -- on top of its foreign debt. This means that these compensation claims will have cost it almost as much as its entire Iran-Iraq war debt.

In the wake of the 2003 US invasion, Kuwait has indicated that it may be willing to exchange a portion of these claims for a stake in Iraq’s new oil concessions. Throughout the last decade, Iraq protested to no avail that many of Kuwait’s compensation claims were spurious, amounting to yet another forced transfer of its oil revenues to the wealthy Kuwaitis, even while Iraq's own citizens were starving. (Just to cite one example -- the case of a wealthy Kuwaiti who complained to the UN in 2003 about losing his thoroughbreds, jewelry, and art collection, and received $4 million in compensation, all of it paid for from Iraq's oil revenues.)

>Sanctions. There was also the enormous cost of the UN sanctions that banned all imports of Iraqi goods. The UN imposed these on Iraq four days after the invasion, and maintained them for 13 years, until May 2003. This was one of the most comprehensive economic blockades in history – way beyond the effort maintained, for example, against South Africa in the 1980s. But even these sanctions failed to get Saddam out of Kuwait, topple him from power, or force him to cough up his purported “weapons of mass destruction.”

What they did do was to create what can only be described as an economic catastrophe for Iraq’s people – despite the fact that they had much less responsibility for their dictator’s behavior than, say, the international community that had helped bring him to power in the 1960s, armed him to the teeth, and encouraged his aggressions throughout the 1980s, so long as it was directed against Khomeini.

These sanctions created havoc in Iraq’s public health, sanitation, and hospital systems, by interrupting the supply of imported medicines, hospital equipment, chlorine and pipes for water treatment plants, pollution control gear for the country’s oil refineries, and many other imported necessities. UNICEF has estimated that these 1990s sanctions alone were responsible for boosting Iraq’s infant mortality from 25 per 1000 births in 1990 to 92 per 1000 in 1995, and causing a one-third reduction in average per capita caloric intake by 1996. In 1996 the UN Oil-for-Food program was introduced to moderate these effects. Still, aid experts estimated that for the decade as a whole, the sanctions on Iraq probably claimed at least 60,000 to 100,000 victims per year – half of them children. In addition, the sanctions also imposed heavy costs on neighboring states like Turkey, which estimated that it lost $80 to $100 billion in trade revenues with Iraq because of their border’s closure.

Meanwhile, the one group of Iraqis that was least affected by the sanctions was of course Saddam’s own Ba’athist Party. A 2002 study by the GAO found that, while the UN Oil for Food program accounted for $51 billion of Iraq oil revenues from 1997 to 2001, another $6 billion of illicit income was probably generated through illegal oil exports and surcharges levied by key officials in exchange for contracts. It speculated that much of this income ended up in the usual places – bank accounts in offshore havens like Switzerland, Lebanon, and Cyprus.

These sanctions also provided the occasion for the well-known remark by US Secretary of State Madeleine Albright in 1996. When asked by reporter Leslie Stahl whether the policy was worth the deaths of 500,000 Iraqi children, she replied, “I think this is a very hard choice, but we think the price is worth it.” Many others did not agree. Two successive senior UN humanitarian program coordinators and the head of the World Food Program resigned from the program in 1998 and 2000, describing what was being done to the Iraqi people as “intolerable.” As one commented, “How long should the civilian population of Iraq be exposed to such punishment for something they have never done?”

The Clinton Administration’s answer -- like that of President George H.W. Bush I and James A. Baker III way back in 1991-92 -- was that, from the standpoint of the First World's own selfish interests, this brutilitarian policy was preferable to the full-scale invasion that would have been needed to take out Saddam and his crew. But for the events of September 11th 2001, and the opportunity that it presented to conflate Saddam’s regime with other “Islamic terrorists,” President Bush II would probably have reached the same conclusion.

All these costs are even before accounting for the enormous costs of the 2003 US-led invasion – at least $100 billion for military costs for the period March 2003 through yearend 2004, and an estimated $20-$30 billion a year for reconstruction. All told, the failure to head off Saddam’s adventurous attempt to solve his “debt problem” by invading Kuwait has easily had an economic price tag – even apart from all the suffering it caused – of at least $800 billion to $1 trillion.

This makes Iraq’s foreign debt – whatever it is – pale by comparison. And it should also make us all a wee bit curious to know whether negotiating a debt-and-oil-price settlement with Saddam was ever seriously considered by James Baker way back in the late 1980s, before all these bloody chickens came home to roost?

IRAQ’S FOREIGN DEBT – WHO’S OWED WHAT NOW?

A s for Iraq’s foreign debt now, who is owed what, and with whom will ‘debt envoy” Baker have to negotiate? Estimates of the debt’s size vary widely, because different measuring rods and time periods are used by different analysts. But by all measures, the accumulated debt burden was already very heavy by the end of the 1980s. And most of it was clearly due to the Iran-Iraq War, which lasted from October 1980 until July 1988, when Iran finally accepted a ceasefire. Since the US and its allies, including Kuwait and Saudi Arabia, actively encouraged that war, and provided assistance to both sides in the interests of perpetuating it, there is a strong moral argument that the portion of the Iraqi debt that pertains to it should indeed be these allies' responsibility.

Iraq’s own official estimate of its foreign debt as of December 31, 1990 was just $42.1 billion. But this left out a huge amount of “quasi-loans” that it had obtained from neighbors like Kuwait, Saudi Arabia, and the Gulf States -- all of which informed Saddam after the war that they had never considered these funds as "grants," but loans, which they expected to be repaid. As noted, this became a crucial bone of contention in the events leading up to the Kuwait invasion.

Since Iraq was embargoed throughout the 1990s, except for UN-approved “Oil-for-Food” transactions, it did not contract any new loans after August 1990. The World Bank/ Bank of International Settlements estimated in 2001 that as of 1998, Iraq’s foreign debt totaled $127.7 billion.
However, this included about $47 billion of interest that accrued during the 1990s. Since this was a period when Iraq was subject to sanctions that prevented it from doing any debt restructuring, however, it is questionable whether it is really fair to charge Iraq for all this imputed interest (calculated by the World Bank at a 7 percent a year.)

Netting out this interest, the World Bank's estimate implies that Iraq’s foreign debt was $80.7 billion in August 1990, just before the Gulf War – including all the disputed finance from the Gulf States. That already made Iraq’s debt-to-national income ratio about 1.1, or $4600 of foreign debt per capita – not quite as high as the debt burdens of some other Third World countries (like Nicaragua), but as high as for the typical “heavily-indebted country.”

Of this $81 billion total, fully $47 billion was "owed" to Arab kingdoms, including $17 billion to Kuwait, $20 billion to Saudi Arabia, and $300 million from Jordan and Morocco. (If interest is included, this adds another $30 billion the $47 billion. ) Most of the $47 billion was provided during the first three years of the Iran-Iraq war, when these countries were most afraid that Iraq might lose the war to Iran. A US intelligence estimate says that Kuwait and the Gulf emirates provided Iraq at least $1 billion a month from October 1980 through the end of 1984, in order to sponsor this war effort.

Another $13.5 billion was provided by the Soviet Bloc, including $12 billion from the USSR (including about $7 billion for arms), $1 billion from Bulgaria, and $500 million from Poland, in the form of export credits. Another $800 million was loaned by Iraq’s good neighbor to the north, Turkey. (Iraq also received the whopping sum of $50 million in foreign aid from the Soviets and Western Europe during this period.)

Finally, about $19 billion of Iraq’s foreign debt came from First World Western sources, including $13.5 billion of bilateral and government-guaranteed export credits from the 16 members of the “Paris Club.” These were also mainly used to finance Iraq’s arms imports. The leading providers were France’s COFACE, which loaned $ 3.75 billion of export credits outstanding for arms and $4.3 billion for other goods; Japan’s JEXIM and leading trading houses, which loaned Iraq 700 billion yen ($5.8 billion); the UK’s ECGD, which provided more than $1 billion in credits, and became Iraq’s “paramount favored creditor;” and Germany’s HERMES, Austria’s OeKB, Canada’s EDC, and Australia’s EFIC.

While these government agencies provided the loan guarantees, a whole army of private banks actually got involved in delivering the guaranteed credits, and some also provided their own credits to Iraq. Among the most important private banks involved in Iraq lending during the 1980s were Germany’s Commerzbank, JP Morgan, Chase, Gironzentrale (Austria), First City Bank of Houston, and Gulf International Bank (Bahrain.) In the early 1980s, JPMorgan also made several rather unusual, life-saving loans to a Brazilian arms company, Engesa, which became one of Iraqi’s principal arms suppliers.
All told, therefore, when James Baker looks around to see who will have to “eat the losses” on Iraq’s foreign debt, he will quickly learn that it not just our Old European rivals, the French and the Germans, or even the fair-weather Russians, but the original “hard ball” players from 1991, Kuwait and Saudi Arabia.

Let’s just hope that James Baker has more success negotiating a debt reduction for Iraq with Kuwait and Saudi Arabia than Saddam did.

IRAQ’S FOREIGN DEBT – BAKER’S OWN INVOLVEMENT

The other interesting fact to know about James Baker’s experience with Iraq’s foreign debt is that he was deeply involved in making it larger. While he was Secretary of State from 1988-92, our very own US Department of Agriculture's Commodity Credit (CCC) Program loaned Saddam nearly $5 billion, with James A. Baker III's knowledge and active encouragement.

Under the US Department of Agriculture's "GSM-102" export credit program, the CCC underwrote private loans that were extended by US banks to foreign banks or US exporters, supposedly for purchasing US commodities like wheat and rice. The DOA had approved Iraq’s participation in the “GSM-102” program early in the Reagan Administration, in December 1982. In 1983 the CCC guarantee $385 million in Iraqi credits to import American grain, the first in a long series of such guarantees. By 1990, these CCC credit guarantees were being issued to Iraq at the rate of $1 billion per year, and accounted for more than 20 percent of the entire GSM-102 program.

These loans were made, not just to feed Iraq’s people and support US farmers, or certainly not because Iraq had good credit, but as part of an effort to cultivate a close relationship with Saddam’s regime -- and especially in the late 1980s, at a point when his oil revenues were collapsing and no one else would lend him any more money, in order to help him continue buying arms.

Yeutter

In June 1989, for example, US Secretary of State James A. Baker III wrote to the US Secretary of Agriculture, Clayton Yeuter, asking him to boost the CCC’s loan guarantee program to Iraq to $1 billion a year. Yeuter promptly did so. Even September 1989, when a major scandal surfaced that involved lending to Saddam by Italy's largest state-owned bank (privatized in 1998) Banco Nazionale del Lavoro (BNL), the record shows that Baker lobbied hard to continue this lending, with the State Department commenting in February 1990 that “the CCC program is a key component of the (Iraq) relationship….we need to move quickly to repair the damage to the US-Iraqi relationship by getting this critical program on track.”

Many prominent US and foreign banks helped to arrange these Iraqi credits under the CCC program, including BNL, JPMorgan, Midland Bank, Chase, First City Bank of Houston, Bank of New York, DG Bank (Germany), Bank of America, Arab Banking Corp. (Bahrain), Gulf International Bank (Bahrain), Girozentrale (Austria), and UBAF. All told, from 1983 to 1990, the USDA’s CCC program extended more than $5.5 billion of credits to Iraq – of which $2 billion was still outstanding when it invaded Kuwait in August 1990.

For a country with just 18 million people at that time, this was an enormous trade credit. But we now know from sources in Iraq and Jordan that much of the grain that these loans were supposed to have purchased never even reached Iraq. Much of it was traded by Saddam’s intermediaries in Jordan, Turkey, and the then-Soviet Union for munitions, spare parts, chemical and other military supplies.

Most of this story has never been fully investigated. The morally-obtuse Clinton Administration decided that it had better things to do than chase down “Iraq-Gate” after it won the 1992 election, and the current installment of the Bush Dynasty certainly has no interest in doing so. Fortunately for Mr. James A. Baker III, the appointment to his new "debt envoy" position doesn't require Senate confirmation.…..

The historian can always dream, however, of being able to ask him a few questions about what really happened way back then, and what he thinks might have been possible with a little more aggressive, more timely, if perhaps less "voluntaristic" approach to debt restructuring.

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(c) James S. Henry, SubmergingMarkets.com, 2003. Not for reproduction or other use without express consent from the author. All rights reserved.

December 5, 2003 at 03:30 PM | Permalink | Comments (6) | TrackBack

Tuesday, December 02, 2003

Transnational Criminals – Part 4: SGS, Pakistan, and the "Pre-Shipment Inspection" Racket

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Asif Ali Zardari

Pinky Bhutto

How’s this for a global racket that most people have probably never even heard of – the “pre-shipment inspection” (PSI) industry?

This industry’s target market includes the world's most impoverished, corruption-ridden countries – places like Bangladesh, Bolivia, the Congo, Haiti, Kenya, Nigeria, Pakistan, Togo, and Zimbabwe, all of which have per capita incomes below $1000 a year, and also consistently rank in the bottom quarter of Transparency International’s annual corruption ratings.

The industry is dominated by a tight-knit group of five global “competitors” that generates more than $800 million a year of revenue and $150-$200 million in profit from inspection contracts with 44 of these desperately poor countries.

These companies’ owners include some of the richest people on the planet, who dwell in premier capitals like Geneva, London, Paris, and Milan, plus a 12th century Swiss castle and a 15th century Tuscan villa or two.

In addition to its direct costs, the industry has many other harmful side-effects. After forty years, development specialists are finally realizing that it has probably actually discouraged bureaucratic reform, boosted trade barriers, and encouraged even more corruption than it has prevented.

In fact most of these PSI companies cut their teeth on servicing the world's worst dictatorships, including Mobutu's Zaire, Suharto's Indonesia, Marcos' Philippines, and the current crop of autocrats in Uzbekistan and Kazahkstan.

They have also recently been convicted of bribing senior Third World officials to secure PSI contracts. For example, as we'll see, in the case of Pakistan, a recent Swiss magistrate's decision in a long-fought court case indicates that SGS and Cotecna Inspection SA, two of the industry’s long-time leaders, really did bribe Benazir Bhutto, the former Prime Minister of Pakistan and leading members of her family throughout the 1990s, with the help of major Swiss, American UK, and French banks and a coterie of Swiss lawyers.

In effect, all these "Western" institutions helped to undermine Pakistani democracy and its chances for providing a democratic alternative to Islamic fundamentalism and military dictatorship. In these times, when the cause of Islamic democracy has belatedly become a rallying cry for US foreign policy, this is an important missed opportunity for us to understand.

Despite this dubious track record, the World Bank, the IMF, and the UN have failed to discipline these PSI companies. Indeed, they have often even insisted that developing countries hire them, and have hired several of these companies themselves, to police programs like the World Bank’s “anti-corruption” standards and the UN’s (pre-invasion) Iraqi “food-for-oil” program!

All told, this is an extraordinary tale. It illustrates the perverse effects of poorly-conceived privatization and outsourcing programs, as required by our leading “development” banks. It shows just how difficult it is for our transnational justice system to keep pace with its arch rival, the global haven industry. And in Pakistan’s case, it shows how vulnerable democratic development can be to corruption -- in this case, as encouraged and facilitated by a coterie of unscrupulous First World bankers, lawyers, and PSI companies. With friends like these.......

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Welcome to the curious world of “pre-shipment inspection (PSI)” services – a First World-based industry that is really a throw-back to the “tax farming” of the Middle Ages, when European governments outsourced tax collection to private agents.

The PSI industry’s value proposition is quite similar to the medieval one. Because of rampant corruption, many of the world’s poorest countries distrust their own customs bureaucracies and export agencies, so they are willing to hire expensive private firms to backstop them, in effect privatizing” the collection of duties and foreign exchange earnings. As in the case of medieval tax farming, the remedy has often turned out to be worse than the disease.

Our examination of the PSI industry also revisits the corruption allegations that surrounded Pakistan’s former Prime Minister Benazir (“Pinky”) Bhutto, who held power during two very influential periods in the 1990s. In the late 1990s, there were numerous stories in leading Western papers like The New York Times about her alleged involvement in corruption. As we’ll see below, the substance of these stories has recently been confirmed by developments in several Pakistani and Swiss court cases. Indeed, Bhutto and her husband, Asif Ali Zardari, have recently been convicted in a Swiss court of having profited enormously from bribes that were paid by a wide variety of First World companies, including several in the PSI racket.

However, our perspective here is a bit different from that of the original newspaper reports on this scandal, which focused on the Bhuttos’ corrupt behavior, with much less attention to the Western companies, banks, and lawyers that facilitated it. Recent court cases have also added greatly to our knowledge of precisely what transpired in this case. If the West is really serious about encouraging “democracy” in Islamic countries like Pakistan, this is a good place to start -- for it shows that "reform" is not only a matter for developing countries.
THE RISE OF PSI SERVICES

As global industries go, the PSI industry is relatively young. It was born in the Congo (formerly “Zaire”) in the mid-1960s, after Joseph Desire Mobutu declared himself President-for-Life in 1965. With backing from the Belgian secret service, the CIA, and the UK, Mobutu, a former journalist and army commander, helped to organize the September 1960 ovethrow of the left-leaning, if duly-elected, nationalist, Patrice Lumumba. With substantial help from the US, by 1965 Mobutu had consolidated power, which he ended up retaining until he died of pancreatic cancer in September 1997. In the process, he turned his country into a private fiefdom for he and his family, and an abattoir of corruption and repression.

Mobutu owed his power base and longetivity not only to “foreign friends” in Brussels, Paris, and Washington, but also to his ability to siphon off Zaire’s export earnings from its rich deposits of copper, cobalt, industrial diamonds, uranium, and gold, and carve up the loot with his cronies. So Mobutu was permanently en guarde for the likelihood that his underlings were no less venal than he was. In late 1965 he hired the Swiss firm Sociéte Générale de Surveillance Holding SA (SGS) www.sgs.com to help him insure that Zaire’s Customs Bureau, tax authorities, and export companies were not cutting side deals, concealing foreign exchange earnings and evading duties on imports and exports. He also wanted to check that Zaire’s traders were not “over-invoicing” their imports and parking the difference between official and actual import prices in offshore havens like Switzerland, where Mobutu himself had stored much of his wealth. (True to form, after he lost power, Swiss banks were only able to locate about $4.3 million of Mobutu’s fortune. As Imelda Marcos once said, “It’s easy to put money in Switzerland, but it is almost impossible to take it out.”)

SGS’S HEYDAY

The original concept behind the PSI business was that foreign inspectors employed by companies like SGS would examine exports to Zaire before they left, to verify contents, tariff classification, and price levels, and make sure there was no over-invoicing. SGS compiled the data and share it with the country’s Finance Minister or, in Mobutu’s case, the Life President himself.

PSI was not SGS’ first business. By the time Mobutu became a client, this Swiss family-owned company was already ninety years old, with a solid customer base in industrial testing and trade certification, and scores of testing facilities all over the world. Its original role had been to certify goods destined for foreign buyers, and it also traded commodities.

However, with the encouragement of the IMF and the World Bank in the 1980s, SGS’ largest and most profitable activity came to be the provision of PSI services to developing countries like Mobutu’s Zaire, Marcos’ Philippines, Moi's Kenya, and Suharto’s Indonesia, where in 1985 SGS signed its first deal that focused primarily on customs duties. By the mid-1990s, SGS had offices in 140 countries, up to 39,000 staff, and more than $1.2 billion in revenues – a quarter from PSI services for developing countries. By then, several other firms had entered the market, including Intertek, BureauVeritas, BSI Inspectorate , and Cotecna Inspection SA, which SGS acquired in 1991-94, and then sold back to its owners in 1997.(See below.) However, of the 29 developing countries that had signed PSI contacts by 1994, SGS accounted for more than a third.

All this was very good news for SGS’ shareholders, not only its Swiss founding family, but for three other key investors who had acquired effective control over the company. These included the German mult-billionaire Baron August von Finck, whose family came to control a quarter of SGS’ voting stock; the Agnelli family (owners of the Fiat Group), which controlled at least another quarter of SGS by way of Worms & Cie, a Paris-based private equity firm that the Agnellis had acquired in 1990; and SwissLife, Switzerland’s leading insurance company, which ultimately acquired about ten percent.
(An irresistible aside: Another troubled SwissLife investment, the Lugano-based private bank Banco del Gottardo, was perhaps even more exotic than SGS – in the 1990s, it reportedly developed extensive connections with senior Russian advisors to President Yeltsin , Argentina’s President Menem, , and a key Swiss/Italian money launderer for Iraq’s Saddam Hussein. SwissLife bought the bank in 1999 and put it up for sale in 2003.)

Baron von Finck, in particular, was one of Germany’s most influential business people. In 2003, Forbes estimated his net worth at $5.6 billion, which made him the world’s 52nd richest person.

All this wealth was derived mainly from coming down the right chute. Born in 1930, August was the grandson of Wilhelm von Finck, who had founded the Munich-based private bank Merck, Finck & Co. in 1870, and German’s top insurance company, Allianz AG, in 1890. August and his ancestors did have to be clever enough to hold on to these assets through two World Wars and the dicey Nazi period from 1933 to 1945. Somehow they managed to do so, despite the fact that Allianz AG was one of a handful of leading Germany firms that had collaborated closely with the Nazis. (See the insert. )

In 1990 the Baron sold the Munich bank to Barclays Bank and moved to Switzerland, where he now resides in Schloss Weinfelden, a twelfth-century Swiss castle. In addition to his SGS holdings, he and his family still own the Swiss restaurant and hotel chain Movenpick, half of the leading German brewery Würzburger Hofbräu, the U.S. gold mining company Homestake Mining, and at least five percent of Allianz AG, which is now a leading global insurance and asset management giant whose ads are now featured prominently on the nightly news in the US. Until 1999 Finck, his brother, and his son also owned Alusuisse-Longa, Switzerland’s only aluminum company, and until October 2003, Spaten, Dinkelacker, the Munich brewery that produces Lowenbrau.

ASIDE: ALLIANZ AG: THE WAR RECORD

As Allianz AG itself now admits, its behavior during the Nazi era was execrable. One of its key managers, Kurt Schmidt, served as Hitler’s Economy Minister from 1933-35, and then returned to Allianz as its CEO. The firm cultivated very close relations with leading Nazis like Hermann Göring and Heinrich Himmler in the 1930s, helped the Nazis seize insurance proceeds that belonged to the Jewish victims of the 1938 Kristalnacht pogram and the Holocaust, and even provided insurance to the Nazi SS for Auschwitz’ death camp facilities.

In 2000, Allianz was one of several Germany companies that contributed to a DM 5 billion ($3 billion) fund for Holocaust victims, including 300 million marks for those who’d been robbed of their iinsurance. Of course no amount of financial aid could compensate victims like James Freudenberg, the former Chairman of Allianz’s Frankfurt subsidiary who was forced to resign in 1934, and ended up being murdered at Auschwitz in 1944 – presumably in the same facilities insured by his former employer.

Despite all this, after the war, key Allianz shareholders like the von Finck family were permitted to retain their positions – probably with help from Swiss banks and foreign trusts. As noted in the main text, they also regained control of many other Germany and Swiss companies, including SGS. SGS was also accused of holding World War II funds that belonged to Holocaust victims, although it has always denied the charges. (For more details, see Business Week, September 5, 1996, "More evidence of hidden holocaust cash,” p.38; and Reuter European Business Report, September 20, 1996, "SGS defends wartime role, says no Jewish funds.")

SGS’ FIRST WORLD RELATIONSHIPS

James Wolfensohn

From the 1960s on, SGS’s strategic role in developing countries made it a convenient perch for several First World institutions that wanted to monitor global trade and corruption. In the early 1980s, for example, the World Bank and the IMF started to insist that developing countries that received their financial assistance hire outside PSI companies like SGS. In June 1996, the World Bank President, James Wolfensohn, selected SGS as the Bank’s very first global programs auditor, as part of its new “spot audit” program to get tough on project corruption in developing countries. As noted below, in 1992 and again in 1999, the UN also hired Cotecna, an SGS subsidiary from 1991 until 1997, to police its “oil-for-food” program for Iraq.

R. James Woolsey

Meanwhile, SGS also acquired some interesting high-level connections in the intelligence community. For example, R. James Woolsey, who served as CIA Director from 1993 to 1995, listed SGS as one of his key clients while he practiced law from 1991 to 1993, during a brief break from government service. When he returned to private practice from the CIA in 1995, he once again listed SGS as one of his key clients at the leading Washington D.C. law firm of Shea & Gardner, until he left the firm to join Booz Allen Hamilton in 2003. (SGS remains on Shea & Gardner's client roster.) As we will see shortly, these must have been instructive times for former CIA Director Woolsey to have been “of counsel” to SGS.

CORRUPTING PAKISTAN’S DEMOCRACY

Of course no global enterprise with thousands of employees in dozens of developing countries can really be expected to be “Snow-White” all the time. But it is ironic that First World companies like SGS, which are supposed to be engaged in the very business of fighting corruption, have sometimes actually turned out to be among the worst offenders. Indeed, like many other Swiss companies and banks, SGS’s corporate culture appears to have tolerated and even encouraged such behavior, with a kind of "its only the wogs" mentality.

In September 1997, just a year after SGS received its World Bank appointment, the firm was revealed to have been deeply involved in bribing Pakistan’s former President Benazir Bhutto, her husband Asif Ali Zardari, her brother-in-law Nasir Hussain, and several other intermediaries. The payments, which totaled about $15.0 million, were made by way of shell companies in the British Virgin Islands, Swiss lawyers, and several Swiss bank accounts, including severral at the Geneva offices of UBS, Barclays Bank, office, and Banque Pasche. They were intended to help SGS and Cotecna, a competitor that SGS acquired in 1991-94, win lucrative Pakistani government contracts for PSI services.

HIGH HOPES FOR PINKY

Zhulfikar Ali Bhutto

Such high-level transnational corruption naturally requires “supply” as well as “demand.” In Pakistan’s case, a significant part of the “supply” during the early 1990s was provided by Mohtarma Benazir “Pinky” Bhutto and her husband, Asif Ali Zardari.

"Pinky" Bhutto was the Harvard- and Oxford-educated daughter of former Pakistan President Zulfikar Ali Bhutto, the scion of one of Pakistan’s richest land-owning families in the Sindh, a rural, semi-feudal southern state where landlessness and debt slavery remain common even today. He founded the Pakistan People’s Party in 1967 and served as the country’s President from 1971 until 1977, when he was overthrown and hung by General Muhammad Zia-ul Haq. In November 1987, 34-year old “Pinky” married the 36-year-old Zardari, a polo aficionado and minor local businessman, and in November 1988, she was elected Pakistan’s Prime Minister, running on the PPP ticket after General Zia died in a mysterious plane crash.

Pinky’s first election was greeted with very high hopes, both in Pakistan and around the world. Huge crowds had greeted her upon her return to the country from a lengthy period abroad in 1986. Well-educated, bright, articulate, attractive, from a land-owning family that was supposed to be too rich to be bribed, she was Pakistan’s youngest Prime Minister ever, and its only female one, in a country that was 97 percent Muslim. It was widely expected that she would provide her country a moderate, democratic alternative both to military rule and to the incipient fundamentalism that was just then taking root among Pakistan’s Islamic parties.

Indeed, to this date, this is the image that Pinky and her many followers in Pakistan’s second largest political party like to portray – her lecture agent’s web site describes her as “a living icon of the battle for democracy,” and “one of a handful of female executive leaders who have shaped the global events of the last century. “

In June 1989, after just six months in office, Pinky gave the Commencement Speech at her alma mater, Harvard University. In a ringing appeal, she called for the formation of an “association of democratic nations,” and warned that “in countries without established traditions of representative government….(a)ll too often, there is the overly ambitious general, the all too determined fanatic, or the all too avaricious politician…” She called for First World democracies countries to support Pakistan’s fledgling democracy, observing that
”democracy needs support and the best support for democracy comes from other democracies.”

Unfortunately, it soon turned out that Pinky’s election had actually opened the door to a host of “avaricious politicians,” including her own husband, mother, brother-in-law, and herself. And the main type of “support” provided by the First World to Pakistan was not for democracy, but corruption.

FIRST WORLD “SUPPORT.”

One of the key First World players in the SGS scandal was a crafty 40-something Geneva lawyer named Jens Schlegelmilch, the Bhutto family lawyer in Europe. In the early 1980s, according to Swiss prosecutors, he had helped Benazir’s mother, Begum Nusrat Bhutto, establish offshore residency. Before that, he may have also helped the Bhutto family set up offshore accounts, including several at Swiss banks. Schlegelmilch attended Pinky’s wedding to Zardari in 1987, where he reportedly met Zardari for the first time. Schlegelmilch lost no time in deepening this relationship. In early 1990, he allegedly negotiated an arrangement whereby one of SGS’s competitors, Cotecna, agreed to pay Madame Begum Nusrat Bhutto a 6 percent commission on a new PSI contract with Pakistan, by way of Barclays Bank (Suisse) S.A. (Account # 622.902) and Mariston Securities Inc., a BVI company that Schlegelmilch administered on Nusrat’s behalf. By August 1990, Nusrat had reportedly received $1.2 million under this Cotecna arrangement.

The relationship was briefly interrupted in August 1990, when Pinky was suddenly dismissed on corruption charges by the country’s President, Ghulam Ishaq Khan. In just 18 months in office, she and her husband had provided Khan with enough justification to file six judicial cases against her for corruption and misconduct. Zardari, Pinky’s husband spent the next two years in jail on these charges.

Nawaz Sharif

However, Pinky’s successor, the Islamic Democratic Alliance’s Nawaz Sharif, proved to be equally corrupt, and was also dismissed by President Khan on corruption charges in April-July 1993. By then, none of the cases against Pinky had been decided. So in October 1993, when the PPP won another national election, Pinky became Prime Minister again. She acquitted herself of all the charges, released her husband from jail, and he and Schlegelmilch went back to work.

One of her government’s first acts was to award a new PSI contract. SGS had acquired a controlling interest in Cotecna in 1991, so this time around it was SGS’ turn to exert influence. In March-June 1994, according to the Swiss investigating magistrate’s July 2003 final report on the case, executives reportedly promised to pay commissions totaling 10.25% percent of its contract value to several new BVI shell companies that were controlled by Zardari, Pinky’s brother-in-law Nasir Hussein, and Schlegelmilch himself. According to Schlegelmilch’s deposition in the case, in 1994, two wire transfers for a total of $1.325 million from SGS and Cotecna Inspection S.A., by then an SGS subsidiary, were made to Bomer Finance Inc., a BVI company whose beneficial owners were Zardari and Pinky. In return, on September 29, 1994, SGS/ Cotecna secured an exclusive, non-competed “pre-shipment inspection” contract from the Government of Pakistan.

By September 1997, when some of these matters came to light, SGS had earned at least $137 million under this 1994 Pakistani contract, and it therefore owed the couple and Schegelmilch about $15 million. Between March 1995 and September 1997, Zardari’s Bomer Finance Inc. received $8.2 million from SGS and Cotecna. Nasir Hussain’s Nassam Overseas Inc. received $3.81 million, and Schlegelmilch himself pocketed $1.53 million from SGS/ Cotecna and another $.5 million from these shell companies.

According to Swiss trial record, the payments to Bomer Finance were made by SGS to Account # 552343 at UBS in Geneva. The trial court obtained documentary evidence that Zardari and Pinky both had ownership rights over this UBS account – indeed, according to Swiss prosecutors, in August 1997, while her husband was still sitting in jail, Pinky accessed the account from London and used the funds there plus some cash to pay for a $188,000 diamond necklace. Today the necklace remains in Swiss custody, pending the outcome of final appeals in the case. Perhaps it should be held in trust as a memorial to “avaricious politicians.”

Once again Pinky got caught with her hand in the cookie jar. By late 1996, corruption rumors about Zardari’s sidelines were flying, in the run-up to the election scheduled for February 1997. In September 1996, Pinky’s elder brother Murtaza -- a radical, who was actually one of her key opponents -- was gunned down by the state police in Karachi, and her own mother Nusrat pointed the finger at Pinky and Zardari. On November 5, 1996, Pinky was once again dismissed on charges of corruption and extra-judicial killings by Pakistan’s President – this time by President Farooq Ahmed Leghari, a member of her own party. Nawaz Sharif returned to power, where he remained until he was overthrown by General Pervaz Musharraf in March 1999. In 1996, Zardari headed back to jail, charged with Murtaza’s murder and several others, plus numerous corruption charges. He’s been there ever since. Pinky and Nusrat fled to London and Dubai.

This second ouster eventually permitted the whole SGS matter to come to the surface. In September 1997 SGS suspended Hans Fischer, a senior manager who had been in charge of SGS’ entire Government Services Division, and in 1998, Fischer, Schlegelmilch, and Robert Massey, the Managing Director of Cotecna Inspection S.A., were all indicted in Switzerland on charges of money laundering. The Swiss magistrate also asked Pakistan to institute money-laundering charges against Bhutto and Zardari.

AFTERSHOCKS

Like most high-level transnational bribery and money laundering cases, this one has taken an eternity to be resolved. In the interim, Pinky Bhutto has continued to roam the world, grandstanding about democracy, women’s rights, terrorism, and all the injustices that she and her family have supposedly suffered at the hands of Pakistan’s military rulers. Evidently she really believes that she still represents her country's leading "democratic" alternative, and that all of these scandals will not prevent her from regaining power a third time.

In fact, however, when one carefully reviews the documentary and testimonial evidence that has accumulated against her and her husband – as several Swiss and Pakistani courts, as well as several independent investigative journalists, have now done -- one comes to the conclusion that Pinky should be grateful that there has been no extradition treaty between Pakistan and the UK or Dubai (the UAE). (Pakistan and the UAE are, however, now in process of negotiating one, but in any case Pinky spends most of her time in the UK, where she owns a plush apartment in Kensington and a £2.5m estate in Surrey, and the US, where she reportedly owns a stud farm in Texas and six houses in Florida. Interestingly, the US has recently asserted that it does have an extradition treaty with Pakistan, by way of a 1931 treaty with the UK, before Pakistan became an independent nation in 1947. But evidently the UK and Pakistan don’t consider that pre-independence treaty binding on them.)

In April 1999 Pinky and Zardari were both convicted in a lower Pakistani court of accepting at least $9 million in bribes from SGS. They were fined $8.6 million, received five-year jail terms, and were banned from holding seats in parliament for seven years. They appealed, while Benazir remained in London and Zardari sat it out in a Karachi jail. In April 2001 their convictions were reversed and she and Zardari were granted new trials, when tape recorded phone conversations turned up showing that a judge had been instructed on how to rule in the case by senior officials in Nawaz Sharif’s government, in exchange for a diplomatic passport.

However, in October 2001, a Pakistani appeals court upheld a three-year sentence given to Nusrat Bhutto for understating her assets. In May 2002, Pakistan’s Accountability Court sentenced Pinky to three years in prison for deliberately avoided the court. And in September 2002, an anti-corruption court sentenced Zardari to seven years in prison in another corruption case involving a 40 million rupee commission on a 130 metric ton steel converter at Karachi’s Pakistan Steel Mills. By then he had been in jail seven years, having been tried unsuccessfully in six other criminal cases and seven accountability cases. The judge could have elected to count this time toward his new sentence, but chose not to.

In September 2002, Pakistan also asked Swiss courts to institute money laundering charges against Zardari, Bhutto, and their helpers, and to accept Pakistan’s claim that it had been damaged by their actions. In February 2003 the Swiss Court of Appeals agreed to hear the case, and in July 2003, a Swiss investigating magistrate ruled that Pinky and her husband were guilty of money laundering, fined them $50,000, awarded them a six-month suspended sentence, and ordered them to return $11.75 million that had been frozen in accounts at UBS and Barclays in Geneva, plus the necklace, to the Pakistani government.

The case is now wending its way through final appeals, which could take years. But there is little doubt at the end of the day, the Swiss magistrate’s verdict will be upheld. After all, most of the documentary evidence in the case came from the office of Schegelmilch himself. It was further supported by the “hard evidence” of the necklace purchase and the frozen accounts that had financed it – if they did not belong to “BB and AZ,” how did she access them? Even if Pakistani courts were biased against her, as they undoubtedly were, Pinky had years to appear before Swiss courts and answer these charges.

Separately, Pinky and Ali are still battling at least a half dozen other corruption cases, including a dispute over real estate holdings in the US, the UK, and France, and another $60 million of Swiss deposits that have been located, including $40 million at Citibank in Geneva, and millions more in 61 accounts at more than a dozen other banks, including Credit Suisse, Pictet, BNP (Paris) , Chase Manhattan (NY), Banque le Henin (Paris), and NatWest (UK).

Zardari, who has been acquitted in three criminal cases, also still faces charges in several others – the government of General Pervez Musharraf seems determined to keep him in jail, in virtual solitary confinement. Pinky's mother Nusrat was also convicted of concealing her assets and sentenced to three years in 2000.

Among the other corruption cases still pending or on appeal against the Bhuttos:

~A $2.4 million bribe allegedly paid by the Polish firm Ursus to the Geneva accounts of Dargal Associated SA, another BVI company reportedly owned by Zardari and Bhutto, in connection with the sale of tractors to Pakistan’s Agricultural Development Bank.

~At least $28 million in alleged bribes from ARY International Exchange/ Traders, a company allegedly owned by a Pakistani gold trader in Dubai, Abdul Razzak Yaqub. These payments reportedly flowed by way of Citibank-Dubai (account #342034), American Express Bank, and perhaps JPMorgan (NY). In October 1994, they ended up at Citibank-Geneva, in accounts owned by Zardari’s Bomer Finance, plus two more BVI companies that Schlegelmilch allegedly set up for him -- M.S. Capricorn Trading SA and Marvil Associated Inc. In December 1994, Bhutto’s government allegedly awarded an exclusive two-year import license for gold to Yaqub, which he used to import more than $500 million of gold into Pakistan.

The prolific Schlegelmilch had reportedly set up all these accounts with the help of a Citibank private banker in Geneva, Kamran Amouzegar. In addition to all the fees he earned from the Bhuttos and SGS/ Cotecna, it turns out that Schegelmilch also struck a lucrative “referral” deal with Citibank, which gave him 20 percent of the first three years of client net revenues from each client he brought to the bank. In essence, he was collecting fees on every side of these transactions.

It also turned out that key Citibank staff, including the bank's EVP for Worldwide Private Banking at the time, Hubertus Baron Rukavina, were well aware that Zardari and Bhutto were the real owners of these accounts. Yet they permitted the accounts to be opened and to be actively used as “pass-through” accounts. In 1999, a US Senate Banking Sub-Committee investigation concluded that “well over $40 million” had flowed through Zardari’s Citibank-Geneva accounts during this period, though it wasn’t able to pierce the veil of Swiss banking secrecy to learn precisely how much or where it went. In 1999, the indiscriminating Baron Rukavina left Citibank for a leading German private bank, Sal. Oppenheim Jr. & Cie. KGaA , where he remained until 2003.
Rukavina

In fact Citibank had long since been put on notice that Zardari’s funds might not be clean – after all, he’d already spent two years in prison on corruption charges in 1991-93, and Citibank’s CEO John Reed had been advised by Citibank staffers to avoid him like the plague when Reed visited Pakistan in February 1994. But Citibank only closed the accounts in November 1996, just a few days after Pinky was removed from power for a second time. At that point the bank swiftly transferred $40 million to another Geneva bank, Banque Financière de la Cité, where Pinky apparently had an account.

In September 1997, at Pakistan’s request, the Swiss government ordered the Zardari and Bhutto accounts at Citibank and three other Swiss banks frozen. Unfortunately, by then the funds had fled. Only in December 1997 did Citibank bother to file a Suspicious Activity Report with the US Treasury’s Financial Crimes Enforcement Network with respect to these Zardari accounts – long after they were empty.

~The last two decades have also been rife with arms scandals in Pakistan, as the country pursued an increasing arms race with India, with much of the payola provided by Europe’s leading arms suppliers. All administrations appear to have profited from the traffic, and Bhutto’s was no exception. For example, Admiral Mansur-ul Haq, Pakistan’s top naval officer during the second Bhutto adminstration, fled the country in 1997, was arrested by US authorities in Austin at Pakistan’s request in 2001, charged with receiving bribes in connection with the 1995 purchase of three Agosta submarines million from the French firm DCN, Two of ul Haq’s subordinates were also reportedly convicted of corruption. Admiral Mansur, who reportedly had close ties to Zardari, was also charged with receiving $3.4 million in connection with the purchase of an Edrian minesweeper from France, missles from the French firm Aerospatiale, and naval equipment from Thompson-CSF. The Admiral was ultimately fined $7.5 million.

~In 1995, France’s Dassault Aviation was angling to sell Pakistan $4 billion of Mirage jets, after the Clinton Administration held up the sale of F-16s to pressure the Pakistanis on nuclear weapons development. Dassault and its partners in the deal, Thomson-CSF and Snecma, reportedly agreed to pay Zardari a whopping five percent commission ($250 million) on a $4 billion jet fighter deal, by way of Marleton Business SA, another BVI company controlled by him, if Pakistan agreed to buy 32 Mirage fighter planes. The offer was reportedly made by Dassault’s Director of Legal Affairs at the time, Jean-Claude Carrayrou, and Pierre Chouzenoux, its International Sales Manager, by way of Schlegelmilch to Zardari and Amer Lodhi, a Paris-based lawyer and banker who was reported to have previously worked for BCCI. The deal only fell apart when Pinky’s second administration was bounced from power in 1996. Zardari’s five percent commission was apparently a little light – in the case of Iraq in the 1980s, Dassault reportedly paid Saddam’s regime 7.5 percent commisions on its weapons sales.

~There have also been a plethora of other charges relating to hanky-panky in purely domestic matters as well, involving alleged kickbacks on rice deals, government land sales, and welfare agencies.

All told, Pakistani prosecutors believe that the Bhutto/Zardari clan may have made off with more than $1 billion in payoffs and accumulated more than $1.5 billion in net assets during their brief four years in office.

More important, Pakistan’s 150 million people, and the cause of Islamic democracy, may well have suffered incalculable damage at the hands of this corrupt elitist clan and its First World abettors. Together with Bhutto/Zardari’s licentious successors in Nawaz Sharif’s two failed governments, they clearly helped to undermine the popular association between democracy and the rule of law, and paved the way for the growing polarization between two anti-democratic alternatives -- military dictatorship and Islamic fundamentalism. Long term, it is this damage, and not some economist’s sterile “excess transactions costs, that is the real cost of transnational corruption.

SWISS JUSTICE?

As for the Zardaris’ Swiss collaborators, there has been a modest amount of justice done, but scarcely enough, when one considers all the damage they may have done to Pakistan’s body politic.

~ Schegelmilch.. In July 2003, a Swiss investigating magistrate ordered Jens Schlegelmilch to reimburse Pakistan for the $2 million of compensation that he received under the SGS money laundering arrangement, and was given three years probation. This sentence is still on appeal. The other Pakistani cases involving bribery allegations against Schegelmilch are still under investigation.

~SGS. As for SGS and Cotecna, they found their Pakistani contracts cancelled for the second time. SGS was still permitted to operate in Pakistan, and received no criminal or civil penalties.

In February 2003, SGS asked The International Centre for Settlement of Investment Dispute (ICSID) to consider a $128 million claim for Pakistan’s termination of its PSI contract. In July 2003, the ICSID decided that it had no jurisdiction, forcing SGS to seek an out-of-court settlement. The matter is still unresolved.

The Pakistani events also triggered a period of embarrassment and internal crisis at SGS. In October 1997 SGS sold Cotecna back to its previous owners, the Massey family, after it was convicted of bribing Bhutto and Zadari. In September 1998, SGS’ entire board of directors and Ms. Elisabeth Salina Amorini, its rather autocratic Chairman since 1989, were forced to resign.

SGS’ new management instituted numerous face-saving practices, like the appointment of an Ethics Committee, the drafting of an ethics code that was translated into 25 languages, a “Six Sigma” quality program, and a new mandatory “business ethics training course” for senior managers. All these changes reportedly helped SGS to restore the confidence of institutions like the World Bank in its practices.

In the wake of the Pakistan case, SGS also suffered a string of key contract losses in the Philippines, Angola, the Ivory Coast, Ethiopia, Indonesia, and Paraguay. Most of the cancellations were not directly related to the Pakistani case, but some of them did involve allegations of improprieties and high-level chicanery.

Juan Carlos Wasmosy

In the case of Paraguay, for example, a 2001 audit by Paraguay’s Controller General disclosed many “irregularities” in PSI contracts that had been negotiated with SGS and BureauVeritas by the administration of former President Juan Carlos Wasmosy, who governed the country from 1993 to 1998. In 2002, Wasmosy was sentenced to four years in prison in an unrelated bank fraud case.

In the case of the Philippines, in 2000 the government of President Joseph Estrada cancelled one of SGS’ most lucrative PSI contracts, claiming that it was not saving the country any money. The real motives may have been much darker. SGS’s contract, reportedly worth more than $100 million a year, had been procured with the help of the “Sultan of Spin,” influential Manila PR consultant Salvador “Bubby” Dacer, who had also served as a PR advisor to President Estrada. In November 2000, Dacer was abducted and murdered in Manila by a group of policemen, including several members of Estrada’s Presidential Anti-Crime Task Force, amid rumors that Dacer had found out more than he needed to know about high-level corruption, including the evasion of import duties. The murder trial is still pending. In January 2001, President Estrada himself was ousted on corruption charges, and SGS is still pursuing a $100 million claim against the Philippines before the ICISD.

Despite such setbacks, by 2003 SGS’ overall business had recovered nicely, with revenue reaching $1.7 billion – less than 12 percent of it from PSI contracts. SGS still remains one of the leaders in the PSI field, providing such services to about 30 developing countries, including Haiti, Madagascar, Zimbabwe, Mexico, Indonesia, Ethiopia, and Cameroon. But it is now refocused on testing and certification services for private companies, and new business opportunities like the certification of eco-tourism operations , preferring to let even less scrupulous competitors take the lead in PSI.

~ Cotecna. One of these may well be SGS’s former subsidiary, Cotecna, (http://www.cotecna.com), the original source of the PSI bribery in Pakistan. As of 2003, Robert M. Massey, who signed the original June 1994 commitment letters promising kickbacks in exchange for contracts, is still listed as Cotecna’s CEO. The company claims a workforce of 4,000 employees in 150 offices in 100 countries, with PSI contracts for many of the developing world’s most corrupt hotspots, including Nigeria (since 1987), Ghana, Kenya, Senegal, Venezuela, Colombia, Ecuador, Niger, Peru, Iran, Togo, and Nigeria. But not, of course, Pakistan.

Interestingly, in 1992, and again in January 1999, Cotecna Inspection S.A. secured a contract to inspect Iraq’s compliance with the “oil for food” program. Are we expected to believe that it was a sheer coincidence that Kojo Annan, UN Secretary General Kofi Annan’s son by his previous marriage to a Nigerian woman, worked at Cotecna S.A. as an “senior staff member” until late 1997, and then became a partner in a Nigerian oil trading company whose clients reportedly include Cotecna?

The youthful Kojo (now 30) has indeed been a busy beaver. In 1999, when he was just 26, one of his other clients, a Nigerian company called Sutton Investments, won a six-million-British- pound subcontract from Cotecna to help monitor the UN's oil-for-food program in Iraq. And since 1999 he has also served as a Director of Air Harbour Technologies (AHT), an Isle-of-Man company that came out of nowhere to win a 1995 tender to build a controversial new multi-billion dollar airport in Harare, Zimbabwe, from the widely-loathed Government of Zimbabwe’s Robert Mugabe. AHT’s CEO is Hani A.Z. Yamani, the son of Saudi Arabia’s former Oil Minister Sheikh Yamani. Kojo is reportedly helping to develop new hotel projects in Abuja, Nigeria’s capital, and Accra, Ghana.

PSI SERVICES – THE JURY’S IN.

During the PSI heyday of the 1980s and early 1990s, the World Bank and the IMF went around encouraging poor countries to “outsource” their customs departments to PSI providers like SGS and Cotecna. Quite a few did so – the number of developing countries mandating pre-shipment inspection increased from 20 in 1990 to 44 in 2003.

Yet when we step back and examine the track record, including the sordid tales above, as the World Bank itself has finally begun to do, the case for mandatory PSI services is doubtful at best. In particular:

~While PSI has had a few short-term “successes,” in terms of increased customs revenues and reduced corruption, there have also been many disasters, like Pakistan and Argentina, or cases where there appears to have been little net benefit, as in Indonesia.

~The direct and indirect costs (including kickbacks) of PSI outsourcing are very high – an average of 1 to 1.5% of country imports per year. Yet the information gathered by PSI firms often goes to waste, completely ignored by contracting governments. For example, SGS estimated that it found $650 million of uncollected import duties in Pakistan alone in 1995-96. And a recent World Bank study estimated that 50 percent of potential revenue gains from PSI services were lost because governments simply failed to use the information gathered. In other cases, as in Pakistan, PSI just allowed officials to extract more payoffs from importers.

~Even in the Philippines of the early 1990s – a case sometimes cited as a success story -- the benefits of PSI declined sharply over time, as more and more imports were diverted to free trade zones and then smuggled in. Indeed, this increase in “insider” smuggling may have been a key factor in the Estrada/ Dacer scandal noted earlier, and the cancellation of SGS’ Philippines’ contract. Similar effects on smuggling have also been noted in countries like Mozambique and Argentina.

~Longer term, there is simply no substitute for countries developing their own tax collection and judicial systems – as, indeed, most First World countries have tried to do, at least for crimes within their own borders. Yet many of the world’s most corrupt countries, like Bangladesh, Nigeria, and Kenya, have now used PSI services for almost two decades, and their customs and tax collection bureaucracies have actually become even more corrupt.

~From the standpoint of tax reform, trade barriers and tax collections, PSI services are what economists call “second best” alternatives to true reform. Not only are they costly, but they may actually help to perpetuate import duties, by keeping developing countries hooked on import duties for tax collection. (See below.)

THE OUTLOOK FOR PSI.

There are signs that some developing countries may be recognizing some of these lessons about PSI. For example, Argentina and Zambia recently terminated their requirements for mandatory pre-shipment inspections of imports, substituting alternative methods of regulation like minimum import prices and cross-border information exchanges. Especially in Latin American, a growing number of countries are also contracting with with multiple PSI providers at one time, hoping that this will increase the competition among them.

Indeed, in the perfect-market long run envisioned by neoliberal idealists, the liberalization of exchange rates and the abolition of tariffs and quotas, combined with the free flow of information about prices and products across borders, will eventually eliminate the need for PSI services entirely. In fact there has already been a tendency for the PSI business to slow down, partly because world trade has stagnated since 1999, and partly because levels of customs duties are declining, at least for “middle income” countries in Asia and Latin America. At the same time, PSI industry leaders have seen their other global businesses expand, as ‘non-tariff barriers” like product standards and quality certifications have displaced tariffs as the key obstacles to developing country exports.

THE THIRD WORLD’S TAX/ TRADE DILEMMA

However, the fact is that even today, many of the world’s very poorest countries still have sole-source contracts with PSI providers – including 22 out of 23 African countries that use PSI. And the number of countries using PSI providers has increased from 37 to 44 in just the last four years. Why, despite everything we’ve seen, is this happening?

The critical point here is “duty addiction” noted earlier. This addiction is grounded in a set of very practical financial realities that are faced by the world’s poorest countries.

~First, when wide-open capital markets are combined with offshore havens and our highly-efficient international private banking system, political influence, weak judicial systems, and poor transnational tax enforcement, it is should not be surprising that developing countries find it almost impossible to tax the incomes, profits, or wealth of their private elites and corporations -- much less foreign corporations.

This helps to explain why the share of taxes accounted for by income and property taxes for developing countries is significantly lower than in high income countries – and, indeed, why this share has declined significantly since the 1970s, while it has actually been stable or even increasing among high-income countries.

For example, for the 65 developing countries that the World Bank considers “low income countries,” with per capita incomes in 2002 below $735, the median share of all tax revenue derived from taxes on income, profits, and capital gains declined from 19.8% in 1975-79 to 18.1 percent in 1998. For 88 “middle income countries” with gross natiional incomes in 2002 between $735 and $9,075. this share declined slightly, from 18.4% in `1978-81 to 17.8% in 1993-2001. (Data for identical years is not available for the two series.) For 24 “high income OECD countries” with per capita incomes greater than $9075, the median increased slightly, from 27.8% for 1975-79 to 31.2% for 1993-98. Overall taxes as a share of GDP increased for OECD countries from a median of 19.5% in 1975-79 to 25.6% for 1993-97. For the US it rose from 17.1% in 1975-79 to 19.4% in 1998-2002.

~Second, domestic markets are often very thin, or are dominated by informal and barter transactions that are hard to tax, especially in countries where the rural sector still accounts for a substantial share of the economy. In practice, this means that sales taxes are difficult to levy in developing countries.

~Third, foreign trade, in contrast to private incomes or domestic sales, is relatively easy for developing countries to tax, as a kind of luxury. It is often dominated by a relatively few importers or exporters with relatively high income. Smuggling is always a problem, but in many countries trade flows can be channeled through a handful of entrepots. At the same time, when combined with offshore havens and weak law enforcement, high tariffs also provide juicy corruption opportunities for government officials.

These harsh realities of Third World finance have been exacerbated by the orthodox approach to liberalization, which demands that developing countries liberalize their “capital accounts” and current accounts” all at once, removing restrictions to the free flow of investment, debt, and capital flight across borders, as well as all tariffs, quotas, and other restrictions that interfere with “free trade.”

These realities also help to explain why, as shown in Table 1 , Click for Table 1.
among the top 50 countries that have been the most important customers for PSI services, as well as the world’s most corrupt (according to TI) countries, as a group they still rely on import duties for 24 percent of tax revenues, only a slight reduction from their 1970 levels. And there is huge variation around this median, with countries like Bangladesh, Togo, Madagascar, Benin, Senegal, Uganda, Liberia, the Central African Republic, and Niger relying on import duties for more than 30 percent of their tax revenues. Indeed, hard-pressed countries like the Ivory Coast, Cameroon, the Congo, Ethiopia, and the Sudan even tax their own exports at significant 10-14 percent to raise taxes.

For OECD countries, in contrast, export duties have long been viritually zero, while import duties have also nearly disappeared as a source of tax revenue – in 2002, they accounted for just 1.2 percent of all tax revenue in Switzerland, 1 percent in the US, and zero in the UK.

Furthermore, these developing countries are having a difficult time collecting taxes in any form. Indeed, total tax revenues as a share of GDP is also much lower for low-income countries – in 2002, taxes as a share of GDP averaged just 15 percent for them, compared with 25 percent for high-income countries. So much, therefore, for the simpliste version of supply-side economics, according to which excessive taxes are the root of all evil. In fact the tax yield is so low in many countries -- less than 9 percent of GDP in Nigeria, Bangladesh, the Congo, and Haiti -- that public services like health and education are drastically underfunded. So just the opposite is true -- the vast majority of residents of these countries remain poor, in a sense, precisely because their tax systems are so weak and porous.

It is all very well, therefore, for First World countries to proclaim the need for free trade and wide-open capital markets. But under the prevailing rules of the game, most of the world’s poorest governments have few alternatives to customs duties as a source of public revenue.

Meanwhile, as we've seen, the same global haven system that compels these countries to rely so heavily on customs duties also provides their officials with the opportunity to abscond with a hefty portion of the revenue to havens like Switzerland, London, and the US, where wealthy foreign nonresidents are permitted to virtually live tax free. It also facilitates the provisioning of services from Swiss companies like SGS, when it comes time to cleaning up the mess back home.

So the global PSI industry is part of a much larger story. Its barons and bankers are not especially malevolent or cruel. They are, in fact, rather decent chaps, who enjoy the good life and undoubtedly wish no one any harm. The institutions they've built have merely seized on all these contradictions in the system and used them to extract nice annuities for their services, minus the occasional tip to the locals. Is that not a perfectly normal human response to the call of opportunity, advantage, and impunity?

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(c) James S. Henry, 2003. Not for quotation, reproduction, or any other use with the express consent of the author. All rights reserved.

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