incorporates a second principle: that of "minimum size". The cost of
running a tender is prohibitive in the cases of purchases in small
amounts.
Even if there is corruption in such purchases it is bound to cause less
damage to the public purse than the costs of the tender, which is
supposed to prevent it!
So, in most countries, small purchases can be authorized by government
officials - larger amounts go through a tedious, multi-phase tendering
process. Public competitive bidding is not corruption-proof: many times
officials and bidders collude and conspire to award the contract
against bribes and other, non-cash, benefits. But we still know of no
better way to minimize the effects of human greed.
Procurement policies, procedures and tenders are supervised by state
auditing authorities. The most famous is, probably, the General
Accounting Office, known by its acronym: the GAO.
It is an unrelenting, very thorough and dangerous watchdog of the
administration. It is considered to be highly effective in reducing
procurement - related irregularities and crimes. Another such
institution is the Israeli State Reviser. What is common to both these
organs of the state is that they have very broad authority. They
possess (by law) judicial and criminal prosecution powers and they
exercise it without any hesitation. They have the legal obligation to
review the operations and financial transactions of all the other
organs of the executive branch. Their teams select, each year, the
organs to be reviewed and audited. They collect all pertinent documents
and correspondence. They cross the information that they receive from
elsewhere. They ask very embarrassing questions and they do it under
the threat of perjury prosecutions. They summon witnesses and they
publish damning reports, which, in many cases, lead to criminal
prosecutions.
Another form of review of public procurement is through powers granted
to the legislative arm of the state (Congress, Parliament, Bundestag,
or Knesset). In almost every country in the world, the elected body has
its own procurement oversight committee. It supervises the expenditures
of the executive branch and makes sure that they conform to the budget.
The difference between such supervisory, parliamentary, bodies and
their executive branch counterparts - is that they feel free to
criticize public procurement not only in the context of its adherence
to budget constraints or its cleanliness - but also in a political
context. In other words, these committees do not limit themselves to
asking HOW - but also engage in asking WHY. Why this specific expense
in this given time and location - and not that expense, somewhere else
or some other time. These elected bodies feel at liberty - and often do
- intervene in the very decision making process and in the order of
priorities. They have the propensity to alter both quite often.
The most famous such committee is, arguably, the Congressional Budget
Office (CBO). It is famous because it is non-partisan and technocratic
in nature. It is really made of experts, which staff its offices.
Its apparent - and real - neutrality makes its judgements and
recommendations a commandment not to be avoided and, almost
universally, to be obeyed. The CBO operates for and on behalf of the
American Congress and is, really, the research arm of that venerable
parliament. In parallel, the executive part of the American system -
the Administration - has its own guard against waste and worse: the
Office of Management and Budget (OMB).
Both bodies produce learned, thickset, analyses, reports, criticism,
opinions and recommendations. Despite quite a prodigious annual output
of verbiage - they are so highly regarded, that virtually anything that
they say (or write) is minutely analysed and implemented to the last
letter with an air of awe.
Only a few other parliaments have committees that carry such weight.
The Israeli Knesset has the extremely powerful Finance Committee, which
is in charge of all matters financial, from appropriations to
procurement. Another parliament renowned for its tight scrutiny is the
French Parliament - though it retains very few real powers.
But not all countries chose the option of legislative supervision. Some
of them relegated parts or all of these functions to the executive arm.
In Japan, the Ministry of Finance still scrutinizes (and has to
authorize) the smallest expense, using an army of clerks. These clerks
became so powerful that they have the theoretical potential to secure
and extort benefits stemming from the very position that they hold.
Many of them suspiciously join companies and organizations, which they
supervised or to which they awarded contracts - immediately after they
leave their previous, government positions. The Ministry of Finance is
subject to a major reform in the reform-bent government of Prime
Minister Hashimoto. The Japanese establishment finally realized that
too much supervision, control, auditing and prosecution powers might be
a Pyrrhic victory: it might encourage corruption - rather than
discourage it.
Britain opted to keep the discretion to use public funds and the clout
that comes with it in the hands of the political level. This is a lot
like the relationship between the butter and the cat left to guard it.
Still, this idiosyncratic British arrangement works surprisingly well.
All public procurement and expenditure items are approved by the EDX
Committee of the British Cabinet (=inner, influential, circle of
government), which is headed by the Ministry of Finance. Even this did
not prove enough to restrain the appetites of Ministers, especially as
quid pro quo deals quickly developed. So, now the word is that the new
Labour Prime Minister will chair it - enabling him to exert his
personal authority on matters of public money.
Britain, under the previous, Tory, government also pioneered an
interesting and controversial incentive system for its public servants
as top government officials are euphemistically called there. They
receive, added to their salaries, a portion of the savings that they
affect in their departmental budgets. This means that they get a small
fraction of the end of the fiscal year difference between their budget
allowances and what they actually spent. This is very useful in certain
segments of government activity - but could prove very problematic in
others. Imagine health officials saving on medicines, or others saving
on road maintenance or educational consumables. This, naturally, will
not do.
Needless to say that no country officially approves of the payment of
bribes or commission to officials in charge of public spending, however
remote the connection is between the payment and the actions.
Yet, law aside many countries accept the intertwining of elites -
business and political - as a fact of life, albeit a sad one. Many
judicial systems in the world even make a difference between a payment,
which is not connected to an identifiable or discernible benefit, and
those that are. The latter - and only the latter - are labelled
"bribery".
Where there is money - there is wrongdoing. Humans are humans - and
sometimes not even that.
But these unfortunate derivatives of social activity can be minimized
by the adoption of clear procurement policies, transparent and public
decision making processes and the right mix of supervision, auditing
and prosecution. Even then the result is bound to be dubious, at best.
Return
Liquidity or Liquidation
Large parts of the world today suffer from a severe liquidity crisis.
The famed globalisation of the capital markets seems to confine itself,
ever more, to the richer parts, the more liquid exchanges, and the more
affluent geopolitical neighbourhoods. The fad of "emerging economies"
has all but died out. Try telling the Macedonians about global capital
markets: last year, the whole world invested 8 million USD in their
poor country. Breadwinners earn 300 DM a month on average. Officially,
in excess of one third of the workforce is unemployed. Small wonder
that people do not pay their bills, employers do not pay salaries, the
banking system has a marked tendency to crash every now and then and
the average real default rate is 50%.
Illiquidity erodes the trust between the economic players. Such trust
is a precondition to the existence of a thriving, modern economy. We
all postpone the gratification of our desires: we save now and consume
later, for instance or we sell goods or services and get paid a month
later. Such postponement of gratification is at the heart of the
economic machine of the new age. It cannot be achieved, however, if the
players do not trust each other to fulfil their promises (to pay, for
example). Alternatively, the state can instate an efficient court
system, aided by active law enforcement agencies. Keeping promises can
be imposed to counter the natural tendency to ignore them.
The countries in transition lack both: liquidity necessary to keep
one's monetary word and the legal system to force him to do so if he
reneges. Small wonder that solutions are actively being sought by all
involved: the business community, the state, the courts and even by
consumers.
In this article, we will describe a few of the global trends. The
trends are global, the reaction is world-wide because the problem is
global. Bouncing checks have become a household reality in places as
rich as Israel, for instance. The mounting crisis in Southeast Asia
foreshadows bankruptcies and delinquencies on a chilling scale.
The simplest method is to revert to a cash economy. Payments are
accepted only in cash. This, naturally, slows the velocity of
money-like products and diminishes their preponderance, obstructing the
expansion of economic activity. An even more malignant variant is the
barter economy. Goods and services are swapped on a no-cash basis. It
is money that generates new value added (by facilitating the
introduction of new technology, to mention but one function). In the
absence of money, the economy stagnates, degenerates and, finally,
collapses because of massive mismatches of supply and demand aggregates
and of the types of goods and services on offer and demanded. Still,
this system has the advantages of keeping the economic patient alive
even following a massive liquidity haemorrhage. In the absence of
barter economy, the economy might have ground to a complete halt and
deteriorated to subsistence agriculture. But barter is like
chemotherapy: it is good for a limited period of time and the side
effects are, at times, worse than the disease.
In many countries (Georgia, to mention one) defaults are prevented by
demanding prepayment for projected consumption. Let us take the
consumption of electricity as an example: many heavy users and numerous
households do not pay their bills at all. To disconnect the electricity
is an effective punitive measure but it costs the electricity company a
lot of money. The solution? Programmable Electronic Meters. The
consumers buy a smart card (very similar to phone-cards). The card
allows the buyer to use a certain amount of prepaid electricity and is
rechargeable. The consumer pays in advance, electricity is not wasted,
the electricity company is happy, the tariffs go down for all the
users. Prepayment does have a contracting effect on the demand and
usage of electricity - but this is welcome. It just means that people
use electricity more efficiently.
A totally different tack is the verification approach. The person
making the payment carries with him a card that confirms that he is
creditworthy and will honour his obligations. Otherwise, the card also
serves as an insurance policy: an entity, not connected to the
transaction, guarantees the payment for a fee. This entity is
financially viable and strong enough to be fully trusted by the
recipient of the payment.
This market in credit guarantees is more developed in the USA (where
credit cards have overtaken cash and personal checks as a mode of
payment) than in Western Europe. But even in Europe there are credit
card equivalents which are very widespread: the Eurocheck card, for
instance, is really a credit card, though it usually comes with
physical checks and guarantees only a limited amount. One must
differentiate the functions of a debit card (with direct and immediate
billing of a bank account following a transaction) from those of a
credit card. The latter allows for the billing of the account to take
place in a given day during the month following the month in which the
transaction was effected or converts the payment into a series of
instalments (within the credit limits of the cardholder as approved by
his bank). But in both cases, the guarantee is there and is the most
predominant feature of the system. Such cards seem like a perfect
solution but they are not: the commissions charged by the card issuers
are outrageous. Between 2 and 10 percent of the payment made go to the
pockets of the card issuers. Cards get stolen, forged, lost, abused by
their owners, expire. But with the advent of new technologies all these
problems should be solved. Electronic POS (point of sale) cash
registers, connected through networks of communication, check the card
and verify its data: is it valid, is it presented by the lawful owner,
was it stolen or lost, is the purchase within the limits of the
approved credit and so on. Then, the billing proceeds automatically.
Such devices will virtually eliminate fraud. The credit card companies
will guarantee the payments, which will be subject to residual crime.
Another fast developing solution is the smart card. These are cards
similar to phone cards and they can be charged with money in the bank
or through automatic teller machines. These cards (in wide use in
Belgium, Austria, Germany and many other countries) contain an amount
of money, which is deducted from the cardholders account. The account
is billed for every recharge. The card is the electronic (and smart)
equivalent of cash and it can be read (=debited) by special teller
machines in numerous businesses. When payment is made, the money stored
in the card is reduced and the recipient of the payment stores the
payment on magnetic media for later delivery to his bank (and crediting
of his account).
A more primitive version exists in many countries in Eastern Europe:
depositors receive checks exactly corresponding to the amount of money
deposited in their account. These checks are as safe as the banks that
issued them because they are fully convertible to cash. They are,
really, paper "smart cards".
Credit cards and (more cheaply) smart cards are a way to restore
confidence to a shattered, illiquid economy. Macedonia should consider
them both seriously and encourage them through the appropriate
legislation and assistance of the state. For Macedonia, the choice is
to be liquid or, God forbid, to economically self-liquidate.
Return
The Predicament of the Newly Rich
They are the objects of thinly disguised envy. They are the raw
materials of vulgar jokes and the targets of popular aggression. They
are the Newly Rich. Perhaps they should be dealt with more
appropriately within the academic discipline of psychology, but then
economics in a branch of psychology. To many, they represent a
psychopathology or a sociopathology.
The Newly Rich are not a new phenomenon. Every generation has them.
They are the upstarts, those who seek to undermine the existing elite,
to replace it and, ultimately to join it. Indeed, the Newly Rich can be
classified in accordance with their relations with the well-entrenched
Old Rich. Every society has its veteran, venerable and aristocratic
social classes. In most cases, there was a strong correlation between
wealth and social standing. Until the beginning of this century, only
property owners could vote and thus participate in the political
process. The land gentry secured military and political positions for
its off spring, no matter how ill equipped they were to deal with the
responsibilities thrust upon them. The privileged access and the
insider's mentality ("old boys network" to use a famous British
expression) made sure that economic benefits were not spread evenly.
This skewed distribution, in turn, served to perpetuate the advantages
of the ruling classes.
Only when wealth was detached from the land, was this solidarity
broken. Land - being a scarce, non-reproducible resource - fostered a
scarce, non-reproducible social elite. Money, on the other hand, could
be multiplied, replicated, redistributed, reshuffled, made and lost. It
was democratic in the truest sense of a word, otherwise worn thin. With
meritocracy in the ascendance, aristocracy was in descent. People made
money because they were clever, daring, fortunate, and visionary - but
not because they were born to the right family or married into one.
Money, the greatest of social equalizers, wedded the old elite. Blood
mixed and social classes were thus blurred. The aristocracy of capital
(and, later, of entrepreneurship) - to which anyone with the right
qualifications could belong - trounced the aristocracy of blood and
heritage. For some, this was a sad moment. For others, a triumphant one.
The New Rich chose one of three paths: subversion, revolution and
emulation. All three modes of reaction were the results of envy, a
sense of inferiority and rage at being discriminated against and
humiliated.
Some New Rich chose to undermine the existing order. This was perceived
by them to be an inevitable, gradual, slow and "historically
sanctioned" process. The transfer of wealth (and the power associated
with it) from one elite to another constituted the subversive element.
The ideological shift (to meritocracy and democracy or to
mass-democracy as y Gasset would have put it) served to justify the
historical process and put it in context. The successes of the new
elite, as a class, and of its members, individually, served to prove
the "justice" behind the tectonic shift. Social institutions and mores
were adapted to reflect the preferences, inclinations, values, goals
and worldview of the new elite. This approach - infinitesimal,
graduated, cautious, all accommodating but also inexorable and all
pervasive - characterizes Capitalism. The Capitalist Religion, with its
temples (shopping malls and banks), clergy (bankers, financiers,
bureaucrats) and rituals - was created by the New Rich. It had multiple
aims: to bestow some divine or historic importance and meaning upon
processes, which might have otherwise been perceived as chaotic or
threatening. To serve as an ideology in the Althusserian sense (hiding
the discordant, the disagreeable and the ugly while accentuating the
concordant, conformist and appealing). To provide a historical process
framework, to prevent feelings of aimlessness and vacuity, to motivate
its adherents and to perpetuate itself and so on.
The second type of New Rich (also known as "Nomenclature" in certain
regions of the world) chose to violently and irreversibly uproot and
then eradicate the old elite. This was usually done by use of brute
force coated with a thin layer of incongruent ideology. The aim was to
immediately inherit the wealth and power accumulated by generations of
elitist rule. There was a declared intention of an egalitarian
redistribution of wealth and assets. But reality was different: a small
group - the new elite - scooped up most of the spoils. It amounted to a
surgical replacement of one hermetic elite by another. Nothing changed,
just the personal identities. A curious dichotomy has formed between
the part of the ideology, which dealt with the historical process - and
the other part, which elucidated the methods to be employed to
facilitate the transfer of wealth and its redistribution. While the
first was deterministic, long-term and irreversible (and, therefore,
not very pragmatic) - the second was an almost undisguised recipe for
pillage and looting of other people' property. Communism and the
Eastern European (and, to a lesser extent, the Central European)
versions of Socialism suffered from this inherent poisonous seed of
deceit. So did Fascism. It is no wonder that these two sister
ideologies fought it out in the first half of the twentieth century.
Both prescribed the unabashed, unmitigated, unrestrained, forced
transfer of wealth from one elite to another. The proletariat enjoyed
almost none of the loot.
The third way was that of emulation. The Newly Rich, who chose to adopt
it, tried to assimilate the worldview, the values and the behaviour
patterns of their predecessors. They walked the same, talked the same,
clad themselves in the same fashion, bought the same status symbols,
and ate the same food. In general, they looked as pale imitations of
the real thing. In the process, they became more catholic than the
Pope, more Old Rich than the Old Rich. They exaggerated gestures and
mannerisms, they transformed refined and delicate art to kitsch, their
speech became hyperbole, their social associations dictated by
ridiculously rigid codes of propriety and conduct. As in similar
psychological situations, patricide and matricide followed. The Newly
Rich rebelled against what they perceived to be the tyranny of a dying
class. They butchered their objects of emulation - sometimes,
physically. Realizing their inability to be what they always aspired to
be, the Newly Rich switched from frustration and permanent humiliation
to aggression, violence and abuse. These new converts turned against
the founders of their newly found religion with the rage and conviction
reserved to true but disappointed believers.
Regardless of the method of inheritance adopted by the New Rich, all of
them share some common characteristics. Psychologists know that money
is a love substitute. People accumulate it as a way to compensate
themselves for past hurts and deficiencies. They attach great emotional
significance to the amount and availability of their money. They
regress: they play with toys (fancy cars, watches, laptops). They fight
over property, territory and privileges in a Jungian archetypal manner.
Perhaps this is the most important lesson of all: the New Rich are
children, aspiring to become adults. Having been deprived of love and
possessions in their childhood - they turn to money and to what it can
buy as a (albeit poor because never fulfilling) substitute. And as
children are - they can be cruel, insensitive, and unable to delay the
satisfaction of their urges and desires. In many countries (the
emerging markets) they are the only capitalists to be found. There,
they spun off a malignant, pathological, form of crony capitalism. As
time passes, these immature New Rich will become tomorrow's Old Rich
and a new class will emerge, the New Rich of the future. This is the
only hope - however inadequate and meagre - that developing countries
have.
Return
The Solow Paradox
The Productive Hardware
The world is debating the Solow Paradox. Named after the Nobel laureate
in economics, it was stated by him thus: "You can see the computer age
everywhere these days, except in the productivity statistics." The
venerable economic magazine, "The Economist" in its issue dated July
24th, quotes the no less venerable Professor Robert Gordon ("one of
America's leading authorities on productivity") - p.20: "...the
productivity performance of the manufacturing sector of the United
States economy since 1995 has been abysmal rather than admirable. Not
only has productivity growth in non-durable manufacturing decelerated
in 1995-9 compared to 1972-95, but productivity growth in durable
manufacturing stripped of computers has decelerated even more."