Specific Applications of the Formula

A share can be thought of as an option on the firm. If the value of the firm is lower than the value of its maturing debt, the shareholders have the right, but not the obligation, to repay the loans. We can, therefore, use the Black and Scholes to value shares, even when are not traded. Shares are liabilities of the firm and all other liabilities can be treated the same way.

In financial contract theory the methodology has been used to design optimal financial contracts, taking into account various aspects of bankruptcy law.

Investment evaluation Flexibility is a key factor in a successful choice between investments. Let us take a surprising example: equipment differs in its flexibility - some equipment can be deactivated and reactivated at will (as the market price of the product fluctuates), uses different sources of energy with varying relative prices (example: the relative prices of oil versus electricity), etc. This kind of equipment is really an option: to operate or to shut down, to use oil or electricity).

The Black and Scholes formula could help make the right decision.

Guarantees and Insurance Contracts

Insurance policies and financial (and non financial) guarantees can be evaluated using option-pricing theory. Insurance against the non-payment of a debt security is equivalent to a put option on the debt security with a strike price that is equal to the nominal value of the security. A real put option would provide its holder with the right to sell the debt security if its value declines below the strike price.

Put differently, the put option owner has the possibility to limit his losses.

Option contracts are, indeed, a kind of insurance contracts and the two markets are competing.

Merton (1977) extend the dynamic theory of financial markets. In the 1950s, Kenneth Arrow and Gerard Debreu (both Nobel Prize winners) demonstrated that individuals, households and firms can abolish their risk: if there exist as many independent securities as there are future states of the world (a quite large number). Merton proved that far fewer financial instruments are sufficient to eliminate risk, even when the number of future states is very large.

Option contracts began to be traded on the Chicago Board Options Exchange (CBOE) in April 1973, one month before the formula was published.

It was only in 1975 that traders had begun applying it - using programmed calculators. Thousands of traders and investors use the formula daily in markets throughout the world. In many countries, it is mandatory by law to use the formula to price stock warrants and options. In Israel, the formula must be included and explained in every public offering prospectus.

Today, we cannot conceive of the financial world without the formula.

Investment portfolio managers use put options to hedge against a decline in share prices. Companies use derivative instruments to fight currency, interest rates and other financial risks. Banks and other financial institutions use it to price (even to characterize) new products, offer customized financial solutions and instruments to their clients and to minimize their own risks.

Some Other Scientific Contributions

The work of Merton and Scholes was not confined to inventing the formula.

Merton analysed individual consumption and investment decisions in continuous time. He generalized an important asset pricing model called the CAPM and gave it a dynamic form. He applied option pricing formulas in different fields.

He is most known for deriving a formula which allows stock price movements to be discontinuous.

Scholes studied the effect of dividends on share prices and estimated the risks associated with the share which are not specific to it. He is a great guru of the efficient marketplace ("The Invisible Hand of the Market").

Devaluation

A Minister of Finance is morally right to lie about a forthcoming devaluation and a woman has the right to lie about her age. This is the common wisdom.

Why do governments devalue?

They do it mainly to improve the balance of trade. A devaluation means that more local currency is needed to purchase imports and exporters get more local currency when they convert the export proceeds (the foreign exchange that they get for their exports). In other words: imports become more expensive - and exporters earn more money. This is supposed to discourage imports - and to encourage exports and, in turn, to reduce trade deficits.

At least, this is the older, conventional thinking. A devaluation is supposed to improve the competitiveness of exporters in their foreign markets. They can even afford to reduce their prices in their export markets and to finance this reduction from the windfall profits that they get from the devaluation. In professional jargon we say that a devaluation "improves the terms of trade".

But before we examine the question whether all this is true in the case of Macedonia - let us study a numerical example.

Let us assume that we have a national economy with for types of products:

Imported, Exported, Locally Produced Import Substitutes, Locally consumed Exportable Products. In an economy in equilibrium all four will be identically priced, let us say at 2700 Denars (= 100 DEM) each.

When the exchange rate is 27 MKD/DM, the total consumption of these products will not be influenced by their price. Rather, considerations of quality, availability, customer service, market positioning, status symbols and so on will influence the consumption decision.

But this will all change when the exchange rate is 31 MKD/DM following a devaluation.

The Imported product will now be sold locally at 3100. The Importer will have to pay more MKD to get the same amount of DM that he needs to pay the foreign manufacturer of the product that he is importing.

The Exported products will now fetch the exporter the same amount of income in foreign exchange. Yet, when converted to MKD - he will receive 400 MKD more than before the devaluation. He could use this money to increase his profits - or to reduce the price of his product in the foreign markets and sell more (which will also increase his profits).

The Locally Produced Import Substitutes will benefit: they will still be priced at 2700 - while the competition (Imports) will have to increase the price to 3100 not to lose money!

The local consumption of products which can, in principle, be exported - will go down. The exporter will prefer to export them and get more MKD for his foreign exchange earnings.

These are the subtle mechanisms by which exports go up and imports go down following a devaluation.

In Macedonia, the situation is less clear. There is a great component of imported raw materials in the exported industrial products. The price of this component will increase. The price of capital assets (machinery, technology, intellectual property, software) will also increase and make it more difficult for local businesses to invest in their future. Still, it is safe to say that the overall effect of the devaluation will favour exporters and exports and reduce imports marginally.

Unfortunately, most of the imports are indispensable at any price (inelastic demand curve): raw materials, capital assets, credits, even cars. People buy cars not only to drive them - but also in order to preserve the value of their money. Cars in Macedonia are a commodity and a store of value and these functions are difficult to substitute.

But this is all in an idealized country which really exists nowhere. In reality, devaluation tends to increase inflation (=the general price level) and thus have an adverse macro-economic effect. Six mechanisms operate immediately following a devaluation:

1. 
   The price of imported products goes up.
   

1. 
   The price of goods and services, denominated in foreign exchange goes up. An example: prices of apartments and residential and commercial rentals is fixed in DEM. These prices increase (in terms of MKD) by the percentage of devaluation - immediately! The same goes for consumer goods, big (cars) and small (electronics).
   

1. 
   Exporters get more MKD for their foreign exchange (and this has an inflationary effect).
   

1. 
   People can convert money that they saved in foreign exchange - and get more MKD for it. A DEVALUATION IS A PRIZE GIVEN TO SPECULATORS AND TO BLACK MARKET OPERATORS.
   

1. 
   Thus, the cost of living increases. People put pressure on their employees to increase their salaries. Unfortunately, there is yet no example in history in which governments and employers were completely successful in fending off such pressures. Usually, they give in, wholly or partially.
   Certain countries tried to contain such wage pressures and the wage driven inflation which is a result of wage increases.
   The government, employee trade unions and representatives of employers’ unions - sign "economic pacts or package deals".
   The government undertakes not to raise fees for public services, the employers agree not to fire people or not to reduce wages and employee trade unions agree not to demand wage hikes and not to strike.
   Such economic pacts have been very successful in stabilizing inflation in many countries, from Israel to Argentina.
   Still, some of the devaluation inevitably seeps into the wages. The government can effectively control only such employees as are in its direct employment. It cannot dictate to the private sector.
   

1. 
   Inflation gradually erodes the competitive advantage awarded to the exporters by the devaluation which preceded it. So devaluations have a tendency to create a cancerous chain reaction: devaluation-inflation followed by more devaluation and yet by more inflation.
   

Macedonia has succeeded where many other countries failed: it created an atmosphere of macro-economic stability. It is a fact that the differential between the official and non-official exchange rates was very small (about 3.5%). This was a sign of trust in the macro-economic management. This devaluation had the effects of drugs: it could prove stimulating to the economic body in the short term - but it might be harmful to it in the longer term.

These risks are worth taking under two conditions:

1. 
   That the devaluation is part of a comprehensive economic program intended to stimulate the economy and mainly the export sector.
   

1. 
   That the devaluation is part of a long term macro-monetary plan with clear, OPENLY DECLARED, goals. In other words: the government and the Central Bank should have designed a multi-year plan, stating clearly their inflation objectives and by how much they are going to devalue the currency (MKD) over and above the inflation target. This is much preferable to "shock therapy": keeping the devaluation secret until the last minute and then declaring it overnight, taking everyone by surprise. The instinctive reaction is: "But if the government announces its intentions in advance - people and speculators will rush to take advantage of these plans. For instance, they will buy foreign exchange and put pressure on the government to devalue by dilapidating its foreign currency reserves".
   

1. 
   The business sector was able to plan its operations years in advance, to price its products properly, to protect itself by buying financial hedge contracts. Suddenly, the business environment became safe and predictable. This had an extremely favourable micro-economic effect.
   

1. 
   The currency stabilized and displayed qualities normally associated with "hard currencies". For instance, the New Israeli Shekel, which no one wanted to touch and which was immediately converted to US dollars (to protect the value) - became a national hit. It appreciated by 50% (!) against the dollar, people sold their dollars and bought Shekels - and all this with an inflation of 18% per year! It became a truly convertible currency - because people could predict its value over time.
   

1. 
   The consistency, endurance and resilience of the governments in implementing their macro-economoic agendas - made the populace regain their trust. Citizens began to believe their governments again. The openness of the government, the transparency of its operations and the fact that it kept its word - meant a lot in restoring the right, trusting relationship which should prevail between subjects and their administration.
   

Granted, the government of Macedonia and its Central Bank are not entirely autonomous in setting the economic priorities and in deciding which measures to adopt and to what extent. They have to attune themselves to "advice" (not to say dictates or conditions) given by the likes of the IMF. If they fail to do so, the IMF and the World Bank will cut Macedonia off the bloodlines of international credits. The situation is, at times, very close to coercion.

Still, Macedonia could use successful examples in other countries to argue its case. It could have made this devaluation a turning point for the economy. It could have reached a nationwide consensus to work towards a better economic future within a national "Economic Agenda". It is still not to late to do so. A devaluation should be an essential part of any economic program. It could still be the cornerstone in an export driven, employment oriented, economy stimulating edifice.

Countries devalue their currencies only when they have no other way to correct past economic mistakes - whether their own or mistakes committed by their predecessors.

The ills of a devaluation are still at least equal to its advantages.

True, it does encourage exports and discourage imports to some extents and for a limited period of time. As the devaluation is manifested in a higher inflation, even this temporary relief is eroded. In a previous article in this paper I described WHY governments resort to such a drastic measure. This article will deal with HOW they do it.

A government can be forced into a devaluation by an ominous trade deficit. Thailand, Mexico, the Czech Republic - all devalued strongly, willingly or unwillingly, after their trade deficits exceeded 8% of the GDP. It can decide to devalue as part of an economic package of measures which is likely to include a freeze on wages, on government expenses and on fees charged by the government for the provision of public services. This, partly, has been the case in Macedonia. In extreme cases and when the government refuses to respond to market signals of economic distress - it may be forced into devaluation. International and local speculators will buy foreign exchange from the government until its reserves are depleted and it has no money even to import basic staples and other necessities.

Thus coerced, the government has no choice but to devalue and buy back dearly the foreign exchange that it has sold to the speculators cheaply.

In general, there are two known exchange rate systems: the floating and the fixed.

In the floating system, the local currency is allowed to fluctuate freely against other currencies and its exchange rate is determined by market forces within a loosely regulated foreign exchange domestic (or international) market. Such currencies need not necessarily be fully convertible but some measure of free convertibility is a sine qua non.

In the fixed system, the rates are centrally determined (usually by the Central Bank or by the Currency Board where it supplants this function of the Central Bank). The rates are determined periodically (normally, daily) and revolve around a "peg" with very tiny variations.

Life being more complicated than any economic system, there are no "pure cases".

Even in floating rate systems, Central banks intervene to protect their currencies or to move them to an exchange rate deemed favourable (to the country's economy) or "fair". The market's invisible hand is often handcuffed by "We-Know-Better" Central Bankers. This usually leads to disastrous (and breathtakingly costly) consequences. Suffice it to mention the Pound Sterling debacle in 1992 and the billion dollars made overnight by the arbitrageur-speculator Soros - both a direct result of such misguided policy and hubris.

Floating rates are considered a protection against deteriorating terms of trade.

If export prices fall or import prices surge - the exchange rate will adjust itself to reflect the new flows of currencies. The resulting devaluation will restore the equilibrium.

Floating rates are also good as a protection against "hot" (speculative) foreign capital looking to make a quick killing and vanish. As they buy the currency, speculators will have to pay more expensively, due to an upward adjustment in the exchange rates. Conversely, when they will try to cash their profits, they will be penalized by a new exchange rate.

So, floating rates are ideal for countries with volatile export prices and speculative capital flows. This characterizes most of the emerging economies (also known as the Third World).

It looks surprising that only a very small minority of these states has them until one recalls their high rates of inflation. Nothing like a fixed rate (coupled with consistent and prudent economic policies) to quell inflationary expectations. Pegged rates also help maintain a constant level of foreign exchange reserves, at least as long as the government does not stray from sound macro-economic management. It is impossible to over-estimate the importance of the stability and predictability which are a result of fixed rates: investors, businessmen and traders can plan ahead, protect themselves by hedging and concentrate on long term growth.

It is not that a fixed exchange rate is forever. Currencies - in all types of rate determination systems - move against one another to reflect new economic realities or expectations regarding such realities. Only the pace of changing the exchange rates is different.

Countries have invented numerous mechanisms to deal with exchange rates fluctuations.

Many countries (Argentina, Bulgaria) have currency boards. This mechanism ensures that all the local currency in circulation is covered by foreign exchange reserves in the coffers of the Central bank. All, government, and Central Bank alike - cannot print money and must operate within the straitjacket.

Other countries peg their currency to a basket of currencies. The composition of this basket is supposed to reflect the composition of the country's international trade. Unfortunately, it rarely does and when it does, it is rarely updated (as is the case in Israel). Most countries peg their currencies to arbitrary baskets of currencies in which the dominant currency is a "hard, reputable" currency such as the US dollar. This is the case with the Thai baht.

In Slovakia the basket is made up of two currencies only (40% dollar and 60% DEM) and the Slovak crown is free to move 7% up and down, around the basket-peg.

Some countries have a "crawling peg". This is an exchange rate, linked to other currencies, which is fractionally changed daily. The currency is devalued at a rate set in advance and made known to the public (transparent). A close variant is the "crawling band" (used in Israel and in some countries in South America). The exchange rate is allowed to move within a band, above and below a central peg which, in itself depreciates daily at a preset rate.

This pre-determined rate reflects a planned real devaluation over and above the inflation rate.

It denotes the country's intention to encourage its exports without rocking the whole monetary boat. It also signals to the markets that the government is bent on taming inflation.

So, there is no agreement among economists. It is clear that fixed rate systems have cut down inflation almost miraculously. The example of Argentina is prominent: from 27% a month (1991) to 1% a year (1997)!!!

The problem is that this system creates a growing disparity between the stable exchange rate - and the level of inflation which goes down slowly. This, in effect, is the opposite of devaluation - the local currency appreciates, becomes stronger. Real exchange rates strengthen by 42% (the Czech Republic), 26% (Brazil), even 50% (Israel until lately, despite the fact that the exchange rate system there is hardly fixed). This has a disastrous effect on the trade deficit: it balloons and consumes 4-10% of the GDP.

This phenomenon does not happen in non-fixed systems. Especially benign are the crawling peg and the crawling band systems which keep apace with inflation and do not let the currency appreciate against the currencies of major trading partners. Even then, the important question is the composition of the pegging basket. If the exchange rate is linked to one major currency - the local currency will appreciate and depreciate together with that major currency. In a way the inflation of the major currency is thus imported through the foreign exchange mechanism. This is what happened in Thailand when the dollar got stronger in the world markets.

In other words, the design of the pegging and exchange rate system is the crucial element.

In a crawling band system - the wider the band, the less the volatility of the exchange rate. This European Monetary System (EMS - ERM), known as "The Snake", had to realign itself a few times during the 1990s and each time the solution was to widen the bands within which the exchange rates were allowed to fluctuate. Israel had to do it twice. On June 18^th, the band was doubled and the Shekel can go up and down by 10% in each direction.

But fixed exchange rates offer other problems. The strengthening real exchange rate attracts foreign capital. This is not the kind of foreign capital that countries are looking for. It is not Foreign Direct Investment (FDI). It is speculative, hot money in pursuit of ever higher returns. It aims to benefit from the stability of the exchange rate - and from the high interest rates paid on deposits in local currency.

Let us study an example: if a foreign investor were to convert 100,000 DEM to Israeli Shekels last year and invest them in a liquid deposit with an Israeli bank - he will have ended up earning an interest rate of 12% annually. The exchange rate did not change appreciably - so he would have needed the same amount of Shekels to buy his DEM back. On his Shekel deposit he would have earned between 12-16%, all net, tax free profit.

No wonder that Israel's foreign exchange reserves doubled themselves in the preceding 18 months. This phenomenon happened all over the globe, from Mexico to Thailand.

This kind of foreign capital expands the money supply (it is converted to local currency) and - when it suddenly evaporates - prices and wages collapse. Thus it tends to exacerbate the natural inflationary-deflationary cycles in emerging economies. Measures like control on capital inflows, taxing them are useless in a global economy with global capital markets.

They also deter foreign investors and distort the allocation of economic resources.

The other option is "sterilization": selling government bonds and thus absorbing the monetary overflow or maintaining high interest rates to prevent a capital drain. Both measures have adverse economic effects, tend to corrupt and destroy the banking and financial infrastructure and are expensive while bringing only temporary relief.

Where floating rate systems are applied, wages and prices can move freely. The market mechanisms are trusted to adjust the exchange rates. In fixed rate systems, taxes move freely. The state, having voluntarily given up one of the tools used in fine tuning the economy (the exchange rate) - must resort to fiscal rigor, tightening fiscal policy (=collect more taxes) to absorb liquidity and rein in demand when foreign capital comes flowing in.

In the absence of fiscal discipline, a fixed exchange rate will explode in the face of the decision makers either in the form of forced devaluation or in the form of massive capital outflows.

After all, what is wrong with volatile exchange rates? Why must they be fixed, save for psychological reasons? The West has never prospered as it does nowadays, in the era of floating rates. Trade, investment - all the areas of economic activity which were supposed to be influenced by exchange rate volatility - are experiencing a continuous big bang. That daily small fluctuations (even in a devaluation trend) are better than a big one time devaluation in restoring investor and business confidence is an axiom. That there is no such thing as a pure floating rate system (Central Banks always intervene to limit what they regard as excessive fluctuations) - is also agreed on all economists.

That exchange rate management is no substitute for sound macro- and micro-economic practices and policies - is the most important lesson. After all, a currency is the reflection of the country in which it is legal tender. It stores all the data about that country and their appraisal. A currency is a unique package of past and future with serious implications on the present.

Development (and Interethnic Relations)

"Sustainable Development" is a worn out cliché - but not where it matters the most: in developing countries. There, unconstrained "development" has led to inter-ethnic strife, environmental doom, and economic mayhem. In the post Cold War era, central governments have lost clout and authority to their provincial and regional counterparts, whether peacefully (devolution in many European and Latin American countries) - or less so (in Africa, for instance). As power shifts to municipalities and regional administrations, they begin to examine development projects more closely, prioritize them, and properly assess their opportunity costs. The multinationals, which hitherto enjoyed a free hand in large swathes of the third world, are unhappy.

The outcome of this tectonic shift is a series of unrequited conflicts from Indonesia to Morocco. The former is now a federation of 32 provinces, each with its own (often contradictory) laws, taxes, and licenses. They tend to ignore promises made by the central government - and the central government tends to live and let live. Some multinationals are in denial. They confront the local authorities and the authorities, in turn, legislate to prevent them from doing business (as in the case of Cemex, the Mexican cement company, described in "The Economist"). Others adapt, collaborate with the locals, establish foundations and endowments, invest in local infrastructure and in preserving the environment. Most crucially, bribes that once went exclusively to Jakarta-based officials, are now split with local politicians.

But sometimes the consequences are more serious than the reallocation of backhanders. When a corrupt central government colludes with multinationals against the indigenous population of an exploited region - all hell breaks loose.

Consider Nigeria and Morocco.

A. Nigeria

Nigeria is an explosive cocktail of more than 250 nations and languages with different (and often hostile) histories, cultures, enmities, and alliances. It is decrepit. Its people are destitute and unemployed, the crime rate is ghastly, the army and police are murderous (as are numerous civilian "vigilante" groups), the authorities powerless, corruption rampant, famines frequent. Most of its oil (its only important export) is produced in the Niger Delta, home to the Ogoni and Ijaw ethnic minorities. The Ijaw are also actively suppressed (and massacred) in Bayelsa state.

When the Ogoni protested against the environmental ruination wrought by oil drilling - nine of them were hanged in 1995. But this brutality did little to quell their complaints, including the fact that almost none of the $7-10 billion in annual oil proceeds was re-invested in the region's economy. This largely economic conflict (brewing since 1993) has now, inevitably, become inter-ethnic and inter-religious. It is now an integral part of the national politics of a Nigeria fracturing along ethnic and religious (Christian vs. fundamentalist Islamist) fault lines.

Multinational oil firms in Nigeria have a strong interest to maintain a functioning political center, with law, order, and a respected, multi-ethnic police force. Yet, in their efforts to stabilize Nigeria, they shot themselves in both feet, repeatedly.

All previous regimes in Nigeria - civilian and military - enjoyed the tacit support (diplomatic and financial) of the big oil multinationals, among them Agip, Mobil, Chevron, Royal Dutch/Shell, and Elf Aquitaine (now Total-FinaElf). The oil companies maintain their own armies ("security") - including helicopters and heavy armor. They rarely openly intervene in local protests and conflicts. But their pronounced silence in the face of numerous massacres, unlawful detentions, murders, beatings, and other human rights abuses by the very army and police with whom they often share their equipment and manpower, forced Human Rights Watch to issue this unusual statement: "Multinational oil companies are complicit in abuses committed by the Nigerian military and police." Oil multinationals are also a major source of corruption in Nigeria.

Moreover, many observers conclude that the multinationals' claims to have bettered their ways by applying adequate environmental protection (against frequent oil spills and dumping of industrial waste), improving public health, observing human rights standards, and developing better relations with affected communities - are nothing but elaborate spin doctoring.

The creation of the dysfunctional "Niger Delta Development Commission" by the government in 2000 only enhanced this perception. Armed guards, employed by oil companies, continue to wound, or kill young protesters. NGOs impotently complained to the World Bank about the decision of its arm, the International Finance Corporation (IFC), to establish the  Niger Delta Contractor Revolving Credit Facility in conjunction with Shell. The IFC did not bother to talk to a single local community about a scheme, which is supposed to provide Nigerian sub-contractors of Shell with credit intended to relieve poverty. Shell, of course, is utterly distrusted by the denizens of the Delta.

"Essential Action and Global Exchange" has issued a seminal report titled "Oil for Nothing - Multinational Corporations, Environmental Destruction, Death and Impunity in the Niger Delta" (January 2000). They describe gas flaring, acid rain, pipeline leaks, health problems, loss of biodiversity, loss of land and other resources, malnourishment, prostitution, rape, and fatherless children. Oil companies, says the report, refuse to compensate the locals, or clean up, break their promises, lie to the Western media, finance agents provocateurs to provoke protesters and break up peaceful demonstrations.

But this may be going too far. American oil firms and Royal Dutch/Shell have collaborated fully with NGO's since the public outcry following the execution of Ken Saro-Wiwa, a prominent Nigerian environmentalist and author in 1995 (though not so their Italian and French counterparts). Activists in the Niger Delta often resort to kidnapping, smashing oil installations, and even attacking off-shore rigs. Security guards are a necessity, not a luxury.

Shell alone has poured $200 million into the local economy, administered by its "development teams" in collaboration with recipient communities. "The Economist" reports that less than a third of the 408 projects have been a success. Micro-credit schemes run by women did best. Some of the projects were the outcome of extortion by kidnappers - others dreamt up in corporate headquarters with little regard to local circumstances. But Shell is really trying hard.

The Nigerian government has asked the Supreme Court in 2001 to rule how should off-shore oil revenues be divided between the federal authorities and the 36 states (only 6 of which, in the southeast, produce oil). The 1999 constitution calls for 13% of all onshore oil revenues to be allotted to the states. But it is mum about offshore oil (the bulk of Nigeria's production). At the time, northern states have threatened to withhold agricultural produce from the south should the Supreme Court plump in favor of the oil producing states. Justice, in this case, may well provoke the disintegration of Nigeria.

B. Morocco

The ubiquitous Kofi Annan, Secretary General of the UN, decided, in mid February 2002, the fate of oil exploration off the disputed coast of Western Sahara. A US chemicals and oil exploration firm (Kerr-McGee), in conjunction with the French Total-FinaElf, have signed much derided reconnaissance agreements, pertaining to the disputed region, with Morocco in October 2001.

Morocco has occupied West Sahara since 1975. It has moved hundreds of thousands of troops and civilians to the area in an effort to dilute the remaining autochthonous population. A fortified wall was constructed along the entire border and it was mined. Morocco persistently obstructs the implementation of a referendum about independence it agreed to with the Polisario in 1991. The original inhabitants of this region, the Sahrawis, have set up a government in exile in a tent city in Algeria. The Polisario, the Sahrawis freedom movement, is weakened by decades of warfare and diplomatic failure. The Sahrawi self-styled "president" wrote to UN envoy, James Baker III, and to President Bush, to warn them of the consequences of this "provocation". The Sahrawis also demanded from the EU to cancel the "illicit and illegal" contract between Total-FinaElf and Morocco.

The reconnaissance agreements are part of a concerted Moroccan policy to relieve the country of its wrenching dependence on oil imports. Morocco's annual oil bill is close to $1 billion. Late King Mohammed VI himself was behind this strategic move. In August 2001, on his birthday, he announced a major discovery (since discredited) in Talsint, 100 km. (60 miles) from the Algerian border (he called it "God's gift to Morocco"). More than 10 exploration licenses have been granted in 2001 alone - 25% of the total.  The law has been modified to allow for a 10-year tax break and to limit the government's stake in new oil ventures to 25%.

But major finds are the exception in an otherwise disappointing quest which dates back to 1920. Spain and Morocco both claim the waters opposite Morocco's coast. The Moroccan government exchanged verbal blows with its Spanish counterpart after it granted prospecting licenses to a Spanish firm opposite the Moroccan coast.

As opposed to Morocco, Western Sahara is estimated to contain what the US Geological Survey of World Energy calls substantial gas and oil fields. "Upstream" reports that previous attempts to find oil, in the 1960's, in collaboration with Franco's Spanish government, floundered. Gulf Oil, WB Grace, Texaco, and Standard Oil withdrew as political tensions increased. Other, lesser, American firms developed tiny fields there. Later, in the late 70's both Shell and British Petroleum abandoned exploration, having reached the conclusion that extraction is justified only if oil prices climb to $40 a barrel.

The Sahrawis quote a UN resolution (A/res/46/64 dated December 11, 1991) which says that "the exploitation and plundering of colonial and non-self-governing territories by foreign economic interests, in violation of the relevant resolutions of the United Nations is a grave threat to the integrity and prosperity of those Territories."

Thus, once again, oil companies find themselves supporting an oppressive and brutal (but ostensibly "stable") regime against local communities with political and ethnic grievances. It seems to be a pattern. Oil companies cosied up to homicidal dictators in Burma, East Timor, Iran, Iraq and Nigeria, to mention but a few. As most Sahrawis are now in refugee camps in Algeria, they are unlikely to benefit from any potential find. Future oil revenues are likely to buttress Moroccan rule and enrich members of the Moroccan elite. The (undisputedly Moroccan) Talsint concession is co-owned, according to the BBC, by relatives of the King and the chief of police.

The politically incorrect Operations Manager of Lone Star, the joint American-Moroccan Talsint exploration company, was quoted by the BBC as wondering (about the internally displaced people of Talsint): "Why should the people of Talsint get more money in their pockets? It's just by chance they're living on top of what appears to be valuable oil and gas reserves."

Such sentiments go a long way towards explaining why oil firms are so hated and why they so often contribute to instability, abuses, and poverty, despite their best interests. Perhaps they better divert the millions they throw at local communities - to educating their staff. Sometimes, development is best begun at home.

Barry Chiswick and Timothy Hatton demonstrated ("International Migration and the Integration of Labour Markets", published by the NBER in its "Globalisation in Historical Perspective") that, as the economies of poor countries improve, emigration increases because people become sufficiently wealthy to finance the trip.

Poorer countries invest an average of $50,000 of their painfully scarce resources in every university graduate - only to witness most of them emigrate to richer places. The haves-not thus end up subsidizing the haves by exporting their human capital, the prospective members of their dwindling elites, and the taxes they would have paid had they stayed put. The formation of a middle class is often irreversibly hindered by an all-pervasive brain drain.

Politicians in some countries decry this trend and deride those emigrating. In a famous interview on state TV, the late prime minister of Israel, Yitzhak Rabin, described them as "a fallout of the jaded". But in many impoverished countries, local kleptocracies welcome the brain drain as it also drains the country of potential political adversaries.

Emigration also tends to decrease competitiveness. It increase salaries at home by reducing supply in the labour market (and reduces salaries at the receiving end, especially for unskilled workers). Illegal migration has an even stronger downward effect on wages in the recipient country - illegal aliens tend to earn less than their legal compatriots. The countries of origin, whose intellectual elites are depleted by the brain drain, are often forced to resort to hiring (expensive) foreigners. African countries spend more than $4 billion annually on foreign experts, managers, scientists, programmers, and teachers.

Still, remittances by immigrants to their relatives back home constitute up to 10% of the GDP of certain countries - and up to 40% of national foreign exchange revenues. The World Bank estimates that Latin American and Caribbean nationals received $15 billion in remittances in 2000 - ten times the 1980 figure. This may well be a gross underestimate. Mexicans alone remitted $6.7 billion in the first 9 months of 2001 (though job losses and reduced hours may have since adversely affected remittances). The IADB thinks that remittances will total $300 billion in the next decade (Latin American immigrants send home c. 15% of their wages).

Official remittances (many go through unmonitored money transfer channels, such as the Asian Hawala network) are larger than all foreign aid combined. "The Economist" calculates that workers' remittances in Latin America and the Caribbean are three times as large as aggregate foreign aid and larger than export proceeds. Yet, this pecuniary flood is mostly used to finance the consumption of basics: staple foods, shelter, maintenance, clothing. It is non-productive capital.

Only a tiny part of the money ends up as investment. Countries - from Mexico to Israel, and from Macedonia to Guatemala - are trying to tap into the considerable wealth of their diasporas by issuing remittance-bonds, by offering tax holidays, one-stop-shop facilities, business incubators, and direct access to decision makers - as well as matching investment funds.

Migrant associations are sprouting all over the Western world, often at the behest of municipal authorities back home. The UNDP, the International Organization of Migration (IOM), as well as many governments (e.g., Israel, China, Venezuela, Uruguay, Ethiopia), encourage expatriates to share their skills with their counterparts in their country of origin. The thriving hi-tech industries in Israel, India, Ireland, Taiwan, and South Korea were founded by returning migrants who brought with them not only capital to invest and contacts - but also entrepreneurial skills and cutting edge technologies.

Thailand established in 1997, within the National Science and Technology Development Agency, a 2.2 billion baht project called "Reverse the Brain Drain". Its aim is to "use the 'brain' and 'connections' of Thai professionals living overseas to help in the Development of Thailand, particularly in science and technology."

The OECD ("International Mobility of the Highly Skilled") believes that:

"More and more highly skilled workers are moving abroad for jobs, encouraging innovation to circulate and helping to boost economic growth around the globe."

But it admits that a "greater co-operation between sending and receiving countries is needed to ensure a fair distribution of benefits".

The OECD noted, in its "Annual Trends in International Migration, 2001" that (to quote its press release):

"Fears of a "brain drain" from developing to technologically advanced countries may be exaggerated, given that many professionals do eventually return to their country of origin. To avoid the loss of highly qualified workers, however, developing countries need to build their own innovation and research facilities ... China, for example, has recently launched a program aimed at developing 100 selected universities into world-class research centers. Another way to ensure return ... could be to encourage students to study abroad while making study grants conditional on the student's return home."

The key to a pacific and prosperous future lies in a multilateral agreement between brain-exporting, brain-importing, and transit countries. Such an agreement should facilitate the sharing of the benefits accruing from migration and "brain exchange" among host countries, countries of origin, and transit countries. In the absence of such a legal instrument, resentment among poorer nations is likely to grow even as the mushrooming needs of richer nations lead them to snatch more and more brains from their already woefully depleted sources.

The following steps are considered to be the "minimum package" in the strengthening of relationships between countries of origin and national diasporas:

1. The granting to the diaspora of unlimited or, at the very least, restricted voting rights in the Motherland (e.g., Macedonia)

2.  The institutionalized involvement of political structures representing the diaspora in the politics of the Motherland (e.g., Israel) and vice versa (for instance, the Jewish Congress and the Jewish Agency).

3. Holding common sports events (e.g., the Maccabia or Maccabead Games as a Jewish Olympiad with participants from all over the world); the exchange and transfer of students and professionals between the diaspora and the Motherland.

4. The establishment of a fund for the purchase of land, the restoration of national treasures to the Motherland, reforestation and preservation of nationally or historically significant sites (e.g., the Jewish Keren Hayesod and Keren Kayemet le-Israel)

5. The solicitation of donations, scholarships, and sponsorships from wealthy individuals in the diaspora

6. Emphasis on cultural activities and the promotion of the national language (e.g., various Francophone activities by France)

7. Selling bonds and stocks exclusively to the diaspora (e.g., the Israeli Bonds) and the creation of various investment funds and vehicles to encourage greater economic involvement of the diaspora in the Motherland.

8. Leveraging the nation's common history, religious affiliation, and cultural roots to further national cohesion and political lobbying and support.

9. Encouraging remittances with the implementation of a special, lenient tax regime, the issuance of remittance-bonds, and by providing foreign investors with tax holidays, one-stop-shop facilities, business incubators, and direct access to decision makers.

UNESCO's somewhat arbitrary definition of "book" is:

"Non-periodical printed publication of at least 49 pages excluding covers."

The emergence of electronic publishing was supposed to change all that. Yet a bloodbath of unusual proportions has taken place in the last few months. Time Warner's iPublish and MightyWords (partly owned by Barnes and Noble) were the last in a string of resounding failures which cast in doubt the business model underlying digital content. Everything seemed to have gone wrong: the dot.coms dot bombed, venture capital dried up, competing standards fractured an already fragile marketplace, the hardware (e-book readers) was clunky and awkward, the software unwieldy, the e-books badly written or already in the public domain.

Terrified by the inexorable process of disintermediation (the establishment of direct contact between author and readers, excluding publishers and bookstores) and by the ease with which digital content can be replicated - publishers resorted to draconian copyright protection measures (euphemistically known as "digital rights management"). This further alienated the few potential readers left. The opposite model of "viral" or "buzz" marketing (by encouraging the dissemination of free copies of the promoted book) was only marginally more successful.

Moreover, e-publishing's delivery platform, the Internet, has been transformed beyond recognition since March 2000.

From an open, somewhat anarchic, web of networked computers - it has evolved into a territorial, commercial, corporate extension of "brick and mortar" giants, subject to government regulation. It is less friendly towards independent (small) publishers, the backbone of e-publishing. Increasingly, it is expropriated by publishing and media behemoths. It is treated as a medium for cross promotion, supply chain management, and customer relations management. It offers only some minor synergies with non-cyberspace, real world, franchises and media properties. The likes of Disney and Bertelsmann have swung a full circle from considering the Internet to be the next big thing in New Media delivery - to frantic efforts to contain the red ink it oozed all over their otherwise impeccable balance sheets.

But were the now silent pundits right all the same? Is the future of publishing (and other media industries) inextricably intertwined with the Internet?

The answer depends on whether an old habit dies hard. Internet surfers are used to free content. They are very reluctant to pay for information (with precious few exceptions, like the "Wall Street Journal"'s electronic edition). Moreover, the Internet, with 3 billion pages listed in the Google search engine (and another 15 billion in "invisible" databases), provides many free substitutes to every information product, no matter how superior. Web based media companies (such as Salon and Britannica.com) have been experimenting with payment and pricing models. But this is besides the point. Whether in the form of subscription (Britannica), pay per view (Questia), pay to print (Fathom), sample and pay to buy the physical product (RealRead), or micropayments (Amazon) - the public refuses to cough up.

Moreover, the advertising-subsidized free content Web site has died together with Web advertising. Geocities - a community of free hosted, ad-supported, Web sites purchased by Yahoo! - is now selectively shutting down Web sites (when they exceed a certain level of traffic) to convince their owners to revert to a monthly hosting fee model. With Lycos in trouble in Europe, Tripod may well follow suit shortly. Earlier this year, Microsoft has shut down ListBot (a host of discussion lists). Suite101 has stopped paying its editors (content authors) effective January 15th. About.com fired hundreds of category editors. With the ugly demise of Themestream, WebSeed is the only content aggregator which tries to buck the trend by relying (partly) on advertising revenue.

Paradoxically, e-publishing's main hope may lie with its ostensible adversary: the library. Unbelievably, e-publishers actually tried to limit the access of library patrons to e-books (i.e., the lending of e-books to multiple patrons). But, libraries are not only repositories of knowledge and community centres. They are also dominant promoters of new knowledge technologies. They are already the largest buyers of e-books. Together with schools and other educational institutions, libraries can serve as decisive socialization agents and introduce generations of pupils, students, and readers to the possibilities and riches of e-publishing. Government use of e-books (e.g., by the military) may have the same beneficial effect.

As standards converge (Adobe's Portable Document Format and Microsoft's MS Reader LIT format are likely to be the winners), as hardware improves and becomes ubiquitous (within multi-purpose devices or as standalone higher quality units), as content becomes more attractive (already many new titles are published in both print and electronic formats), as more versatile information taxonomies (like the Digital Object Identifier) are introduced, as the Internet becomes more gender-neutral, polyglot, and cosmopolitan - e-publishing is likely to recover and flourish.

This renaissance will probably be aided by the gradual decline of print magazines and by a strengthening movement for free open source scholarly publishing. The publishing of periodical content and academic research (including, gradually, peer reviewed research) may be already shifting to the Web. Non-fiction and textbooks will follow. Alternative models of pricing are already in evidence (author pays to publish, author pays to obtain peer review, publisher pays to publish, buy a physical product and gain access to enhanced online content, and so on). Web site rating agencies will help to discriminate between the credible and the in-credible. Publishing is moving - albeit kicking and screaming - online.