Cyclopedia Of Economics 3rd edition

In July 2002 Christopher Deliso recounted in antiwar.com that Dutch Radio, based on reports leaked by a Dutch military analysis firm, accused the US government of aiding and abetting terrorists in Macedonia. Not for the first time, the Americans were rumored to have hired the services of MPRI (Military Professional Resources, Inc.) to train and assist the rebels of the NLA, the Albanian National Liberation Army, which skirmished for months with the Macedonian police and military throughout last year.

MPRI is a leading Private Military Company (PMC) whose presence was espied in other Balkan trouble spots, such as Croatia, Kosovo, and Bosnia. The absurd is that MPRI has been training the Macedonia army - to little avail it would seem - since 1998 under a "Stability and Deterrence Program".

Croatian former Foreign Minister Tonino Picula described MPRI's role thus:

"We started at the beginning of the 1990’s lacking all kind of assistance. We faced a war of aggression. We needed all kinds of friends to enhance our capability to keep a schedule. I know that it (MPRI) did a significant job in Croatia as a part of US assistance to Croatia during the 1990s."

Other governments - notably Colombia's and Nigeria's - were less sanguine about the utility of MPRI's services. Colombian officials complained "the MPRI's contributions were of little practical use", while according to the Center for Democracy and Development, the vociferous objections of the Nigerian military led to the dismissal by the president of senior army officers, among them General Malu, the Nigerian chief of staff.

The end of the Cold War spelled the termination of many an illustrious career in the military and the secret services - as well as the destabilization and disintegration of many states. The Big Powers are either much reduced (Russia), militarily over-stretched (Europe), their armies ill-prepared for rapid deployment and low intensity warfare (everyone), or lost interest in many erstwhile "hot spots" (USA). Besieged by overwhelming civil strife, rebellions, and invasions - many countries, political parties, politicians, corporations, and businessmen seek  refuge and protection.

More than 5 million soldiers were let go all over the world between 1987-1994, according to Henry Sanchez of Rutgers University. Professional soldiers, suddenly unemployed in a hostile civilian environment, resorted to mercenariness. A few became rogue freelancers. The role of the Frenchman Bob Denard in the takeover of the Comoros Islands is now mythical. So is the failed coup in Seychelles in 1981, perpetrated by Colonel "Mad" Mike Hoare, a British ex-paratrooper.

Private armies for hire proliferated. Executive Outcomes acted in Sierra Leone, Congo, and Angola, Sandline International in Sierra Leone and Papua New Guinea, DynCorp in Colombia, Haiti, Kosovo, and Bosnia and, of course, MPRI in Bosnia, Croatia, Kosovo, and, lately, Macedonia. Aviation Development Corporation flies surveillance planes for the CIA. Its involvement was revealed when, in Peru, it misidentified a civilian light plane as carrying narcotics. It was shot down by the Peruvian air force.

But these are only the tip of a growing iceberg. Vinnell Corporation was established in the US during the Great Depression and is currently owned by TRW. It has coached militaries, operated facilities, and provided logistical support in more than 50 countries, starting in Saudi Arabia in 1975, where it won a controversial $77 million contract to train oilfield guards.

BDM International, Betac, Logicon, and SAIC are competitors, but Kroll of New York and Saladin Security of London do mainly intelligence gathering. Brown and Root of Houston, Texas, provide logistical support to peacekeeping operations, for example in Kosovo.

Pacific Architects and Engineering (PAE) furnishes logistical support and private security to armies the world over, mainly to the ECOMOG West African multilateral force. Control Risks Group offers corporate security, research, and intelligence solutions. It specializes in hostage situations. It boasts having advised in more than 1200 kidnappings and extortion cases in 80 countries.

Armor Holdings was founded in 1969 as "American Body Armor and Equipment" and incorporated in 1996. It is a Private Security Company (PSC). Its London-based subsidiary, Defense Systems Limited, guards industrial and other sensitive sites, such as embassies and HQ's of international organizations, mainly the UN's.

Armor itself manufactures police and other "non-lethal" equipment. It is a leading maker of armored passenger vehicles and the prime contractor to the U.S. Military for the supply of armoring and blast protection for High Mobility Multi-purpose Wheeled Vehicles (HMMWVs).

Gray Security is another PSC with clients in both Africa and among Latin American immigrants in Florida. Some PMC's are ethnically pure. Succumbing to market realities, the legendary Gurkhas now offer their services through Gurkha International. The oil-rich region of Cabinda is air-patrolled by AirScan - Airborne Surveillance and Security Services.

Big money is involved. The Los Angeles Times quoted, in its April 14th issue, Equitable Services, a security industry analyst. In 1997, it predicted that the international security market will mushroom from $56 billion in 1990 to $220 in 2010. This was long before the boost given to the sector by September 11.

"The top five executives at Science Applications International Corp. of San Diego made between $825,000 and $1.8 million in salaries in 2001, and each held more than $1.5 million worth of stock options." - continued the LA Times.

Control Risks Group's turnover last year exceeded $50 million. Armor Holding's 1999 revenues exceeded $150 million. Prior to its controversial demise, Executive Outcomes of South Africa was said to have earned c. $55 million in its last 4 years - excluding the $1.8 million per month contract it has signed with Sierra Leone, most of which went unpaid. There were unsubstantiated allegations of securing a share of the diamond trade in the ravaged country as well.

Sandline's contract with Papua New Guinea amounted to $36 million for the first 3 months with just under $1 million for any consecutive month - or a total of c. $45 million per the first year. The country's new government at first refused to honor the commitments of its predecessor - hurling at it vague corruption charges - but then compromised with Sandline and agreed to dole out $13 million.

Nor are these small ensembles. MPRI - now in its 14th year - employs over 800 people, most of them former high level US military personnel. It draws on a database of 12,500 freelancers "former defense, law enforcement, and other professionals, from which the company can identify every skill produced in the armed forces and public safety sectors". Many of its clients work under the US government's Foreign Military Sales program and abide by the GSA (General Services Administration) tariffs.

Control Risks Group - founded in 1975 as a subsidiary of the Hogg Robinson insurance group - claims to have had "more than 5,300 clients (including 86 of the Fortune 100 companies) in over 130 countries". Eighty three percent Of the firms comprising the FTSE 100 use one or more of CRG's services. It has 400 employees in 16 offices around the world. It has recently acquired Network Holdings Limited, the UK's largest private forensic laboratory.

The Armor Holdings Products Division is made up of nine operating companies in eight geographic locations. It offers its branded security products through a network of more than 500 distributors and agents internationally. ArmorGroup employs 5,500 people in 38 countries.

Modern PMC's, such as Sandline, are veritable - though miniature - armies, replete with staff military ranks, uniforms, doctrine, training syllabi, cohesion, unit spirit, and discipline.

Smaller, ad hoc, outfits from Ukraine, Russia, Belarus, France, the United Kingdom, Israel, Croatia, South Africa, the United States and other nationalities scour the Earth for emerging conflicts. Such units are often infiltrated by criminals on the run, terrorists in disguise, sadistic psychopaths, and intelligence officers.

These "dogs of war" are known for their disloyalty and lack of discipline. Many have committed acts of banditry, rapes, and an array of atrocities in the mutilated host countries. Still, these are marginal groups and in the minority of PMC's - the last resort, often hired by undesirables and failed states.

On February 12, the British Foreign and Commonwealth Office released a long-awaited briefing ("green") paper in support of regulating the private military sector. Quoted in "Defense News", the paper stated:

"The demand for private military services is likely to increase ... A strong and reputable private military sector might have a role in enabling the (United Nations) to respond more rapidly and more effectively in crises. The cost of employing private military companies for certain functions in U.N. operations could be much lower than that of national armed forces."

Regulation, though, has a poor record. All PMC's in the USA are subject to the porous and ill-enforced Arms Export Control Act overseen by the State Department. The Los Angeles Times is not impressed with the record:

"Congress is notified only of contracts worth more than $50 million. Sometimes there are conflicting views of what is in the U. S. interest. And once a license is granted, there are no reporting requirements or oversight of work that typically lasts years and takes the firms' employees to remote, lawless areas." Decisions often appear to be arbitrary and are mysteriously reversed. All major PMC's maintain lobbyists in Washington and function, partly, as rent seekers.

Still, PMC's are the most cost-effective alternative. According to the UN Special Representative to Sierra Leone, The UN peacekeeping mission there costs more than $500 million per year - compared to Executive Outcomes' $33 million spread over 21 months.

Regulation may amount to a belated acceptance of reality. MPRI boasts that it already operates in foreign countries with the full knowledge and "licence" of the American administration. It is a way to circumvent both the oft-withheld Congressional approval needed for US military involvement abroad - and unwelcome media scrutiny.

The US Army, in the framework of LOGCAP (Logistics Civil Augmentation Program), "preplans during peacetime for the use of civilian contractors to perform selected services in wartime and other contingencies. Utilization of contractors, in a theater of operation, will release military units for other missions or fill shortfalls." The ubiquitous MPRI is LOGCAP's main contractor.

Bahamas-incorporated Sandline also claimed British Foreign Office tacit approval of its mission in Sierra Leone. Most PMC's are self-regulating and selective. They won't render their services to organized crime, drug cartels, rogue states, terrorists, illegal arms traders, and regimes known for flagrant violations of human rights.

The privatization of hitherto exorbitantly costly peacekeeping and humanitarian operations would bestow legitimacy upon these outfits and entice them to adhere to strict regulatory codes. Still, the exercise of violence is a prerogative of states and a hallmark of often hard-gained sovereignty. Many do not take kindly to the encroachment of morally-neutral private sector replacements upon these hallowed grounds.

David Isenberg wrote in the March 11th issue of "Defense News":

"The only question is how best to address concerns about accountability, threats to a nation's sovereignty (i.e., usurping the state's prerogative of having a monopoly on violence), having a vested interest in perpetuating a conflict, violating human rights or acting as government proxies. The consensus opinion is that this is best accomplished through regulation."

The imperceptible line between "military advisors" and combatants is often crossed. According to the Los Angeles Times, Vinnell employees may have joined Saudi National Guard units in battle against the invading army of Saddam Hussein in 1991.

MPRI personnel are alleged by Ken Silverman in his book "Private warriors" and by numerous media - from the British journalist Paul Harris on Australia's Radio National's "Background Briefing" to The Scotsman - to have helped plan the Croatian occupation and ethnic cleansing of Serb-populated Krajina in 1995.  Even the Foreign Military Training Report published by both the State Department and Department of Defence in May refers to these allegations against MPRI not entirely disparagingly.

Sanchez describes what happened in Papua New Guinea:

"When citizens of Papua New Guinea learned that their government signed a $27 million contract with EO (should be Sandline - SV) to train the Army to fight a secessionist rebel uprising it set off five days of rioting and protests. Even the Army commander (later convicted on unrelated corruption charges - SV) refused to work with the South African firm.

States that hire private firms for security are usually financially poor but mineral rich. They often pay for services by offering concessions earned through diamond mining, oil drilling or other natural resources. An enterprising military firm may end up exploiting a poor nation of its modest resources. As a result there may be a new 'Scramble for Africa' over resources where no government exists or is desperate for help..."

Few PMC's if any consent to any form of payment, except cash. Mineral concessions require heavy investments and existing mines require a logistical infrastructure often way beyond the expertise and financial wherewithal of the average PMC. PMC's may be involved in influence peddling on behalf of mineral extractors or receive introduction fees and commissions from multinationals, though. PMC's also make a lot of money on arms sales to their client states.

Consider Sandline International. It was never a shareholder in Branch Energy, DiamondWorks, or any other real or imaginary mining firm it was associated with by sloppy researchers and journalists. Nor was it the successor to Executive Outcomes. Yet, the same people acted as directors, or advisors in all these firms.

This incestuous setup led to the false assertions that Sandline - and EO before it - looted the mineral wealth of countries such as Sierra Leone and Angola. That many PMC's render security services to mining firms - both statal and private - adds to the confusion.

"The Financial Times" mentioned the positive role "Southern Cross Security" played in keeping Sierra Leone's titanium-dioxide mines intact throughout the war. Others wrongly accused it of being an EO offshoot out to pillage the minerals it sought to protect.

Even Sanchez acknowledges that "(others think that) a private company can deploy forces rapidly, avoid the difficulties of ad-hoc multinational forces (command is streamlined and cohesive), they usually have standing logistics for transport, appear to be cost-effective, and are willing to sustain loss of life".

Isenberg concurs:

"It is time to recognize that today's PMCs are far different from the ad hoc organizations of the past. As experts such as professor Herb Howe of Georgetown University have noted, many of today's companies exhibit a distinct corporate nature and a desire for good public relations. The companies' goal of obtaining contracts encourages them to control their employees' actions. Private firms have a large pool of qualified applicants, due to worldwide political realignments and defense cutbacks since 1989 ... One thing is clear: The need for security from the private sector is going to increase dramatically. And PMCs are going to fulfill that need."

PMC's have embarked on a concerted effort to alter their penumbral image. MPRI - its Web site replete with literary quotes lifted from the works of Marcel Proust and other renowned soldiers of fortune - has contracted with Enterprise Strategies and Solutions under the Department of Defence's Mentor-Protégé program. MPRI explains:

"ESSI's emphasis on economic well-being, technology transfer, corporate social investing, business incubation, and knowledge management complement the vital safety and security roles performed by MPRI. MPRI has the added advantage of being able to utilize the skill sets of a small, woman-owned, veteran-owned business. MPRI and ESSI form a comprehensive team that enables them to perform on a wide range of projects that would otherwise be inaccessible for one or the other."

MPRI branched out to offer corporate leadership programs that include the re-enactment of historical battles. It is a major provider of training, support, and "other services" - such as strategic planning and leader development - to the US armed forces, Department of Defense, the corporate sector, and "non-DoD government agencies." Its Web site - a sincere stab at transparency - lists dozens of military and semi-military contracts.

Its military contracts notwithstanding, it emphasizes the humanitarian side of its operations. It "shipped more than $900,000,000 worth of donated food and medical supplies to the newly independent states of the former Soviet Union over a five year period ... has provided peace keeping monitors for both the Department of Defense and the Department of State" and engaged in other charitable deeds, like demining.

In the Winter 2002 issue of "Harvard International Review", Sean Creehan summed up this shift in public perceptions:

"Today's mercenaries still fight for money, but in the context of global capitalism, some groups are becoming less morally objectionable. The organization of mercenaries into corporations that function like consulting firms has put distance between them and their activities. Mercenary corporations' increasing efficiency and self-regulation is influencing the way legitimate governments view mercenaries as instruments of state policy."

In a BBC poll conducted in the wake of the British government's Green Paper about regulating "soldiers of fortune", a reader named Katie raised important points regarding the corporate structure and liabilities of PMC's:

"The UK has a rather poor record of holding corporate officers responsible in any way for their actions ... Maybe military 'companies' should actually be restricted to being partnerships where the owners have unlimited liability similar to a lawyer's practice? Maybe a special class of company needs to be created, for this purpose so they can be audited and tracked and to clarify their relationship with the government (for whom they act). Essentially ... the directors of the company can be held responsible for war crimes as would ranking officers in the army. To some extent the 'corporate veil' needs to be thinner for these companies."

The United Kingdom - and Australia - promote a complete re-think of the concept of national defense. Britain's public-private partnership dubbed the "Private Finance Initiative" revolves around "paying privately for the defence we cannot afford publicly". Thus, transport planes, ships, trucks, training, and accommodation - may all be on long term leases from private firms. The equipment will be leased to other customers during down time, reports the BBC.

After all, when rich countries pay poor countries to send their ill-disciplined, ill-equipped, and ill-trained soldiers on peacekeeping operations - isn't this a mercenary system in all but name? And atrocities are not the preserve of "dogs of war". American regular soldiers committed them in Kosovo and Japan, Nigerian conscripts perpetrated them all over West Africa, "national armies" are feared by their own civilians more than any mercenary troupe. Time to rid ourselves of self-righteous myths and privatize peace as we, alas too often, did war.

Interview granted to Barry Zellen, INTERSEC (UK), February 2008

1. Since the end of the cold war, what has been the role of private contractors in the conduct of war? Has it been on the rise?

A. Private contracting of military functions has been on the rise since the first Gulf War (1991). With the collapse of the USSR, the militaries of the main Western protagonists, the USA and the UK, have been drastically scaled back, a process known as the "peace dividend". At the same time, economists and politicians throughout the world embarked on an ambitious plan involving the privatization of state-owned firms and functions. Inevitably, the two fads coalesced and huge chunks of hitherto state-monopolized warfare were contracted out, outsourced, and even offshored.

2. What have been the primary functions for contractors in war zones, and how has this aided the war efforts of states?

As far as the USA and UK are concerned, until the Iraq war, private contractors were mainly responsible for logistics, training, and security tasks. This narrow definition of their roles is in flux, though. Private soldiers of fortune may yet be hired and rented out even by the governments of the West, though I regard this as extremely unlikely.

A. Though it would make eminent sense, I am not aware of such a role. Granted, private military companies are involved in the provision of logistical, training, and security support to forces on the ground and they also collaborate with field agents of secret services (such as the CIA). But, asymmetrical warfare is still carried out largely by regular armies, backed by intelligence gathered by state-run agencies.

Actual combat is not being transformed by the influx of private contractors. We are simply reverting to earlier times and models when war was a public-private partnership and military camps incorporated entrepreneurial suppliers, contractors, service providers, and hangers-on. The attempt to render modern armies self-sufficient and self-sustaining has clearly failed.

4. Part of Secretary Rumsfeld's Transformation program was a trend toward a decreasing size of our armed forces, and a continued shift toward superior technology to defeat the enemy. Does the increasing role of contractors enable defense organizations to shift their resources on the higher-tech functions, effectively "outsourcing" the lesser skilled functions? Is the "privatization" of the warfighting functions consistent with the Transformation and the Revolution in Military Affairs, as we shift toward leaner, higher-tech, armed forces?

Private contractors merely substitute for existing structures. Their functions are not always low-skilled, quite the contrary. Moreover, the army duplicates the functions of private contractors. This redundancy may appear wasteful but it stems from the deep and justified distrust professional soldiers hold towards civilian contractors.

A. Quantitatively, yes, but not qualitatively. PMCs and private contractors will grow in number, stature, and contribution to the war effort. But they are unlikely to replace the professional soldier in actual combat or the field agent in HUMINT. Their functions will remain largely limited to logistical support and training.

A. Private contractors are not GIs. They provide no substitute for the fighting men and women of the armed services. I doubt if they ever will. Thus, they do not alter the military equation in any meaningful way. Their involvement has no bearing on whether to draft and mobilize fighting age conscripts.

Incredibly, there are no serious studies that decide the question whether private contracting is a clever move, from the pecuniary point of view. Anecdotal evidence suggests that it is not and that waste and corruption are as rife there as among the traditional state bureaucracy.

Chain of command issues are inevitable. This is especially true when contractors are granted immunity to the consequences of their delinquency, crime, waste, and venality. There is no love lost between the fighting corps and private contractors. As we have seen in Iraq, the involvement of PMCs is often resented by host governments and leads to diplomatic and other incidents.

The solution, of course, is to hold private contractors accountable for their actions and misdeeds.

7. I was thinking about how Xenophon and many of the battle-hardened Greek warriors hired themselves out to the Persians in an effort to foster regime change there 2.5 millennia ago -- resulting in his infamous "march of the 10,000" back to Greece after the effort failed. It seems that there has been a very long history of private entities participating in warfare -- lots of military theorists have examined the topic, Machiavelli comes to mind. I am curious your thoughts on this long history -- in some ways it seems like an old phenomenon; but then again, something seems new as well. With Napoleon's levee-en-masse transforming the conduct of modern warfare, resulting in the emergence of total war, and later a series of world wars, I am wondering, does the recent trend toward "privatization" suggest a return to the classical roots of war seen in ancient and early modern days, and a shift away from total war toward more limited engagements -- or might this be temporary, until a new peer adversary such as China rises to shift things back toward mass warfare?

The attempt to render modern armies self-sufficient and self-sustaining by getting rid of these "parasites" has clearly failed. We are back to where we started: the traditional army.

It is also completely wrong to postulate that "Total War" is a modern phenomenon. It is at least as old as the Bible. The ancient Hebrews were instructed by God to eradicate their enemies, men, women, and children and to confiscate the property of their vanquished foes. How more Total can it get?

Mankind has always cycled between geographically-limited, guerrilla type skirmishes and all-out warfare. Top-heavy Goliath forces, armed with the latest technologies always faced pebble-slinging, nimble, "low intensity" Davids. There's nothing new about that. We are simply in an interim period between two classical wars. Call it a respite.

Predicting the future is a tricky business. There have been countless ridiculous failures at identifying the trends and products which will determine the future shape of our life and our environment.  Even more difficult is trying to guess which of us will be deemed a useful member of the community – and which an obsolete relic. To a large extent, the answer to this question lies in determining the useful professions of the future. This is an age when people are determined, defined and categorized in strict accordance with their professions. Whereas during the Renaissance, a person might have been defined by his range of interests (remember the likes of Leonardo da Vinci), by his familial, religious, or ethnic affiliations, by his or her gender and so on – today the first and foremost question is a person's profession. The first question that we must provide a clear answer to is: What constitutes a profession (as opposed to a hobby), a vocation (as opposed to an avocation)? To qualify as a profession, the act must bear the following hallmarks:

1. 
   It must be continuous and pursued for a long time.
   

2. 
   It must occupy most of the waking hours.
   

3. 
   It must yield earnings or compensation whether in money or in kind.
   

4. 
   The person must have an advantage in that field of knowledge or activity, at least over laymen. In other words, the categories of laymen and expert – which are the result of highly specific education – must exist and prevail.
   

5. 
   It must be hierarchically layered with clear flows of professional authorities and responsibilities and with a clear career path (progressing up the professional ladder).
   

People, goods and, lately, information became and become, daily, more and more mobile. Physical distance has been shrunk. A global marketplace has formed. Information is almost instantly available anywhere. This was described as the global village – an outdated concept which might soon be replaced by the global home. All the professions which has to do with more mobility will benefit and represent preferred professions of the future. The moving of people: pilots, drivers, the car industry, sophisticated traffic planners and automotive innovators, tourism related professions and so on. The moving of goods: shipping, trucking, air and modern train travel. This area is already so specialized that I do not consider it as offering opportunities in the future (put differently, I do not regard it as a growth industry). The moving of information (today dubbed: "The Service Industries"): Trading systems, the Internet, Networking and communications related professions, the field of communications within the computer industries, telecommunications, entertainment related professions, technologies of banking. The creation of destinations for people, goods and information (commonly known as Markets or Marketplaces): advertising, marketing, trading, design, image and public relations experts.

Better medicine will lead to a polarization of the age structure of society: there will be more older people and more younger people. Gradually, as birth rates fall and contraception becomes widespread, a reverse pyramid will be formed: most people will be middle aged and old. This offers a clear view of professions which will be required in the future: Professionals to take care of older and younger people (which have very similar needs): nurses, paramedics, nannies, entertainers, leisure time professionals, companions, specialized equipment manufacturers, operators of homes for the very old or for the very young, pension planners, manufacturers of specialized medical and paramedical needs and products for both age groups, legal and accounting specialists in pension and inheritance laws and tax planning. Virtually every industry and field of human activity will have to adapt themselves to these demographic changes. Age-related expertise will develop in each one of them. This applies to the arts (mainly music and cinema) as well as to the crafts, to industry as well as to agriculture, to infrastructure as well as to government. Human society will be enormously influenced by these shifts.

Initially, society was composed of very large units. People belonged to tribes "nations". These were groupings of up to hundreds of thousands of people. They felt amply defined by this belonging. Nothing was left out when you said that a certain person was "Hebrew". Nothing needed to be added. Stereotypes were more than sufficient and, usually accurate.

Later, the concept of family fully emerged. First, in a very extended form: the family comprised a few generations and all removed family (blood) connections. Gradually, the family shed more and more layers. People began to be called by family names only 250 years ago. The nuclear family was an invention of the 19^th century, when the industrial revolution and modern methods of transport and communication broke families apart. Even this relatively small units came under a debilitating attack in the last 50 years and the nuclear family underwent a nuclear implosion, it disintegrated. Today, the basic unit of society, its cell, its atom, is the individual.

People will tend to isolate themselves: stay more at home, work from it with flexitime, form and break up short term attachments to other humans or be engaged in non-committal activities with others, activities which will not threaten their absolute freedom and mobility. Solitary media will be predominant: the Internet is a one-user medium (television was a family medium).

The professions which will cater to the needs of individuals and separate them from society (while maintaining the survival need to communicate) will be the professions of the future: Internet, entertainment (especially customized), telecommunication, singles-related industries (dating and couple matching, for instance, single's bars, to mention another), virtual reality, small businesses which can be run from home, agencies for temporary work placement and other professions catering to the conflicting human needs of being together while being alone.

All the other seeming trends are recurrent illusions. Thee have been ages of more or less democracy, more or less market orientation, more or less polarization between rich and poor people. The human race experienced numerous forms of government, of marriage, of economy, of management, of residence, of production, even of trying to predict the future. It was the wisest of all men, King Solomon, who said: "There is nothing new under the sun". True, but it is getting stronger.

Five thousand years ago, people were still roaming the earth as nomads. They carried along their few precious possessions in their hands and on their backs. They hunted and gathered food at random.

Then came the Agricultural Revolution: people settled down and got attached - physically, emotionally and legally - to specific plots of land. They grew their food in accordance with a pre-meditated plan. They domesticated animals. This new pattern of human existence led to enormous shifts in demographic patterns.

It took yet another 4500 years before the dawn of the next Revolution: the Industrial one. Its main achievement was to separate the raw materials and the means of production from the land. It also created the need to have an educated workforce. This Revolution brought in its wake the formation of cities (which supplied workers to mega-factories), mass education systems and leisure.

For the first time in history, people began to have free time on their hands.

Numerous organizations, firms and institutions sprang up in an effort to satisfy the insatiable desire for entertainment and the necessity to cope with the ever growing complexity of social and economic institutions.

Contrary to common opinion, the service oriented society was - and still is - an inseparable part of the industrial world.

Today, we are in the eye of the biggest storm ever: the Third Wave (to borrow Alvin Toffler's excellent coinage). This is the Information and Knowledge Revolution. It is leading to an economy which will be based on the accumulation, the processing and the delivery of information (the equivalent of raw materials) and of knowledge (the equivalent of processed goods). All these will be made accessible to ever widening strata of society.

This, indeed, is what separates this Revolution from its predecessors:

(1) It is equitable - anyone and everyone can partake in it.

To participate in the previous two Revolutions - large amounts of capital were needed. Where capital was amiss - raw force was used to obtain raw materials, capital goods, land and other means of production (including very cheap labour in the form of slavery).

This Revolution is different: all that is needed is good ideas, some (ever lessening) technical background and ever cheaper infrastructure.

So, this Revolution is open to young people in home garages (this is how computer giants such as Apple Computers and Microsoft were established).

It is non-discriminating: age, gender, race, colour, nationality, sexual preferences - they all do not matter. This Revolution is the Great Equalizer.

(2) This is the first time in human history that raw materials, production processes, finished products and marketing and distribution channels are one and the same. Let us examine the example of the sales of products (e.g., software) through the Internet:

Software is written on computers using programming languages - a manipulation of electronic bits in a virtual environment. Thus, the product (=the software), the production processes (=the programming languages), the raw materials (mental algorithms translated to electronic bits) and the channels of marketing and distribution (the electronic bit streams of the Internet) - they are all made of the same elements and components.

This is why the technology is so cheap. This is why the products of the forthcoming Revolution will be disseminated so easily. To manufacture and to distribute will become mundane - rather than arcane - operations.

(3) Only some of our forefathers have been influenced by the Agricultural Revolution. Only some of them have been influenced by the Industrial Revolution. Gradually, the percentage of the population working the land decreased from well over 60% to less than 3% (in the USA, for instance). An equal drop can be discerned among the part of population engaged in industry.

But this is not the case with the third Revolution:

There is not a single human on earth who is not influenced by the third, biggest Revolution of all: the Information / Knowledge Revolution.

All of us are exposed to radio, television, computers, cellular phones, the Internet. These products and services are becoming cheaper and more available and accessible by the month. The new Revolution is all- pervasive and all-encompassing.

(4) All the above characteristics brought about a new form of economic development: non-centralised, high value added, fast progressing with quick business cycles. It is the first non-mercantilist, non-colonial phase in human history. All economic activity in the past was characterized by the importation of raw products at low prices from the very same markets that absorbed the final products (produced from those raw materials) at much higher prices.

This form of exploitation will gradually become impossible. Today, it is no longer important where goods are produced. The demarcation lines between finished products and raw materials are so blurred (even where old-fashioned industrial products are concerned) - that the old distinctionbetween "colonizer" and "colony" has all but vanished.

This holds a great promise for less-developed and developing countries.

In the (near) past, they would have needed huge amounts of capital and other, non-monetary, resources to equate themselves with the more developed part of the World. Today, much less investment is needed to achieve the same results. The world is finally becoming what the sage of Western media, Marshall McLuhan called: "The Global Village". It matters less WHERE you are - it matters more WHAT you think. A global economic premium is placed on innovation, creativity, improvisation and the entrepreneurial spirit.

These - the new mental commodities - are abundantly and equally available to all the countries in the world: poor and rich, off-center and on-center, developed, developing and less developed.

The old economic conception of an evolution: from the agricultural to the industrial to the service economies is being replaced. The new breed of economic thinking encourages countries - such as Macedonia - to move directly from the Agricultural phase to the Third Wave: that of Information and Knowledge industries. Macedonia can better accommodate this type of industries: they are affordable, accessible, easy to understand and to implement, highly profitable, ever evolving and progressing.

Macedonia will not be the first country to implement such a daring policy of leaping forward and skipping the Industrial stage - straight into the age of Information. Israel has done it before and so have Switzerland, Hong-Kong, Singapore and (to a certain and hesitant extent) India. All these countries were naturally under-privileged. Some of them are mere deserts, others isolated, barren islands or severely overpopulated. But they all managed to get heavily involved in the unfolding revolution. All of them (with the exception of India which is a new, half-hearted, entrant) possess the highest per capita GNP in the world.

The gamble has paid off.

But there is a fascinating side-benefit to such a choice.

The shift from industry to the information technology and knowledge industries - is a shift from dealing with reality to dealing with symbols. The techniques used to manipulate symbols are the very same - no matter what the symbols are. If a country is successful at developing trained operators of symbols - they will know how to manipulate, operate and transform any kind of symbol.

This is also true when it comes to the biggest symbol of all: to Money.

Money - as we all know - is a symbol. It represents an agreement reached amongst members of a group of people. It has no intrinsic value. The same techniques which are used for the manipulation of information are easily applicable to the manipulation of the symbol called money.

THE MORE ADEPT A COUNTRY IS AT PROCESSING SYMBOLS (=INFORMATION) - THE MORE ADEPT IT IS IN FINANCIAL TRANSACTIONS OF ALL KINDS. It is more likely to attract investments, to develop flourishing stock exchanges and money markets, to train young professionals, to trade and in general: to get enmeshed in the very fabric of the modern international economy.

Public Goods

"We must not believe the many, who say that only free people ought to be educated, but we should rather believe the philosophers who say that only the educated are free."
-- Epictetus (AD 55?-135?), Greek Stoic philosopher
 

I. Public Goods, Private Goods

Contrary to common misconceptions, public goods are not "goods provided by the public" (read: by the government). Public goods are sometimes supplied by the private sector and private goods - by the public sector. It is the contention of this essay that technology is blurring the distinction between these two types of goods and rendering it obsolete.

Pure public goods are characterized by:

I. Nonrivalry - the cost of extending the service or providing the good to another person is (close to) zero.

Most products are rivalrous (scarce) - zero sum games. Having been consumed, they are gone and are not available to others. Public goods, in contrast, are accessible to growing numbers of people without any additional marginal cost. This wide dispersion of benefits renders them unsuitable for private entrepreneurship. It is impossible to recapture the full returns they engender. As Samuelson observed, they are extreme forms of positive externalities (spillover effects).

II. Nonexcludability  - it is impossible to exclude anyone from enjoying the benefits of a public good, or from defraying its costs (positive and negative externalities). Neither can anyone willingly exclude himself from their remit.

III. Externalities - public goods impose costs or benefits on others - individuals or firms - outside the marketplace and their effects are only partially reflected in prices and the market transactions. As Musgrave pointed out (1969), externalities are the other face of nonrivalry.

The usual examples for public goods are lighthouses - famously questioned by one Nobel Prize winner, Ronald Coase, and defended by another, Paul Samuelson - national defense, the GPS navigation system, vaccination programs, dams, and public art (such as park concerts).

It is evident that public goods are not necessarily provided or financed by public institutions. But governments frequently intervene to reverse market failures (i.e., when the markets fail to provide goods and services) or to reduce transaction costs so as to enhance consumption or supply and, thus, positive externalities. Governments, for instance, provide preventive care - a non-profitable healthcare niche - and subsidize education because they have an overall positive social effect.

Moreover, pure public goods do not exist, with the possible exception of national defense. Samuelson himself suggested [Samuelson, P.A - Diagrammatic Exposition of a Theory of Public Expenditure - Review of Economics and Statistics, 37 (1955), 350-56]:

From Pickhardt, Michael's paper titled "Fifty Years after Samuelson's 'The Pure Theory of Public Expenditure': What Are We Left With?":

It would seem that knowledge - or, rather, technology - is a public good as it is nonrival, nonexcludable, and has positive externalities. The New Growth Theory (theory of endogenous technological change) emphasizes these "natural" qualities of technology.

The application of Intellectual Property Rights (IPR) alters the nature of technology from public to private good by introducing excludability, though not rivalry. Put more simply, technology is "expensive to produce and cheap to reproduce". By imposing licensing demands on consumers, it is made exclusive, though it still remains nonrivalrous (can be copied endlessly without being diminished).

Yet, even encumbered by IPR, technology is transformative. It converts some public goods into private ones and vice versa.

Consider highways - hitherto quintessential public goods. The introduction of advanced "on the fly" identification and billing (toll) systems reduced transaction costs so dramatically that privately-owned and operated highways are now common in many Western countries. This is an example of a public good gradually going private.

Books reify the converse trend - from private to public goods. Print books - undoubtedly a private good - are now available online free of charge for download. Online public domain books are a nonrivalrous, nonexcludable good with positive externalities - in other words, a pure public good.

Education used to be a private good with positive externalities. Thanks to technology and government largesse it is no longer the case. It is being transformed into a nonpure public good.

Technology-borne education is nonrivalrous and, like its traditional counterpart, has positive externalities. It can be replicated and disseminated virtually cost-free to the next consumer through the Internet, television, radio, and on magnetic media. MIT has recently placed 500 of its courses online and made them freely accessible. Distance learning is spreading like wildfire. Webcasts can host - in principle - unlimited amounts of students.

Yet, all forms of education are exclusionary, at least in principle. It is impossible to exclude a citizen from the benefits of his country's national defense, or those of his county's dam. It is perfectly feasible to exclude would be students from access to education - both online and offline.

This caveat, however, equally applies to other goods universally recognized as public. It is possible to exclude certain members of the population from being vaccinated, for instance - or from attending a public concert in the park.

Other public goods require an initial investment (the price-exclusion principle demanded by Musgrave in 1959, does apply at times). One can hardly benefit from the weather forecasts without owning a radio or a television set - which would immediately tend to exclude the homeless and the rural poor in many countries. It is even conceivable to extend the benefits of national defense selectively and to exclude parts of the population, as the Second World War has taught some minorities all too well.

Nor is strict nonrivalry possible - at least not simultaneously, as Musgrave observed (1959, 1969). Our world is finite - and so is everything in it. The economic fundament of scarcity applies universally - and public goods are not exempt. There are only so many people who can attend a concert in the park, only so many ships can be guided by a lighthouse, only so many people defended by the army and police. This is called "crowding" and amounts to the exclusion of potential beneficiaries (the theories of "jurisdictions" and "clubs" deal with this problem).

Nonrivalry and nonexcludability are ideals - not realities. They apply strictly only to the sunlight. As environmentalists keep warning us, even the air is a scarce commodity. Technology gradually helps render many goods and services - books and education, to name two - asymptotically nonrivalrous and nonexcludable.

Samuelson, Paul A. and Nordhaus, William D. - Economics  - 17th edition - New-York, McGraw-Hill Irian, 2001

Heyne, Paul  and Palmer, John P. - The Economic Way of Thinking - 1st Canadian edition - Scarborough, Ontario, Prentice-Hall Canada, 1997

Ellickson, Bryan - A Generalization of the Pure Theory of Public Goods - Discussion Paper Number 14, Revised January 1972

Buchanan, James M. - The Demand and Supply of Public Goods - Library of Economics and Liberty - World Wide Web: http://www.econlib.org/library/Buchanan/buchCv5c1.html

Samuelson, Paul A. - The Pure Theory of Public Expenditure - The Review of Economics and Statistics, Volume 36, Issue 4 (Nov. 1954), 387-9

Pickhardt, Michael - Fifty Years after Samuelson's "The Pure Theory of Public Expenditure": What Are We Left With? - Paper presented at the 58th Congress of the International Institute of Public Finance (IIPF), Helsinki, August 26-29, 2002.

Musgrave, R.A. -  Provision for Social Goods, in: Margolis, J./Guitton, H. (eds.), Public Economics - London, McMillan, 1969, pp. 124-44.

Musgrave, R. A. - The Theory of Public Finance -New York, McGraw-Hill, 1959.

Public Procurement

In every national budget, there is a part called "Public Procurement". This is the portion of the budget allocated to purchasing services and goods for the various ministries, authorities and other arms of the executive branch. It was the famous management consultant, Parkinson, who once wrote that government officials are likely to approve a multi-billion dollar nuclear power plant much more speedily that they are likely to authorize a hundred dollar expenditure on a bicycle parking device. This is because everyone came across 100 dollar situations in real life - but precious few had the fortune to expend with billions of USD.

This, precisely, is the problem with public procurement: people are too acquainted with the purchased items. They tend to confuse their daily, household-type, decisions with the processes and considerations which should permeate governmental decision making. They label perfectly legitimate decisions as "corrupt" - and totally corrupt procedures as "legal" or merely "legitimate", because this is what was decreed by the statal mechanisms, or because "this is the law".

Procurement is divided to defence and non-defence spending. In both these categories - but, especially in the former - there are grave, well founded, concerns that things might not be all what they seem to be.

Government - from India's to Sweden's to Belgium's - fell because of procurement scandals which involved bribes paid by manufacturers or service providers either to individual in the service of the state or to political parties. Other, lesser cases, litter the press daily. In the last few years only, the burgeoning defence sector in Israel saw two such big scandals: the developer of Israel's missiles was involved in one (and currently is serving a jail sentence) and Israel's military attache to Washington was implicated - though, never convicted - in yet another.

But the picture is not that grim. Most governments in the West succeeded in reigning in and fully controlling this particular budget item. In the USA, this part of the budget remained constant in the last 35(!) years at 20% of the GDP.

There are many problems with public procurement. It is an obscure area of state activity, agreed upon in "customized" tenders and in dark rooms through a series of undisclosed agreements. At least, this is the public image of these expenditures.

The truth is completely different.

True, some ministers use public money to build their private "empires". It could be a private business empire, catering to the financial future of the minister, his cronies and his relatives. These two plagues - cronyism and nepotism - haunt public procurement. The spectre of government official using public money to benefit their political allies or their family members - haunts public imagination and provokes public indignation.

Then, there are problems of plain corruption: bribes or commissions paid to decision makers in return for winning tenders or awarding of economic benefits financed by the public money. Again, sometimes these moneys end in secret bank accounts in Switzerland or in Luxembourg. At other times, they finance political activities of political parties. This was rampantly abundant in Italy and has its place in France. The USA, which was considered to be immune from such behaviours - has proven to be less so, lately, with the Bill Clinton alleged election financing transgressions.

But, these, with all due respect to "clean hands" operations and principles, are not the main problems of public procurement.

The first order problem is the allocation of scarce resources. In other words, prioritizing. The needs are enormous and ever growing. The US government purchases hundreds of thousands of separate items from outside suppliers. Just the list of these goods - not to mention their technical specifications and the documentation which accompanies the transactions - occupies tens of thick volumes. Supercomputers are used to manage all these - and, even so, it is getting way out of hand. How to allocate ever scarcer resources amongst these items is a daunting - close to impossible - task. It also, of course, has a political dimension. A procurement decision reflects a political preference and priority. But the decision itself is not always motivated by rational - let alone noble - arguments. More often, it is the by product and end result of lobbying, political hand bending and extortionist muscle. This raises a lot of hackles among those who feel that were kept out of the pork barrel. They feel underprivileged and discriminated against. They fight back and the whole system finds itself in a quagmire, a nightmare of conflicting interests. Last year, the whole budget in the USA was stuck - not approved by Congress - because of these reactions and counter-reactions.

The second problem is the supervision, auditing and control of actual spending. This has two dimensions:

1. 
   How to make sure that the expenditures match and do not exceed the budgetary items. In some countries, this is a mere ritual formality and government departments are positively expected to overstep their procurement budgets. In others, this constitutes a criminal offence.
   

2. 
   How to prevent the criminally corrupt activities that we have described above - or even the non criminal incompetent acts which government officials are prone to do.
   

But, this is not as simple as it sounds.

Some countries publish international tenders, striving to secure the best quality in the cheapest price - no matter what is its geographical or political source. Other countries are much more protectionist (notably: Japan and France) and they publish only domestic tenders, in most cases. A domestic tender is open only to domestic bidders. Yet other countries limit participation in the tenders on various backgrounds:

the size of the competing company, its track record, its ownership structure, its human rights or environmental record and so on. Some countries publish the minutes of the tender committee (which has to explain WHY it selected this or that supplier). Others keep it a closely guarded secret ("to protect commercial interests and secrets").

But all countries state in advance that they have no obligation to accept any kind of offer - even if it is the cheapest. This is a needed provision: the cheapest is not necessarily the best. The cheapest offer could be coming from a very unreliable supplier with a bad past performance or a criminal record or from a supplier who offers goods of shoddy quality.

The tendering policies of most of the countries in the world also 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, noncash, 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 institutions 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. Parallelly, 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 have 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 effect 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.

Public Sector, Future of

What is: big, hated, outdated and indispensable? Answer: the Public Sector.

Everyone likes to complain about the deterioration of services provided by the Government and about how it obstructs the development of the Private Sector.

The Public Sector is composed of two elements:

1. 
   
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