Cyclopedia Of Economics 3rd edition

"Voucher Communities" are communities of unemployed workers organized in each municipality. The unemployed exchange goods and services among themselves in a barter-like or countertrade system. They use a form of "internal money": a voucher bearing a monetary value.

Thus, an unemployed electrician can offer his services to an unemployed teacher who, in return, gives the electrician's children private lessons. They pay each other with voucher money. The unemployed are allowed to use voucher money to pay for certain public goods and services (such as health and education). Voucher money is redeemed or converted to real money – so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed.

II. The Clearing Authority

The Clearing Authority has four functions:

(1) To issue (print) the vouchers in various currency-equivalent denominations

(2) To create and maintain the project's information systems (see below).

(3) To issue laminated plastic (and, later, magnetic striped) identification cards to voucher recipients ("Voucher Beneficiary ID Cards")

(4) To provide binding dispute settlement and resolution mechanisms and forums

In some countries, vouchers issued by the Clearing Authority can be used to defray expenditures related to education and health and to pay local taxes. This is subject to agreements signed between the Clearing Authority and the relevant local and state authorities.

The Employment Bureau provides the Clearing Authority with information about the status of applicants (are they unemployed or not), pursuant to the receipt of written release from the applicant.

IV. Liaison with employers

Some Clearing Authorities act as employment agencies. They match jobseekers with employers who then proceed to pay their employees in vouchers. In these cases, the Clearing Authorities provides employers with vouchers on condition that they are used to employ the hitherto unemployed beneficiaries.

The voucher is a contract between service providers. It contains the following elements and components:

(1) It is headlined "Contract" between payer and receiver to render services.

(2) A denomination (how many currency units the voucher represents) known as "Value Store".

(3) The serial ID or registration number of the voucher.

VI. Recipients and Beneficiaries

The vouchers are distributed to the unemployed and the homeless in order to enhance their purchasing power and enable them to resume an economically productive role in society.

The total sum of vouchers distributed to any given recipient or beneficiary should not exceed one third of his or her income from all other sources combined.

The vouchers should be distributed once every quarter and expire at the end of the quarter in which they were distributed.

The voucher recipients or beneficiaries can use them to pay only for services rendered by other recipients or beneficiaries. They should be allowed to freely negotiate transactions and agree prices among themselves.

VII. Information Systems

The Clearing Authority maintains a Central Registry in both hard, print copy and computerized form (Excel spreadsheet).

The Central Registry contains the following data and is indexed thus:

    (a) Name of recipient/beneficiary

    (b) Profession of recipient/beneficiary and services rendered by him or her

    (c) Contact details (address, phone number, e-mail) of recipient/beneficiary

    (d) Number and value of outstanding, unused vouchers in any given quarter

Customers of the service provider are allowed to comment online on the service provider's (the voucher recipient's/beneficiary's) performance and conduct and to rate it.

To summarize:

Each beneficiary/recipient of vouchers has a record in bother print and computerized forms.

The record comprises his or her name, professional qualifications, services rendered, contact details, number and value of outstanding and unused vouchers, and comments and rating by clients pertaining to the beneficiary/recipient's performance and conduct in rendering his or her services.

Enhancing the purchasing power of the unemployed and the homeless

Restarting the economic cycle in deprived neighborhoods and regions

Increasing the psychological well-being and motivation of deprived and dysfunctional strata of the population

Engendering networks of service-providers and customers which can later integrate into the formal, monetized economy

No inflationary ill effects

No fiscal ill effects (no budgetary deficits)

(2) Negative

Possible hoarding of vouchers (largely prevented by the introduction of beneficiary/recipient ID cards)

Vouchers are a form of money substitute. Not only do they subvert the money issuance monopoly of the central bank, they also demonetize the economy and have no multiplier effects. In other words, they create a parallel system that is detached and distinct from the main money supply transmission mechanisms and channels.

This can be overcome by limiting the amount of vouchers in circulation and their duration (expiry or maturity date). The whole operation should be carried out in coordination with the central bank and the Ministry of Finance.

Peace activists throughout the world accuse the American administration of profit-motivated warmongering. More sophisticated types remind us that it was the second world war - rather than President Franklin Delano Roosevelt's New Deal - that ended the Great Depression. "Wag the Dog" is a battle cry in Europe implying that the United States is provoking yet another conflict in Iraq to restart its stalled economy and take the collective mind off an endless stream of corporate sleaze.

In the wake of the previous Gulf war, in the Spring 1991 issue of the Brookings Review, a venerable American economist, George Perry, wrote:

"Wars have usually been good for the U.S. economy. Traditionally they bring with them rising output, low unemployment and full use of industrial capacity as military demands add to normal economic activity." According to Perry, writing long before the dotcom euphoria and slump, war is counter-cyclical.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee tends to support this view. The strongest expansions were registered during and after major crises - the Civil War, the first and second world wars, the Korea War, throughout most of the conflict in Vietnam and immediately following Operation Desert Storm, the previous skirmish in Iraq.

In the wake of September 11, US military spending is already up one tenth and poised to continue its uptrend. Defense contractors and service industries, concentrated across the southern USA stand to undoubtedly benefit after a lean decade following the unwinding of the Cold War. GDP may grow by 0.6 percent this year based on $50 billion in war-related expenditures, project DRI-WEFA for MSN's Money Central.

This is an unrealistic price tag. According to the Cato Institute, Operation Desert Storm cost $80 billion (in 2002 dollars), the bulk of which was covered by grateful allies. This war may be more protracted, less decisive and its costs are likely to be borne exclusively by the United States. Postwar reconstruction in Iraq will dwarf these outlays, even allowing for extra revenues from enhanced oil production.

DRI-WEFA present a worst case scenario in which GDP falls by 2.2% over two quarters, the Fed Funds rate ratchets up to 6% to staunch inflation, and unemployment peaks at 7.8%. Recovery is unlikely in the first 18 months of this nightmarish script.

On the minus side, the budget deficit has already ballooned, crowding out lending to the private sector, stoking inflation and threatening to reverse the downtrend in interest rates. Edward Yardeni of Prudential has demonstrated how inflation has followed every single military conflict since 1800. Ultimately, taxes are likely to rise as well.

Yet, that war impacts the timing and intensity of the business cycle is by no means universally accepted.

In an International Finance Discussion Paper titled "Money, Politics and the Post-war Business Cycle" and published by the Board of Governors of the Federal Reserve system in November 1996, the authors, Jon Faust and John Irons, sweepingly dismiss "political effects on the economy". "If they exist" - they add - "they are small and difficult to measure with confidence."

David Andolfatto, from the Department of Economics of Simon Fraser University in British Columbia, Canada, in his "U.S. Military Spending and the Business Cycle" dated October 2001, quotes an email sent to him by one of his students:

"I heard someone say that the US government tends to 'find themselves in war' every time they are in a recession. This person also claimed that the increased government expenditures on war pulled the US out of each of the last few recession they've been in. Furthermore, this person said that the 'military industry' is one of the biggest industries in the US, which is why greater government expenditures on war always pull the US out of recessions ... the boom the US had in the last decade was in large part attributed to all their considerable military effort..."

Andolfatto then proceeds to demolish this conspiratorial edifice. Military spending per adult in the USA has remained constant at $2000 between 1947-2000. It actually declined precipitously from 15 percent of gross domestic product during the Korea War to 4-5 percent today. Military buildups - with the exception of the Gulf War - mostly happen during peacetime.

During the Unites States' recent spate of unprecedented prosperity in the 1990s, military layouts actually shrank. When they did expand in 1978-1987, the economy endured at least one serious recession (1979-1983). In reality, changes in military expenditures lag changes in GDP. Surprisingly, mathematical analysis reveals that GDP growth does not respond measurably to unexpected surges in military spending. Rather, military budgets swell when GDP suddenly increases.

But this is a minority view. Even economists who dispute the economic schools of shock-driven cycles admit that war does affect the economy. Theoretically, at least, government spending, investment decisions and consumer confidence should be affected.

Jonas Fischer at the Chicago Federal Reserve Bank claims that real business cycle models cannot account for the response to fiscal shocks of real wages and hours worked, unless they unrealistically assume that marginal income tax rates are constant and that increased government purchases are financed in a specific manner.

In any case, war, or a commensurate military buildup, do cause expansionary deficit-financed government purchases, employment, output and nonresidential investment to rise while real wages, residential investment and consumption fall. This is compatible with the predictions of neo-classical business cycle models.

There are longer-term effects. According to Martin Eichenbaum from Northwestern University, productivity in the manufacturing sector declines - though it rises in the private sector as a whole. Ultimately, the production of durable goods contracts and interest rates, having initially dropped, end up rising. Marginal income tax rates tend to mount post conflict.

Consumers and investors are inclined to postpone big-ticket decisions in times of uncertainty. Hence the adverse reaction of the capital markets to the recent crisis over Iraqi disarmament. With the exception of the Gulf War and the Cuban Missile Crisis, the Dow Jones Industrial Average has always crumbled in the face of hostilities, only to skyrocket when the situation stabilized and certainty was restored.

The DJIA went down 12 percent when the Korean War broke in 1953 - only to reverse the entire loss and climb yet another 18 percent in the following 3 months. After September 11, 2001 it plunged 14 percent and then clawed back the shortfall and soared an extra 21 percent by the yearend.

After the first victorious day in Operation Desert Storm, stocks surged by 4.6 percent on Jan. 17, 1991, by another 7 percent in the following 30 days and by a total of 25 percent in the next 2 years. According to Ned Davis Research, quoted by USA Today, the Dow has risen on average by c. 15 percent in the year after every triumphant excursion by America's military. Messier conflict, though - like the Vietnam War - induce no exuberance, it seems.

The Gulf War was preceded by a brief recession in the United States. The Dow lost one fifth of its value. Unemployment soared. House prices fell and so did retail sales. When the war erupted, business in shopping malls, car dealerships and airlines ground to a halt. The spike in oil prices added to their woes.

But the recession lasted merely nine months and ended officially a month before the actual invasion of Kuwait by Iraq. It was followed by the longest expansion on record. It affected both sides of the Atlantic. This, despite the fact that the economy was in bad shape long before Saddam's antics. Interest rates stood at about 8 percent, inflation was running at double the current rate and President George Bush Sr. raised taxes rather than lower them, as his son has done.

Was the quiver in 1991-2 induced by the war in Iraq - or by the contraction of defense and aviation industries following the end of the Cold War? Probably the latter.

But talking about a uniform trend in a country as vast as the United States is misleading. As Knight Kiplinger, editor-in-chief of the Kiplinger Letter notes, regions and industries in the USA have endured recessions even as the entire economy boomed.

So, is war good for business?

Depends on which economist you happen to ask. Some would say that war reflates the economy, re-ignites the economic engine, generates employment, increases consumption, innovation and modernization. Others, that it is merely a blip. The truth is out there but don't count on the dismal science to reveal it.

Until recently, the very existence of business (trade) cycles was called into question by the devotees of the New Economy. It took a looming global recession to convince wild-eyed optimists that old cycles are more reliable guides than any new paradigm. Even now, three years later and still in the throes of a meltdown of capital and real markets on both sides of the Atlantic, the voguish belief in the demise of pre-1990s economics is alive and well.

Consider inflation.

Even conservative voices, such as The Economist reassure us that consumer price inflation is dead and that policymakers should concentrate on the risk of deflation brought on by asset disinflation. Central bankers - particularly Alan Greenspan the mythical Chairman of the Federal Reserve - are castigated for adhering to outmoded schools of thought and for fighting the last war (against inflation), or the wrong one (artificially perking up the stock markets).

The Economist was among the most consistent and persistent critics of the New Economy. Yet, by preaching that certain economic phenomena - notably inflation - are "over" it has joined, unwittingly, a growing camp of "revisionist" economists who spot the demise of the business cycle.

As recapped by Victor Zarnowitz, the research director of the Foundation for International Business and Economic Research in New-York, the optimists believed that downsizing, new technologies, inventory control, the predominance of the services sector, deregulation, better government and globalization have rendered boom and bust a thing of the past.

They tended to tone down the roles of earnings, inventories, investment and credit, the drivers of the "now defunct" classical business cycle. They also largely ignored the interplay between different sectors of the economy and between entwined national economies - continuous interactions which determines inventory planning, the level of wages and pricing. The purported connection between the money supply and output was largely discounted as unproven.

The consensus now, though, is that the cycle is alive and well, though it is less volatile and more subdued. Economies spend less time in recession than they used to until 1980. The cycle is still susceptible, though, to exogenous shocks, such as war, or an abrupt increase in the price of oil. Bursting asset bubbles, if they become more frequent in the future due to financial liberalization, globalization and unbridled credit growth, may restore past volatility, though.

Another ominous phenomenon is the synchronization of recessions and expansions across continents. According to the International Monetary Fund, gross capital flows has exceeded $7.5 trillion globally in 2000 - four times the amount of money sloshing around in 1990. Foreign portfolio assets doubled as a percentage of household assets.

The ratio of merchandise exports to world output has long exceeded its 1913 level, the previous record year. Such unhindered exchange exerts similar influences on countries as far apart as Germany, the United states, Argentina and Singapore - all in the throes of a concurrent recession.

Still, expansions continue to be restricted by the increase in population, net investment and, importantly, technological innovation. The downside is also limited by population increase, government policy on income support and investment. The economy fluctuates to adjust itself to these constraints. The business cycle is a symptom of this process of adaptation.

The waxing and waning of credit made available by alternately over-optimistic and over-cautious financial intermediaries plays a crucial part. Fiscal policy - which affects investment and employment - also matters as do foreign trade, monetary policies and the reaction of the financial markets.

The business cycle typically passes through seven phases correlated with the fluctuations in the output gap - the difference between an economy's actual and potential gross domestic product. Cycles are self-perpetuating, though they can be hastened by exogenous shocks, such as a precipitous rise in oil prices or a protracted military campaign. They can also be smoothed or ameliorated by the operation of automatic fiscal stabilizers and appropriate counter-cyclical government policies.

Centuries of cumulative experience allow us to identify these stages better than ever before, though timing them with any accuracy is still impossible. They are based on the shifting balance between the emotions of greed and fear - as immutable as human nature itself.

Every economic cycle invariably starts with inflation. The previous sequence having ended - and the new one just begun - the environment is mired in uncertainty. In the wake of a recession, often coupled with deflation, goods and services are (absolutely) scarce and money is (relatively) abundant.

When too much money chases few products, the general price level rises. But this constant and ubiquitous increase (known as "inflation") is also the outcome of mass psychology. Households and firms compensate for the aforementioned high degree of uncertainty (that is, of risk) by raising the prices they charge. Market signals are thus garbled by psychological noise and uncertainty increases. It is a vicious cycle: inflation brought on by uncertainty only serves to enhance it.

Ignorant of the appropriate or optimal equilibrium price level, everyone is trying to stay ahead of perceived economic threats and instabilities by increasing the risk premiums that they demand from their customers. On their part, consumers are willing to pay more today to avoid even higher prices tomorrow.

Inflation appears to be a kind of market pathology, or a market failure. But the psychological underpinnings of inflation have been thoroughly dissected in the last few decades. It is the source and dynamics of economic uncertainty that remain obscure.

Inflation disguises the suboptimal and inefficient economic performance of firms and of the economy as a whole. "Paper" profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks are distorted and prevent meaningful analyses and well-founded decision making.

Inflation leads to technological and economic stagnation. Pecuniary aspects are emphasized while industrial and operational ones are neglected. Financial assets are preferred to investments in machinery, infrastructure, research and development, or marketing. This often yields stagflation - zero or negative growth, coupled with inflation.

In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. This forces firms to innovate and streamline. Efficiency, innovation, entrepreneurship, productivity and competitiveness are the buzzwords of this phase.

As trade barriers fall, cross border capital flows and investments increase, productivity gains and new products are introduced. The upward price spiral is halted and contained. The same amount of money buys better, more reliable products, with added functionality.

The rise in real incomes results in increased demand. The same dose of working capital generates more production. This is technological deflation. It is beneficial to the economy in that it frees economic resources and encourages their efficient allocation.

Increased consumption (both public and private) coupled with a moderate asset price inflation prevent an outright downward spiral in the general price level (monetary deflation). Moreover, as Jeffrey Miron demonstrated in his book, "The Economics of Seasonal Cycles", output growth causes a surge in money supply.

These conflicting influences allow inflation to remain within a sustainable "band". This transitory phase - from hyperinflation or high inflation to a more supportable plateau - is known as "disinflation". It usually lasts one or two decades.

Various studies have shown that the revolutions in knowledge, communications and transportation technologies have shortened both the cycle and every stage in it. This is attributed to the more rapid dissemination and all-pervasive character of contemporary information.

The values of important parameters such as the equilibrium general price level and other gauges of expectations (such as equity prices) are all determined by data. The more information is available more readily - the more efficient the markets and the shorter and the speedier the business cycles. This enhances the false perception that modern markets are inherently unstable. Yet, rapid cycling does not necessarily imply instability. On the contrary, the faster the adjustments in the marketplace - the more efficient the mechanism is.

The psychological wellbeing and reassurance brought on by disinflation generate demand for assets, especially yielding ones (such as real estate or equities). The more certain the future value of streams of income, the more frequently people transact and the more valuable assets become.

Assets store expectations regarding future values. An assets bubble is created when the current value (i.e. price) of money is low compared to its certain future value. This is the case when prices are stable or decreasing. Stock exchanges and real estate then balloon in irrational exuberance out of proportion to their intrinsic (or book) value.

All asset bubbles burst in the end. This is the fifth phase. It signifies the termination of the bull part of the cycle. Asset prices collapse precipitously. There are no buyers - only sellers. Firms find it impossible to raise money because their obligations (commercial paper and bonds) are not in demand. A credit crunch ensues. Investment halts.

The bursting of an assets bubble generates asset price deflation. The "wealth effect" is replaced with a "thrift effect". This adversely affects consumption, inventories, sales, employment and other important angles of the real economy.

The deflationary phase, on the other hand, is usually much shorter. People do not expect it to last. They fully anticipate inflation. But though not assured of low prices, they are so preoccupied with economic survival that they become strongly risk averse. While in times of inflation people are looking for ways to protect the value of their money - in times of deflation people are in pursuit of mere livelihood. A dangerous "stability" sets in. People invest in land, cash and, the more daring, in bonds. Banks do the same. Growth grinds to a halt and then reverses.

If not countered by monetary and fiscal means - a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets - a monetary deflation might set in.

Full-fledged deflations are rare. Outright or growth recessions, business slumps, credit crunches, slowdowns - are more common. But a differentiated or discriminatory deflation is more common. It strikes only certain sectors of the economy or certain territories.

A monetary deflation - whether systemic or specific to certain industries - is pernicious. Due to reversed expectations (that prices will continue to go down), people postpone their consumption and spending. Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. This is known as a "liquidity trap".

Investment and production slump and inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases ("debt deflation"). Coupled with declining asset prices, deflation leads to bank failures as a result of multiple debts gone sour. It is a self- perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle: reflation.

The market's failure, at this stage, is so rampant that all the mechanisms of self-balancing and allocation are rendered dysfunctional. State intervention is needed in order to restart the economy. The authorities need to inject money through a fiscal stimulus, to embark on a monetary expansion, to lower interest rates, to firmly support the financial system and to provide tax and other incentives to consume and to import.

Unfortunately, these goals are best achieved militarily. War reflates the economy, re-ignites the economic engine, generates employment, increases consumption, innovation and modernization.

Still, with or without war, people sense the demise of an old cycle and the imminent commencement of a new one, fraught with uncertainty. They rush to buy things. Because the recessionary economy is just recovering from deflation - there aren't usually many things to buy. A lot of money chasing few goods - this is the recipe for inflation. Back to phase one.

But the various phases of the cycle are not only affected by psychology - they affect it.

During periods of inflation people are willing to hazard. They demand to be compensated for the risk of inflation through higher yields (returns, profits) on financial instruments. Yet, higher returns inevitably and invariably imply higher risks. Thus, people are forced to offset or mitigate one type of risk (inflation) with another (credit or investment risk).

Paradoxically, the inflationary segment of the business cycle is an interval of certainty. That inflation will persist is a safe bet. People tend to adhere to doctrinaire schools of economics. Based on the underlying and undeniable certainty of ever-worsening conditions, the intellectual elite and decision-makers resort to peremptory, radical, rigid and sometimes coercive solutions backed by ideologies disguised as "scientific knowledge". Communism is a prime example, of course - but so is the "Free Market" variant of capitalism, known as the "Washington Consensus", practiced by the IMF and by central bankers in the West.

Countries with a non-convertible currency and a developing economy more and more often face low intensity and prolonged guerilla warfare which leads to a gradually worsening economic situation.

Measures number 2C, 4, 6A, 6B, 7, 9, 11A, 11B below are applicable to such a situation.

Another scenario is a crisis in balance of payments. The country then often seeks trade relief under GATT or WTO rules and multilateral financial aid packages (such as the IMF's CCF).

These measures are then applicable:

1B-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 7, 8, 9, 11C, 11D, 11E, 11F.

The last and worst scenario is an unmitigated, all out, state of war.

These measures would then apply:

1A-1H, 2A, 2B, 2C, 2D, 2E, 3, 4, 5, 6A, 6B, 6C, 6D, 6E, 7, 8, 9, 10, 11C, 11D, 11E, 11F, 12, 13.

1. Foreign Exchange Regime and Capital Controls

1A. The central bank can fix the exchange rate or establish a currency board

2A. Certain types of reserves of the banks with the central bank – for lending to import businesses, for instance - are increased

Increases in Lombard and discount rates to offset speculation against the currency.

Reduce the period for repatriation of export proceeds.

Prohibition on import of luxury goods and non-commercial vehicles.

6A. Ceiling budgeting (the imposition of ceilings on item expenditures and micromanagement of the accounts of the budget users)

IMF facilities under an arrangement

Donor Conferences

War effort bonds – voluntary (firms with turnover above a certain amount are "encouraged" to purchase the bonds through tax incentives)

War budget items can be part of the current budget.

Freeze on wages

11A. Decision on which goods are to be included in the strategic reserves (oil, food)

Suspension of tax reductions in existing laws

Rationing of essential goods (oil, food)

As its disintegration in 1992 has proven, Czechoslovakia may have been merely an artificial multi-ethnic chimera. But it was also an industrial and military powerhouse. In the fateful 1930's, its - mainly heavy - industry was the 7th largest in the world. Even the Germans were awed by its well equipped and well trained army.

The Sudeten was a region of Czechoslovakia bordering on Germany and Austria and inhabited mainly by Germans. The new-fangled country incorporated more than 3 million Germans in what used to be Austrian Silesia. These Germans, once members of the ruling majority in the Austrian Empire - became overnight a minority subjected to subtle forms of discrimination in their new country.

The Germans - a hostile and restless lot - demanded to have an autonomy, which Czechoslovakia refused to grant them. It feared that the Germans will secede and join Hitler's emerging "Great Reich". Such calamity would have deprived Czechoslovakia of important industrial and mineral assets and of its rail links to northern Europe. The Sudeten was also a formidable natural barrier against an imminent German invasion.

Unemployment and inflation further radicalized the Sudeten Germans. Support for Hitler and his pan-Germanic policies increased with every bloodless and bold German victory: the militarization of the Rhineland and the Anschluss (the unification with Austria). The extremist Sudeten German party, led by the Nazi puppet Konrad Henlein, blossomed after 1938.

Henlein sought the dissolution of Czechoslovakia, "this French air carrier in Europe's midst", in Hitler's words. The Germans demanded to exercise the right to self-determination enshrined in numerous international treaties. The status of the German language was a major issue as was the local participation of Germans in the police forces and army. Hitler instructed Henlein: "You must always demand so much that you cannot be satisfied."

"Spontaneous" demonstrations, protests, and riots erupted all over the Sudetenland. The Czechoslovaks were cast by Hitler and the West as intransigent racists, bigots, and bullies. The economies and armies of France and Britain were pitifully unprepared for war. Western leaders were traumatized by the great conflagration of 1914-8. They were reflexive appeasers and pressured Czechoslovakia into making one unpalatable concession after another.

Britain and France bullied Czechoslovakia by annulling their mutual defense pacts. Bonnet, France's Minister of Foreign Affairs advised the Czechoslovaks not to be "unreasonable". Otherwise, he warned, France will "consider herself released from her bonds". Halifax, the British Foreign Minister, enlightened his Ambassador in Paris about the "importance of putting the greatest possible pressure on Dr. Benes (Czechoslovakia's president) without delay".

The Sudeten Germans have, in the meantime, established militias and clashed with Czechs in mixed towns. An "independent" British mediator - Lord Runciman - was dispatched to arm twist the Czechoslovaks. His instructions were to prevent war at all costs. "We will use the big stick on Benes" - thus Cadogan, permanent under-secretary in the British Foreign Office.

Henlein kept raising new demands or reviving old ones. On September 4, 1938, an exhausted President Benes accepted all German demands. This was rejected by both Henlein and Hitler as "too late". Even a pro-German idea of referendum in the Sudetenland was rebuffed by Hitler.

Finally, the French and the British presented this ultimatum to democratic, multiethnic Czechoslovakia, on September 22, 1938 - Quoted in "On the Origins of War and the Preservation of Peace" by Donald Kagan:

"One - That which has been proposed by England and France is the only hope of averting war and the invasion of Czechoslovakia.

Benes accepted this ultimatum. Hitler demurred. Now he demanded that German troops occupy parts of Czechoslovakia to protect rioting Sudeten Germans from Czechoslovak retribution. In the Munich Conference of the leaders of the West these demands were essentially accepted and Czechoslovakia was no more. Hitler conquered it, in stages, and assimilated it in the German Reich.

The infamous British Prime Minister, Neville Chamberlain made this radio address to the British people in the heat of the crisis on September 27, 1938:

"How horrible, fantastic, incredible it is that we should be digging trenches and trying on gas masks here because of a quarrel in a far-away country between people of whom we know nothing ... However much we sympathize with a small nation confronted by a big and powerful neighbors, we cannot in all circumstances undertake to involve the whole British Empire in war simply on her account. If we have to fight it must be on larger issues that that."

Between 1940, while still in exile in London, and 1946, when Czechoslovakia was reconstituted, president Benes issued a series of decrees, later made law by the Czechoslovak provisional national assembly. The decrees mandated the expulsion of 2.5 million Germans and tens of thousands of Hungarians from Czechoslovakia, expropriating their land and stripping their citizenship in the process. A few German males were subjected to forced labour.

The laws were never repealed and, technically, are still in force. Statutes of restitution enacted after the 1989 Velvet Revolution apply only to property confiscated by communists after the 1948 coup. The Czechs and Slovaks are still afraid of a flood of claims by relatives of the refugees.

Hungary's prime minister, Orban, repeatedly called on Prague and Bratislava to rescind the decrees. They are incompatible with EU membership, he thundered. The EU seems to unofficially agree with him. Officially, Gunther Verheugen, the EU Commissioner for Enlargement said that the decrees were issued long before there was a European Union and, therefore, should have no effect on EU-Czech relations. The European Parliament disagrees. It has called upon the Czech Republic in 1999 to revoke the laws and it has ordered its foreign policy commission to scrutinize the legality of the decrees.

The German Chancellor, Schroeder, cancelled a trip to the Czech Republic in March 2002. Joschka Fischer, the German foreign minister, said the decrees were the biggest obstacle to bilateral relations - despite a 1997 joint declaration that seemed at the time to have resolved the differences.

The decrees became an election campaign issue in these four central European countries. An association of Sudeten Germans based in Austria is preparing to sue the Czech government in a Czech court, aiming to, as they put it "rectify damages resulting from the decrees' infringement on human rights".

Another, US-based group, is contemplating a similar move, according to "Forward Magazine". A lawsuit was filed by Sudeten Germans located in Germany against the German authorities for failing to act to countermand the Benes Decrees.

Czechs are not unanimous about the decrees either. A former presidential advisor, Jiri Pehe, told Radio Free Europe/Radio Liberty:

"I think that from the whole package of decrees, [parliament] should repeal those decrees which massively violated human rights and were essentially undemocratic, because not all the decrees issued by President Benes were like that. Decision making through decrees in the first months after the war was a legitimate component of the Czech legal order. To that end, the decrees were ratified by the provisional parliament."

A group of prominent Czechs, including Bishop Vaclav Maly, is circulating a "Stop Nationalism" petition, urging politicians not to exploit the controversy in the run-up to the June elections.

But the Czech Republic's former - and possibly future - outspoken prime minister, Vaclav Klaus, suggests to embed the decrees in the country's accession agreement with EU in order to render them tamper-proof. Zeman, the current Czech premier labeled the Sudeten Germans "Hitler's fifth column" and "traitors" in an interview in an Austrian magazine.

The reparations demanded by the Sudeten Germans ever since they filed a petition with the UN in 1975, potentially amount to tens of billions of US dollars. They cover confiscated bank accounts, annulled insurance policies, land, property, artifacts, and compensation for slave labour and wrongful deaths.

It is an irony of history that the struggle of the Sudeten Germans is greatly aided by the recent successful settlement of claims of - mostly Jewish - holocaust victims.

US House of Representatives Resolution 562 dated October 13, 1998 - in support of these claims - calls upon "countries which have not already done so to return wrongfully expropriated properties to their rightful owners or, when actual return is not possible, to pay prompt, just and effective compensation, in accordance with principles of justice...to remove restrictions which limit restitution or compensation ...to persons who reside in or are citizens of the country..."

As early as 1952, West Germany has enacted the Federal Indemnification Law (BEG). Other laws aimed at compensating the victims of the holocaust followed in 1953, 1956, and 1965. Austria has similar legislation on its books. But, contrary to popular mythology, these laws were shamefully stingy and heartless. They have mostly lapsed now.

Survivors were given small monthly sums to amortize health care and medical costs. Eligibility criteria were so strict and application procedures so convoluted that a cottage industry of restitution lawyers and advisors has sprung up.

Some victims still receive monthly allowances from the German social security fund. The slave labour of a few workers is even recognized for the purpose of accumulating pension benefits. A tiny group of mothers receive symbolic child rearing benefits. The State of Israel support the vast majority of these crippled and traumatized people from funds it allocates under its Invalids and Nazi Prosecution Law.

Despite the fact that the holocaust occurred mainly in central and eastern Europe, holocaust survivors behind the iron curtain were ineligible for German compensation. A "Hardship Fund" was set up in 1980 and paid 5,000 DM to 180,000 claimants from these countries. But Jews residing in the region are still not eligible to any other kind of aid - 13 years after the downfall of communism.

In response to repeated complaints, the German government has set up a Central and East European Fund (CEEF). It pledged to contribute to CEEF $180 million in 4 annual installments starting in 1999. By end 2001, the Fund has paid c. $150 million to more than 17,000 survivors, with maximum monthly benefits of $120.

All told, the Germans allocated $220 million to victims from Poland and less than $470 million to survivors from Russia and Ukraine combined. More than 4.5 million people perished in these three countries - exterminated in camps such as Auschwitz. At least 10,000,000 people served as slave laborers between 1933-1945, enriching a clutch of German firms and senior Nazis in the process. About 2,000,000 of them are still alive.

It took decades of negotiations - and a re-unified Germany - to secure funds for formerly ineligible survivors. The Article 2 Fund was established in 1993. The very few who fulfill the myriad, cumulative, conditions, receive less than $250 a month. Germany claims that since it has provided 12 west European governments with "global compensation" funds between 1959 and 1964, their subjects are not eligible either.

Austria set up its compensation fund in 1995, conveniently well after most of the victims died. The maximum indemnity Austria pays is $6000 per person. In a typically cynical fashion, Austria auctioned off art looted from the Jews in 1996 and used the proceeds to compensate the victimized former owners through its Mauerbach Fund.

The governments of formerly Nazi-occupied territories proved sometimes to be more generous than the perpetrators. Denmark and the Netherlands financially support disabled victims to this very day. Norway established in 1999 a $58 million fund for its few remaining Jews. Even Switzerland founded, in 1997, Shoa - a $183 million fund for 310,000 Needy Victims of the Holocaust.

The corporate and banking sectors were next.

Following intensive public pressure by Jewish organizations - and a thinly-disguised anti-Semitic backlash - funds to compensate slave laborers were set up by various firms (Siemens, Volkswagen). Allianz, BASF, Bayer, BMW, DaimlerChrysler, Deutsche Bank, Degussa-Hüls, Dresdner Bank, FrieDrive Krupp, Hoesch-Krupp, Hoechst, Siemens and Volkswagen and 50 other wartime exploiters - boosted by matching funds from the German federal authorities - grudgingly and reluctantly formed a "Foundation Initiative of German Firms: Memory, Responsibility and Future." The Foundation has $5 billion to distribute to slave laborers and their descendants.

In August 1998, Switzerland's two major banks, UBS and Credit Suisse, agreed to set up a $1.25 billion fund to settle claims by holocaust survivors and their relatives. The red-faced Swiss government threw in $210 million. It seems that banks - from the USA to Switzerland - were in no hurry to find the heirs to the murdered Jewish owners of dormant account with billions of dollars in them.

A settlement was reached only when legal action was threatened against the Swiss National Bank and both public opinion and lawmakers in the USA turned against Switzerland. It covers owners of dormant accounts, slave laborers, and 24,000 refugees turned back to certain death at the Swiss border - or their heirs.

A high level international commission, headed by Paul Volcker, a former chairman of the Federal Reserve Board, identified 54,000 accounts opened by holocaust victims - not before it inspected 350,000 accounts at an outlandish cost, borne by the infuriated banks, of $400 million. A similar - though much smaller ($45 million) settlement was reached with Bank Austria and Creditanstalt of Vienna. Another $2 billion are claimed from 9 French banks.

Five major insurance firms - Allianz AG, AXA, Generali, Zurich and Winterthur Leben - formed an International Commission on Holocaust Era Insurance to deal with unresolved insurance claims of holocaust victims. Assicurazioni Generali went ahead and set aside $12 million in a compensation fund. But the claims may total $1 to 4 billion.

Surprisingly, calls for the restitution of Jewish real-estate, property, bank accounts, insurance policies, and art works confiscated by the Nazis and their collaborators are fairly recent. The International Committee on Restitution took until 1999 to appeal to the Austrian government to restore assets to their rightful Jewish owners.

Governments from Austria to France and from Belgium to the Netherlands appointed commissions to investigate Jewish claims. The United Kingdom has posted to the Internet a list of tens of thousands of assets confiscated - mostly from refugee Jews - under the 1939 Trading with the Enemy law.

More than $60 million were set aside by 18 governments in the 1997 London conference on Nazi gold. A French commission, chaired by Jean Matteoli, a resistance fighter, identified $1 billion in expropriated Jewish property, including 40,000 apartments and hundreds of thousands of works of art.

According the World Jewish Congress, Germany and Poland confiscated $3 billion of Jewish property each (in 1945 values), Romania and France - $1 billion each, the Czech Republic and Austria - c. $700 million each. Hungary saw $600 million appropriated and the Netherlands - $450 million. Russia still holds 200,000 looted works of art. Plundered pieces by Monet and van Gogh, among others, were identified and restored to their Jewish owners all over the world - from Boston to Berlin.

Matters are more complicated in eastern Europe where the concept of property rights is novel and communist confiscations followed Nazi ones, hopelessly complicating the legal situation. Moreover, victims and survivors of waves of ethnic cleansing have recently lodged claims with post-communist governments. Macedonians from the Aegean part of Greece, recently repatriated Kosovars, Serbs expelled from Croatia, Croats exiled from Serbia, Hungarians everywhere - are all studying the Jewish example and its precedents thoroughly.

The Bulgarian ministry of finance has just announced that it will pay reparations to some of the 350,000 Turks forcibly expelled from Bulgaria to Turkey during Zhivkov's communist regime in 1984-89. The Haskovo City Council demanded compensation for 550 bulldozed houses.

The government - which includes in its coalition the ethnic-Turkish Movement for Rights and Freedoms (DPS) - agreed to cough up the funds. The accommodation of such demands for compensation by an ethnic minority is unprecedented. It could be the harbinger of massive, politically destabilizing, claims, expensive court battles, and multi-billion dollar settlements.

This tidal wave is not confined to Europe. Aborigines in Australia, descendents of slaves in the States, Japanese-Americans incarcerated during WWII are all suing. "The Economist" wrote in its review of Elazar Barkan's "The Guilt of Nations":

"Negotiations over these claims are not really about the past, but the future. However they are resolved, they give victims, usually the poor and dispossessed, a voice and a reason to believe that they have a stake in their society. And such negotiations force the better-off to recognise their obligations to those beneath them in the pecking order. A society which can face the ugly episodes in its own history, and agree a way to repudiate them, is also a society capable of setting moral standards for itself, of constraining its own worst instincts, and of aspiring to a better future."

Water

Growing up in Israel in the 1960's, we were always urged to conserve precious water. Rainfall was rare and meager, the sun scorching, our only sweet water lake under constant threat by the Syrians. Israelis were being shot at hauling water cisterns or irrigating their parched fields. Water was a matter of life and death - literally.

Drought often conspires with man-made disasters. Macedonia experienced its second worst dry spell during the civil strife of last year. Benighted Afghanistan is having one now - replete with locusts. Rapid, unsustainable urbanization, desertification, exploding populations, and economic growth, especially of water-intensive industries, such as microprocessor fabs - all contribute to the worst water crisis the world has ever known.

Governments reacted late, hesitantly, and haltingly. Water conservation, desalination, water rights exchanges, water pacts, private-public partnerships, and privatization of utilities (e.g., in Argentina and the UK) - may have been implemented too little, too late.

Rising incomes lead to the exertion of political pressure on the authorities by civic movements and NGO's to improve water quality and availability. But can the authorities help? According to the World Bank, close to $600 billion will be needed by 2010 just to augment existing reserves and to improve water grade levels.

The UNDP believes that half the population in Africa will be subject to wrenching water shortages in 25 years. The environmental research institute, Worldwatch, quoted by the BBC, recommends food imports as a way to economize on water.

It takes 1000 tons of water to produce 1 ton of grain and agriculture consumes almost 70 percent of the world's water - though only less than 30 percent in OECD countries. It takes more than the entire throughput of the Nile to grow the grain imported annually by Middle Eastern and North African countries alone. Some precipitation-poor countries even grow cotton and rice, both insatiable crops. By 2020, says the World Water Council, we will be short 17 percent of the water that would be needed to feed the population.

The USA withdraws one fifth of its total resources annually - proportionately, one half of Belgium's drawdown. But according to the OECD, Americans are the most profligate consumers of fresh water, more than double the OECD's average in the 1990's. Britain and Denmark have actually reduced their utilization by 20 percent between 1980 and 1996 - probably due to sharp and ominous drops in their water tables.

Stratfor, a strategic forecasting firm, reported on May 14, 2002 that Mexico and the USA are in the throes of a conflict over Mexico's "failure to live up to its water supply commitments under a 1944 treaty", which allocates water from the Colorado, Rio Concho, and Rio Grande among the two signatories.

Mexico seems to have accumulated a daunting debt of 1.5 million acre-feet between 1994-2002 - the result of a decade long drought. Each acre-foot is c. 1.2 million liters. Mexico's reservoirs are less than 25 percent full. Some of the water, though, has been used to transform its borderland into a major producer of fresh vegetables for the American market - at the expense of Texas farmers.

Faced with the worst drought in more than a century in some states, the Bush administration has announced on May 3, 2002 that it is considering sanctions, including, perhaps the suspension of water supplies from the Colorado to Mexico. Texas lawmakers demanded to re-open NAFTA and amend it punitively.

Mexico is a typical case. Only 9 percent of its streams and rivers are fit for drinking. Its underground water is almost equally polluted. Its infrastructure is crumbling, leading to severe seepage of more than two fifths of the water. Half of the rest evaporates in open canals.

Moreover, water is under-priced, thus encouraging wasteful consumption, mainly by farmers. Stratfor cites an estimate published in the May 5, 2002 issue Fort Worth Star-Telegram - more than $60 billion will be needed over the next decade to refurbish Mexico's urban and rural networks.

William K. Reilly, former administrator of the EPA, writing in the "ITT Industries Guidebook to Global Water Issues", mentions the human cost of water scarcity: a million dead children a year, a billion people without access to treated water, almost double this number without sanitation.

More than 11,000 people died in a cholera epidemic induced by polluted water in Latin America in the 1990's. Every year, according to the World Bank, the amount of water polluted equals the quantity of water consumed. In many parts of the world, notably in Africa, people walk for hours to obtain their contaminated daily water rations.

Water shortage hobbles industrial production in places as diverse as Sicily and Malaysia. The lower estuaries of the Yellow River - China's most important - are now dry two thirds of the year. The water table beneath China's fertile northern plane is falling by 1.5 meters a year.

The drought in Sri Lanka is so severe and so prolonged that the International Red Cross had to intervene and launch an appeal for emergency funds. The Mekong River, which flows from China to Vietnam, is being obstructed by 7 Chinese dams under construction. Once completed, its flow will be reduced by half.

Close to 200 million people in seven countries will be affected. In a retaliatory move, Laos is planning to hold back c. 70 percent of its contribution to the Mekong by constructing 23 dams. Thailand follows with 20 percent of its contribution and a mere 4 dams. Vietnam is likely to pay the price of this "dam war". Thailand is sufficiently rich to simply buy the water it needs from its truculent neighbors.

Australia is in no better shape. The diversion of Snowy River inland led to massive salinization of the lands it irrigates - Australia's bread basket. Many of the tributaries are now unfit for either irrigation or drinking. In India, the holy river, Ganges, is depleted and impregnated with poisonous arsenic.

A long running dispute is simmering between India and Bangladesh regarding this dwindling lifeline, recent progress in negotiations notwithstanding. This is reminiscent of a low intensity conflict that has been brewing along the banks of the Nile between an assertive Egypt and the encroaching Sudan and Ethiopia since the Nile Basin Initiative has been signed in 1993.

A July 2000 conference of the riparian states, backed by the likes of the World Bank and the United Nations, eased the tension somewhat by promulgating a workable plan to redistribute the African river's throughput. The emphasis in the February 2001 meeting of the International Consortium Cooperation on the Nile, though, was on hydro-power over the contentious minefield of water usage rights.

Turkey is constructing more than two dozen dams on the Tigris and Euphrates within the Southeastern Anatolia Project (GAP). Once completed, Turkey will have the option to deprive both Syria and Iraq of their main sources of water, though it vowed not to do so. In a cynical twist, it offers to sell them water from its Manavgat river. Iraq's own rivers have shriveled by half. Still, this is the less virulent and violent of the water conflicts in the Middle East.

Israel controls the Kinneret Sea of Galilee. It is the source of one third of its water consumption. The rest it pumps from rivers in the region, to the vocal dismay of Syria, Lebanon, and Jordan. Despite decades of indoctrination, Israelis are water-guzzlers. They quaff 4-6 times the water consumption of their Palestinian and Arab neighbors.

"The Economist" claims that:

Only two decades ago, the Aral Sea featured in encyclopedias as the world's fourth largest inland brine. In a typical hare-brained subterfuge, the communists diverted its two sources - the Amu Darya and Syr Darya - to grow cotton in the desert. The "sea" is now a series of disconnected, toxic, patches overlaid on a vast wasteland of salt.

But excess water can be as damaging to multilateral relationships - and to the economy - as scarcity. Floods brought on by the Zambezi River have devastated the countries on its path, despite their efforts to harness it. Often, these calamities are man-made. Zimbabwe wrought a deluge upon its region by opening the gates of the Kariba dam on March 2000. The countries of West Africa, from Ghana to Mali are "one river states". Their fortunes rise and fall with the flow and ebb of waterways.

Sometimes watercourses are conduits of destruction and death. A single - though massive - chemical spill in Romania on January 31, 2000 devastated the entire Tisa River which runs through Yugoslavia and Hungary. Only when the waste reached the Danube did the West wake up to the danger.

Nor are these phenomena confined to the poor precincts of our planet. The people of Catalonia in Spain are thirsty. They contemplate diverting water from the river Rhone in France to Barcelona. A five years old government plan to redistribute water from rain-drenched regions to the arid 60 percent of Spain meets with stiff domestic resistance. The Ogallala aquifer in the USA, its largest, has been depleted to near oblivion. The BBC estimates that it lost the equivalent of 18 Colorado rivers by 2000.

All the lakes around Mexico City have dried and it is now sinking into the cavernous remains of its withered reservoirs. Soil subsidence is a major problem in cities around the world, from Bangkok to Venice. According to "The Economist", the town of Cochabamba in Bolivia, once a florid valley is now a dust bowl. Some of its residents receive water only a few hours every two or three days. A World Bank financed project attempts to pipe the precious liquid from mountain rivers near the city.

Singapore, concerned by its dependence on water from capricious Malaysia, decided in November 2001 to purchase water from private sector suppliers who will be required to build one or more desalination plants, capable of providing it with 10% of its annual consumption.

Singapore is so desperate, it even considered importing water from the strife-torn (and now tsunami-devastated) Aceh province in Indonesia. The cost of Malaysian fresh water skyrocketed following a bilateral accord with Singapore signed September 2000.

Control of water sources has always served as geopolitical leverage. In Central Asia, both Kyrgyzstan and Tajikistan often get their way by threatening to throttle their richer neighbors, Kazakhstan and Uzbekistan - and by actually cutting them off from the nourishing rivers that traverse their territories. This extortion resulted in inordinately cheap supplies of gas, coal, and agricultural products.

To avoid such dependence, Turkmenistan has decided to divert water from the catchment basin of one of the rivers - the Amu Darya - to a $6 billion artificial lake. This inane project is comparable only to China's much-disputed Three Gorges Dam - the $30 billion, 180 meters tall hydroelectric plant that will block the fierce Yangtze River.

On January 2000, a Kinshasa-based firm, Western Trade Corporation, and an American partner, Sapphire Aqua, proposed to raise financing for a $9 billion set of 1000-2000 km. pipes from the Congo River to the Middle East and South Africa. Stratfor justly noted that the water were to be given free, casting in doubt the viability - or the even the very existence - of such a project.

Con-artists and gullible investors notwithstanding, water is big business. Water Forum 2002, sponsored and organized by the World Bank, attracted many NGO's, donors, and private companies. The Agadir conference in June 2002 attracted scholars and governments as well. According to the government of Morocco, it dealt with "views and experiences on water pricing, cost recovery and the interactions between micro and macro policies related to water".

T. Boone Pickens, a corporate raider, has bought water rights from Texans during the 2001 drought. He succeeded to amass c. 200,000 acre-feet worth c. $200 million.

Economic competition coupled with acute and growing scarcity often presage conflict.

"Water stress" is already on the world's agenda at least as firmly as global warming. The Hague Ministerial Declaration released on March 2000 identified seven 'water-related challenges'. This led to the establishment of the 'World Water Assessment Program' and UNESCO's 'From Potential Conflict to Cooperation Potential' (PC to CP) which 'addresses more specifically the challenge of sharing water resources primarily from the point of view of governments, and develops decision-making and conflict prevention tools for the future'."

Simultaneously, Green Cross International and UNESCO floated "Water for Piece" project whose aims are "to enhance the awareness and participation of local authorities and the public in water conflict resolution an integrated management by facilitating more effective dialogue between all stakeholders." In its efforts to minimize tensions in potential and actual conflict regions, the project concentrates on a few case studies in the basins of the Rhine, the Aral Sea, the Limpopo/Incomati, the Mekong, the Jordan River, the Danube, and the Columbia.

Peter Gleik of the Pacific Institute suggested this taxonomy of water-related conflicts (quoted in thewaterpage.com):

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  "Control of Water Resources (state and non-state actors): where water supplies or access to water is at the root of tensions.
  

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