Kolb received two Ph. Over his career, he has published more than 50 academic research articles and more than 20 books. In addition to completing the second edition of this encyclopedia, he is currently working on a book about sovereign debt. Ramon J. Aldag University of Wisconsin, Madison. Wayne Ambler University of Colorado, Boulder. Barbara Hilkert Andolsen Fordham University. Judith Andre Michigan State University. Raquel Antolin-Lopez University of Almeria. Daniel G. Arce University of Texas, Dallas.
Denis G. Arnold University of North Carolina, Charlotte. Diana E. Jennifer Anne Baker College of Charleston. Mark R. Bandsuch Loyola Marymount University. Adele L. Barsh University of California, San Diego. Tom L. Beauchamp Georgetown University. Christina M. Bellon California State University, Sacramento. Barry Bennett Bonneville Power Administration. Dawn D. Bennett-Alexander University of Georgia. Olof P. Bik Nyenrode Business University.
Boatright Loyola University, Chicago. Norman E. Bowie University of Minnesota. Sharon Brown-Hruska A. Freeman School of Business. Samuel V. Bruton The University of Southern Mississippi. Ann Kathryn Buchholtz Rutgers University. Rogene A. Buchholz Loyola University, New Orleans.
Burton Western Washington University. Martin Calkins University of Massachussets, Boston. Jerry M. Calton University of Hawaii, Hilo. Archie B. Carroll University of Georgia. Thomas L. Carson Loyola University, Chicago. Deen K. Chatterjee University of Utah. Corey A. Ciocchetti University of Denver. Timothy J. Classen Loyola University Chicago. William W. Clohesy University of Northern Iowa. Michael L.
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Cook University of Missouri. Ricardo F. Crespo Universidad Austral and Conicet. Christopher Culp Johns Hopkins University. Ryan M. Megan E. Dayno University of Pennsylvania. Robbin Derry University of Lethbridge. Keith William Diener Stockton University. Peter Dordal Loyola University, Chicago. Christopher Dreisbach Johns Hopkins University. Craig P. Dunn Western Washington University.
Sara R. Elias University of Missouri. Marta M. Elvira University of Navarra. Jeanne Enders Portland State University. Ljiljana Erakovic The University of Auckland. Clark Farmer Flagstaff Academy, Colorado. Bryan Finken University of Colorado, Denver. Marilynn P. Fleckenstein Niagara University. Billy Foster Arizona State University. William C. Frederick University of Pittsburgh. Julian Friedland University of Colorado, Boulder. Jeffrey Gale Loyola Marymount University.
Michael Garrison University of St. Steven Globerman Western Washington University. Devi R. Gnyawali Virginia Tech University. Brian R. Goegan Arizona State University. Kenneth Goodpaster University of St. Marc Grau Universitat Internacional de Catalunya. Daniel W. Greening University of Missouri. Jennifer J. Griffin Loyola University Chicago. Gerald Groshek University of Redlands. Terrence Guay Pennsylvania State University. George T. Haley University of New Haven. Usha C. Haley West Virginia University. Hammes University of Hawaii at Hilo. Howard Harris University of South Australia.
Marc Hayford Quinlan School of Business. Gene H. Hayworth University of Colorado at Boulder. Eleanor G.
Henry Southeast Missouri State University. Anita Ho National University of Singapore. Michael Hoffman Bentley University. David F. Hoinski West Virginia University. Jeffrey S. John Hooker Carnegie Mellon University. Abol Jalilvand Loyola University Chicago. Harvey S.
James Jr. University of Missouri. Gary G. Johnson Southeast Missouri State University. Michael E. Johnson-Cramer Bucknell University. Pamela C. Jones Colorado State University. Nenad Jukic Loyola University Chicago. Frederick Kaefer Loyola University Chicago. David H. Pauline Kaurin Pacific Lutheran University. William J. Kehoe University of Virginia. Christopher Kilby Villanova University. Peter D. Manfred Kirchgeorg Independent Scholar. Andrew N. Kleit The Pennsylvania State University.
Robin S. Koenigsberg Regis University. Kort Coastal Carolina University. Krismann University of Colorado, Boulder. LeeAnne G. Kryder University of California, Santa Barbara. Gene R. Laczniak Marquette University. Kai R. Larsen University of Colorado, Boulder. Jeffrey Lenn George Washington University. Patsy G. Lewellyn University of South Carolina, Aiken. Wendell Licon Arizona State University. Barrie E. Jeanne M. Logsdon University of New Mexico. Loykie L. Lomine University of Winchester.
Ellen M. Maccarone Gonzaga University. Peter Madsen Carnegie Mellon University. Michael Magasin Pepperdine University. Alexandre Magnier University of Missouri. Dean Maines University of St. Malliaris Loyola University, Chicago. Mary Malliaris Loyola University, Chicago. Richard Marens Sacramento State University. Tom Marini Raymond A. The price tag is sizable though not unsustainable.
Though earmarked, funds are fungible. Even the staid Jane s World Armies concurred. No one knows how much the war has cost Russia hitherto. It is mostly financed from off-budget clandestine bank accounts owned and managed by the Kremlin, the military, and the security services. Russia was forced to close, post haste, bases in Vietnam and Cuba, two erstwhile pillars of its geopolitical and geostrategic presence. It was too feeble to capitalize on its massive, multi-annual assistance to the Afghan Northern Alliance in both arms and manpower. The USA effortlessly reaped the fruits of this continuous Russian support and established a presence in central Asia which Russia will find impossible to dislodge.
A leading Soviet military analyst, Pavel Felgengauer, itemized the expenditures. The largest articles are transport, fuel, reconstruction of areas shattered by warfare, and active duty bonuses to soldiers. The expense of this brawl exceed the previous scuffle s. Russia allocated c. Still, these figures are misleading underestimates. According too the Rosbalt News Agency, last year, for instance, Russia was slated to spend c.
Russia has been lucky to enjoy a serendipitous confluence of an export-enhancing and import-depressing depreciated currency, tax-augmenting inflation, soaring oil prices, and Western largesse. It is also a major producer and exporter of weapons. Chechnya serves as testing grounds where proud designers and trigger-craving generals can demonstrate the advantages and capabilities of their latest materiel.
Some - like the Institute of Global Issues - say that the war in Chechnya has fully self-financed by reviving the military-industrial complex and adding billions to Russia s exports of armaments. This surely is a wild hyperbole. Chechnya - a potentially oil-rich territory - is razed to dust. Russia is ensnared in an ever-escalating cycle of violence and futile retaliation. Its society is gradually militarized and desensitized to human rights abuses. Corruption is rampant. Russia s Accounting Board disclosed that a whopping 12 percent of the money earmarked to fight the war five years ago has vanished without a trace.
Top brass set up oil drilling operations in the ravaged territory. They are said by Rosbalt and "The Economist" to be extracting up to tons daily - double the amount the state hauls. Another tons go up in smoke due to incompetence and faulty equipment.
There are 60 oil wells in Grozny alone. Hence the predilection to pursue the war as leisurely - and profitably - as possible. Often in cahoots with their ostensible oppressors, dispossessed and dislocated Chechens export crime and mayhem to Russia s main cities. The war is a colossal misallocation of scarce economic resources and an opportunity squandered. Russia should have used the windfall to reinvent itself - revamp its dilapidated infrastructure and modernize its institutions.
Oil prices are bound to come down one day and when they do Russia will discover the true and most malign cost of war - the opportunity cost. Child Labor From the comfort of their plush offices and five to six figure salaries, self-appointed NGO s often denounce child labor as their employees rush from one five star. The hairsplitting distinction made by the ILO between "child work" and "child labor" conveniently targets impoverished countries while letting its budget contributors - the developed ones - off-the-hook.
Reports regarding child labor surface periodically. Children crawling in mines, faces ashen, body deformed. The agile fingers of famished infants weaving soccer balls for their more privileged counterparts in the USA. Tiny figures huddled in sweatshops, toiling in unspeakable conditions. It is all heart-rending and it gave rise to a veritable not-so-cottage industry of activists, commentators, legal eagles, scholars, and opportunistically sympathetic politicians.
Ask the denizens of Thailand, sub-Saharan Africa, Brazil, or Morocco and they will tell you how they regard this altruistic hyperactivity - with suspicion and resentment. Underneath the compelling arguments lurks an agenda of trade protectionism, they wholeheartedly believe. Stringent - and expensive - labor and environmental provisions in international treaties may well be a ploy to fend off imports based on cheap labor and the competition they wreak on well-ensconced domestic industries and their political stooges.
This is especially galling since the sanctimonious West has amassed its wealth on the broken backs of slaves and kids. The census in the USA found that 18 percent of all children - almost two million in all - were gainfully employed. The Supreme Court ruled unconstitutional laws banning child labor as late as This decision was overturned only in The GAO published a report last week in which it criticized the Labor Department for paying insufficient attention to working conditions in manufacturing and mining in the USA, where many children are still employed.
One in 16 of these worked in factories and construction. More than teens died of work-related accidents in the last ten years. Child labor - let alone child prostitution, child soldiers, and child slavery - are phenomena best avoided. But they cannot and should not be tackled in isolation. Nor should underage labor be subjected to blanket castigation. Working in the gold mines or fisheries of the Philippines is hardly comparable to waiting on tables in a Nigerian or, for that matter, American restaurant.
There are gradations and hues of child labor. That children should not be exposed to hazardous conditions, long working hours, used as means of payment, physically punished, or serve as sex slaves is commonly agreed. That they should not help their parents plant and harvest may be more debatable. As Miriam Wasserman observes in "Eliminating Child Labor", published in the Federal Bank of Boston s "Regional Review", second quarter of , it depends on "family income, education policy, production technologies, and cultural norms.
This statistic masks vast disparities between regions like Africa 42 percent and Latin America 17 percent. In many impoverished locales, child labor is all that stands between the family unit and all-pervasive, life threatening, destitution. Child labor declines markedly as income per capita grows. To deprive these bread-earners of the opportunity to lift themselves and their families incrementally above malnutrition, disease, and famine - is an apex of immoral hypocrisy. Quoted by "The Economist", a representative of the much decried Ecuador Banana Growers Association and Ecuador s Labor Minister, summed up the dilemma neatly: "Just because they are under age doesn t mean we should reject them, they have a right to survive.
You can t just say they can t work, you have to provide alternatives. The outcry against soccer balls stitched by children in Pakistan led to the relocation of workshops ran by Nike and Reebok. Thousands lost their jobs, including countless women and of their progeny. The average family income - anyhow meager - fell by 20 percent. Economists Drusilla Brown, Alan Deardorif, and Robert Stern observe wryly: "While Baden Sports can quite credibly claim that their soccer balls are not sewn by children, the relocation of their production facility undoubtedly did nothing for their former child workers and their families.
Manufacturers - fearing legal reprisals and "reputation risks" naming-and-shaming by overzealous NGO s - engage in preemptive sacking. German garment workshops fired 50, children in. Quoted by Wasserstein, former Secretary of Labor, Robert Reich, notes: "Stopping child labor without doing anything else could leave children worse off.
If they are working out of necessity, as most are, stopping them could force them into prostitution or other employment with greater personal dangers. The most important thing is that they be in school and receive the education to help them leave poverty. Less than 1 percent work in mining and another 2 percent in construction. Most of the rest work in retail outlets and services, including "personal services" - a euphemism for prostitution.
But this is a drop in the sea of neglect. Poor countries rarely proffer education on a regular basis to more than two thirds of their eligible school-age children. This is especially true in rural areas where child labor is a widespread blight. Education - especially for women - is considered an unaffordable luxury by many hard-pressed parents. In many cultures, work is still considered to be indispensable in shaping the child s morality and strength of character and in teaching him or her a trade.
It is also common to see children working in shops or on the streets. Poor families will often send a child to a richer relation as a housemaid or houseboy, in the hope that he will get an education. Robinson of the University of California at Berkeley - has now permeated the mainstream. Abusive child labor is abhorrent and should be banned and eradicated. All other forms should be phased out gradually. Developing countries already produce millions of unemployable graduates a year - , in Morocco alone. Unemployment is rife and reaches, in certain countries - such as Macedonia - more than one third of the workforce.
Children at work may be harshly treated by their supervisors but at least they are kept off the far more menacing streets. Some kids even end up with a skill and are rendered employable.
- New Frontiers in Bryology: Physiology, Molecular Biology and Functional Genomics;
- Handbook of numerical analysis.
- CEE Archive - Econlib.
- Cyclopedia of Economics (PDF).
Common Agricultural Policy CAP The June budget summit in Brussels foundered on the issue of farm support and subsidies which now consume directly Tony Blair refused to let go of Britain s infamous rebate amounting to two thirds of its net contributions to the community s coffers unless and until these handouts which Britain s dilapidated agriculture does not enjoy are slashed. This followed close on the hills of the rejection of the proposed EU constitution in French and the Dutch referenda in May-June One of the undeniable benefits of the enlargement of the European Union EU accrues to its veteran members rather than to the acceding countries.
The EU is forced to revamp its costly agricultural policies and attendant bloated bureaucracy. This, undoubtedly, will lead, albeit glacially, to the demise of Europe s farming sector as we know it. Contrary to public misperceptions, Europe is far more open to trade than the United States. It is also the world s second largest importer. In constant dollar terms, it is the world s largest trader. Europe s average tariff on agricultural produce is four times those levied on non-agricultural goods. Yet, a number of trends conspire. The introduction of the euro rendered prices transparent across borders and revealed to the European consumer how expensive his food is.
Scares like the mishandled mad cow disease dented consumer confidence in both politicians and bureaucrats. But, most crucially, the integration of the countries of east and central Europe with their massive agricultural sectors makes the EU s Common Agricultural Policy CAP untenable. Recent, controversial reforms, introduced by the European Commission, call for a gradual reduction and diversion of CAP outlays from directly subsidizing production to WTO-compatible investments in agricultural employment, regional development, environment and training and research.
This decrease has since continued unabated. Still, the EU is unable to provide the new members with the same level of farm subsidies it doles out to the current 15 members. Close to one quarter of Poland s population is directly or indirectly involved in agriculture - ten times the European average. The agreement struck between Germany and France in September and adopted in a summit Brussels in October freezes CAP spending in its level until This may further postpone the identical treatment much coveted by the applicants.
Theoretically, subsidies for the farm sectors of the new members will increase and subsidies flowing to veteran members will decrease until they are equalized at around 80 percent of present levels throughout the EU by the end of the next budget period in But, in reality, the entire CAP stands to be renegotiated in No one can guarantee the outcome of this process, especially when coupled with the Doha round of trade liberalization. The offers made now to the candidate countries are not only mean but also meaningless. A tweak by Denmark, the president of the EU in the second half of , to peg support for farmers in the new members at two fifths the going rate, won a cautious welcome by the then candidate countries.
Some of this novel subventionary largesse will be deducted from a fund for rural development in the new members. Additionally, national governments will be allowed to top up inadequate EU dollops with governmental budget funds. It also fails to tackle equally weighty wrangles about production quotas, EU protectionist "safeguard" measures, import tariffs imposed by the new members against heavily subsidized European farm products, reduced value added taxes on agricultural produce and referential periods and yields - the bases for calculating EU transfers.
It also ignores the distinct - and thorny - possibility that the new members will end up as net contributors to the budget. With the GDP per capita of most candidates at one fifth the EU s, this would be a perverse, socially unsettling and politically explosive outcome. Aware of this, the European Commission denies any intention to actually accept cash from the New Europe. Their net contributions would remain theoretical, it pledges implausibly. Yet, as long as a country such as Poland is incapable of absorbing - disseminating and utilizing - more than 28 percent of the aid it is currently entitled to - veteran EU members rightly question its administrative ability to tackle much larger provisions - c.
The prolonged and irascible debate has taken its toll. In some new member countries, pro-EU sentiment is on the wane. Leszek Miller, then Poland s prime minister, told the PAP news agency in late that Poland should contribute to the EU less than it receives in agricultural subsidies. And what if not? Almost two thirds of respondents in surveys conducted by the EU in Estonia,. Latvia, Slovenia and Lithuania are undecided about EU membership or opposed to it altogether. The situation in the Czech Republic is not much improved.
Only Hungary stalwartly supports the EU s eastern tilt. Opinion polls periodically conducted by GfK Hungaria, a market research group owned by GfK Germany, paint a more mixed picture. On the one hand, even in countries with a devout following of EU accession, such as Romania, support for integration has declined this year. Support in Hungary and Poland, on the other hand, picked up.
Yet, the EU can t seem to get its act together. According to the Danish paper, Berlingske Tidende, Danish prime minister in , Anders Fogh Rasmussen, ruled out a "take it or leave it" ultimatum to the new members. There will be "real negotiations", he insisted. We have a certain framework, and we stick to it. Naturally, flood-affected farmers throughout the region - from the Czech Republic to Poland - are vigorously protesting their unequal treatment and the compromises their governments were arm-twisted into making.
Still, according to a survey released in December by the European Commission, 60 percent of the denizens of the accession countries supported it. As the endgame nears, the parties to the negotiations are posturing, though. EU enlargement commissioner, Gunter Verheugen, argued in November against equalizing. In a typical feat of incongruity he said it will prevent them from modernizing and alienate other professions.
Franz Fischler, the Austrian EU s agriculture commissioner, hinted that miserly production quotas for cereals, meat and dairy products, offered by the EU to the new members, can be augmented. The EU presently provides the new members with funding, within the Special Accession Programme for Agriculture and Rural Development SAPARD to support farm investments, to boost processing and marketing of farm and fishery products and to bankroll infrastructure improvements.
In a thinly veiled threat, Fischler included this in a speech he made in an official visit to Estonia in late "The EU enlargement countries should be pleased with the 25 per cent agriculture subsidies, as the member states have not agreed even on that yet, therefore this should be the first goal and only after that can further subsidies be discussed. It would not be very wise to tell the EU member states that accession countries are not pleased, that would not be positive for the whole process. Poland s fractured farm sector is notoriously inefficient. With one quarter of the labor force it produces less than 4 percent of GDP.
But the peasants. In the meantime, the ten new members of the EU have teamed up to present their case in Brussels. Their ministers of finance, foreign affairs and of agriculture, parliamentary deputies in their finance and farm committees - all issued and issue common statements, position papers, briefings and memoranda of understanding. But no one is inclined to take such ad-hoc alliances among the candidate countries seriously. The disparity between their farm sectors is such that it rules out a single voice. Moreover, the EU is strained to the limit of its habitual consensus-driven decision making.
The breakdown of the European mechanism of deliberation was brought into sharp relief by the way in which the future of the CAP was decided in a series of chats between the leaders of France and Germany in a hotel in Brussels in Their deal was later rubber stamped, unaltered, in a summit of all EU members in October The Union is in constitutional and institutional flux.
Small and even medium sized members - such as the United Kingdom - are marginalized. As the EU bloated to 25 countries, a core of leadership failed to emerge. Decision-making has been reduced to the Council of Ministers handing down blueprints to be fleshed out by the less significant states and by an increasingly sidelined. European Commission and a make-believe European Parliament. The constitution which was supposed to restore central authority and participatory democracy is dead in the water. The countries of central and eastern Europe are and will, for a long time, be second class citizens, tolerated merely because they provide cheap, youthful, labor, raw materials and close-by markets for finished goods.
The new members are strategically located between the old continent and booming Asia. EU enlargement is a thinly disguised exercise in mercantilism tinged with the maudlin ideology of embracing revenant brothers long lost to communism. But beneath the veneer of civility and kultur lurk the cold calculations of realpolitik. The New Europe - the EU s hinterland - would do well to remember this. According to a June OECD report, and contrary to popular, media-fostered impressions, farm subsidies are being phased out almost everywhere. Turkey is an exception. On average, farm subsidies declined from 2.
This statistic masks yawning disparities between countries. Virtually all subsidies linked to production levels are being phased out everywhere, albeit glacially. Their distorting and pernicious effects on the allocation of scarce economic resources in the farm sector is widely recognized. Compensation is now more commonly linked to acreage, number of cattle heads, and average historical prices. Still, the farm lobby in rich countries is formidable. In the USA, for instance, Bill Clinton s farm bill which meant to gradually eliminate farm protections was all but reversed by George Bush s package of laws that nearly doubled agricultural subsidies.
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The WTO has recently taken a more active role in fighting discriminatory practices. Brazil won cases against American cotton subventions and EU sugar protections. Yet, nothing much has changed in the last three years Farming Conference. Gaymard drew the battle lines and made clear that the French resistance is alive and kicking at least with regards to the European Commission s proposed reforms of the European Union s Common Agricultural Policy CAP. The CAP which now consumes close to half of the EU s budget will not be revamped until at the earliest, though outlays will be frozen in real terms and, starting in , gradually diverted from subsidizing production to environmental and other good causes "decoupling" and "modulation" in EU jargon.
This upset the EU s ten new members, which joined it in May With spending capped, they are unlikely to enjoy the same pecuniary support bestowed on the veterans, even after As it is, their agricultural benefits are phased over ten years and face an uncertain future when the CAP is, inevitably and finally, scrapped.
Moreover, France s recalcitrance imperils the crucial Doha round of trade talks. The USA called for a total elimination of all manner of farm subsidies. The EU fudged. The developing countries are already up in arms over promises made by the richer polities in the protracted Uruguay round and then promptly ignored by them. Agriculture is arguably the poorer members highest priority. They demand the opening of the rich world s markets, whittling down export and production subsidies and the abrogation of non-tariff trade barriers and. Gaymard proffered the usual woolly mantras of "farm products are more than marketable goods", "France, and Europe in general, need security of food supply", "food cannot be left to the mercy of market forces".
Farmers, unlike industrialists - insisted the Minister counterfactually - cannot simply relocate and agrarian pursuits are a pillar of the nation s culture and its attachment to the land. Yet, it cannot be denied that Gaymard advanced in his speech a few thought-provoking and oft-overlooked points. He convincingly argued that farm products covered by EU subsidies are rarely in direct competition with the crops of the poor in Africa and Asia. The cotton, rice and groundnut oil subventions generously doled out to growers in the United States - the EU s most vocal critic harm the third world smallholders and sharecroppers it purports to defend.
The IMF - perceived in Europe as the long and heartless arm of the Americans - has dismantled the coffee regime and marketing structures causing irreparable damage to its indigent growers, Gaymard said. The CAP, insists Gaymard, does not encourage environmental ills. The policy does not subsidize the husbandry of disease-prone poultry and pigs, nor does it support genetically modified crops.
The CAP is also way cheaper than portrayed by its detractors. Food constitutes only 16 percent of the family budget - one third of its share when the CAP was instituted, four decades ago. The CAP amounts to a mere 1 percent of the combined public. The comparable figure in America is 1.
This last argument is, of course, spurious. It ignores the distorting effects of the CAP: exorbitant food prices in the EU, double payments by EU denizens, once as taxpayers and then as consumers, mountains of butter and rivers of milk produced solely for the sake of finagling subsidies out of an inert and bloated bureaucracy and deteriorating relationships with irate trade partners. Gaymard is no less parsimonious with the full truth elsewhere in his counterattack. This is partly untrue and partly misleading. Important commodities - such as sugar, rice and bananas - are virtually excluded by long phase-in periods.
Non-tariff and non-quota barriers abound. Macedonian lamb is regularly barred on sanitary grounds, for instance. Health, sanitary, standards-related and quality regulations render a lot of the supposed access theoretical. Still, it is true that the EU s larger economies are more open to international trade than the United States. Gaymard flaunted a telling statistic: the EU absorbs well over two fifths of Brazil s farm exports. The USA - in geographical proximity to Brazil and a self-described ardent champion of free trade - takes in less than 15 percent.
The problem with farming in the developing world is its concentration on cash crops, whose prices are volatile. This subverts traditional agriculture. Gaymard implied that the destitute would do well to introduce a CAP all their own and thus underwrite a thriving indigenous sector for internal consumption and more stable export revenues. They can expect no help from the industrialized nations, he made crystal clear: " The rich countries are not ready to eliminate their support for agriculture.
They have not committed themselves to doing so in international forums and do not believe that, as far as they Are concerned, it would be to the developing countries advantage. Therefore," - he concluded soberly - "let us stop dreaming. The conspiracy minded stipulate that France was actually merely seeking to strengthen its bargaining chips. Finally, they go, it will accept decoupling and modulation. But recent policy initiatives do not point this way. France all but renationalized its beef markets, proposed to continue dairy quotas till , sought to index milk prices and defended the much-reviled current sugar regime.
These are bad news, indeed. Agriculture is a thorny issue within the EU no less than outside it. A recessionary Germany and a more dynamic UK have been bankrolling sated and affluent French and Spanish farmers for decades now. This has got to stop and will - whether amicably, or acrimoniously. The new members - most of them from heavily agrarian central and east Europe - will demand equality sooner, or later. Poor nations will give up on the entire trade. It is a precipice and France has just taken us all one step forward.
Common Investment Schemes The credit and banking crisis of has cast in doubt the three pillars of modern common investment schemes. Mutual funds known in the UK as "unit trusts" , hedge funds, and closed-end funds all rely on three assumptions: Assumption number one That risk inherent in assets such as stocks can be "diversified away". If one divides one s capital and invests it in a variety of financial instruments, sectors, and markets, the overall risk of one s portfolio of investments is lower than the risk of any single asset in said portfolio.
Yet, in the last decade, markets all over the world have moved in tandem. These highly-correlated ups and downs gave the lie to the belief that they were in the process of "decoupling" and could, therefore, be expected to fluctuate independently of each other. What the crisis has revealed is that contagion transmission vectors and mechanisms have actually become more potent as barriers to flows of money and information have been lowered. Assumption number two That investment "experts" can and do have an advantage in picking "winner" stocks over laymen, let alone over random choices.
Market timing coupled with access to. Yet, they didn t. Few investment funds beat the relevant stock indices on a regular, consistent basis. The yields on "random walk" and stochastic random investment portfolios often surpass managed funds. Index or tracking funds funds who automatically invest in the stocks that compose a stock market index are at the top of the table, leaving "stars", "seers", "sages", and "gurus" in the dust.
This manifest market efficiency is often attributed to the ubiquity of capital pricing models. But, the fact that everybody uses the same software does not necessarily mean that everyone would make the same stock picks. Moreover, the CAPM and similar models are now being challenged by the discovery and incorporation of information asymmetries into the math.
Nowadays, not all fund managers are using the same mathematical models. A better explanation for the inability of investment experts to beat the overall performance of the market would perhaps be information overload. Recent studies have shown that performance tends to deteriorate in the presence of too much information. Additionally, the failure of gatekeepers - from rating agencies to regulators - to force firms to provide reliable data on their activities and assets led to the ascendance of insider information as the only credible substitute.
But, insider or privileged information proved to be as misleading as publicly disclosed data. Finally, the market acted more on noise than on signal. As we all know, noise it perfectly randomized. Expertise and professionalism mean nothing in a totally random market. Assumption number three That risk can be either diversified away or parceled out and sold. This proved to be untenable, mainly because the very nature of risk is still ill-understood: the samples used in various mathematical models were biased as they relied on data pertaining only to the recent bull market, the longest in history.
Thus, in the process of securitization, "risk" was dissected, bundled and sold to third parties who were equally at a loss as to how best to evaluate it. Bewildered, participants and markets lost their much-vaunted ability to "discover" the correct prices of assets. Investors and banks got spooked by this apparent and unprecedented failure and stopped investing and lending.
Illiquidity and panic ensued. If investment funds cannot beat the market and cannot effectively get rid of portfolio risk, what do we need them for? The short answer is: because it is far more convenient to get involved in the market through a fund than directly. Another reason: index and tracking funds are excellent ways to invest in a bull market. Commonwealth of Independent States, Economies of The Lucerne Conference on the then 9 months old CIS-7 Initiative ended two years ago with yet another misguided call upon charity-weary donors to grant the poorest seven countries Armenia, Azerbaijan, Georgia, Kyrgyz.
Republic, Moldova, Tajikistan, and Uzbekistan of the Commonwealth of Independent States financial assistance in the form of grants rather than credits. The World Bank s Managing Director, Shengman Zhang, concluded with the deliriously incoherent statement that "donor assistance in the form of highly concessional finance and debt relief will only succeed if linked to effective reform". Since independence a decade ago - aided and abetted by the same founts of Washington wisdom - the seven unfortunates have regressed to a malignant combination of unbridled autocracy and perpetual illiquidity.
Poverty soared to African proportions, the region s economies shriveled and public and external debts mounted dizzyingly. Ever the autistic solipsists, the IMF and World Bank maintained in a press release that the talk shop "broadened and deepened the debate to include a range of economic, institutional and social issues that must be tackled if the seven countries are to achieve the targets of the Millennium Development Goals".
The release is strewn with typical IMF-newspeak. The destitute, oppressed and diseased people of the region should achieve "ownership of the reform agenda" in accordance with "clear national priorities". Worry not, reassures the anonymous hack: the World Bank has. The cynical cover-up of the west s abysmal failure in the region comes replete with unflinchingly triumphant balderdash: the policies of the Bretton-Woods institutions are "putting the countries themselves in the driver s seat of reforms". According to Mr. Zhang, corruption in the CIS7 is "moderating" and the investment climate is "beginning to improve".
The solution? This and better access to markets in "the rest of the world" will assure "recovery and future prosperity". Zhang conveniently neglected to mention the Stalinesque rulers of most of the CIS-7, the political repression, the personality cults, the blatant looting of the state by pernicious networks of cronies, the rampant nepotism, the elimination of the free media and the proliferation of every conceivable abuse of human and civil rights, up to - and including - the assassination of opponents and dissidents.
To raise these delicate issues would have been impolitic when the IMF s largest shareholder - the United States - has embraced these despots as newfound allies. And from fantasyland to harsh reality: According to the World Bank s own numbers, with the exception of Uzbekistan, the current gross domestic product of the reluctant members of the CIS-7 is between 29 percent Georgia and 80 percent Armenia of its level ten years ago. More than half the population is below the poverty line. These dismal results are despite seven years of strong growth pegged at 6 percent annually and remittances from abroad which equal a staggering one eighth of GDP.
Armenia is the second most prosperous of the lot. Its inflation is down to two digits. Its currency is stable. Its trade is completely liberalized a-propos Zhang s nostrums. Azerbaijan, its foe and neighbor, should be so lucky. Close to nine tenth of its population live as paupers.
This despite a tripling of oil prices, its mainstay commodity. The World Bank notes wistfully that its agriculture is picking up. Its oil fund, insist the sponsoring institutions, incredibly, is "governed by transparent and prudent management rules". Georgia flies in the face of the Washington Consensus. To no avail. Annual GDP growth collapsed from 10 percent in to less than 3 percent thereafter. The Kyrgyz Republic is a special case even by the dismal standards of the region.
Poverty actually increased in the last few years when economic growth picked up. Is this appalling performance the outcome of brazen disregard for the IMF s sagacious counsel? Not so. That the patient is as sick as ever casts in doubt the doctors competence. The best economic performance of the lot was Uzbekistan s. It is often wheeled out as a success story and used as a fig leaf. Uzbekistan s GDP is, indeed, unchanged compared to But a closer scrutiny reveals the - customary prestidigitation by the proponents of the Washington orthodoxy. With the exception of Belarus, another relative economic success story, Uzbekistan resisted the IMF s bitter medicine longer than any other country in transition.
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