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Can Google Live Without China?

March 25, 2010 72 comments

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By Marquis Codjia

Op-eds in prominent newspapers around the world are discussing profusely the latest decision by Google to disengage from China in a move that epitomizes the search engine’s level of camaraderie with communist censors.

While few viewpoints offer a holistic examination of a complex issue that goes beyond the business sphere, the majority applaud Google’s shift as salutary to enhancing democracy in the Asian country.

The query nowadays in the western hemisphere is whether China can live without Google.

Many respond by the negative, citing, among others, the infancy of the country’s technology infrastructure and its limited number of qualified engineers; some even posit metaphorically that Beijing will be “in the darkness” after such exit.

Truth be told, China needs Google far less than the opposite. Hence, to the inverse question – can Google live without China? – the reasonable answer becomes yes.

Strategically, there is a superfluity of arguments attesting that the Mountain View, California-based technology mammoth is following the wrong path in handling its Chinese conundrum. Some of these arguments are specifically endogenous to the firm, whereas others are more varied in nature and closely inherent to the macro-environment in which the firm evolves.

Google does not divulge the size nor the profitability of its China business but it can be inferred, from the country ca. 400 million internet users, that Google.cn – its local portal – contributes a hefty part of the overall bottom line.

Gauging the firm’s scope of business in Mao’s republic implies factoring not only core search revenues but also the ancillary business derived from joint-ventures in Asia and Google’s own commercial undertakings.

The firm cannot ignore the potential cash-cow that Chinese internet users represent and the competitive pre-eminence that a local presence can proffer. The recent announcement from Google to move its local servers from the mainland to Hong Kong and end its censorship of searches does a disservice to the firm’s core business strategy because Google needs to be in China to win in the Chinese market, irrespective of the notorious practices of the nation’s economic climate.

Therefore, Ed Burnette is accurate in reiterating this viewpoint.

It is very momentous to acknowledge that China’s economic practices are far from fair and its socio-political system may at times be antithetical to paradigms experienced in other parts of the world. That China is not a democracy is commonplace rhetoric, yet many, if not all, Fortune 100 companies are keen to put basic tenets about free speech into oblivion and open a Chinese subsidiary.

Geostrategic factors at the macro-economic level are those that Google should pay thorough attention to. The firm is a leader in its industry and possesses reliable friends within the Obama administration – Andrew McLaughlin, its former head of global public policy, is currently the Deputy U.S. Chief Technology Officer in the Executive Office of the President. Yet, a company by itself cannot represent a major strategic player in the much larger and complex continuum of US – China relations.

Politicians are very economical with the truth when it comes to China. While they occasionally resort to rhetorical dissent vis-à-vis Beijing’s transgressions on democracy and issues relating to free speech, they all keep legendarily mum when it comes to coupling business with ethics.

They shouldn’t be necessarily blamed because there’s a variety of sibylline elements that make up transnational relations, and bi- or multi-lateral issues are not always simplistic with crystal clear solutions.

If Google pulls out of the mainland, it stands to lose billions of dollars in core revenues and collateral business. It will lose its dominance in the regional search business and such economic void will attract other rivals, which in the end will cripple the firm’s global market share.

This doom scenario is far from a Hollywood sci-fi episode. If Google exits, locals (such as Baidu) and major rivals like Microsoft’s Bing and Yahoo will doubtless grab the manna. Alternatively, new entrants may easily imitate the firm’s search model and take advantage of local authorities’ reprimand and develop their business.

There is a long list of Western multinationals operating in the mainland despite repeated protests from human rights activists. Think McDonald’s, Wal-Mart, Carrefour, Citibank, etc.

Collateral losses for Google are already reflecting China’s angry reaction after the search engine made its announcement; news media reported so far that Chinese mobile phone companies will drop Google or Android, its new mobile operating system.

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Did The Bank Bailout Work?

March 18, 2010 63 comments

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By Marquis Codjia

A few months ago, the crumbling global economy was atop the agenda of many G20 leaders. Social unrest, banking sector meltdown, global growth conundrum, and stock market yo-yos were the main discussion topics among the planetary leadership.

Governments the world over addressed the most imperative issue, the banking pandemonium, with massive cash inflows into a sector that hitherto epitomized capitalism at its best (and worst), with a modus operandi more akin to central intervention in communist economies.

The global tab ranges from 4 to 5 trillion US dollars according to the most optimistic estimates, but the overall costs may run higher in the future.

The financial rescue of the ailing banking sector, in principle, was the right course of action and various experts across the political spectrum saw eye to eye on its criticality, including the staunchest free-market theorizers who routinely treat as leftist energumens out of the antediluvian era those who dare buck conventional wisdom regarding the role of government in social economics.

It was flummoxing, however, to observe how lenient authorities were vis-à-vis banks throughout the bailout process on top of the very favorable terms under which funds were disbursed. Hence, financial institutions that benefited from state largesse were able to quickly use monies received to regain profitability and reimburse their respective governments.

Other parts of the economy didn’t experience so swift a recovery. Unemployment is still high; the mortgage sector is still in a shambles. Banks have been reluctant to lend, creating an underperforming productive sector and a lethargic private consumption. The stock market may be up but, debatably, the “real economy” is still down.

Banks played a crucial role in the current economic malaise, but anti-bailout commentators were wrong to vilify them and to affirm that such guilt should have precluded public rescue. Financial intermediaries are an epochal pillar of our post-modern economies, and it would have been socio-economically ruinous and politically unpalatable to let them sink.

Admittedly, a majority of banks are today more cash awash and profitable than a year ago albeit some pockets of the industry are still comatose owing to the liquidity hemorrhage that has devastated them since the recession erupted.

Regrettably, nothing has changed. These institutions are resorting again to the erstwhile practices that wrought havoc to the economy in the first place, under the aegis of a regulatory body eerily blind, deaf and tongue-tied.

Banks, evidently, should be encouraged to pursue and make profits as any private concern. But when such a financial quest comes at the expense of an entire system or poses a systemic threat to the productive sector of the economy, the argument in favor of tougher regulation becomes of preeminent import.

Companies need to utilize hedging for exposure control; yet, speculators lately seem to use derivatives to bet against their very benefactors. Although outrageous to vast swaths of the populace, such practices are explicable if one considers that the speculating camp only furthers private interests of elites (their investors) who seldom factor morality into the profitability equation.

Case in point: Greece. The Hellenic government bailed out its banking sector with billions of dollars only to see their country downgraded a few months later because of a perceived default risk.

At this moment, elected officials and central bankers should ponder the following question: did the bailout work? Or, stated differently, did the mammoth cash infusion into banks and the associated supplemental initiatives reach the initial goals?

Seasoned economists and social scientists will grapple amply with issues regarding program effectiveness and efficiency in the future, but prominent experts currently believe the answers to such interrogations are negative. George Mason University economist Peter Boettke posited that bank bailouts have created a “cycle of debt, deficits and government expansion” that in the end “will be economically crippling” to major economies, whereas Barry Ritholtz, famed author of Bailout Nation and CEO of research firm FusionIQ, thinks the rescue programs could have been conducted better.

It can be argued that the initial rescue phase of the bailout program was effectual in that it helped avert a domestic and global banking hubbub. But, contrary to popular credence, that was the easiest part. The courageous headship of political leaders and regulators cannot be underrated in the process, but it is indisputably far facile for a powerful central bank, like the US Federal Reserve, to make journal entries to the credit of targeted institutions and replenish their corporate coffers via the much celebrated “quantitative easing”.

The Fed, just like other G8 central banks, is in an enviable position because it can create money ‘out of nothing’ by increasing the credit in its own bank account. Ask current Greek Central Bank governor George Provopoulous whether he’d like to have such latitude.

Regulation is where actual political bravery need be shown from authorities, and so far the lack of sweeping reforms in the financial sector may obliterate the latter’s plodding recovery.

At present, there are five distinct reasons explicating the mediocre results obtained so far from the bailout scheme.

First, the much needed financial overhaul is taking longer to move up the legislative ladder and reach US President Barack Obama’s desk because not only financial lobbies – such as the über-powerful American Bankers Association – are exerting strong pressure,  the political agenda is also crowded out with the pressing healthcare reform and the geostrategic concerns linked to conflicts in Afghanistan and Iraq.

The fact that Senate Banking chief Chris Dodd, D-Conn., wants to introduce reform in the sector will probably change little in the short-term.

Second, President Obama’s own senior level financial staff is composed of former Wall Street alumni and lobbyists, and many skeptics are incredulous that a clique so tied to financial interests can spearhead true reforms in an industry that was previously munificent to them.

The next two factors are endogenous to the banking industry. One is the past experience of regulation and deregulation cycles that usually make laws dissipate over time, and the other stems from the idiosyncratic ability of financial engineers and investment bankers to design new products and techniques to counter existing laws.

Finally, the regulatory endeavor should be global in scope, and the present lack of geographic cooperation and the practical difficulty to track systemic risk within the industry are currently handicapping further advances.

From Wall Street to Dubai – The Lucrative Idiosyncrasies of Islamic Banking

March 4, 2010 59 comments

Religious limitations within Islamic jurisprudence have kept Islamic banks more cash awash than their risk-taking Western counterparts after the recent economic hubbub, but gradual reforms need to take place for the industry as a whole to experience a structurally sustained positive growth in the future.

By Marquis Codjia

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A supranational symposium of key financial players took place recently (March 2nd and 3rd, 2010) at the posh King Hussein Bin Talal Convention Center on the shores of the Dead Sea, circa 25 miles southwest from Amman, Jordan.

The event received trifling media interest from major western news outlets; however, behemoths in the global banking industry were closely eyeing pivotal decisions that may be announced in the final communiqué.

They were right to do so.

The gathering, the first Islamic Finance and Investment Forum for the Middle East, occurred in economically healthy and politically stable Jordan – a prominent ally of the West in a geostrategically susceptible region, – which enjoys the highest quality of life in the Middle East and North Africa Region, according to the 2010 Quality of Life Index prepared by International Living Magazine.

Another essential factor to heed lies in the fact that participants were among the crème de la crème of the Islamic financial marketplace, a group of over 350 bankers and experts from 15 countries that are spearheading transformational shifts in an economic sector likely to experience solid growth in the foreseeable future.

A bird’s eye view of Islamic banking is utile to fathom the industry’s core dynamics.

Islamic banking – and to a larger extent, Islamic finance – is deeply rooted in Islamic economics and quintessentially governed by Sharia, a legislative corpus that encapsulates the religious precepts of Islam.

Sharia or its financial section known as Fiqh al-Muamalat (Islamic rules on transactions) allows financial intermediaries to engage in any form of economic activity so long as they don’t charge interest (Riba) and shun businesses implicated in forbidden (Haraam) undertakings.

Sharia strongly furthers risk sharing among investors and economic transactions collateralized by tangible assets such as land or machinery but outlaw derivative financial instruments.

A derivative instrument is a product that derives its value from other financial instruments (known as the underlying), events or conditions. It is mostly utilized for hedging risk or speculating for profit. The recent turmoil in global capital markets and the ensuing socio-economic pandemonium owe much of their existence to a type of derivative called Credit Default Swap (CDS).

Viewpoints alien to the Muslim world may find Sharia restrictions deleterious for sustained economic development because what Muslim jurisprudence defines as vice (gambling, adult filmography, alcohol, etc.) not only plays a vital role in many countries’ GDPs but is also an arguable social and temporal concept.     

Notwithstanding, a plethora of observers now contend that constraints within Islamic finance have successfully shielded Sharia-compliant institutions from the recent economic meltdown while keeping their coffers cash awash.

Several factors support a potential Islamic finance boom, including skyrocketing deposits from denizens of oil-rich populated countries, numerous infrastructure projects and the emergence of a large middle class.

UK-based International Financial Services London estimates that Sharia-abiding assets have grown by 35% to $951 billion between 2007 and 2008, even though the industry “paused for breath” in 2009 amid the ongoing economic lethargy.

According to Mohammad Abu Hammour, Jordan’s minister of finance, the Islamic banking sector witnesses an annual growth rate of 10-15 % and there are currently over 300 Islamic banks in more than 50 countries, with large concentrations noted in Iran, Saudi Arabia and Malaysia.

Most of those banks and financial intermediaries are owned by native shareholders but growing swaths of the Islamic banking sphere are being populated by specialized sections of “ordinary” full-service Western banks.

HSBC Amanah, the Islamic finance arm of HSBC, is an illustration of that trend.

Islamic banking is highly profitable and the heightened foreign interest conspicuously corroborates the notion that the industry is bound to expand once emerging nations within the Muslim world are willing and able to use their gigantic cash reserves to structurally develop core sectors of their economies.

Nonetheless, many pending issues are still crippling the Islamic finance sector and prevent it from exceeding the 1% share it currently holds in global banking business.

The first relates to the need for Islamic banks to devise risk-hedging strategies – especially those engaging in cross-currency transactions – and instruments that are compliant with regulatory precepts. Specialists within the industry have to be creative because derivatives, a major hedging tool, are prohibited by Sharia. Progress in that area is still timid.

Second, Islamic scholars need to devise and inculcate a homogenous body of legislation to financial agents to avoid asymmetric disadvantage in the marketplace. The immensity of such a task cannot be underrated because Islam has multiple schools of thought and divergent interpretations of certain religious precepts can often turn out to be insurmountable stumbling blocks.

Sunni Islam is the largest branch of Islam with at least 85% of the world’s 1.5 billion Muslims although the endogenous variety of schools of thoughts often creates a diversity of views.

If a bank located in Sunni Saudi Arabia finds itself at a regulatory disadvantage versus an Iranian bank ruled by the precepts of Shiite Islam or a financial institution in Kharijite Oman, then evidently fundamental market disequilibria will emerge.

Third, the sector needs to harmonize practices to grow. Uniformity is needed not only in regulatory oversight but also in accounting and risk standards, both internally (within the Islamic world) and externally (vis-à-vis Western or other regional financial zones). A practical example will be to seek compliance with I.F.R.S. (International Financial Reporting Standards) and Basel II Banking Accords.

Finally, Islamic banks will need to engage in a sophisticated, well-targeted communication campaign aimed at educating skeptical U.S. and E.U. regulators (primarily), as well as prospective clients in the Western hemisphere. This effort will be pivotal in shifting public perception of the quality and positioning of their products and services and in expunging the stigma that erstwhile (and current) geopolitical happenings may have placed on the “Islamic brand”.


Dr. Abu Ameenah Bilal Philips on Interest and Islamic Banking

Competitive Asymmetry vs. Corporate Strategy: The Perilous Nexus in a Treacherous Chasm

February 19, 2010 64 comments

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by Marquis Codjia



In the past, corporate strategists sought to maximize overall firm profitability by devising the best modus operandi that will help achieve results efficiently and effectively. Such a strategy routinely took advantage of the endogenous analogies of a homogenous market or geographic zone, such as culture, regulatory landscape, uniformity in fiscal or monetary policies, and socio-political affinity.

This system of similarities was observed in North America between Canada and the United States, in Western Europe prior to the Schengen Accords that led to higher economic integration within the European federation, and Japan within its Asian economic and geopolitical fiefdom. It has proven very fruitful for many a company because the strategic proximity afforded them lower implementation costs and higher profitability.

Nowadays, globalization along with its cohort of uncertainties is rebalancing the economic landscape and swinging the strategic pendulum in unlikely whereabouts. Globalization forces companies to review their tactical practices because of inherent execution difficulties in cross-cultural environments.

Tactics ought not to be mixed up with strategy. The former deals with detailed maneuvers to achieve aims set by the latter.

The need to control and instill a grain of homogeneity in the global marketplace has forced Western governments – mainly – to found organizations that will promote anti-protectionist measures and greater legislative coordination in world’s business. World Trade Organizations (WTC), North American Free Trade Agreement (NAFTA), and Eurozone are examples of such institutions or zones.

Though these international bodies have help catapult capitalistic free-trade as the preferred ethos, they have proven ineffective at creating a common economic environment in which corporations can engineer the same strategy to achieve their goals across geographical zones or markets.

This failure is due to the complex continuum of events taking place daily in the global arena that forces corporate leaders to include new factors in their strategy matrices.

A strategy matrix indicates how effectively a business entity can achieve profitability by juxtaposing such factors as store location, operating procedures, goods/services offered, pricing tactics, store atmosphere and customer services, and promotional methods.

New factors to be added to the mix are diverse and intricate; hence, an exhaustive analytical list cannot be within the purview of this paper. Some emerging trends relate to online marketing, higher government intervention, shareholder activism, military deals with domestic or foreign vendors, terrorism and war effects, and intellectual property theft.

Business leaders usually lump some of these issues in several corporate functions: risk management, government relations, regulatory, marketing, human resources, etc., and address them at higher echelons only when their magnitude dictates executive decision-making.

This approach is erroneous because it fails to recognize the systemic pedigree of corporate strategy and the notion that it must include all risks and objectives across the organization to be successful. The threats cited earlier are complex and diverse, and they usually change market equilibria by permitting, for instance, small firms to compete against larger rivals in markets they once couldn’t have penetrated.

This is the reason why I ascribe the concept of “competitive asymmetry” to this new phenomenon.

Numerous news headlines illustrate competitive asymmetry in the market. Western luxury brands are nowadays faced with fierce competition from “made in China” faked items, while American pharmaceutical mammoths like Pfizer and Johnson & Johnson observe powerlessly patent-protected pills being fraudulently transformed into generics in India. Another example is activist investor Carl Icahn confronting Time Warner’s management and demanding a change in corporate strategy or organizational structure (segment divestiture, merger, acquisition, etc.).

Other instances include Boeing filing a contract protest with the US Government Accountability Office after it lost a military deal to Northrop Grumman Corp and Europe’s EADS or fast-food giant McDonald losing an eight-year trademark battle to stop Malaysian Indian McCurry Restaurant from using the “Mc” trademark.

These trends are obviously deleterious for most firms within the western hemisphere because that asymmetric rivalry deprives them of the profits their R&D investment must have normally secured over a large time span. The threat is coming principally from emerging and underdeveloped countries because now mature European, American and Japanese markets no longer offer maximal growth prospects and enjoy a legal environment that disincentivizes intellectual property malpractice.

Major companies cannot underestimate the criticality of these emerging trends because they not only stand to lose market share at home but also see their profits eroded in those international markets where growth rates are healthier.

I’ll end with some geoeconomics questions: how will Google’s recent infuriation at China affect the firm’s country strategy given that the current 300 million Chinese computer users constitute a less ignorable niche? What about its overall Asia strategy? Will business prevail over politics? Will Google’s potential exit from the Chinese market propel rival Baidu to domestic and global supremacy? How will that affect the firm strategy with respect to launching other products in a country with 1.3 billion customers? How will this affect Google’s overall profit line?

SPECIAL REPORT – The art of economic espionage: why China is crushing America’s global supremacy

February 5, 2010 44 comments

Cyber-security warfare is a growing field in today’s strategic planning apparatus where emerging military colossi utilize asymmetric conflict tools to thwart or cripple the ability of established leaders. This article explores china’s massive IT investment in light of its geopolitical standing with the US.

by Marquis Codjia

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Modern historiography specialists have long argued that an essential segment in the study of human evolution is inextricably tied to the basic understanding that societies generally emerge, progress and fall cyclically. Such frequency in social evolution is not just a consequence of endogenous factors, it also results from the impact of the external environment, be it close – neighboring constituencies vying for the same resources – or far – as part of a larger geographical area.

History teaches us another fundamental truth, predominantly unveiled in social sciences: humans are inherently prone to believing in the danger of the unknown, the fear that uncertainty – when present in life – brings an intolerable level of complexity in handling daily activities. Economists, in tandem with the larger group of social scientists, ascribe the word “risk” to this angst.

Risk lies in everyday life. From birth to death and in between the terrestrial episode called life, humans experience a sophisticated relationship with risk and utilize it as a powerful catalyst to furthering their interests. We fear the unknown not just in temporal terms – e.g.: what will tomorrow be? – but also in more practical, present-day terms, that is, what will happen today?

In assessing the rectitude of our daily decisions, the analysis of the environment we live in becomes of critical importance. There emerges then the need to know, understand and act on a variety of variables that make up our ecosystemic reality. Neighbors are a major part of that reality.

The indubitable observation that humans are ‘sociable animals’ implies a life in community, which in turns posits the sharing of interests, destinies and geography. We share our lives with neighbors, other humans whom we don’t fundamentally know and whom we believe are different from us. Neighbors, in continental philosophy, are the ‘constitutive other’ as opposed to ‘same’. Neighbors are different, and because of that, they must be hazardous to our very existence, hence “hell is other people” (Jean-Paul Sartre).

Consequently, our desire to know the ‘other’ and what they’re undertaking forces us to constantly be in a question mode: ergo, we resort to spying. Espionage is ingrained in basic human instincts from cradle to grave. First, we ape our relatives, then our acquaintances and later our neighbors. In that quest for knowledge, humans recklessly spy on each other in a bid for power. Once they determine with a reasonable degree of comfort the neighbor’s strengths, the overwhelming tendency is to match it, surpass it, annihilate it, keep it at a politically acceptable level, or use a combination of all these options if the socio-historical continuum of events demands it.

Doubtless, the need to control the military and economic standing of neighbors is the quintessential, albeit hidden, dogma of modern geopolitics. Doctrinal differences may abound, but a studious analysis of contemporary events demonstrates clearly that wars and other man-engineered crises have historically proven to be good ways to rebalance powers among neighbors, or more precisely, within geographical zones. Crises, facts have shown, drive innovation and quality of life.

Espionage is not a recent discipline within political science. It has been a staple of human history for the past 2,000 years and even before. Throughout history, nations have risen or fallen based on their ability to collect data from rivals and use that body of knowledge to gain a competitive edge. History also suggests that societies that show a disinclination for ‘outer research’ of their environment, and consequently, a significantly lower number of exogenous interactions – be it cordial or belligerent – with others have been weakened over time. The high frequency of wars between nations in the ‘Old Continent’ explains the relative superiority that Europe had over, say, Amerindians and Africans for the past few centuries, first in slavery and then colonization.

Espionage is rooted in modern life

After two atrocious global wars, countless medium-size conflicts and a dogmatic cold-war between capitalism and communism, political and military leaders seem to have finally gauged the idiocy of lethal conflicts with planetary implications. The notion of ‘détente’, that is, the easing of strained relations in the political phraseology, gives nations the imaginary assurance that they may all coexist pacifically and a major conflict is preventable once greater cooperation between societies subdues the inherent quest for power that causes hostilities.

Acquiescing that there exists a permanent détente within the current geopolitical landscape is an optical illusion because it goes counter the very human urge to monitor the neighbor in order to know him or dominate him, if not annihilate him. This can be very easily illustrated in instances where spies are caught in so-called ‘friendly’ territories. Take the example of Israel’s Mossad agents being arrested in the United States.

The nuts and bolts of modern state espionage lie in a sophisticated and complex apparatus that all nations, and peculiarly global superpowers, have invented to carry out data-collecting and monitoring activities in peace time. Embassies, with their massive bureaucracies, specialized technocrats and their diplomatic inviolability, are preeminent on that list. They are essential in monitoring the host country’s social dynamics and report to their respective governments. Simply put, an embassy is, de jure, a stranger turned neighbor.

Next are supranational organizations that populate the global political, social and economic sphere. Their local representations and periodically published studies may also serve an intelligence purpose. Finally, aid agencies and so-called ‘humanitarian’ organizations are critical in gauging so-called ‘underdeveloped’ nations’ economic ability and progress in their development. It is no coincidence that major countries in the developed sphere do not customarily accept ‘aid programs’ from their counterparts unless excruciating circumstances dictate that such refusal would be politically unacceptable.

Strategic studies and the modern economic literature are replete with topics referring to Japan’s, and to a lesser extent, Asian dragons’ ability to use economic espionage at the end of the Second World War to gain a competitive edge over erstwhile powers such as the United States and Great Britain. The necessity to monitor and direct the continent’s economic reconstruction, and the panic of a potential dominance by communist Russia, also led the United States to implement the Marshall Plan in Europe from 1948 through 1952.

Businesses thrive from spying more than the military

A noteworthy myth in today’s world is that espionage is principally the province of military strategists and national armies. Evidence from authoritative business intelligence magazines, leading governmental studies and a massive body of knowledge from academia have clearly explained the causal relationship between firm profitability and espionage. Differently stated, governments tend to always transfer intelligence data to their domestic industries, whether they are at war or at peace.

As a result, the military-industrial complex benefits considerably from intelligence and such prerogatives are then disseminated into other firms in the economic fabric. As an illustration, it would be fairly understandable that a firm like Boeing, which derives a substantial portion of its revenues from government’s contracts and sale of military aircrafts, is more attuned to certain developments in US intelligence gathering than a financial services giant like Citibank.

Nevertheless, businesses have also parlayed their gargantuan economic clout into a very successful data-collection enterprise. The plethora of tools available to business executives nowadays is strikingly sophisticated and effective. Even if it is not exhaustive, a good analysis of such tools must look at their source and their degree of macro-economic interconnectedness.

On one hand, external mechanisms allow at the macro-level business enterprises to gather information from competitors and control how such information can be utilized to thwart rivals, increase their own market primacy, or do both. When they share a community of interests vis-à-vis a new market or are in an oligopolistic situation, companies are routinely willing to join hands provided, of course, that the risk-payoff ratio of a single venture is not immensely superior to that of a joint venture. Tacit collusion, that is, the market situation where two firms agree to play a certain strategy without explicitly saying so, is a fine illustration of business intelligence sharing.

In practice, firms engage in economic espionage via economic sections of embassies, chambers of commerce, lobbying groups, industry groups, specific studies from consultants, and monies granted for academic research in particular fields of interest. Concomitantly, they guard against intelligence threats by massively supporting intellectual property laws.

On the other hand, a sophisticated internal approach allows companies to stay abreast of latest developments within their industry. First and foremost, they hire to their corporate boards or for senior positions, experienced former government officials and high-rank military leaders who had been privy to high-value strategic insights during their public tenure.

This is immensely beneficial to the hiring side because a former cabinet member, a congressman or a four-star general, can possess a breadth and depth of experience and knowledge of past, present and future topics that is considerably worth more than countless external consulting reports. Second, economic intelligence departments and government relations departments also fulfill data gathering roles through research, lobbying and interacting with industry groups.

Cyber-warfare, the new cold war

As the planet becomes technologically more intertwined, novel tools and modus operandi are being made available to governments and private interests to collect specific intelligence. These tools and procedures are an intricate combination of old and new procedures which simultaneously penetrate nations’ military, economic and social constructs to extirpate valuable bits of knowledge.

Defense experts are calling these emerging asymmetric conflict tools ‘cyber-warfare’. Due to the plethoric ramifications they present and the simultaneous dual tasks they may serve to fulfill (attack and defend) when engineered in certain ways, I label this group Modern Cyber-warfare Gear (“MOCYG”).

MOCYG, as it stands, involves the offensive use of various techniques to derail a nation’s infrastructure, perturb the military and financial systems of a country with the aim of crippling its defense responsiveness and the integrity of economic data, or accomplish other destructive aims based on the attacker’s incentives and strategy. Security specialists and military researchers have classified these techniques into 5 major groups: computer forensics, viral internet tactics, assault on computer networks or software, hacking and espionage.

The idiosyncratic power of cyber-crime lies in its ‘stateless’ nature, its capacity to be inexpensively controlled and deployed, and the vast damage it can exert. Given the judicial vacuum created by cyber-warfare techniques, nations are rushing to build up legislative safeguards to prosecute offenders even though criminologists argue such undertakings are largely inefficient at the moment.

A memorable cyber-criminal event occurred in Estonia in 2007 when more than 1 million computers, allegedly from Russian-based servers, were used to simultaneously cripple state, business and media websites in a modus operandi analogous to the “shock and awe” military tactic. That attack ended up costing Tallinn’s authorities tens of millions of US dollars.

China, a cyber-giant in progress

Upward socioeconomic trends in the People’s Republic of China are well known to international masses and covered profusely in western news media. So are Chinese authorities’ singular understanding of democracy and human rights as well their overt wish to play a bigger geopolitical role in world affairs. However, the quiet revolution China is experiencing lies within the astronomical investment country authorities are making in top notch universities so as to catapult China into the top league of technological giants, along with the United States and Japan. Given the size of such educational outlays, Chinese authorities must believe that a major competitive edge can be gained in the technology field and such advantage can be converted or transferred into other sectors of their mushrooming economy.

Top western sinologists and other think tanks are closely monitoring these academic developments because they understand the basic notion that future geopolitical dynamics will inextricably be tied to how successful Chinese will be at leveraging technology to boost their future ‘global penetration’.

The smart tactic is that, while future chief engineers are being trained at world-class institutions such as University of Science and Technology at Hefei, Harbin Institute of Technology, Beijing University and Tsinghua University, China is concurrently putting a veil of secrecy around its information systems and cyber-infrastructure. The country may be notorious today for its copyright infringement cases or intellectual property violations, but it is inconspicuously gearing up for tomorrow’s technological primacy that its expansionist aspirations may dictate.

China also investigates currently available ways and means to unearth state-of-the art synergy tools that can be leveraged between its major government departments and state agencies as it prepares to enter the ‘knowledge economy’. Authorities view this coordination effort as an indispensable step forward because it adds another layer of centralization to a government structure that is built around the canon of ‘consolidated power’.

More specifically, country leadership has summoned top minds in technology and auxiliary fields to synergistically engineer the future cyber-infrastructure that will solidly mark China’s imprint in the digital landscape. This task is colossal, and the vastness of it effects precludes obviously an analytical granularity. Several hundreds of thousands of Chinese computer engineers, regrouped under ad hoc commissions, think tanks and strategy centers are the backbone of this emerging ‘digital army’.

They work under the aegis of brilliant specialists whose unquestioned patriotism and in-depth expertise are unparalleled at such high seniority levels; this group includes Liang Guanglie, Wan Gang and Li Yizhong. The first is the current minister of defense, who works in conjunction with the People’s Liberation Army and the Central Military Commission to manage the largest military force in the world (ca. 3 million) and oversee its strategic evolvement.

The second is the head of the Ministry of Science Technology and is mechanical engineer and auto expert. The third is the Minister of Industry and Information Technology, a cabinet position pivotal for the country’s information systems development.

Anemic US IT investments

Equipped with this super cyber-security gear, China seems to be winning, or is in a significant position within, the ongoing global cyber-war. In a sense, the country is not an ‘emerging’ superpower as western analysts and social science specialists would like to call it. It is already a superpower in the fullest sense of the concept.

The term ‘emerging superpower’ is presently preferred in academic and business literature as well as in media parlance because it is more politically palatable to the elite and other classes of citizens in traditionally influential economies (G8) who fear the psychological and social implications of welcoming new colossi in the select club of the powerful.

Security experts and top military minds in the United States are truly concerned that the Chinese massive IT investment dwarfs America’s and do not hesitate to point to the geopolitical implications of such a chasm. They note that the countless cyber-attacks from China and Russia are just a start of the new cyber ‘Cold War’ of the 21st century.

It is a fact that many foreign-engineered digital attacks have targeted many industrialized countries’ military systems, power grids, and financial infrastructure in the past few years. Yet governments and military forces at present have limited capacity to detect or infiltrate the attacker, counter the attack, and prevent future assaults.

US defense officials and business leaders understand the looming threat but believe its intensity and gravity constitute a hyperbole. However, authoritative statistics from the Government Accountability Office, US Congress reports, and academic studies indicate evidently that the world leader has not shown hitherto the political willpower to tackle the digital gap in its cyber-security infrastructure.

Truth be told, politicians in Washington, Pentagon strategists, and the intelligence community at large have long known of and understood the nature of the menace. Notwithstanding, a series of geopolitical events forced them to transfer certain topics into budgetary oblivion at the credit of more pressing, more ‘visible’ national security threats that are effortlessly noticed by constituents (e.g.: terrorist attacks).

A few factors explain Washington’s inability, or budgetary lethargy, in addressing the cyber-warfare threat. First is the geostrategic complacency derived from the fall of communist Soviet Union and the ensuing inertia that global unipolarism usually creates.

Second, America’s military apparatus is currently ‘distracted’ by two ongoing wars and engaged in a host of relatively minor security missions around the world. Adding to those involvements, there is the corollary ‘war on terror’ that has mobilized since 2001 colossal resources to thwart further domestic attacks.

‘Domestic’ in this sense refers to an incredibly enormous geographical area because it encompasses US conventional soil and the related territories, American overseas diplomatic missions, its military bases, transnational organizations where the US holds significant strategic interests (e.g.: NATO headquarters and military stations), and the countless aid, religious, and humanitarian outposts around the world.

Third, the diversity and criticality of issues at hand force the US government and congressional leaders to prioritize their budgetary efforts. The current economic despondency bodes ill for any serious endeavor in tackling underinvestment issues in information technology because the country is pecuniarily limited and cannot afford to continuously print money (risk of inflation and currency devaluation) or borrow from… China.

US budding cyber-security grid is solid

Despite the socio-economic gloom, the Obama administration has shown in the past 6 months a strong level of commitment in assuring the integrity of the nation’s information assets. He appointed late December Howard Schmidt, a renowned computer security specialist and former Microsoft security executive, as White House cyber-security czar. Other high-profile nominations have followed in the army ranks and other key departments and government agencies such as Homeland Security, Treasury, the FBI and the CIA.

The efforts appear to be coordinated and effectively reaching their desired goals, from the Pentagon’s launching of a giant “cyber-command” unit to the CIA’s and FBI’s massive ‘hiring spree’ of computer engineers and cyber-security specialists. International cooperation with other allies is also part of the undertaking; US intelligence agencies are thus partnering with foreign counterparts such as Britain’ MI5 and MI6, Israel’s Mossad, Germany’s Bundesnachrichtendienst (Federal Intelligence Service, BND) and Militärischer Abschirmdienst (Military Counterintelligence Agency, MAD) to address emerging threats.

Private interests are equally gearing up. Businesses are investing massively in IT infrastructure and upgrading computer networks, and working jointly with government agencies. They are also granting rising subsidies to think tanks and academia to help in this effort.

The combination of efforts has to be successful because an absence of effectiveness in cyber-warfare measures can be ‘lethal’ to US global supremacy. Judging by the great havoc cyber attacks had catapulted onto Estonia in 2007, hyperbola ought not to be barred in this topic.

Based on the latest estimations, US nominal GDP is nearly 3 times that of China ($14.5 trillion vs. $4.5 trillion), but the latter’s healthier growth rate is helping bridge that gap gradually. Thus, many forecasters – and the proverbial ‘conventional wisdom’ – assume that it will take Beijing many decades to attain America’s economic clout and level.

That said, in the hypothetical scenario that a cyber-warfare erupts between both countries, a stronger China may only need to considerably crush US economic productivity and therefore its GDP to claim victory and financially surpass its rival. Absent effective security systems, China, or any other foe, may only need to assault vital arteries of the US military-industrial complex: power grids, financial transaction systems, Federal Reserve System, US Armed Forces’ computer systems and networks, Congress’ and White House’s IT infrastructures, etc. It’s easy to imagine the massive damage electricity failure can do to a country’s transportation, financial, and military systems.