Archive for the ‘Special Reports’ Category

Confronting The Entitlement Conundrum – Why Social Security May Be America’s Financial Weapon of Mass Destruction

April 18, 2010 67 comments

By Marquis Codjia

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Warren Buffett, the billionaire investor and long-time Chairman of conglomerate colossus Berkshire Hathaway, emphatically stated in 2002 that derivatives were “time bombs, both for the parties that deal in them and the economic system”. Given the deleterious role these securities had in the recent economic crisis, the “Oracle of Omaha” certainly evinces prescience in addition to his mythic business acumen.

Yet, what will likely choke off economic growth in the U.S., and by percolation, usher in global economic disequilibria, is managing mammoth entitlement benefits due to – or rather, promised to – millions of Americans over not only a year or two, but decades in their lifetimes, once they face thorny existential episodes such as illness, old age, disability, or loss of employment.

Of all government-steered social schemes, Social Security – the federal Old-Age, Survivors, and Disability Insurance (OASDI) program – is the largest, claiming 20% of the national budget in 2009 or $678 billion, right after defense (23%). Other known schemes are unemployment benefits, Medicare and Medicaid.

A conceptual understanding of Social Security is helpful to gauge the dynamics at work in the entitlement debate. Simply explained, Social Security allows retirees to earn pension income from contributions made by current workers – via specific payroll taxes. Understandably, the system remains balanced if contributions made exceed benefits paid – as is currently the case.

However, current projections posit a funding gap starting in 2016 – in other words, expenses will outrun revenues, thus coercing the country into seeking external funds (from new loans or cuts in other programs). Worse, successive governments have borrowed and used up over the years cumulative surpluses held in the Social Security Trust Fund.

The funding deficit is caused by a panoply of factors, the most important of which are the increase in life expectancy, the lowering birth rate, and aging baby-boomers (resulting in fewer workers paying for more retirees).

What’s flummoxing is that the current political elite – like their forerunners in both parties – seem to be voluntarily embroiled in partisan ramblings, and gladly enjoying esoteric rhetoric that renders the populace obtuse, and discredits the urgency and criticality of the social security debate. Consequently, our most intellectually dynamic citizens do not give this topic the socio-economic import it deserves.

The ensuing status quo threatens to turn a tractable conundrum into a veritable crisis – a “time bomb” into a “financial weapon of mass destruction” against America’s social fabric. Former and current Fed chairmen, fortunately, fathom the essence of the matter; thus, Alan Greenspan advocates a mix of measures to bring entitlement programs under control and ensure long-term economic prosperity, while Ben Bernanke warns that “Americans may have to accept higher taxes or changes in entitlements… to avoid staggering budget deficits.”

Several elements form the disquieting body of thoughts that justifies the hyperbolic, or apocalyptic, formulation used in this analysis.

First, the absence of a real, serious forum to gauge the merits of viewpoints engaged in the Social Security overhaul disputation. As noted earlier, this status quo seems to be furthered, at the very least, by consecutive administrations for the past three decades, because either the issue is thorny and politically unpalatable to constituents or elected officials deem it of lower priority. In sum, they dare not venture topics that may derail re-election prospects.

To fill the rhetorical void, snippets of partisan parlance are interjected here and there, mainly to polarize citizens and eschew a thorough debate. One such snippet is the notion that Social Security should be privatized and entrusted with professional portfolio managers because the government should let free-market decide and any form of public management of the behemoth fund is a type of communist intervention intolerable in capitalist America. In this article, the pros and cons of this argument cannot be evaluated with granularity but factual observations reveal the latter’s practical limits. It’s easy to wonder what financial devastation the country would have suffered had the Fund been invested in the stock market before the recent mini-crash. It’s also easy to observe how effective a manager the government can be by analyzing operational results at the Federal Employees Retirement System (FERS), the Army Medical Department, Medicare, and Medicaid, all of which remain sound programs.

Second, the much needed overhaul of the IRS and the country’s tax collection scheme is taking longer to occur, and this delay, coupled to the ongoing government waste at the federal, state, and legislative levels, annihilates any serious endeavour to cut budget deficits.

Next, the systemic spectre of a vicious cycle looms. If the ratio of retirees to active workers grows excessively, there will be fewer contributions to pay pension benefits, and such a reduced purchasing power will yield lower private consumption. Companies will then be forced to cut their workforce if sales are lethargic, and the smaller remaining workforce will contribute even less to the Social Security Fund, and so forth.

Fourth, the Fed – as the lender of last resort – can lend to the U.S. Treasury should public finances deteriorate but it can’t sustainably keep printing money via its quantitative easing tactic lest the dollar tumble on defiance from capital markets and heightened inflation.

Fifth, the country’s incapacity to lower its trade deficits will likely not be solved in the near future because the American industrial complex is currently unable or disinclined to produce superior goods affordably, and opening up U.S. markets to foreign suppliers serve as geostrategic levers in international discussions.

In the end, entitlement specialists and those well-versed in the Social Security issue ask the following: why aren’t authorities implementing the Social Security Trust Fund’s proposal (2009 Report) to marginally raise the tax rate or the salary cap on payroll tax in order to fix the funding gap? For example, raising the payroll tax rate to 14.4% in 2009 (from 12.4%) or cutting benefits by 13.3% would fix the program’s gap indefinitely, while these amounts increase to ca.16% and 24% if no changes are made until 2037.

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?

Rethinking corporate risk

February 14, 2010 87 comments

A new risk typology is gradually decimating firm profitability amidst the ongoing economic crisis. Even though individual risks taken separately can be handled with a relative effectiveness, different risk management paradigms need be implemented to curb their cumulative adverse impact.

by Marquis Codjia

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An important staple in corporate affairs management lies not only in the intricacies of the external environment and its potential impacts – deleterious or favorable – on firm profitability but also in factors endogenous to the entity. A business entity has to panoramically gauge in permanence all elements that are part of its ‘quality chain’, that is, its supply chain and distribution channels taken in conjunction with its corporate brand rating within the market.

Uncertainty is at the heart of every business venture. The adventure of a venture is what epitomizes every undertaking that has profit seeking as its core ethos. Decision-makers are keen not only to seek the best ingredients for strategic success but to derive systemically the most cost-efficient modus operandi that will perennially heighten overall financial competitiveness and shareholder value.

Uncertainty can be viewed as the inherent dichotomy that exists in day-to-day decisions regarding core utility and chance; in other words, uncertainty is the big question mark that hangs on the shoulders of most corporate executives, asking them whether they’re making good decisions and whether these decisions will yield good outcomes.

Good outcomes are vital to immediate, short-term firm success in the marketplace; however, good decisions are preeminent in the long-run strategic standing of most corporations because a framework that structurally fosters the emergence of the best ideas and the most efficient and effective procedures uniquely positions these entities for a relatively perennial competitive dominance.

The current risk literature emphasizes that risk, that is, the unknown from uncertainty, can be construed in two ways: aleatory and epistemic. Aleatory risk refers to a situation of pure chance whereas epistemic risk is a conflict circumstance where the resolution depends on the experience level of the decision-maker and their judgment. The latter risk is customarily encountered in business dealings but the former is more a product of probability. For instance, Tony Merna and Faisal F. Al-Thani (2008, page 14) qualified the discovery of Viagra as aleatory because the drug was originally for angina but was found during clinical trials that it could be used to prevent erectile dysfunction syndromes in males.

Corporate risk officers need to continually devise a structured framework to systemically address risk at all levels of the strategic continuum, be it at the executive and project levels or lower echelons. Uncertainty is an indissoluble nexus in business; therefore, risk can never be integrally eradicated. This heightens considerably the criticality of a sound mode of operation that places due interest on the detection, the analysis and the mitigation of all risks across the firm.

Diverse risks but a single risk management framework

(Risk chart courtesy Astral Computing, Inc.)

Many types of risk are found in business entities nowadays, both exogenously and endogenously, depending on the economic sector, the market situation and position (monopoly vs. oligopoly, monopsony vs. oligopsony, or perfect competition) and the strategic direction corporate executives are disposed to spearhead.

To a majority of corporate leaders, the conventional risk typology addresses three key areas which are quintessential to business processes, firm profitability and monetary viability: operational, market and credit. These risk areas were redefined and enhanced through the Basel II banking regulation although the precepts of the latter regulatory corpus can be applied effectively to any business sector.

Operational risk lies in the execution of a company’s business functions and thus covers an incredibly large span of functions, from internal processes to human resources and IT systems. An example of such risk may be a theft of information or a loss due to internal fraud (asset misappropriation).

Credit risk refers to the unfavorable event when a debtor is unable to repay a loan or other line of credit due to bankruptcy or temporary liquidity problems (the epithet “country risk” is preferred when the defaulting party is a country or any other sovereign entity).

Market risk is the risk that market factors (stock prices, interest rates, foreign exchange rates, and commodity prices) may have individually or communally an unfavorable pecuniary effect on a corporate investment or trading portfolio.

Another risk – political risk – is present within a firm’s external environment and emerges concomitantly with a move into the international sphere. This relates to the financial peril that a country may suddenly change its policies and explains, in part, why many underdeveloped countries lack foreign direct investment.

Managing new types of risks

Admitting that risks are inherently the Achilles’ heel in most corporate functions makes accordingly easier the argument that an effective risk management program is pivotal to avoiding potential financial losses or brand damage. Risk officers need to utilize an effective and efficient toolkit in order to detect, analyze and mitigate or eradicate potential risks at all levels of corporate strata, and risk modeling via computer simulation has proven relatively effectual at mapping organization “risk cloud”. Chapman and Ward (1997, page 169) also identify more exhaustively eight phases in the risk management process: define, focus, identify, structure, ownership, estimate, evaluate and plan.

There exists at the moment a complex panoply of methods and systems to address risks, and that list is correlatively associated with the magnitude of the underlying events when they occur (high, medium, low). It can also be affected by the extent to which the probability of the likelihood of occurrence of such events cannot be evaluated with a comfortable degree of accuracy (Lifson and Shaifer, 1982, page 133)

New types of preeminent risks have surfaced the past few years in the marketplace, and at the moment these areas of uncertainty are eerily ignored or underrated by risk specialists or academic experts. Although some of these threats have been tracked with a fluctuating degree of thoroughness over the years, their stratospheric increase in the last decade and the resulting financial havoc on corporate cash accounts have catapulted them into the “high risk” category.

These risks are shareholder activism risk, reputational risk, and regulatory risk.

Tony Merna and Faisal F. Al-Thani still posit that the entire risk universe can be divided into 3 sections: known risks, unknown risks, and unknown unknowns. The latter category is of preeminent import in the current analysis because it encompasses the emerging threats named earlier.

Shareholder activism, an erstwhile epiphenomenon, has metastasized lately into a increasingly frequent and potentially deleterious incident within the economic landscape. Of course, the nuisance here is gauged from the vantage point of a corporate executive whose position or policies can be potentially annulled by outside activists.

This type of activism utilizes the conduit of equity stake in a corporation to put pressure on its management and reach the goals and strategies at the core of activist shareholders’ mission. Although shareholder value creation is one momentous ethos for corporate leaders, shareholder activists do not necessarily pursue a community of interests with other shareholders or business leaders. The dichotomy arises because the former group customarily seek short-term goals that are of utmost importance only to them and usually of a pecuniary nature, while the latter aspire to longer-term strategic goals that will enhance firm market standing and competitive status.

Magnifying investor activism risk is the economic observation that it is relatively cheap from the investor’s standpoint – a small ownership of 5 – 10% is sufficient to launch a fruitful campaign – compared to other more costly takeover undertakings within the economic sphere. In practice, stockholder activism can be found in several circumstances: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management.

Carl Icahn and T. Boone Pickens, both billionaire US investors, have proven very adept at successfully bringing about change within their target companies and in that process amass gargantuan profits once the desired restructuring, merger or takeover is completed. Mr. Icahn has parlayed his unique business acumen, strategic thinking and huge checkbook into The Icahn Report, an effective pedagogic resource that fosters his views on governance and economic matters.

From a corporate perspective, risks of this category can be extremely prejudicial because a takeover or board turnover can beyond a shadow of a doubt derail the medium- to long-term goals that managers set, which in turn can affect profitability and market leadership while costing the firm unnecessarily millions of dollars in litigation and public relations campaigns.

Reputational risk arises when adverse events affect the brand or social standing and image of a business concern as a result of actions undertaken by the media, firm employees, senior management, and government bodies or industry overseers (the latter group is the source of regulatory risk).

Corporate managers need to heed the aforementioned new risks in a different manner than ordinary risks due to their intense asymmetry (low cost vs. sizeable financial damage). Obviously they must apply the best practices dogma of good financial decision making in corporate finance to this risk typology: present value, financial statement analysis, and risk and return but also option pricing and governance code (Damodaran 2006).

In addition to a solid IT infrastructure aimed at capturing these risks, corporations need to create a new consolidated function, working under the aegis of the Chief Risk Officer, to synergistically address these areas of uncertainty. This role must have overall responsibility for the development and implementation of a detailed business risk management framework and advise senior leaders on sound corporate governance practices. The future of solid firm profitability is at stake.

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.

Goodbye Copenhagen, Hello Haiti!

January 22, 2010 15 comments

The outpouring of financial aid in the wake of Haiti’s seismologic calamity is a welcome sign of global largesse. Though short-term monies will be disbursed for certain, past practice suggests long-run pledges are less likely to be, unless country leaders are proactive.

by Marquis Codjia

Voir version française

One of the most memorable “media circuses” in 2009 was the Copenhagen Climate Summit, COP-15, that gathered in the Danish metropolis late in the year a diverse mix of world leaders, social activists, interested financiers and the usual cohort of highly paid lobbyists. Although that meeting has justifiably yielded the meager results its divided participants were pushing for, the notable fact remains the political ‘tour de force’ that the United States and China eventually exhibited.

The antagonism was not limited to those two superpowers; it had metastasized into the broader North-South affairs, leaving, for instance, the once ebullient France and Germany deeply frustrated at India’s and Brazil’s lack of political will, and the surprisingly united African leaders – habitually ignored at international gatherings – irate about the richest nations’ disinclination to hand out the billions of dollars hitherto promised.

Apart from the millions of dollars disbursed, the temporary cut in local unemployment spawned by the hire of “climate experts” and media pundits, the direct economic boom momentarily enjoyed by Danish businesses, and the general “feel good attitude” espoused by politicians and green activists, the forum resulted in what everyone – except the staunchest idealists – expected: a failure.

A total collapse that all political analysts predicted, especially after COP-15 attending nations had showed, a month prior to the meeting, a divergence of views and interests that, cumulatively, were akin to ‘irreconcilable differences’ often cited in divorce proceedings.

Now that the liberal wing of the Democratic Party has understood the limited power that Barack Obama, the(ir) “change agent”, can actually wield in certain fields of American foreign policy, and concomitantly, the solid structural power that lobbyists and other economic forces brandish when some fundamental systemic balances are threatened, the US leader needs a game changer to regain his ‘moral stature’ with Democrats and Independents.

The urgency of such initiative cannot be underestimated or addressed lightly by Democratic strategists, especially in the wake of an unheralded loss of the Massachusetts senate seat to GOP’s Scott Brown in a political bastion dominated by the late Senator Edward Kennedy for 40 years.

That major upset, while reshaping the current political landscape, is set to derail, or at a minimum, perturb the president’s agenda on major points, including health care reform, financial services regulatory overhaul, economic empowerment, education reform, and a successful conclusion in Afghanistan and Iraq.

Judging by the swiftness of US actions and the grandiosity of the country’s forces – diplomatic, military, logistics, humanitarian – deployed in Haiti over the past week, Barack Obama and his advisers seem to view the quake in the devastated nation as that game changer, their ‘eureka moment’.

Not that the leader of the free world is only gauging the political benefits of rapid intervention, he seems to truly believe in the moral leadership and capacity of America to aid countries in misfortune and spread its ‘good fortune’ wherever it can.

After one year in power, these altruistic endeavors have doubtless helped propel the president’s poll numbers to reasonable margins, after the bitter socio-political, partisan wrestling of 2009 gravely eroded his once stratospheric political capital, and brought it back to standards routinely enjoyed by politicians at that time in their tenure.

That surge in favorability, for the most part, is due to the supporting 1-million strong Haitian diaspora’s electoral base, the ‘collateral benefits’ of higher esteem in the larger Caribbean community, the de facto acquiescence of a majority of Americans for charitable intervention in crisis-stricken areas, the need to shun the nightmarish debacle and inertia of US emergency apparatus in a Hurricane Katrina-like situation, and last but not least, the opportunity to really start ‘earning’ that 2009 Nobel Peace Prize. Needless to say the latter was awarded as “encouragement for a work in progress”, a “call for action”.

Notwithstanding, Washington’s strong pledge to alleviating the repercussions of the seismologic calamity in Haiti is being matched by an equivalent degree of commitment from other international players.

Gone seems to be the period where a unipolar world dominated by American capitalism would render charitable outlays of this magnitude only affordable to the United States. Inspirited by massive foreign reserves and gargantuan balance sheets thanks to enviable growth rates and healthy exports, these rising stars are prying into an anemic US economy to solidify their presence on the global stage.

B.R.I.C. nations (Brazil, Russia, India, and China) are, of course, atop this group, in tandem with other emerging market behemoths such as South Africa, Indonesia, and Mexico.

Traditionally munificent western donors such as the European Union, Canada, and Japan, are nowadays pecuniarily depleted after two years of exorbitant bailouts of their banking and industrial systems. Ergo, they cautiously guard against any further outflows for aid and prefer funding via established international financial channels (e.g.: World Bank, IMF).

The irony, or rather, the melancholy of this humanitarian imbroglio is that, eventually, the monies pledged along with the corresponding media blitz and political speeches are feared to be a mere publicity stunt, an ‘effet d’annonce’, in the strictest sense of the French phraseology.

Distinctive parameters are lining up to produce another media circus with plenty of zanies, small and big, who are all vying for the ‘top benefactor’ position in the global collective psyche, without actually paying the corresponding price.

Differently stated, past experience and the fact that Haiti represents a minuscule geo-economic target – if any, at all – suggest that odds are in favor of international inertia once journalists and the public take their emotional eyes off the country due to news fatigue or the eruption of another crisis or tragedy, be it man-made or ‘act of God’.

No doubt, the short term vital needs of Haitians will be fully met; however, big clouds of uncertainty shroud the fulfillment of medium- and long-run promises. Alas, this is no longer about saving the ecosystem, which is an arguably paramount ethos for replete Westerners’ stomachs; it is about saving the lives of millions of individuals and the political existence of a nation-state.

Assuming these predictions turn out wrong, that is, the amounts pledged are actually disbursed in full, and subsequently managed with the strictest governance standards, Haiti will embark on an enviable journey to turn around its chaotic legacy into an economically viable, socially stable, and politically independent state. Some sort of Marshall Plan, but those are big “if”.

International aid that is currently being directed at the devastated territory can be grouped in two chief categories: material and monetary. The former has so far consisted of all the logistical, military, medical, and humanitarian equipment needed for basic emergency activities; it also relates to the military, peace- keeping, and humanitarian personnel that a host of nations, mainly the United States and the United Nations, have already deployed.

Although hard to quantify, these operational initiatives are crucial to rescue the wounded, secure social peace, avoid business looting, and help safeguard the country’s (remaining) political fabric. They are also key in establishing a temporary medical infrastructure to keep pandemics at bay, provide food and potable water to the population, and restore or maintain international exchange.

Finally, and most importantly, these endeavors exist to assuage growing concerns from the twenty-five A.C.S. (Association of Caribbean States) leaders, particularly the neighboring Dominican Republic, who fear that social chaos in Haiti might metastasize into regional bedlam, thanks to refugee exodus and the ensuing social instability so deleterious to these tourism-dependent economies.

The monetary assistance earmarked for Haitians, by its very nature, can be (theoretically) quantified. It consists mainly of four sources, which can be often interconnected: governments, charitable and rescue organizations, private donors, and supranational institutions.

As the country falls into the second week after the tragedy struck, there exist a variety of news accounts narrating its pecuniary aid, and it can be expected such largesse will continue for some time.

In a recent study, the Associated Press estimated government quake aid to Haiti at nearly $1 billion, with more than half ($575 million) from the European Union’s 27 nations.

Individual donors, the world over, are indefatigably partaking in the effort, under the aegis of celebrity initiatives, humanitarian organizations, news outlets ‘telethons’, and internet campaigns.

Americans, despite the ambient precarious economy, handed out $200 million so far, whereas Germans and Dutch donated $25 million and $41 million, respectively.

Deep-pocketed Bretton Woods institutions have also lent a helping hand. IMF chief Dominique Strauss-Kahn pledged $100 million from his institution to aid in reconstruction, while the World Bank waived for 5 years Haiti debt payments estimated at $38 million per annum.

A bird’s eye view of the various aid pledges at the moment put the total estimate at close to $1.5 billion, and it can be reasonably forecasted that the ongoing fundraising gumptions, once a more detailed analysis is conducted, can up that number to $2 billion.

Suffice to say, as already posited earlier, that there exists a strong possibility that a substantial portion of that pledged money – the medium- and long-term parts – will not be eventually disbursed, once global emotion tapers off.

Haiti’s President René Préval and his closest advisers must fathom that fact and act accordingly. They must see their country exactly as the global community has seen it hitherto: a minuscule, underdeveloped, and poverty-stricken land, the future of which – in the secret opinion of some top leaders present at COP-15 – is less important than global warming.

While recognizing the very notion that their country is not of any geostrategic interest to global superpowers and major investors, Haiti must equally see the current tragedy as an opportunity for renewed economic development.

Mr. Préval cannot underrate the necessity and vastness of such a task, especially given that his country will be competing with other nations or causes for aid money throughout the year. He must swiftly create a task force, under the leadership of Prime Minister Jean-Max Bellerive, and summon top minds in his country and abroad to reflect on a serious overall strategy coupled with an action plan to redeem that aid money. Country leaders also need to cogitate on the best way to coordinate relief efforts and avoid process duplication (e.g.: who should be the boss?)

Absent such a level of organization and commitment, Haiti will not access that $1.5 to $2 billion manna, which equates to 2 years of its fiscal revenue (2008 estimates), or 15% of its GDP that is expected to be lost as a result of the calamity. A phone call to 2004 tsunami victims, countless skeptical Third World leaders, or more recently, Afghan President Hamid Karzai might be a good wake up call.