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After the Rain

S >> Sam Vaknin >> After the Rain




This is a private case in a more widespread phenomenon: the assets
(=loan portfolios) of many a financial institution are not diversified
enough. Their loans are concentrated in a single sector of the economy
(agriculture, industry, construction), in a given country, or
geographical region. Such exposure is detrimental to the financial
health of the lending institution. Economic trends tend to develop in
unison in the same sector, country, or region. When real estate in the
West Coast of the USA plummets - it does so indiscriminately. A bank,
whose total portfolio is composed of mortgages to West Coast Realtors,
would be demolished.

In 1982, Mexico defaulted on the interest payments of its international
debts. Its arrears grew enormously and threatened the stability of the
entire Western financial system. USA banks - which were the most
exposed to the Latin American debt crisis - had to foot the bulk of the
bill, which amounted to tens of billions of USD. They had almost all
their capital tied up in loans to Latin American countries. Financial
institutions bow to fads and fashions. They are amenable to "lending
trends" and display a herd-like mentality. They tend to concentrate
their assets where they believe that they could get the highest yields
in the shortest possible periods of time. In this sense, they are not
very different from investors in pyramid investment schemes.

Financial mismanagement can also be the result of lax or flawed
financial controls. The internal audit department in every financing
institution - and the external audit exercised by the appropriate
supervision authorities are responsible to counter the natural human
propensity for gambling. The must help the financial organization
re-orient itself in accordance with objective and objectively analysed
data. If they fail to do this - the financial institution would tend to
behave like a ship without navigation tools. Financial audit
regulations (the most famous of which are the American FASBs) trail way
behind the development of the modern financial marketplace. Still,
their judicious and careful implementation could be of invaluable
assistance in steering away from financial scandals.

Taking human psychology into account - coupled with the complexity of
the modern world of finances - it is nothing less than a miracle that
financial scandals are as few and far between as they are.


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The Revolt of the Poor


The Demise of Intellectual Property






A year ago I published a book of short stories in Israel. The
publishing house belongs to Israel's leading (and exceedingly wealthy)
newspaper. I signed a contract, which stated that I am entitled to
receive 8% of the income from the sales of the book after commissions
payable to distributors, shops, etc. A few months later, I won the
coveted Prize of the Ministry of Education (for short prose). The prize
money (a few thousand DMs) was snatched by the publishing house on the
legal grounds that all the money generated by the book belongs to them
because they own the copyright.

In the mythology generated by capitalism to pacify the masses, the myth
of intellectual property stands out. It goes like this: if the rights
to intellectual property were not defined and enforced, commercial
entrepreneurs would not have taken on the risks associated with
publishing books, recording records and preparing multimedia products.
As a result, creative people will have suffered because they will have
found no way to make their works accessible to the public. Ultimately,
it is the public, which pays the price of piracy, goes the refrain.

But this is factually untrue. In the USA there is a very limited group
of authors who actually live by their pen. Only select musicians eke
out a living from their noisy vocation (most of them rock stars who own
their labels - George Michael had to fight Sony to do just that) and
very few actors come close to deriving subsistence level income from
their profession. All these can no longer be thought of as mostly
creative people. Forced to defend the intellectual property rights and
the interests of Big Money, Madonna, Michael Jackson, Schwarzenegger
and Grisham are businessmen at least as much as they are artists.

Economically and rationally, we should expect that the costlier a work
of art is to produce and the narrower its market - the more its
intellectual property rights will be emphasized. Consider a publishing
house. A book which costs 50,000 DM to produce with a potential
audience of 1000 purchasers (certain academic texts are like this) -
would have to be priced at a minimum of 100 DM to recoup only the
direct costs. If illegally copied (thereby shrinking the potential
market - some people will prefer to buy the cheaper illegal copies) -
its price would have to go up prohibitively, thus driving out potential
buyers. The story is different if a book costs 10,000 DM to produce and
is priced at 20 DM a copy with a potential readership of 1,000,000
readers. Piracy (illegal copying) will in this case have been more
readily tolerated as a marginal phenomenon.

This is the theory. But the facts are tellingly different. The less the
cost of production (brought down by digital technologies) - the fiercer
the battle against piracy. The bigger the market - the more pressure is
applied to clamp down on the samizdat entrepreneurs. Governments, from
China to Macedonia, are introducing intellectual property laws (under
pressure from rich world countries) and enforcing them belatedly. But
where one factory is closed on shore (as has been the case in mainland
China) - two sprout off shore (as is the case in Hong Kong and in
Bulgaria).

But this defies logic: the market today is huge, the costs of
production and lower (with the exception of the music and film
industries), the marketing channels more numerous (half of the income
of movie studios emanates from video cassette sales), the speedy
recouping of the investment virtually guaranteed. Moreover, piracy
thrives in very poor markets in which the population would anyhow not
have paid the legal price. The illegal product is inferior to the legal
copy (it comes with no literature, warranties or support). So why
should the big manufacturers, publishing houses, record companies,
software companies and fashion houses worry?

The answer lurks in history. Intellectual property is a relatively new
notion. In the near past, no one considered knowledge or the fruits of
creativity (art, design) as "patentable", or as someone "property". The
artist was but a mere channel through which divine grace flowed. Texts,
discoveries, inventions, works of art and music, designs - all belonged
to the community and could be replicated freely. True, the chosen ones,
the conduits, were honoured but were rarely financially rewarded. They
were commissioned to produce their works of art and were salaried, in
most cases. Only with the advent of the Industrial Revolution were the
embryonic precursors of intellectual property introduced but they were
still limited to industrial designs and processes, mainly as embedded
in machinery. The patent was born. The more massified the market, the
more sophisticated the sales and marketing techniques, the bigger the
financial stakes - the larger loomed the issue of intellectual
property. It spread from machinery to designs, processes, books,
newspapers, any printed matter, works of art and music, films (which,
at their beginning were not considered art), software, software
embedded in hardware and even unto genetic material.

Intellectual property rights - despite their noble title - are less
about the intellect and more about property. This is Big Money: the
markets in intellectual property outweigh the total industrial
production in the world. The aim is to secure a monopoly on a specific
work. This is an especially grave matter in academic publishing where
small- circulation magazines do not allow their content to be quoted or
published even for non-commercial purposes. The monopolists of
knowledge and intellectual products cannot allow competition anywhere
in the world - because theirs is a world market. A pirate in Skopje is
in direct competition with Bill Gates. When selling a pirated Microsoft
product - he is depriving Microsoft not only of its income, but of a
client (=future income), of its monopolistic status (cheap copies can
be smuggled into other markets) and of its competition-deterring image
(a major monopoly preserving asset). This is a threat, which Microsoft
cannot tolerate. Hence its efforts to eradicate piracy - successful
China and an utter failure in legally-relaxed Russia.

But what Microsoft fails to understand is that the problem lies with
its pricing policy - not with the pirates. When faced with a global
marketplace, a company can adopt one of two policies: either to adjust
the price of its products to a world average of purchasing power - or
to use discretionary pricing. A Macedonian with an average monthly
income of 160 USD clearly cannot afford to buy the Encyclopaedia
Encarta Deluxe. In America, 100 USD is the income generated in average
day's work. In Macedonian terms, therefore, the Encarta is 20 times
more expensive. Either the price should be lowered in the Macedonian
market - or an average world price should be fixed which will reflect
an average global purchasing power.

Something must be done about it not only from the economic point of
view. Intellectual products are very price sensitive and highly
elastic. Lower prices will be more than compensated for by a much
higher sales volume. There is no other way to explain the pirate
industries: evidently, at the right price a lot of people are willing
to buy these products. High prices are an implicit trade-off favouring
small, elite, select, rich world clientele. This raises a moral issue:
are the children of Macedonia less worthy of education and access to
the latest in human knowledge and creation?

Two developments threaten the future of intellectual property rights.
One is the Internet. Academics - fed up with the monopolistic practices
of professional publications - already publish there in big numbers. I
published a few book on the Internet and they can be freely downloaded
by anyone who has a computer or a modem. There are electronic
magazines, trade journals, billboards, professional publications,
thousand of books are available full text. Hackers even made sites
available from which it is possible to download whole software and
multimedia products. It is very easy and cheap to publish in the
Internet, the barriers to entry are virtually nil, pardon the pun. Web
addresses are provided free of charge, authoring and publishing
software tools are incorporated in most word processors and browser
applications. As the Internet acquires more impressive sound and video
capabilities it will proceed to threaten the monopoly of the record
companies, the movie studios and so on.

The second development is also technological. The oft-vindicated
Moore's law predicted the doubling of computer memory capacity every 18
months. But memory is only one aspect. Another is the rapid
simultaneous advance on all technological fronts. Miniaturization and
concurrent empowerment of the tools available has made it possible for
individuals to emulate much larger scale organizations successfully. A
single person, sitting at home with 5000 USD worth of equipment can
fully compete with the best products of the best printing houses
anywhere. CD-ROMs can be written on, stamped and copied in house. A
complete music studio with the latest in digital technology has been
condensed to the dimensions of a single software. This will lead to
personal publishing, personal music recording and the digitisation of
plastic art. But this is only one side of the story.

The relative advantage of the intellectual property corporation was not
to be found exclusively in its technological prowess. Rather it was in
its vast pool of capital and its marketing clout, market positioning,
sales and distribution. Nowadays, anyone can print a visually
impressive book, using the above-mentioned cheap equipment. But in an
age of an information glut, it is the marketing, the media campaigns,
the distribution and the sales that used to determine the economic
outcome.

This advantage, however, is also being eroded. First, there is a
psychological shift, a reaction to the commercialisation of intellect
and spirit. Creative people are repelled by what they regard as an
oligarchic establishment of institutionalised, lowest common
denominator art and they are fighting back. Secondly, the Internet is a
huge (200 million people), truly cosmopolitan market with its own
marketing channels freely available to all. Even by default, with a
minimum investment, the likelihood of being seen by surprisingly large
numbers of consumers is high.

I published one book the traditional way - and another on the Internet.
In 30 months, I have received 2500 written responses regarding my
electronic book. This means that well over 75,000 people read it (the
industry average is a 3% response rate and my Link Exchange meter
indicates that 160,000 people visited the site by February 2000, with
well over 630,000 impressions in the last 15 months alone). It is a
textbook (in psychopathology) - and 75,000 people (let alone 160,000)
is a lot for this kind of publication. I am so satisfied that I am not
sure that I will ever consider a traditional publisher again. Indeed,
my next book is being published in the very same way.

The demise of intellectual property has lately become abundantly clear.
The old intellectual property industries are fighting tooth and nail to
preserve their monopolies (patents, trademarks, copyright) and their
cost advantages in manufacturing and marketing.

But they are faced with three inexorable processes, which are likely to
render their efforts vain:

The Newspaper Packaging

Print newspapers offer package deals of subsidized content (sold for a
token amount) and subsidizing advertising. In other words, the
advertisers pay for content formation and generation and the reader has
no choice but be exposed to commercial messages as he or she studies
the contents.

This model - adopted earlier by radio and television - rules the
Internet now and will rule the wireless Internet in the future. Content
will be made available free of all pecuniary charges. The consumer will
pay by providing his personal data (demographic data, consumption
patterns and preferences and so on) and by being exposed to advertising.

Thus, content creators will benefit only by sharing in the advertising
cake. They will find it increasingly difficult to implement the old
model of royalties paid for access or ownership of intellectual
property. The venerable (and expensive) "Encyclopaedia Britannica" is
now fully available on-line, free of charge. Its largesse is supported
by advertising.

Disintermediation

A lot of ink has been spilt regarding this important trend. The removal
of layers of brokering and intermediation - mainly on the manufacturing
and marketing levels - is a historic development (though the
continuation of a long term trend). Consider music for instance.
Streaming audio on the Internet or MP3 files, which the consumer can
download will render the CD obsolete. The Internet also provides a
venue for the marketing of niche products and reduces the barriers to
entry previously imposed by the need to engage in costly marketing
("branding") campaigns and manufacturing activities.

This trend is also likely to restore the balance between artist and the
commercial exploiters of his product. The very definition of "artist"
will expand to include all creative people. Everyone will seek to
distinguish oneself, to "brand" himself and to auction her services,
ideas, products, designs, experience, etc. This is a return to
pre-industrial times when artisans ruled the economic scene. Work
stability will vanish and work mobility will increase in a landscape of
shifting allegiances, head hunting, remote collaboration and similar
labour market trends.

Market Fragmentation

In a fragmented market with a myriad of mutually exclusive market
niches, consumer preferences and marketing and sales channels -
economies of scale in manufacturing and distribution are meaningless.
Narrow casting replaces broadcasting, mass customisation replaces mass
production, a network of shifting affiliations replaces the rigid
owned-branch system. The decentralized, intrapreneurship-based
corporation is a late response to these trends. The mega-corporation of
the future is more likely to act as a collective of start-ups than as a
homogeneous, uniform (and, to conspiracy theorists, sinister)
juggernaut it once was.


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Scavenger Economies, Predator Economies






The national economies of the world can be divided to the scavenger and
the predator types. The former are parasitic economies, which feed off
the latter. The relationship is often not that of symbiosis, where two
parties maintain a mutually beneficial co-existence. Here, one economy
feeds off others in a way, which is harmful, even detrimental to the
hosts. But this interaction - however undesirable - is the region's
only hope.

The typology of scavenger economies reveals their sources of sustenance:

Conjunctural - These economies feed off historical or economic
conjunctures or crises. They position themselves as a bridge between
warring or conflicting parties. Switzerland rendered this service to
Nazi Germany (1933-1945), Macedonia and Greece to Serbia (1992 to the
present), Cyprus aided and abetted Russia (1987 to the present), Jordan
for Iraq (1991 to the present), and now, Montenegro acts the part for
both Serbia and Kosovo. These economies consist of smuggling, siege
breaking, contraband, arms trade and illegal immigration. They benefit
economically by violating both international and domestic laws and by
providing international outcasts and rogues with alternative routes of
supply, and with goods and services.

Criminal - These economies are infiltrated by criminal gangs or
suffused with criminal behaviour. Such infiltration is two phased: the
properly criminal phase and the money laundering one. In the first
phase, criminal activities yield income and result in wealth
accumulation. In the second one, the money thus generated is laundered
and legitimised. It is invested in legal, above-board activities. The
economy of the USA during the 19th century and in the years of
prohibition was partly criminal. It is reminiscent of the Russian
economy in the 1990s, permeated by criminal conduct as it is. Russians
often compare their stage of capitalist evolution to the American "Wild
West".

Piggyback Service economies - These are economies, which provide
predator economies with services. These services are aimed at
re-establishing economic equilibrium in the host (predator) economies.
Tax shelters are a fine example of this variety. In many countries
taxes are way too high and result in the misallocation of economic
resources. Tax shelters offer a way of re-establishing the economic
balance and re-instating a regime of efficient allocation of resources.
These economies could be regarded as external appendages, shock
absorbers and regulators of their host economies. They feed off market
failures, market imbalances, arbitrage opportunities, shortages and
inefficiencies. Many post-Communist countries have either made the
provision of such services a part of their economic life or are about
to do so. Free zones, off shore havens, off shore banking and
transhipment ports proliferate, from Macedonia to Archangelsk.

Aid economies - Economies that derive most of their vitality from aid
granted them by donor countries, multilateral aid agencies and NGOs.
Many of the economies in transition belong to this class. Up to 15% of
their GDP is in the form of handouts, soft loans and technical
assistance. Rescheduling is another species of financial subsidy and
virtually all CEE countries have benefited from it. The dependence thus
formed can easily deteriorate into addiction. The economic players in
such economies engage mostly in lobbying and in political manoeuvring -
rather than in production.

Derivative or Satellite economies - These are economies, which are
absolutely dependent upon or very closely correlated with other
economies. This is either because they conduct most of their trade with
these economies, or because they are a (marginal) member of a powerful
regional club (or aspire to become one), or because they are under the
economic (or geopolitical or military) umbrella of a regional power or
a superpower. Another variant is the single-commodity or single-goods
or single-service economies. Many countries in Africa and many members
of the OPEC oil cartel rely on a single product for their livelihood.
Russia, for instance, is heavily dependent on proceeds from the sale of
its energy products. Most Montenegrins derive their livelihood,
directly or indirectly, from smuggling, bootlegging and illegal
immigration. Drugs are a major "export" earner in Macedonia and Albania.

Copycat economies - These are economies that are based on legal or
(more often) illegal copying and emulation of intellectual property:
patents, brand names, designs, industrial processes, other forms of
innovation, copyrighted material, etc. The prime example is Japan,
which constructed its whole mega-economy on these bases. Both Bulgaria
and Russia are Meccas of piracy. Though prosperous for a time, these
economies are dependent on and subject to the vicissitudes of business
cycles. They are capital sensitive, inherently unstable and with no
real long term prospects if they fail to generate their own
intellectual property. They reflect the volatility of the markets for
their goods and are overly exposed to trade risks, international
legislation and imports. Usually, they specialize in narrow segments of
manufacturing which only increases the precariousness of their
situation.

The Predator Economies can also be classified:

Generators of Intellectual Property - These are economies that
encourage and emphasize innovation and progress. They reward
innovators, entrepreneurs, non-conformism and conflict. They spew out
patents, designs, brands, copyrighted material and other forms of
packaged human creativity. They derive most of their income from
licensing and royalties and constitute one of the engines driving
globalisation. Still, these economies are too poor to support the
complementary manufacturing and marketing activities. Their natural
counterparts are the "Industrial Bases". Within the former Eastern
Bloc, Russia, Poland, Hungary and Slovenia are, to a limited extent,
such generators. Israel is such an economy in the Middle East.

Industrial Bases - These are economies that make use of the
intellectual property generated by the former type within industrial
processes. They do not copy the intellectual property as it is. Rather,
they add to it important elements of adaptation to niche markets, image
creation, market positioning, packaging, technical literature,
combining it with other products or services, designing and
implementing the whole production process, market (demand) creation,
improvement upon the originals and value added services. These
contributions are so extensive that the end products, or services can
no longer to be identified with the originals, which serve as mere
triggers. Again, Poland, Hungary, Slovenia (and to a lesser extent,
Croatia) come to mind.

Consumer Oriented economies - These are Third Wave (Alvin Toffler's
term), services, information and knowledge driven economies. The
over-riding set of values is consumer oriented. Wealth formation and
accumulation are secondary. The primary activities are concerned with
fostering markets and maintaining them. These "weightless" economies
concentrate on intangibles: advertising, packaging, marketing, sales
promotion, education, entertainment, servicing, dissemination of
information, knowledge formation, trading, trading in symbolic assets
(mainly financial), spiritual pursuits, and other economic activities
which enhance the consumer's welfare (pharmaceuticals, for instance).
These economies are also likely to sport a largish public sector, most
of it service oriented. No national economy in CEE qualifies as
"Consumer Oriented", though there are pockets of consumer-oriented
entrepreneurship within each one.

The Trader economies - These economies are equivalent to the
cardiovascular system. They provide the channels through which goods
and services are exchanged. They do this by trading or assuming risks,
by providing physical transportation and telecommunications, and by
maintaining an appropriately educated manpower to support all these
activities. These economies are highly dependent on the general health
of international trade. Many of the CEE economies are Trader economies.
The openness ratio (trade divided by GDP) of most CEE countries is
higher than the G7 countries'. Macedonia, for instance, has a GDP of
3.6 Billion US dollars and exports and imports of c. 2 billion US
dollars. These are the official figures. Probably, another 0.5 billion
US dollars in trade go unreported. Additionally, it has one of the
lowest weighted customs rate in the world. Openness to trade is an
official policy, actively pursued.

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