Scapegoating migrants

The nativist myth: When God created the world, in his wisdom he placed a fixed number of jobs in each country. He also dictated that people within a country should stay only in that country, regardless of famine, drought, war, or love. They should not migrate to other countries, as they would upset the balance and there would be too many people and too few jobs. Therefore it is the job of people in a country to protect the jobs they have, for they will never get more, and the ones they have might be stolen and carried away in a box to another country, along with their cars and other belongings

Assuming that people really believe the story above is the only way I can make sense out of recent anti-migration rhetoric in the US and EU. Indeed the news this week has been surreal. I have been listening to reports and call-in show hosts on BBC stoking the perception that migrants cost money, and encouraging discussion on their contribution to crime. Government officials are also stoking the rhetoric. "Gordon Brown has pledged more jobs for British workers." And when government policy fails (like housing in the UK) it is easy to blame foreigners as they may pay taxes but may not vote. In the Netherlands, there are serious proposals to throw Poles (apparently just Poles for some reason, perhaps because they work too hard) out after six months in Holland-- notwithstanding EU treaties. "Rita Verdonk..said she found the discussion on the integration of Poles unnecessary since Poles should not settle here permanently." Italy is planning to deport EU nationals (i.e. Romanians) for petty crime -- again in violation of EU treaties. ("Italy has begun rounding up thousands of Romanian immigrants for deportation after passing a new "public order and security" law...The move appeared to have the blessing of the European Union. Nello Rossi, the head of Italy's National Magistrates Association, said that "The new law does not appear to conform to our own constitution or to the European law which recognises the right of European citizens to circulate freely and stay within the territory of any member state.") And the Swiss have plans to deport entire families when a child falls short of the law. ("The SVP party has begun a campaign seeking the 100,000 signatures necessary to force a referendum ...(that) calls for the deportation of the entire family if the convicted criminal is a minor... The initiative is reminiscent of the Nazi practice of Sippenhaft, or kin liability.") The rhetoric across Europe is disturbingly racist and tribal. And in the US, the racist anti-migrant rhetoric (immigrant bashing has an anti-Hispanic tone in the US) is steeped in irony. Many (most?) "native" US citizens have Irish or German or Italian ancestors who were refused work because they were Irish or German or Italian. Indeed my own grandmother was an undocumented migrant from Ireland to the US. She was not a criminal. She was simply undocumented.

And then I read stories like this: Towns rethink laws against immigrants, New York Times, 26 September 2007. To quote: "A little more than a year ago, the Township Committee in this faded factory town became the first municipality in New Jersey to enact legislation penalizing anyone who employed or rented to an illegal immigrant.Within months, hundreds, if not thousands, of recent immigrants from Brazil and other Latin American countries had fled. The noise, crowding and traffic that had accompanied their arrival over the past decade abated. The law had worked. Perhaps, some said, too well. With the departure of so many people, the local economy suffered. Hair salons, restaurants and corner shops that catered to the immigrants saw business plummet; several closed. Once-boarded-up storefronts downtown were boarded up again...(the mayor) was voted out of office last Fall."

Yes, when an economy works properly, migrants create work, and pay taxes, and generate demand for goods and services. They can even build housing. When an economy fails to deliver jobs and services, it is not because of migrants. But they are an easy target, and Europe has a long history of stealing the lives and property of easy targets. By promoting deeper integration, the EU was meant to help Europe rise above this dark tendency from its past. Sadly, this week has been a serious step backwards.

Strangely, this week I find myself thinking the EU needs more money to allocate across Europe for its mix of crazy agricultural subsidies, paper-work heavy research subsidy schemes, and infrastructure subsidy schemes. This way, when the Dutch turn to the center for cash, the Poles can remind them of their hospitality as hosts, and the Romanians can similarly remind the Italians. And maybe the EU can serve as a more distant scapegoat, rather than our hard-working mixed-accent neighbors.

Firewalls and Firestorms

This past Summer has seen the sub-prime lending crisis in the United States turn into a global liquidity crisis. Subsequent events illustrate two important things about financial globalziation. First, no financial crisis is really local. The U.S. crisis has sparked a bank run in the UK and has forced the German authorities to use tax payer money to support German banks in crisis. At the same time, because we are able to spread local shocks globally, the markets outside North America are absorbing some of the brunt of the U.S. crisis. In similar fashion, when we next have a crisis somewhere in Asia or Europe, the local impact will be less as global markets are better equipped to handle the shock than are local markets. This logic follows from the simple algebra of portfolio diversification and risk. And yet...

The current crisis also illustrates other, less sanguine, aspects of the emerging global financial architecture. One important aspect of modern banking is the blending of commercial banking services (managing the operating funds and transactions of businesses and households) with investment banking, speculation, and underwriting. For example, Germany's IKB Deutsche Industriebank AG had to receive financial support from the state-owned KfW development bank (along with other banks) because of its exposure to risks linked to the sub-prime crisis in the U.S. Its problems are linked to the bank's investment activities through Rhineland Funding. For those versed in the history of financial crises and regulation, this sounds uncomfortably like problems -- linked to investment activities of banks -- that preceded the crash of 1929. Indeed, in Europe it seems we are always facing banking scandals. It is clearly hard to bring perpetrators to task, and regulation is opaque and politically susceptible. This brings us to another aspect of the European side of the crisis -- an inherent instinct to distrust investors and hide information. Indeed, in a surreal twist on the logic of regulation, senior EU officials are calling for less transparency. To paraphrase Bank of England governor Mervyn King: "the European Market Abuse Directive was partly to blame for the crisis that hit Northern Rock by not allowing the Bank to act covertly." This follows similar statements by the European Commissioner Colin McCreevy (commissioner for the internal market). McCreevy is on record criticizing the UK for applying too much transparency. He said: “Unfortunately, in recent weeks, gold-plated transparency rules stood in the way of the quiet resolution of a problem before it became a crisis: The result was that transparency rules that were intended to underpin investor confidence, when put to the test, actually promoted investor panic." In other words, if we had been able to hide the problem from investors, we could have found a way to keep it quiet until the whole thing blew over. Elsewhere in the press it has been noted that "He said regulators would be wise to learn from the crisis and should adjust rules regarding transparency, saying it was often beneficial for issues affecting the stability of major financial institutions to be carried out behind closed doors." What?! Do recent scandals like Parmalat, Enron, and Bawag mean anything? Might it not be the case that we understood too little about the risks banks had taken on?

It may be time to revisit the logic and working of the old U.S. system that was underpinned by the Glass-Steagall Act. Following the Great Crash that opened the show for the Great Depression, the U.S. Congress introduced a system of financial firewalls. Some were geographic, with a deliberate segmentation of regional financial markets. Others related to areas of operation. Basic commercial banking had to be kept separate from investment banking. This was accompanied by Federal guarantees of commercial bank deposits. The cost of this guarantee was regulation. With financial innovation, and the ability of investment firms to offer bank-like services (like money market accounts), this system was eventually dismantled, ending with repeal of Glass-Steagall in 1999. This was accompanied by a wave of financial mergers in the U.S. that, many believe, did promote greater efficiency in the financial services sector. The geographic fragmentation of U.S. banks did lead to small and capital-weak institutions unable to weather the liquidity crisis set off in 1929. And there are benefits to bigger banks. Yet, in light of present events one might wonder about the merits of segmentation of commercial and investment services... We again find ourselves in a world where banks are blending investment and basic banking activities. The result is that institutions that are important to the working of the basic monetary system underpinning the economy are threatened by financial cross-obligations in their investment arms. At the same time, it is not clear that incentives and rules are structured properly for full transparency about risks undertaken.

There are arguments for letting banks collapse in the current crisis, to send the "right signal" to the market that management (and investors) are responsible for their decisions. In the absence of explicit government guarantees, it is the role of investors, management, and rating agencies to sort out risk and communicate information. However, it is clear that we live under a second-best set of political constraints. It is not possible to let major banks go under, along with corporate and private savings. Instead there will be bailouts. Witness Northern Rock , IKB Deutsche Industriebank AG, and BAWAG. Whether is is explicit (like the deposit insurance scheme in the US) or implicit (like repeated bailouts in the EU), we live in a world where political constraints mean risk-taking behavior by bank management is underwritten by the public purse. We may wish it was otherwise. We may be able to argue that theoretically the world would be better if this were not so. However, the reality of populist politics in the industrial world means it is not possible let such institutions fail. If we admit that a mix of implicit and explicit guarantees is unavoidable, then we need to rethink regulation. This includes capital requirements under Basel II, but it also means more. We need to revisit the concept of firewalls between the basic liquidity services of financial institutions, and their more adventurous investment activities. It is encouraging that the chairman of the Basel Committee on Banking Supervision Nout Wellink is skeptical of US bank plans to fix the current problem with conduits (junk bonds?) with an "uber-conduit" or superconduit. Wellink's comments are diplomatic. Comments on the blogosphere are less diplomatic. (For example "I'll be the first to admit I'm not a financial expert. But engaging in even more of the same behavior? Sounds like trying to solve a gambling problem by gambling your way out.") Also, notwithstanding the opinions of Messrs. McCreevy and King, we need more transparency, not less. We also need to at least consider modern versions of the 20th Century's financial firewalls. We can then let the investment industry be as innovative as it likes (within the law) while maintaining a more stable though admittedly less exciting sub-sector for basic transaction services.

Further reading:

[1] "Understanding How Glass-Steagall Act Impacts Investment Banking and the Role of Commercial Banks," Brain Bank.

[2] "Suspend Rock shares – it’s a false market," The Sunday Times online, October 28, 2007.

[3] "Credit Crisis Spreading New Jitters in Europe," The New York Times online, October 26, 2007.

[4] "European Commissioner McCreevy blames UK gold-plating for Northern Rock debacle," MoneyMarketing, Paul Mcmillan - 26-Oct-2007.

[5] "Boom and Bust in Early America," in Money, Greed, and Risk: Why Financial Crises and Crashes Happen By CHARLES R. MORRIS, Times Business online (Chapter 1). This provides a good read on earlier times. The present crisis is nothing new. To quote: "The secret of successful banking, reported a New York practitioner of the banker's dark arts in 1836, was to issue notes with 'a real furioso plate, one that will take with all creation—flaming with cupids, locomotives, rural scenery, and Hercules kicking the world over.'"

[6] "Super Conduit to the rescue!" Salon.com letters to the editor, 16 October 2007.

Ich bin übersiedelt.

I have not been writing here lately, as I have been focused on the minor issue of moving this Summer from Holland to Austria. The experience has brought many things to mind -- migration and integration rules in Europe, market failure in the home construction and renovation market, the long way Europe has to go before its service markets are really integrated, variations in education policy across the EU, and such. When I moved to Holland ten years ago a local banking scandal (the South Holland banking scandal) was wrapping up, and as I moved to Austria a comparable banking scandal is unfolding in the local press. (The BAWAG scandal -- and efforts to apprehend the parties involved --makes interesting reading.) And then there is the very real (yet seemingly surreal) question, should we hedge our children's college funds better against currency risk? And most important, what do you do when DHL loses your professional library in shipment? (They did eventually find it, but the experience makes one think.) The dust has not settled, but the teaching term has begun and we are covering the global macroeconomy. The topics we cover in class are being mirrored in the financial markets, so there is much to talk about in class.

It is time to declare victory and go home

We have been here before

We are still negotiating the Uruguay Round. This may come as a surprise to casual observers and negotiators alike. After all, documents were signed in Marrakech in 1994 concluding the Round.


As the Uruguay Round drew to a close, US and EU negotiators were unable to make substantive progress on agriculture, middle-income countries were demanding credit for unilateral liberalisation undertaken outside the GATT, and LDCs were demanding one-sided concession from the OECD. The unelected leaders of the nascent anti-globalisation movement, flush from their first kill with the death of the Multilateral Agreement on Investment, demanded that the representatives of elected governments either give them some control over the process (a “seat at the table”) or end the process entirely. Lester Thurow declared the GATT dead, and....


You can read the rest of this posting on VoxEU.

How Big is China?

China-bashing is back in fashion in Washington and Brussels.  The U.S. Congress is demanding that China re-value its currency to correct what is perceived as a trade imbalance.  The financial press has called this, delightfully, a product of “The collective brain deficit trust, otherwise known as the US Congress.” Europe is also growing increasingly impatient with the Chinese propensity to undervalue its currency – and more broadly with the Asian tendency to do the same.  With massive imbalances in the English-speaking world, and Asian currencies effectively pegged, the euro has been left to pick up the slack.  Logically, this leaves exporters in Europe unhappy. The U.S. current account problem is not, of course, China’s fault.  The Bush Administration, aided and abetted by local governments and private households, has been fiscally profligate.  Combined with dismally low savings rates, this means the U.S. ran a current account deficit of 6.5 percent of national income, according to the IMF, in 2005 and 2006. Thankfully, this is projected to fall to “only” a deficit of only 6.1 percent in 2007.

China’s exchange rate policy mirrors, in some ways, the growth path followed by German from 1947 through 1970.  Germany built its economic miracle on a strong export industry supported by an undervalued D-mark and by the recycling of its surplus through foreign investment and aid.  (See Hetzel for more on this.)

So… if China is following a path marked by Germany, what exactly is the problem? To put it bluntly, the problem is the dragon in the middle of the room.  China’s economy has grown, to be hyperbolic, to epic proportions.  Before I discuss numbers, I should briefly review the concept of purchasing power parity and the Balassa-Samuelson effect.  Because wages are low, service prices tend to be low in developing countries.  This translates into a general low price for non-traded goods, so that official exchange rates understate the actual value (and hence size) of the domestic side of developing economies.  Various efforts are made to adjust for this (i.e. to make values reflect relative prices) when we compare per-capita incomes.  This means that the size of China’s economy is underestimated when we use world prices.  This is even before we add the issue of an undervalued exchange rate.  This point is illustrated in the figure below.





In the figure, the left-hand axis plots China’s GDP, while the right-hand axis plots China’s current account surplus as a percent of GDP.  The first set of numbers is at nominal prices, and the second reflects adjustment of China’s GDP to reflect differences in prices and purchasing power (known as a PPP adjustment).  What emerges is that while China’s trade surplus, as a share of GDP, is huge at official exchange rates, it is actually quite reasonable given the actual size of the Chinese economy.  Indeed, if we valued the basket of China’s domestic (i.e. non-traded) goods and services at U.S. prices, the Chinese economy is roughly 81% the size of the U.S. economy, while the trade surplus is only 2.7 percent, rather than the 10.0 percent estimated by the IMF at official exchange rates.  A consequence of China’s current exchange rate policy is to overstates its trade surplus, and understate the size of the underlying domestic economy. Indeed across Asia we tend to understate the size of the regional economies and overstate trade relative to domestic activity for the same reason. You can make these, and similar calculations, yourself with data from the IMF's World Economic Outlook.

In the interest of overkill and overstatement, the second figure compares Germany, China, and the U.S. in 1980 and 2007.  Again, we are looking at GDP and the current account surplus, adjusted for PPP.  What this shows is that, valued at OECD prices, China’s economy has surged past Germany, and is now over 4 times as big as Germany’s.  This contrasts sharply with unadjusted data. At official exchange rates and without adjusting for China’s price levels, the two economies are roughly the same size.  Also striking is the size of the relative trade surpluses.  The IMF projects that Germany will have a current account surplus of 5.3 percent (at official exchange rates), which is equal to 6.1 percent of PPP-adjusted GDP.  China’s trade surplus, on the same basis, is 2.1 percent of PPP-adjusted GDP.  In terms of the share of goods and services produced and priced on the same basis, Germany’s current account surplus is 3 times larger than China’s on a share basis.  Yet Congress is not bashing the euro zone.  Congressional moves attacking currency manipulators (i.e. Baucus-Grassley-Schumer-Graham)  target Asia, not Europe.

Given the relative under- and over-valuation of Asian and European currencies, and the relative size of current accounts relative to actual GDP, one is left a bit bemused.  China is following a macroeconomic growth path marked out by Germany, and for this it is being condemned.  At the same time, U.S. imbalances are being pegged on everybody but the U.S. itself.  And no one is talking about the real reason why China’s surpluses have such a big impact on the world economy.  Quite simply – China has grown huge, and this is masked by current exchange rate policy, combined with a healthy does of Balassa-Samuelson effects.  For a long time, as the world’s biggest kid on the block, U.S. imbalances have had a major impact on global capital markets, sometimes sucking capital in from smaller countries and regions.  China (abetted by Japan) appears to be softening this effect somewhat.  Do we really want this to end abruptly? Be careful what you wish for, as you may actually get it.

Further reading

[1] Be careful what you wish for,” John Mauldin, FXstreet.com, 16 June 2007.

[2] German Monetary History in the Second Half of the Twentieth Century: From the Deutsche Mark to the Euro,” R.L. Hetzel, Federal Reserve Bank of Richmond Economic Quarterly Volume 88/2 Spring 2002: 29-64.

[3] Baucus-Grassley-Schumer-Graham,” International Political Economy Zone:  Tales of Power, Money, and Occasional Violence, Wednesday June 13 2007.

[4] Balassa-Samuelson Effect," Wikipedia.

[5] The IMF's World Economic Outlook database.

[6] The International Comparison Program.

[7] " France Raises Prospect of New Bra Wars," The Scotsman, 19 Jun 2007.

We must all hang together, or most assuredly we shall all hang separately

Europe and Russia are in a codependent relationship. West European powers in Brussels are playing the role of a codependent spouse, denying injuries to the children and believing that somehow they can manipulate things toward a positive outcome while ignoring outright attacks on Members of the EU family. Russia plays the role of the abusive partner in this very real drama.

Imagine if Russian interests (whether government or mafia based) shut down the computer systems of the UK or U.S. government, and all the banks and financial firms in London or New York, cutting them off from the financial world.  Imagine further that the cyber attacks were extended to the emergency services, aiming to cripple the police and ambulance services.  At the same time, imagine that Russia blockaded a major pipeline supplying oil to Germany, and imposed a boycott on agricultural exports from France.  And imagine if the car of a Swedish Ambassador was attacked by supporters of President Putin. Indeed, all this is happening to EU and NATO Members at the moment.  Only the names have been changed.  Except the Swedish ambassador. That really did happen. The other victims are new Members of the European Union.  They are Poles, Estonians, and Lithuanians. The EU is being tested on the foreign policy front.  It is being tested and it is failing miserably.  This proves the case for a stronger European executive (president, foreign minister, etc) for, to quote Benjamin Franklin “We must all hang together, or most assuredly we shall all hang separately.” Maybe the Eurocrats in Brussels also need a refresher in history. Quite simply, Russia wants to neuter the East Europeans again.  Germany has -- one hopes unwittingly -- again been a party to this process, with its complicity in Russia’s effort to isolate them politically and economically. Witness evolving German energy policy in the region. As West Europeans seem to have a short historical memory, I will provide a quick historical recap here.

To understand Russia’s diplomatic trouble with Central and Eastern Europe, one has to look at it through the lens of history -- the history of Russia's past imperial adventures in the Baltics.  The closest parallel I can think of is Japan’s continued problems with China, Taiwan, Korea, and much of Southeast Asia.  Japan was a brutal imperial power, slaughtering hundreds of thousand of civilians as it aimed to subjugate populations and build an East Asian empire.  Yet it still has not faced up to its role as an aggressor.  It teaches in schools that it was a victim in World War II, it still denies well-documented war crimes, and suffers from repeated gaffes by political leaders with a penchant to cause riots in Seoul and Beijing.  Similarly, Russia’s view of its own 20th Century history is at odds with the memories of many countries that Russia stepped on during the 20th Century as it chased imperial ambitions. Russia was both victim and aggressor in World War II. Yet it only remembers half of this experience. Judging by Japan’s experience, Russia’s problems with the European Union may run for decades unless its view of its own history is revised. Russia is acting like post-Imperial Japan, quick to remember its role as victim but with no sense of guilt about its own aggression.

The European preliminaries that led to World War II included the Soviet Russian absorption of the Baltic States, with the complicity of Nazi Germany.  Indeed Nazi Germany and Soviet Russia started as allies.  On the basis of a non-aggression pact (the Molotov-Ribbentrop Pact), they divided up Central and Eastern Europe into spheres of influence, and the East Europeans emerged from the hellish consequences of this German-Russian gamesmanship only in the 1990s.  This mirrored an earlier absorption of Poland by the Austro-Hungarian, German, and Russian Empires in the 18th Century.  In the 20th Century repeat of this carving up of Central Europe, both Germany and Russia were brutal imperial masters.  After the war, Germany took responsibility for its actions, and has served admirably at the center of the European Experiment (the EC/EU) since.  Russia, on the other hand, still resents losing territory it had seized when it worked in concert with Nazi Germany to divide Europe.  After the war Soviet Russia was allowed to keep the parts of Poland it occupied in 1939, annexing them to the Soviet Union. (They are now part of Ukraine, Belarus, and Lithuania). Indeed Stalin moved all borders West at the end of the war.  This historical episode colors the conflicting views on current Russian claims that they should be viewed as liberators by Estonia.  The Estonians (and the Baltics in general) remember that independence was first lost when the Soviet Russians made a deal with the Nazis and then invaded. Similarly, Poland remembers that it was the Russians who massacred tens of thousands of Poles in the Katyn forest.  (Gorbachev finally admitted to the massacre only in 1989.) The Russian Army also halted its advance on Warsaw to allow the Wehrmacht time to finish killing off the Polish Home Army (55,000 Polish defenders died during the delay) so that they could install a Communist government – waiting 66 days for before they moved back into Warsaw – an occupation that really only ended in the 1990s. The Poles also remember that they were left behind the Iron Curtain when the war ended.

So what should Europe do?  In theory, the EU represents a deliberate, collective break from a past colored by centuries of European civil war.  To be an effective brake on repeated history, it needs to stand together to fight collective tendencies to repeat history.  This means the EU15 (and Germany in particular) need to overcome their collective penchant to engage in appeasement, selling out Central and Eastern Europeans to outside bullies.  The cyber attack is state sanctioned (if not sponsored) terrorism.  If these were UK banks that were being targeted, or French or German trade sanctions, Brussels would be up in arms.  If all EU citizens have equal rights, a higher profile protection of its Eastern Members is called for. Russia needs help fighting its own historical deamons. The EU is acting as an enabler. Turning off electronic bank transfers across the Russian border might catch Russia’s attention. Withdrawing all European Union ambassadors, collectively, for consultation, also seems appropriate.  Holding joint summits seems inappropriate to me. It is like giving your abusive spouse more money for his next round of binge drinking. If this continues, eventually it will be German and British Banks, Austrian and Italian energy, and demands of a more military and territorial nature.

---

Further reading
(1) NATO experts investigate 'well-organised' cyber attacks on Estonia.
(2) the Molotov-Ribbentrop Pact
(3) Tough love vs. Enabling of an Abusive Family Member
(4) Moscow had a hand in Estonia riots, cyber-attacks: experts
(5) Druzhba: The not-so-friendly Russian oil pipeline
(6) Estonia calls for EU help on Russia embassy siege
(7) EU protests over Russian attacks on ambassadors
(8) ‘E-stonia’ Accuses Russia of Computer Attacks
(9) Russian response in meat row "insufficient", EU says.
(10)Enabling and Codependency.

As long as we are talking about corruption...

The European sharks smell blood and are circling. Paul Wolfowitz, President of the World Bank, as of this writing has just received further backing from the Bush Administration. This is possibly a signal that they want him to stand tall as they push him out of the administration's sinking lifeboat. The problem, technically, is the cloud of corruption surrounding the President of the World Bank. This is somewhat problematic, as the World Bank is the OECD's anti-corruption missionary.

Someone has to carry the anti-corruption flag, as neither the Europeans, nor the Americans, are up to it. Indeed, as long as we are discussing corruption, it seems to me we should bring up some European cases to balance the scales. For example, can someone explain to me why German Chancellor Gerhardt Schroeder is not in prison? At the end of his term as Chancellor, he negotiated a gas pipline deal with the Russians that, in essence, turned over a bit more of Europe's collective energy security to Russia. He made security concessions to the Russians while representing his country at the negotiating table. According to the International Energy Agency, "the Northern Pipeline will make Germany even more dependent on Russia in terms of gas supplies." Schroeder's government even gave a €1billion guarantee to Gazprom. As a reward, when he retired he switched sides at the table, assuming chairmanship of Nord Stream. This looks to me like conflict of interest. It certainly seems as bad as many things the Bush Administration has done -- like Cheney's handling of the U.S. energy industry's interests. Then again Cheney is not in jail either. However, I am not convinced the Bush Administration deliberately sold U.S. security for profit. Rather it was collateral damage. In Schroeder's case, he quite simply sold German (and European) energy security interests to the Russians, and retired into a high-salaried job working for the other side. In a country obsessed with investigating corporate corruption, I am baffled as to how this one has stayed out of the courts. If the Germans won't do it, maybe the Poles could put him in jail. Yes, a German sold Polish security to the Russians (again...)

Another, more current question, relates to British bribery. Britain belongs to the OECD, and has signed onto the OECD Anti-Bribery Convention. In December, the Serious Fraud Office in Britain closed an inquiry into rather obvious allegations that BAE had paid substantial bribes linked to sales in Saudi Arabia. The Blair government pressed for closure of the investigation (something that surely involved Blair himself) because the investigation "risked jeopardizing relations with the Saudis." In other words, notwithstanding treaty obligations against corruption, when it comes to British defense exports to the Middle East, corruption is ok. This is not over. Since Swiss bank accounts were used to pay the bribes, the Swiss are investigating. The U.S. Congress is also investigating, and may use the issue to block further BAE expansion into the U.S. defense market. In addition, while the Saudi arms deal, known as al-Yamamah and worth an estimated £40 billion, stretched over many years, there are new allegations involving BAE and Saab (yes, even the squeaky clean the Swedes are now caught up in corruption scandals) sales of Griepen fighters. In this case prosecutors from Austria, Britain, the Czech Republic, Sweden and Switzerland are all working on the investigation. So here is a case where a British company, BAE, is having problems with its moral image (if not its behavior -- a decision for the courts). And in this case the British Prime Minister has apparently intervened to extricate the company from a corruption investigation. It has not helped national security, as the company will be punished in OECD markets for its behavior in the Middle East.

And while we are at it, in addition to Swedes (Saab), the British Prime Minister, and the former German Chancellor, we can add the former Presidents Chirac of France and Berlusconi of Italy, who both avoided criminal prosecution for corruption by virture of the office they held.

This whole epidose is steeped in irony. In retrospect it is clearly ironic that the Republicans, under the Clinton Administration, felt free to go after President Clinton for what was clearly personal behavior problems. This was somehow reprehensible. Under such a standard, it is ironic that the Bush Whitehouse characterizes the apparent rule-breaking of Wolfowitz as somehow ok. If you remember the spectacle of an impeachment surrounding a sexual peccadillo, it is hard to know how to take it when Press Secretary Tony Snow says Wolfowitz "made mistakes," but shouldn't be fired. It is also hard to know how to take it when the European pot calls the American kettle black. Lewis Carrol would approve.

Further reading

1. The OECD Anti-Bribery Convention
2.Swiss confirm BAE inquiry
3.Schroeder's Gazprom pipeline job provokes storm
4.Schroeder Govt Guaranteed Credit for Russia’s Gazprom, Report Confirmed
5. International Energy Agency Speaks Out Against Russia’s Baltic Gas Pipeline
6. Chirac after the presidency
7. Italian PM's fraud trial resumes
8. Today's Idiom = "The Pot Calling The Kettle Black"
9.Through the Looking Glass
10.Wolfowitz barricades self in World Bank office.
11. The Daily Show spin on the Wolfowitz scandal

Endnotes:

1/ "What sort of things do you remember best!" Alice ventured to ask.

"Oh, things that happened the week after next," the Queen replied in a careless tone. "For instance, now," she went on, sticking a large piece of plaster on her finger as she spoke, "there's the King's messenger. He's in prison now, being punished: and the trial doesn't even begin till next Wednesday: and of course the crime comes last of all."

Lewis Carroll, Through the Looking Glass: Chapter 5 "Wood and Water", M. F. Mansfield & A. Wessels: New York 1899 .