Reports 1999

Index 1999

– December 1999, Conflicts in the World, Part I

– November 1999, Financial Affairs

– October 1999, Asia, out of the dark?

– September 1999, A note on business management

– August 1999, German defence revisited

– July 1999, Updates on Kosovo and Kashmire – Financial assesment

– June 1999, Indonesia revisited

– May 1999, The Kosovo conflict; history, exits and future

– April 1999, Portfolio management in 1999

– March 1999, Stability and Conflict 1999, Part III

– February 1999, Stability and Conflict 1999, Part II

– January 1999, Stability and Conflict 1999, Part I

December 1999

December 1999

Conflicts in the world

December 1999, Part I;

– Introduction

– The Americas

– Europe, Russia and the new states

– The Middle East

February 2000, Part II;

– Africa

– The Indian subcontinent

– Asia, the Pacific-rim

Conflicts in the world, Part I

– Introduction

– The Americas

– Europe, Russia and the new states

– The Middle East

Introduction

On the eve to a new millennium the world has not become any safer or more peacefully. There are now more conficts and wars than in the previous decades during the superpower stand-off. The Cold War might have been unpleasant but at least it kept most conflicts in the world at bay. As no side could allow a failure or even a loss of face. This could have easily escalated into to something uncontrollable and absolutely destructive.

On all continents of the earth there are some or more conflicts or even wars going on. As a definition of conflict or war we would like to use the following description, war or conflict is happening if states or organised groups of people have differences with eachother which they choose to solve or end by the use of violence. This violence is that large and intensive that normal live is interrupted by it. War in our understanding is only an increased, stronger, form of conflict with more agression an more victims, military and civilian.

We intent to deliver an overview of all actual conflicts and the ones which might come into existence on the short term, e.g. in the coming 6 to 12 months, in the world.

The Americas

The North and South American continents have been relatively peacefull places, with a couple of exceptions. There are three countries which have some kind of internal problem, from low intensity to civil war level, and two countries who are at odds which eachother about the demarcations of their mutual border.

Venezuela vs. Guyana

Venezuela and Guyana have still a different interpretation of the demarcation of the border. This difference intensified as Venezuela deployed a number of troops to the region, allegedly to stop drugs smugglers, the Guyana government became excited as they did not trust the situation.

This long standing disagreement has never been that serious that an armed conflict would be just around the corner. Both countries are thereby unable to launch, continue and support such and operation. Militarily and especially economically they have to many problems to start an enterprise like a small scale war with a neighbour.

The border disagreement arises if one of the countries unexpectedly deploys forces to the region. But this does not happen that often. The conflict has been therefore very low level and seems to stay that way on the short to medium term. The conflict seems to diminish and disappear because the United Nations have send an intermediary to the region which has a fair chance to solve it.

Mexico

The problems in Mexico are of a different nature. The economic and social differences have been always very wide and they seem to increase in the southern part of the country. In this rural area farming has been the main source of income. As most of the land is owned by large landowners many of the people living over there have been forced to work for them or lease the land from that group. The large landowners have become more wealthy and the working people have become poorer.

The poverty of these people, and to a lesser extent the working class in the north, have been the reason of the existence of some groups which want to improve the situation of these people. If necessary with violence. The EPR, Ejercito Revolucionarias Popular, and the CND are national operating organisations who demand a change in he political system. The majority of their work is more or less normal political work but at times they use other means, like violence, to intimidate and persuade people of the rightousness of their claims.

The EPR and CND have been relatively calm in the past six months and paid more attention to political work. The elections which are to held in 2000 are the main reason for this. They do not want to give the ruling PRI party an excuse to tighten security, increase police activities, suppress the opposition or even cancel the elections which they are prone to loose.

The other main oppostion party outside the normal political infrastructure is the Zapatista Liberation Army. The Zapatistas are an indian based party concentrated at the province of Chiapas. They want to change the unfair distribution of property. The Zapatistas have been using military/guerilla tactics to enforce their policy. In the last one to two years the Zapatistas have been largely subdued and are now vitually prisoners in their own province.

All opposition movements in Mexico want to improve the situation of the poor, landless farmers and the Indians. Beside a political structure they are also using violence to force the Mexican government to change its policy. Because of the coming elections an artificial peace like environment has been created. The normal political parties and the opposition movements, EPR, CND and the Zapatistas, are anxiously awaiting the results and therefore called some kind of cease fire in the guerilla war they are waging.

The new government might be more willing to listen, cooperate and to change something about the bad socio-economic situation of the poor, landless farmers and Indians. If the wishes and demands of the opposition are not met, not even partially, the situation in Mexico will turn very nasty. Violence will increase as the political process proved to be unworkable / unsupportive for the worse off in the Mexican society. A desperate fight will be the consequence as the opposition will have nothing left to loose, in short civil war.

Colombia

The situation in Colombia is as worse as before. The country is essentially involved in a full scale civil war. The government has not been able nor will be able to control or stop the activities of the leftist guerillas of the FARC, Fuerzas Armadas Revolucionaries de Colombia, the ELN, the National Liberation Army, and the right wing para-militaries. Beside the violent political opposition, there are still a number of criminal organisations which financially support the above mentioned organisations in exchange for protection and occasional support services, read forced labor and transport services.

The leftist guerilla organisations of the FARC and ELN, control over 42.000 KM2 of the territory of Colombia. The right wing militias also control considerable parts of the country but this in cooperation with the large land owners who more or less support the militias. The right wing militias were in the first place created to protect the land owners, or associations of land owners, from attacks of the leftist guerillas.

The Colombian armed forces could until now, 1999, not defeat the guerilla forces. They are forced to protect to many vital installations and important people. So only a fraction of the forces are available to fight the guerilla. And the quality of the guerilla has been very good. The training of the guerilla, especially the FARC, has been better than that of the regular soldier of the army.

The promised U.S. financial and material support to combat the narco organisations would be helpfull as this would them a better chance to defeat the narco trade. Consequently the financial resources of the leftist guerillas and the right wing para militaries would be reduced. But the U.S. support will prove to be to little and to slow to make an impact on the short to medium term.

In the mean time the only option of the government is to talk, negotiate, with the leftist guerillas. They are however very adverse to negotiations as their positions are much better, stronger, then the government’s position. All attempts to talk have failed because of increasing and new demands of the leftist guerillas.

The government is in a difficult position as they are not able to defeat the armed opposition and the start of negotiations will become ever more difficult. The leftist guerillas consider the negotiations as a way to gain more territory or liberties and they see it as a weakness of the government. They see themselve on the winning side, so why give in something you will be able to take in the short to medium term. All pleas of the population will not change the policy of the leftist guerillas so close to their goal.

The conflict is likely to intensify in the future. The government received additional support from abroad, they are getting tired of the negotiations which lead to nothing and are increasingly trying to fight the guerilla and the narco-gangs which support the guerilla. The FARC and ELN have increased their operations against the government and the FARC has approached the outskirts of the capital Bogota in the traditional hit and run tactics. The guerilla will be in the short term more hurted by the apprehension of the narco financial supporters than by the operations of the armed forces against them.

The civil war will most likely continue in 2000. Colombia will remain a country is distress. The fighting will continue as no side is able to defeat the other side.

Peru

The situation in Peru has improved as the capabilties of the MRTA, Movimento Revolucionario Tupac Amaru, and especially the Sendero Luminoso, Shining Path, have been severely limited by the actions of the government. The MRTA has been virtually destroyed since the last spectacular action, the kidnapping, in the Japanese embassy. The MRTA as a city guerilla, never had that much support in the population and remained small in scale and effectivety. The government could thus relatively easy control and destroy the most active elements of the MRTA.

The Shining Path has also become the phantom of its former strength after nearly the whole leadership have been arrested and put in jail. The Shining Path still exists as a guerilla force but they are at the moment not able to control parts of the country and to strike at the armed forces as before.

The government and the security forces will continue with the crack down of the Shining Path and the MRTA. The Shining Path will therefore not be able to become as dangerous as before. The only option left wil be some occasional attacks against the armed forces, deep inside the jungle of the country. Peru will be safer as before and this trend is most likely to continue.

Europe, Russia and the new states

In this chapter we will evaluate the situation in Europe, from the Atlantic ocean to the Ural mountain range, and because of the close relations with Russia we will include the new Asian states, which formerly were part of the now defunct Soviet Union.

The situation in Europe, with two exceptions, can be divided into two parts. The quiet Northern-, Western- and Eastern Europe and the volatile South-eastern Europe. Where as the first group is free of any outside direct threats and internal violent oppostion with the exception of the United Kingdom and Spain. The second group, South-eastern Europe, is much more under threat from inter- and intra state conflict. The Balkan remains the most volatile area, with Turkey on a second place and Greece closing the line.

The territory of the former Soviet Union, excluding the Baltic states, Belorussia, the Ukraine and Moldova, is a much more complicated affair. A number of countries have inter- and intra state differences, some intra state problems and with the exception of one or two the left over is being hit by spill overs from their neighbours problems.

Europe

As mentioned above Northern-, Western- and Eastern Europe is virtually free from any conflicts with the exception of the United Kingdom, Spain and to be complete France. South-eastern Europe is the area with the problems which destabilises the area and could affect the other part of Europe by the refugees if a problem becomes hot.

The United Kingdom

The problem which could become violent again is the Northern Ireland case. Northern Ireland remains a potential hot spot as long as the two groups, the Catholic republican minded group and the Protestant UK/monarchy minded group, do not reach an agreement.

After years of violence, bombings, terror and suppression of the Irish Republican Army and associated groups, the Ulster Defence Force and associated groups and the Britsh forces, the Ulster Constabulary and the Britsh Army who acted very often one-sided, all parties agreed something had to change.

The IRA represented by the Sinn Fein, the Ulster Unionist Party, with approval of the UDF, and the British government started negotiations to end the conflict. After an initial success, elections and the cessation of violence the peace process stalled over the disarmament demand of the UDF and the British government. If the peace process stalls to long dissatisfaction and reciprocal accusations and assaults will become more likely.

The parties involved in the peace process need progress as the hawks on each side, who never really agreed with the peace process, are pressing to return to the armed fight. They still believe they can win the conflict by the use of force, violence.

It therefore of the utmost importance that the negotiations will start again. There are signs that all concerning parties are prepared to compromise. Sinn Fein ministers will be allowed to join the government, an IRA member will join the disarmament commission, the disarmament will be postphoned to the beginning of 2000 and the Ulster Unionist Party accept that if disarmament fails the Sinn Fein ministers will have to leave the government.

It should however be considered that the demand of disarmament is shortsighted. A disarmament will only deliver an artificial feeling of security. Because if they disarm there can never be a certainty that all weapons are handed over. There are private illegal weapons and ofcourse the weapons of the Protestant militant groups. They can rearm very quickly. The hand over of weapons to the British armed forced is experienced as a surrender but there are no victors nor defeated. And the armament delivers the Catholic side an idea of equality versus the Protestants and the all mighty British security forces.

The disarmament question should be dealt with after the peace threaty have been fully implemented and the people can and will live and work together as normal people. A first step that the explosives will be handed over to the government, British army, should be enough as a confidence building measure.

A return to the armed conflict will be unlikely on the short term as both sides profit most from peace and the leaders are to carefull to destroy the progress that have been reached. But to avoid violence on the medium to long term the process/negotiations/cooperation have to start again. Otherwise things may look bleak.

Spain

The demand of the Bask people, or better the ETA, Euzkadi Ta Askatasuna, for independence remains as firm as before. The promising first contacts, the start to peacefull cooperation and the disgust of the Bask people of a number of attacks of the ETA have been turned around. The election in Bask country of a coalition of pro-Bask independence/autonomy parties and a resurgent Herri Batasuna, the political arm of ETA, politically, and ETA, militarily, are a clear sign that the armed struggle will continue.

The Spanish government might have been to slow and carefull in the policies regarding the Bask province but they could most probably not avoid the resurrection of the ETA. The hard liners have been backed by a new generation of ETA supporters and are vividly and loudly proclaiming their goal, independence. The political activities have been supported by the creation of new arms depots and a new infra-structure in Spain and in France.

The ETA seems to be prepared again to use violence to support their fight against the Spanish government. Independence of the Bask province and even the creation of great Bask country seems to be the goal of the ETA. A restart of the armed conflict seems to be very likely as no side is prepared and able to compromise. All progress made in the last two years will be thrown away as the ETA cannot give up the independence demand and Spain cannot go any further than the already autonom status of the Bask province.

France

The problem of France seems to be small against the problems in Spain and the United Kingdom. The province of Corsica is still a trouble spot in France. There are three or four parties / organisations who demand independence or better something like it.

The parties are not very active and occasionally burn houses of people who are not native Corsicans or use it a holiday house. Sometimes, even rarer, they attack government property or people representing the French government. Their normal work is to collect taxes from Corsicans under the guise of paying for the independence fight and / or they collect money from the French government as a kind of pacifying gesture of the government. Corsica is the most subsidized province of France.

And this is the problem of Corsica, they want to be independent but they do not want to loose their preferential treatment. Corsica and especially the parties voting for independence are addicted to the financial support. The reason of existence sometimes seems to be financial motivated.

This struggle seems to be continueing in the coming years as long as France does not radically change its policy towards Corsica. Changing the subsidy regime towards the Corsicans will increase the attacks against government institutions. And if granting independence would be considered Corsica will most probably reject it, as economically Corsica is hardly able to do it on their own.

South-eastern Europe

The real problems of Europe are centred at an area which have been historically very difficult and violent. There are different religions and people in this area which each have at one one time ruled over the other. There are differences about the exact demarcation of the border, revanchism and a leader who considers conflict and/or war as an opportunity to stay in power. The area in question is the Balkan. And in particular the area of the former republic of Yugoslavia.

The other region with above normal tensions is the long lasting Greek-Turkish contradiction and the connected Cyprus question.

The Balkan

The Balkan has been for centuries the centre of conflict. In one of the last major conflicts it has been on the frontier between two opposing religions and world powers, the Austro-Hungarian empire versus the Ottoman empire. Or as it is sometimes called in Germany, Morgenland gegen Abendland.

The republic of Yugoslavia became the victim of the end of the Cold War. The differences between the peoples in Yugoslavia, the division of power and the inequality of economic development and wealth in the country, made the country fall apart. Slovenia, Croatia, Bosnia-Herzegovina and in 1999 Kosovo left the republic. With the exception of Slovenia all had to fight for their independence as large groups of Serbians in each of those areas resisted to, with support of the Yugoslav army, the dissolution of the country. Only after years of battle, mutual atrocities, dislocation/movement of ethnic groups and after long hesitation the decisive intervention of NATO forces some stability could be introduced.

As long as NATO remains on station in the area, in Bosnia and Kosovo, there will be no fighting between the different ethnic groups. Bosnia will remain however a divided country as each group has its own little territory. The situation is Bosnia has stabilised in sofar that a new conflict seems to be very unlikely on the short to medium term.

Kosovo will also finally experience a more stable environment. The NATO contingent will not allow any fighting. And Kosovo will be dominantly Kosovo-Albanian as the Serb minority fled the area, after the conflict, in fear of revenge of the Albanians.

The bad genius of the area is still in power. The president of little Yugoslavia, or better Serbia, Slobodan Milosevic, have used and will use the ethnic differences in the country to stay in power. With little attention to the demands of other ethnic groups who live and have lived in Yugoslavia he protected his position and the dominant position of the Serbians in former Yugoslavia. As soon as some one was undermining those positions he played the nationalistic Serbian card to suppress all opposition. There are now two areas left in little Yugoslavia, the northern Serbian province Vojvidina and the associated state in little Yugoslavia Montenegro, in which there are respectively a large group of Hungarians and a majority of Montenegrans

It seems to be very likely that Milosevic has a two track strategy for Montengro. He will on one side use the aversion of Montenegro towards his regime and on the other side he will want to destroy the opposition in Montenegro with the common goal to reinforce his position. E.g. Serbia and Milosevic cannot loose Montenegro as it is the only connection to the sea and the Serbians will most probably rally behind Milosevic if it seems as Montenegro will secede from little Yugoslavia.

It is therefore very likely that Serbia will act in the months of March, April or May of 2000 to bring back Montenegro under the direct control of Serbia. The number of Yugoslav army, VJ, troops in Montenegro have been increased after the defeat in Kosovo. Milosevic would like to bring in the politically more reliable and better armed and trained para military security forces of the MUP into Montenegro but this is forbidden by the constitution of Montenegro. So the VJ forces should in the mean time intimidate the president of Montenegro Milo Djunkanovic to accept full federal authority. If this fails or if Montenegro secedes it will give Milosevic an excuse to send in the MUP forces.

A to independent Montenegro is geo-strategic and political intolerable for Serbia and Milosevic.

Greece vs. Turkey

Since the creation of modern Turkey by Ataturk there have been difficulties about the exact demarcation of the sea border, especially in the Aegean sea, between Greece and Turkey. The relations are further undermined by the acquisitions of advanced armament by both countries, the policy on Cyprus and the suspicion of Turkey that Greece is supporting the PKK. These tensions are increased by a historical event when large number of Greek people were forced to leave western Turkey where they had lived until 1922-1923. The same is valid for the Turkish people who lived in the northern Greek province of Thrace. And the fact that the Greeks are orthodox and the Turks are muslims is also not a condition to improve the situation.

The tensions between the countries are real and sometimes it gets worser as one of both sides is executing a claim they think to have. Like the occupation of some rocks in the Aegean or the threat to close, or better control, the Aegean as it is something of a Greek lake. At those moments they seem to be on the brink to war. But international intervention, pressure, and the sense that war will not solve the problem have until now de-escalated the tensions between the two.

A war will be therefore unlikely between Greece and Turkey. To much is at stake. But the situation remains dangerous even as Greece supported Turkey after the recent earthquakes. There are to much tensions and both think vital interests are at stake in the Aegean.

Cyprus

The situation on Cyprus is a reflection of the Greek-Turkish conflict. Cyprus is inhabited by a majority of Greeks and a minority of Turks. As the Turkish people were threated unfair by the Greek dominated government and institutions and when the Greeks, or better some religious and political representatives of the Greek community, wanted to unify Cyprus with Greece proper Turkey interfered and occupied about one-third of the island.

Cyprus have since been divided into a Greek- and Turkish part. The Turkish part builded an own state but it has been recognized only by Turkey. The division between the two parts is and have been nearly absolute. Contacts between the two is very difficult and every action of one of the two sides is met by distrust.

Greek and Turkey both do not want the Cyprus question to escalate and control both sides not to endanger the status quo. As no side wants to enter in a war in cause of Cyprus. If a conflict might arise on Cyprus it will nearly immediately spread out to Greece and Turkey proper. The consequences of a conflict are simply to large. But both sides try to maximise their position and this might increase the already tensed situation.

Turkey

Beside the external tensions of Turkey with Greece and on Cyprus, Turkey is also facing an internal threat. The integrity of the Turkish state is being questioned by a large minority living in the eastern part of Turkey. The Kurdish people demand more liberties, autonomy and some even independence.

A number of the Kurdish people organised themselve in the PKK, Partiya Karkaren Kurdistan. A militant organisation with a political wing, the ERNK, National Front for the Liberation of Kurdistan, and a military wing the ARGK, Kurdish National Liberation Army, with the goal to create a socialist independent Kurdish state. Under the leadership of Abdullah Ocalan, Apo, the PKK became a very well organised and ruthless organisation which with limited resources was able to make live very difficult for the Turkish security forces.

After the capture and trial of Ocalan the PKK has become more willing to compromise with the Turkish government, which in turn are not very eager, even unwilling, to negotiate with the PKK. As a gesture of his power and goodwill Ocalan has ordered PKK guerilla forces to leave Turkey or even to surrender to the government. Ocalan seems to be willing to do everything to pacify the Turkish government. To persuade the government to start negotiations about the Kurdish case with Ocalan as a negotiation partner.

The PKK commanders in the field were in the beginning willing to obey the orders from the PKK’s president Council, e.g. Ocalan. But the first splits have surfaced in the PKK. Cemil Bayik and a field commander, Haydar Alperslan, refused to participate any further in the socalled peace policy of Ocalan. Those two demanded the continuation of the fight against the Turkish government. If more field commanders and people from the leadership of the PKK refuse to cooperate, implement a peace policy, the unity of the PKK could be destroyed.

The fight for a Kurdish homeland in the South-east of Turkey is very likely to continue. Instead of fighting one organisation, the PKK, Turkish security forces will face more organisations as the unity of the PKK is just a matter of time before it falls apart. At first the new organisations will be weaker but after some time, 6 to 18 months, those organisations will have been restructured, new and more men, better armed, more and diversified support. In short instead of one snake, the PKK, many new agressive venomous vipers will have to be confronted.

Turkey is further confronted, as many islamic nations, with an another threat. The radical fundamentalistic elements in the society who want to change the secular system in Turkey into an Islamic republic with the Sharia as book of law are becoming more popular. Those people organised themselve in several organisations like the Islamic Brotherhood, the Jihad, Hizbollah and the Islamic Great Eastern Riders Front. All these organisations vary in size and methods. Some are more violent others are focussed on social work to improve the conditions of the people. But all have the same goal and receive support especially from the worser off in the society and from certain university students.

The fundamentalistic organisations wil not be able to make a large impact on the society. They will not receive enough support and with terrorism, bomb assaults and the like, they are just a nuisance. The security forces are still able to control them on the short to medium term. The moderate form of fundamentalism could count, on the other hand, to get support from around 20 % of the population. They could become more dangerous but they are still to small, considered as unreliable as a partner and more importantly unwilling to use violence.

Russia and the new states

The dissolution of the Soviet Union has created a large number of new states in the Caucasus and in the Asian part of the former Soviet Union. Nearly all new states happen to be muslim states but they insist that they are not muslim fundamentalistic nations. Politics and religion are separated, more or less.

A large number of these new states are experiencing problems with other states of with violent opposition parties who want to enforce changes in the country.

Even Russia itself is having problems with one of the many peoples, the Chechnyans, which are formally part of Russia. Further, Russia is involved in the majority of the conflicts in the new states. At least as an adviser and / or supplier.

Russia

The situation in Russia has not experienced any improvement in 1999. At best one can talk of some kind of stabilisation of the economy. But socially there has been a slight deterioration and politically things have become worser.

The external political position of Russia has improved somewhat as the Russian influence in the former Soviet Asian republics has been stabilised and more importantly is wished by the governments and people to establish stability and support against the muslim fundamentalistic organisations in the most southern Asian republics. The fundamentalists and the overspill of Uzbek guerilla fighters into Kyrgyzstan and the remaining pressure to all countries bordering Afghanistan as fundamentalists, weapons and illegal substances continue to flow into the bordering states and to the other territories of the former Soviet Union will remain a threat to the stability of the whole region. This threat will be accompanied by occasional low intensity conflict, guerilla raids but not strong enough to change the goverment.

The internal situation is much more complicated. Russia has problems in many regions as the central government is neglecting the rural provinces and republics in the country. They only want to use, exploit, the resources but are unable to deliver something in return. The majority of the regions learned to act on their own and are becoming ever more unwilling to execute orders from Moscow. Essentially they have become semi-autonomous regions.

The problems in the Caucasus are much more dangerous as they undermine directly and agressively the integrity of Russia. The area is threatened by muslim-fundamentalists who want to create one large muslim republic out of the Caucasus republics which now are part of Russia.

The radical muslims in the Caucasus receive some support from small organisations which have identical goals, the improvement and the enlargement of the position, power, influence and territory of the muslim peoples. Organisations like the Islamic Army try to undermine the Russian society and enforce their case by bomb attacks, e.g. terror. This will continue on the short term as those small organisations are difficult to identify but their actions will not support their goal. On the contrary it will undermine the muslim case as it unifies the Russian people and increases the willingness to destroy them.

The geographical center of the conflict is Chechnya but the ideological center, were the idea originated, is the Middle East. The idea for one muslim nation on the Caucasus comes from the Wahibi organisation. The Wahibi organisation is a muslim fundamentalistic organisation with strong links to nearly all terrorist muslim organisations, including Osama bin Laden, and protects and supports an islamification of areas with a muslim population. The Wahibi organisation is leaded by Emir Al Chattab whose real name is allegedly Habib Abd al-Rahman

The rebellious Chenchnyan republic, which achieved semi-independence status after the Russian forces were forced to leave the republic, overplayed their hand by trying to spread muslim fundamentalism into the whole region.

The Chechnyan warlord Sjamil Basajev, with ideological support from the Wahibi organisation, invaded Dagestan allegedly to protect his muslim brothers who were threatened by the Dagistani government. The forces of Basajev could be ejected out of Dagestan after some hard fighting with Russian forces with support of Dagestani militia forces. To return at another place in Dagestan some weeks later and to be thrown out again.

Dagestan is not Chechnya, the population is much larger and more diversified than the population of Chechnya. The Dagistanis do not want to become independent and prefer the present situation.

The Dagestani adventure could proof to be a vital mistake as it awakened and stimulated Russia’s feelings of revenge after the defeat in Chechnya. The defeat, Dagestan and the fact that Chechnya has been very irritating because of the illegal activities of Chechnyan criminal organisations, oil theft, kidnappings, arms and drugs business, prostitution, created a situation were the Russian government with support of the people decided to act and end the activities of the Chechnyans in the area.

The invasion of Chechnya has been succesfull as Russia did not make the same mistakes as the last time. They used better trained and paid soldiers, US $ 1.000 a month instead of US $ 40, better tactics and strategy. They isolated Chechnya, softened up enemy positions before moving in ground forces and remained in the low-lands of Chechnya, at least until they removed all possible opposition from there. Entering the mountainous part of Chechnya is more dangerous but with good forces, adequate artillery and air support, if the area is sealed off and if the Russians are willing to accept a higher number of casualties then in the first phase of the conflict then it is possible to defeat the Chechnyan warlords with their guerilla forces.

The conflict in Chechnya will continue in the next millennium. The Chechnyans will rely on their fighting power and willingness and on the favorable geographic circumstances in the mountains. This will harden their resistance but if they lack support and the Russian forces methodically reduce their freedom of movement and their numbers they will be not able to win. Within 18 to 24 months the Russian forces would be able to defeat the Chechyan warlords.

Kazakhstan

The most wealthy and most stable of the new countries in the Asian part of the former Soviet Union is experiencing few problems. The only problem might be the large group of Russian settlers in the north and north-western part of the country. There are rumours which claim that certain people, groups, prepare a coup to secede the Russian dominated part from Kazakhstan.

These rumours will be partly true as the original Kazakh population are receiving better positions and faster promotions so their is some dissatisfaction emerging with the Russian population. And partly untrue as the Kazakh government is to afraid of such a development that they imagine to much to it. It is therefore very unlikely that there will be some kind of armed Russian opposition against the Kazakh government on the short term.

Tajikistan

After years of fighting several muslim fundamentalist organisations there have been reached some kind of cooperation agreement between the government and the largest and now more moderate, the United Tajik Opposition, and a number of smaller muslim parties like the Islamic Revival Party and the Democratic Party. Tajikistan will be more islam minded in the future and less inclined to support the neighbouring secular governments in their struggle against the fundamentalistic muslims.

The main threat to stability in Tajikistan may be removed but there are at least still two minor threats around. The consequences of a spill over from the conflict in Afghanistan and the activities of former premier Abdulmalik Abdulladzhanov and former colonel Makhmud Khudoiberdyev.

The spill over from Afghanistan will be on the short term mainly the refugees and the arms and drugs trade. On the long term, especially if the Taliban in Afghanistan is succesfull, small groups of fighters of the northern alliance might pass the border and use Tajikistan as a base. Then things will look different and more threatening.

Abdulladzhanov and Khudoiberdyev are probably hiding in the countryside or in Uzbekistan as they allegedly received support from there. They remain a latent threat and are active in the Khojent region. The number of fighters under their command is not very large but if Tajikistan hides or even supports muslim fundamentalistic elements, the people around Jumaboy Khodjiyev, better known as Juma Namangani, out of Uzbekistan, the support for Abdulladhanov and Khudoiberdyev could increase dramatically. Remember Uzbekistan is the largest military power in the region.

Uzbekistan

The authoritarian government in Uzbekistan has been under pressure by activities of muslim fundamentalists led by Jumaboy Khodjiyev, better known as Juma Namangani. Namangani is a 35 year old militant muslim who fought alongside the Taliban in Afghanistan and the UTO in Tajikistan.

After a crack down of the fundamentalists the government could eliminate the most dangerous elements out of the society. Namangani with about 1.500 followers could getaway and sought initially refuge in Tajikistan. The Tajikistan government, which includes the fundamentalistic party the UTO, does not disapprove the fundamentalistic muslim movement and their goals in Uzbekistan but is not able to openly support Namangani. They covertly supported them and allowed them to move into Kyrgyzstan where they kidnapped some foreigners to improve their war chest. Where after they moved into the Fergana valley which is geographically strategic situated, close to Uzbekistan and very rugged and inhospitable, and the population is conservative so friendly and most likely supportive.

Out of the Fergana valley in Kyrgyzstan Namangani plans to launch a guerilla war into Uzbekistan to overthrow the government. With bomb attacks on important people and places and the incursions out of the Fergana valley into Uzbekistan Namangani hopes to get popular support and weaken the government to eventually replace it with an islamic republic.

Uzbekistan will continue to suffer from a low intensity conflict as long as Namangani and its kind are able to receive support from abroad or are allowed to operate from foreign bases. With or without approval of the neighbouring country.

Kyrgyzstan

Kyrgyzstan became a victim of the spill over about the conflict in Uzbekistan. After the crack down on islamic fundamentalists in Uzbekistan a large number of islamic fundamentalist fighters fled to Tajikistan and there after to Kyrgyzstan into the Fergana valley which perfectly fits for the launch of a guerilla campaign into Uzbekistan. An additional benefit is that the Kyrgyz government is not able to do much against it as they lack the capabilities and resources to eject them.

The promised and partly delivered support from Russia, Kazakhstan and Uzbekistan is absolutely necessary to improve the capabilities of the Kyrgyz armed forces. The support should enable them to eject the rebel forces of Namangani out of the Fergana valley.

Kyrgyzstan will face some hard fighting on the short to medium term to eliminate the foreign forces on their soil and to keep them out. Especially as only a combined action of Uzbekistan, Kyrgyzstan and Tajikistan will really destroy the muslim fundamentalists organisations in the region. And this will be very unlikely considering the position of Tajikistan.

Armenia

The Caucasus remains an area of tensions. Not only the Russian part of the Caucasus is volatile but the other countries in the region are experiencing the same kind of tensions.

The Armenian conflict with Azerbaidjan about the Armenian enclave Nagorno-Karabach has ended in Armenia controlling the area, a cease fire is in place, Azerbaidjan wants to regain control, both are however economically unfit to extent a war on the short to medium term, the future oil revenues will improve the Azeri negotiation position but the oil pipelines will cross Armenian territory or will be very close. Essentially the situation is in a status quo, on the short term no country is in the position to make any improvements. The war between the two antagonists, or the end of the conflict, will take some time if it cannot be solved at the negotiation table.

The main pressures for Armenia will be the internal problems about the bad performing economy, social dissatisfaction, the uncertainty about the Nagorno-Karabach question and the willingness to use violence to change the government policy.

As long as the Nagorno-Karabach conflict was hot all attention was channeled towards the conflict but now the former fighters want to see a reward or improvement which they do not get. This will fuel more agression. Violence will continue in Armenia as long as there is no solution to the economical problems. The socalled patriots will continue to attack the government for their, in the patriots understanding, bad performance.

The Middle East

The Middle East will remain a powder keg, but the fuze has been taken out and the matches are in the cupboard. There has been a relaxation in the relations between the opposing states in the Middle East. Not all the problems are eliminated, far from it. As the majority of the nations continue to improve their war fighting capabilities, there is a low intensity conflict going on in Lebanon, Iraq is still the same bad man of the region and old animosities are still prevalent. But there is change in thinking which becomes best clear in the fact that the will to start a war has diminished dramatically. This development can be considered as very positive in a region were it has been normal to start conflicts, use violence, for the smallest of things.

Lebanon

Lebanon is a country under foreign control. Israel is controlling, with support of the South Lebanese Army, the security strip. Syria is controlling the Bekaa valley and indirectly the Lebanese government. And finally Iran has indirectly a controlling stake in South-western Lebanon as they advise, train and supply the Hizbullah.

The Lebanese government naturally disapproves the occupation of the security strip by Israel. But they do not take any action to retake the security strip and they also do not promise to guarantee that, if the Israelis withdraw, it will be safe and peacefull in the border region, e.g. no missile attacks on Israel and no commando raids on Israel. They simply are not able to do one of both things. Militarily Lebanon is a midget compared to Israel and the power of the Lebanese government is limited to the cooperation of the Hizbullah, Syria and the many clan leaders to make and execute policy.

So in short the Lebanese government is demanding the unconditional withdrawal of Israel. A demand which will be very difficult, if not impossible for Israel to fulfill. The security demand of Israel would forbid such a policy. It would leave northern Israel at the mercy of unfriendly organisations like the Hizbullah, Hamas and the radical Palestinian organisations who disapprove the peace process or for that matter the existence of the Israeli state. But there could be a small ray of hope for Israel. Technology, occasional military action and negotiations could minimize the security risk to an acceptable level.

The conflict, activities, in Lebanon have been and are mainly between Israel with support of the South Lebanese Army, SLA, and the Hizbullah with Iran and Syria sitting in the back ground and looking what is happening. Israel had created the security strip and the SLA as some kind of militia army, mercenaries, to guard the security strip against incursions from terrorists. At first the SLA was an effective force but as the Lebanese poltical situation became more clearer and only one opposing force remained, the Hizbullah, the effectiveness of the SLA began to wane. The Israeli Defence Force had to take over more positions and patrols to limit the movement of the Hizbullah.

In this second part the Hizbullah with generous support of Iran could turn around the situation. At first the terrorist were hunted but now the IDF and the SLA are more or less forced into strengthened positions with now and then patrols into the surrounding area. Only with a lot of air support and occasional larger operations of the IDF they can continue to control the security strip. The weakness of nearly all occupying forces is the attrition of low intensity fighting with road side bombs and ambushes. This undermines the capabilities and the morale of the IDF and the SLA.

The small withdrawal of the IDF/SLA from some postions, Jezzine, will not be viewed as a friendly gesture but as a weakness. It will encourage the Hizbullah to continue the fight as Israel get ever more tired of the occupation of the security strip.

A total withdrawal will become ever more attractive for Israel as the costs in material and human lives gets higher. And they will increasingly be able to protect their border with occasional operations of the IDF into Lebanon, massive air-ground operations and the improved defence systems like the Nautilus laser system and the Arrow II missile system to counter incursions and missile attacks. An additional advantage would be that Syria would loose a bargaining chip in the negotiations over the Golan heights. A total solution as wished by Syria would then be unnecessary.

Israel vs Syria

Beside the above described problems in the security zone in Lebanon Israel has another external problem with a territory which they occupied during the 1967 six day war. This strategically and as a water source very important area, the Golan heights, is located at an area which can overlook northern Israel to the sea and upon Damascus in Syria. Until 1967 the Golan heights were part of Syria and since then they wanted to recover the territory from Israel. By war in 1973 and since then by pressure on Israel. They have used physical pressure by a very large military force in the triangle Damascus-Lebanon-Jordan, by around 30.000 men in the Bekaa valley in Lebanon and the virtual control of the whole of Lebanon. And more psychological pressure like the threat of force and terror and by diplomacy.

The end of the Cold WAr and the second Gulf war gave Syria another opportunity to regain the Golan heights. The end of the conflict, occupation, could be reached by negotiations. Several rounds were held without any direct results. As no side really was willing to make a commitment or sacrifice. Their own interests were that important that a compromise was not attainable. As Syria wanted to regain full souvereign control, Israel demanded demilitarisation of the Golan heights, withdrawal of Syrian forces from the border area and the right to keep some vantage points to control the activities on the Golan and its surroundings. And ofcourse the right to control the water distribution of the region. Both demands are difficult if not impossible to reconcile.

The Israeli-Syrian problems will continue to play an important role in the Middle East. None of opponents is however willing to go to war as Syia is at the moment ill-prepared to go to war. The Syrian military capabilities are severely limited by a lack of spare parts, the wrong kind of training, counter-insurgency instead of offensive operations, and an internal power struggle about who to succeed the terminally ill president Hafez al-Assad.

Israel also will want to avoid war as it is very expensive and it would bring no additional benefits for the security of the Jewish state. Militarily Israel is fully capable to defeat Syria, or any other country in the region, but financially and politically it cannot afford a war.

Israel

Of course Israel has many other enemies in the Arab and/or islamic world as the majority of those countries and people have some problems with the existence of the state of Israel and their occupation of Arab land and holy places. None of these enemies is however capable to defeat nor create medium to large damage to Israel. An Iranian or Iraqi nuclear-biological-chemical missile threat is still some years away and even if they would possess such kind of weapons within 8 to 10 years, using them is a total different ball game.

Israel’s main problem is internal. The Palestinian question has to be solved to the satisfaction of both sides before stability will return to both entities. The large numbers of Palestinians in the Gaza strip and the West Bank need to have some kind of state and economical future if you want to refrain them from joining fundamentalistic organisations like the Jihad or Hamas. If the question of Jeruzalem and the exodus Palestinians can be equally fair dealt with peace will be long lasting in the Middle East. The best way to eliminate enemies is by taking away their agony.

It will be impossible to satisfy all so a number of small radical organisations will continue to fight Israel. They belong to the group of enemies which hate Israel but who do not have the capabilities to create large damage to the existence of Israel as a nation. Their method will be terror attacks, bombs, preferably in Israel. This will have a large psychological impact on the Israeli society but not on the nation itself. If Israel overreacts and punishes all Palestinians, e.g. the new Palestinanian entity, state, militarily or economically the consequences of those actions could be more damaging to Israel.

The Palestinian Authority

The hopefully new nation in the Middle East will be the new Palestinian state on the Gaza strip and the West Bank. With international support and economic cooperation with Israel this new nation could become economically viable.

This new Palestinian state will however be under pressure from internal fighting about power, positions and wealth. Especially if the current leader Yassir Arafat has to be replaced. And from muslim fundamentalistis elements like the Hamas.

The internal differences and fighting will lead to more suppression and the weakening of the new state. This will undermine the political and economical stability and future of the new country. On the short term this will increase the security of Israel but the chaos will strengthen the postion of the Hamas.

The Hamas has been able to create a large and strong network of institutions and followers in this area. They might wish to expand their influence in the new state’s political hierarchy and eventually instigate tensions between Israel and the new Palestinian state. They will never be able to become a real threat to Israel as the new state simply lacks the resources to do so. And the strength of the Hamas is and was social support to the people and insurgengy, popular resistance read violent demonstrations, against an occupying force.

The future of the new Palestinian state will depend on the ability of Arafat to built stable state institutions to stimulate economic growth and give the Palestininas an opportunity to make a living. If the current policy of suppression, corruption and nepotism will continue it will be very likely that the country will experience fighting between the main factions within the government with the Hamas picking up the spoils. Which also will bring no peace nor progress.

Iran

The islamic republic of Iran is experiencing some internal problems as there are some changes in the society. The population has become divided as one part is more positive about the policy of the conservatives, hardliners, under the leadership of ayatollah Ali Khamanei and the other part is favoring the more moderate policies of the more liberal, in an islamic fashion, president Muhammad Khatami.

The division has created tensions as the conservatives are trying to limit the influence of the moderate part of the society by closing news papers and proscecuting and sentencing to jail of followers of Khatami. This has led to several demonstrations which ended in confrontations with the security forces of the country.

This process is likely to continue. The conservatives are likely to able to control the liberals on the short term as they are controlling the majority of the important institutions like the ministries, police, justice and judiciary. And even if the chief executive is not a conservative nearly everybody else in the departments will be conservative.

The economic difficulties in Iran will make the problems of the conservatives larger and at the end uncontrollable as dissatisfaction will mobilize large parts of the population against them. So demonstrations and suppresion will be very likely on the medium to long term.

The external problems of Iran are less dangerous. There is a dispute with the United Arab Emirates, U.A.E., about the posession of some islands in the Persian Gulf, Abu Musa and the Greater and Lesser Tunbs islets. Some of them, Abu Musa and some islets of the Greater Tunbs, are occupied and fortified by Iran. But this is more directed in defense of the large U.S. presence in the Gulf than against the U.A.E. A conflict about the islands is unlikely as both do not consider it as a premier national interest and prefer a diplomatic solution.

The differences with Afghanistan are of a different character. The difference in the religious interpretation of the islam, e.g. the fact that the Taliban is Sunni and Iran Shia and the success of the Taliban in Afghanistan is posing a threat to Iran. The Afghan threat is not physical but more psychological. The Taliban ideology could spread to other islamic countries, including Iran, and undermine the position of the Iranian religious leadership. But the Iranian support for the Northern Alliance in Afghanistan could divert the total success of the Taliban and essentially remove the immediate threat from the position of Iran.

Iraq

Iraq will remain the main threat to the stability in the Gulf region. Even if Iraq is experiencing internal difficulties with the Kurdish people in the north, organised into the KDP and PUK, and the marsh Arabs in the south. The Kurds and the marsh Arabs, which are Shia and pose the majority of the people in the country, will not be able to destroy the government of Saddam Hussein. Even if the opposition would cooperate it will prove to be very difficult, if not impossible, to eject Saddam out of power. The system of security services, the republican guard and the ruthless suppression of everything with only the suspicion of opposition is the explanation of the survival of Saddam Hussein.

Without the support of some higher commanders of the republican guard, air force an security services any coup or insurrection will be fruitless. And even those commanders will need to be very careful and secretive. It will be very difficult to find the necessary number of important identical spirits wiling to risk their lives.

The strength of the regime became clear as Iraq resisted the world community in the second Gulf war, the UN embargo, the consecutive air riads on Iraqi targets as they did not obey the UN security council resolutions and in general the limiting of Iraqi souvereign right.

Even the UN installed no-fly zones in the north, north of the 36 parallel, and south, south of the 33 parallel, of the country could not stop the ambitions of Saddam Hussein. He had to wait for the right moment, right weather, only had a one or two night time-span and could mainly use infantry and some armoured formations before he could eliminate the US sponsored northern security zone and as he supported the KDP in removing the PUK from some important positions. The UN was equally uncapable to protect the Kurdish and marsh Arab peoples in Iraq from the activities of the Iraqi Republican Guard when they destroyed their resistance.

Saddam Hussein will remain in power as there are no competitors available which could replace him. It is very difficult to survive such an idea, not to speak of an attempt. Iraq with its current power system will be the same on the short to medium term, as will its problem.

The Iraq problem is the possible threat it may become if it is out of control. If the embargo and the no-fly zones are enforced the options of Iraq are limited. But if it can do what it would like to do it will develop itself into a major regional power with large conventional armed forces with medium to long range NBC capabilities. Especially this last factor is feared by the U.S.A. and especially Israel.

Iraq would like to play a dominant role in the region and the world. It would demand respect and even some kind of retribution for the efforts in the first Gulf war and for the damages Iraq had in cause of the Kuwait affair. The occupation of Kuwait was in the eyes of Baghdad a legitimate action as Kuwait owed much to Iraq and Kuwait is and was in the end some kind of renegade province. But this is another story.

In the short term Iraq will not pose a large threat to the region. Its military and especially economical capabilties have been much degraded by the war and the embargo. Iraq will remain able to act against its direct neighbours with small scale operations and terror. But as said before, as long as the UN, read US armed forces, are in the vicinity its options are limited.

Addendum

What need to be mentioned is the real future possibility of war about water. In this water scarce region a decrease in water availability because of drought or diversions with more demand at the same could be the cause for some big conflicts in the future. A large number of countries in the Middle East, Israel, Jordan, Syria and Irak, are very vulnerable to the water shortage.

Every diversion could be a casus belli. Israel as a large user and in command of the sources on the Golan heights and the West Bank could have problems with Syria and Jordan. Turkey who commands the major rivers into Syria and Iraq could have problems with both if it continues it diversions of water into irrigating projects in Turkey.

At the moment the water problem has not received the highest attention but this can change at a very short time span. Within two to thee years this situation can be changed. By then water will be a major cause for war.

November 1999

November 1999

Financial Affairs

The financial road towards 2000

1999 have been until now very volatile at the majority of the stock markets with the exception of the far east. The Pacific-rim stock markets have been performing very well. It seems as they have succeeded in the economical turn around after approximately 2 years of recession.

The US stock markets have been very volatile and experienced several ups and downs. Very generalised the year looked like this. January and the first part of February positive, to end of February and March negative and April and half way May were the most positive of the year. The summer months were very flat and moving sideways with now and then a small growth spurt but overall with a negative tendency. To reach new lows for the year in October as the psychology, e.g. the fear of the high stock valuations, and the possible increasing inflation, e.g. rising interest rates, pushed the markets down to the Dow Industrials 10.000 point level. The European markets were more or less following the US trend but remained more positive in general. The far east and the emerging markets were also influenced by the US trend but they could gain back much of what they had lost in the last two years. Especially the numbers in Japan were very promising as the Nikkei 225 reached the 17.000-17.500 level.

The United States of America

The decline of the stock markets in the US were, as mentioned above, mainly based on psychological factors. It is therefore to early to speak about a bear market. As a possible rise in interest rates are now more or less included in the stock market, an actual rise will only cause moderate damage. The Y2K problem could lead to some more problems especially in the last quarter of 1999 and the first quarter of 2000. Y2K remains however to our understanding and estimates more a virtual threat than a reality.

But remember a decline is also an opportunity to get into some new stocks which were before exorbitantly expensive.

The current situation can be better described as that the bull takes a rest to continue at the end of 1999 or in the third and fourth quarter of 2000. The economic fundamentals are still to good to start a bear market.

The threatening inflation and the high stock valuations will remain however a problem in the US even as the actual figures, especially the inflation indicators, are not as bad as expected. The Producers Price Index was higher than expected but they were distorted by the non-inflationary rise in tobacco, car and oil prices. The Consumer Price Index was more moderate and in line with expectations. The CPI will deliver a better, or correct, view on the US economy and that inflation is not yet that dangerous. The majority of the US companies are thereby performing better than expected. They continue to beat the market expectations. These positive indications should lead to some additional growth but nothing of the kind is happening. All gains of one day are being eliminated the next day.

There is some kind of war going on between interest rates and the earnings growth of the companies. The interest rates have a depressing effect on the market where as the good results should support the market. The federal reserve, fed, will continue, with the big stick of rates, to calm down the market with the goal of avoiding inflation. The fed considers the high stock valuations and the fast growth of the stock market as an unwelcome development which could stimulate inflation. Occassional interest rate rises, speeches of the chairman Allan Greenspan of the fed and especially the threat of even more rate hikes depress the stock market. Consequently a very likely movement of the market is, after the 10 to 15 % drop of September-October, sideways with a slight negative trend on the short to medium term. We estimate the Dow Industrials at the end of 1999 in the 10.500 – 11.500 range, but most likely at the bottom side of the estimation. It remains a volatile market with some companies are performing very well where as other are not able to break the trend.

The US economy is hot but not overheated and a soft landing is certainly possible. As is indicated by the production/order estimates for the coming months which estimates a lower production for the next two to three months.

The stock market’s health is further looked after, protected, by the fed. Even if it can be thought that the control of the stock market is not the job of the fed it could be usefull as to forego the creation of a bubble on the stock market. If some air can get out now, the markets could continue with a stable growth in the next couple of years of 15-20 % per annum instead of the very high return of 25-30 % growth of recent years.

The US market

It will be ever more difficult to select the right stocks. Some groups of the economy will continue to outperform the others but it will increasingly dependent on the individual company’s performance if a company is a growth stock or a laggard. We will give some indications of some sectors and about their situation.

The pharmaceutical sector is still very expensive and even if the returns are above expectations and the product pipeline is promising, every negative publication will be used to sell the sector. On the short term the drugs stocks will be flat but on the longer term they will be very promising. A healthy financial position, a promising product package and an increasing group of customers, e.g. higher demand, will make the sector very interesting.

The tech sector is ambivalent, the hardware sector, with exception of Apple and some chipmakers, is depressed by the Y2K threat perception. The software side is divided into general and maintenance/implementation software providers, the likes of Microsoft, CSC and CA, and the application companies, the ERP, internet technology and like group. Were the first group will remain profitable the second group will be depressed by the Y2K problems and contract deferments until the first or second quarter of 2000. The internet provider and E-commerce business group of companies will remain growing in scale and returns. The subscription numbers continue to grow but the e-commerce sales remain a little behind expectations. In general this group will remain positive. The high stock valuations of the internet companies is the only limitation for a strong growth of this sector.

The telecommunication sector will see a stable growth. All will profit from the increased use of telecommunication services by the internet users. Not only voice but especially data transfer will be a major boost to the returns of the telecommunication companies. In this competitive sector only proper management, product management and cost control will divide the better companies of the group which can and will outperform their competitors. The sector will probably not deliver any large increases in stock price as they are occupied in digesting the latest acquisitions and fusions. But we do not exclude a pleasant surprise in this sector. Some of the baby-bells and medium sized operations could become very attractive as they might grow faster than expected. On the medium to long term the telecommunication sector remains very interesting.

The other tech related group are the consumer electronic producers and distributors. This group will be very profitable if they are in the right group of products. The companies in the DVD, flat screen and mobile phone equipment production and distribution will show a very nice growth in the coming quarters. Especially the retailers will profit from the upswing in consumers electronics.

The financials are on the edge as interest rate hikes will undermine the sector but if the Y2K problem is actually depressing the stock market and the inflation indicators remain moderate then there will be no interest rate rise which will be benifial to the financial sector. The financial sector will most likely make good the territory they have lost in the first three quarters of 1999 as the latest scenario is the most likely to happen.

Energy will continue to be one of the best performing groups in the market. The higher oilprice and the increasing demand, winter time in the northern hemisphere and the improved economic situation in South-East Asia, will continue to boost the performance of the energy sector. All parts of the energy chain will be promising, exploration, procesing and distribution will experience booming markets.

The auto/car producers and sub contractor sector will continue to do well. The best years might be over but the next couple of years will not bring to much feared collapse in car sales. The sales in the US might remain more or less the same but the rest of the world will see an increased demand for cars and trucks.

Other sectors like paper, specialist chemicals and even the Caterpillars will see improved sales and a rising stock price. Where as US demand will not see any large improvement, world wide demand will improve the numbers of those companies. A weaker dollar will additionally reinforce their position on the world market.

The Aerospace and defence sector will also experience better times. Especially the defence sector will see after the recent drop in the share prices a clear improvement. Beside the good domestic market these companies will receive more international demand. This moment is the right time to enter this sector as they only can become better.

The European markets

The European stock markets have been and will be influenced by the sideway movement of the US markets, it will not receive any support, upward pressure, from the US like they had in the last couple of years. This will somewhat limit European growth but this could be benificial to the market as overheating and a bubble will be less likely to occur. The majority of the European markets will experience growth as the European economies are improving. Their home markets will become more healthy, the emerging markets improve and the US market will remain stable. In general the European markets are very promising for the coming quarters.

There will be however a clear division in Europe. Western Europe, the members of the European Union, will outperform Eastern Europe. In general Western European countries will grow in 1999 around 2,5 % with a low inflation of 1+%. The growth estimates for the year 2000 will be better as all indicators, production, marketconfidence, export and consumer demand are better than before. The European economy is expected to grow at an average 3+ % for the year 2000 with a core inflation of about 1 to 1,5 %. The countries of the European Union are going to experience a wide based growth in the coming years. Not only the export oriented companies will be performing well but also the domestic markets will see an above average growth.

The forecasts for Eastern Europe are not that rosy. As Eastern Europe has been badly hit in 1998 by the spill overs from the Russian crisis which put an end to the economic recovery after the dissolution of the Soviet empire. The southern part of Eastern Europe have been additionally hurted by the Kosovo conflict in 1999. The Kosovo conflict limited economic activities, destroyed the trust in the markets and increased the government expenditures.

Eastern Europe’s economic performance in 1999 will be lower than expected as the exports are lower than estimated, government expenditures are to high, the inflation remains high and the foreign investments have become lesser since the Russian crisis. Eastern Europe can be divided for the year 2000 into roughly three groups. The first group with an annual growth for 2000 of above 3 %. The second group with a growth of 2 to 3 %. And the third group with a growth of lesser than 2 %. Countries in the first group are Hungary, Polen and Slovenia. The second group, Czech Republic, Slowakia and the Baltic countries. And the third group, Rumania, Bulgaria, Russia, Ukrania and Belorussia. Were the last two even might experience zero growth or even an negative growth figure fo 2000. Where as the Ukrania only has problems with the performance of the economy, Belorussia has additional problems because of the ineffective and incompetent political leadership. The problems in Russia surpass them all. In Russia the problems are about a bad performing economy, political indecisiveness and struggle for positions and even more dangerous, a little war in Chechnya.

The Eastern European economies require a lot of investment and even more time before prosperity will become a common good. Their industries are in desparate need of financial and technology support. The wages might be low but outdated equipment, unproductivity and unattractive products destroys the comparative advantage of this group of countries. Beside many low perfoming companies there are some companies which are capable to compete on the world market but these are mostly foreign owned and operated or they are / were a kind of special case, model, company. But they are to low in number to make an impact on the society.

Beside the wage advantage, educated workforce and flexibility some Eastern European companies remain attractive as a bridgehead into a new market. The best companies have already been acquired but with some additional work and ofcourse investments there are still some good companies available. The first hype in Eastern Europe has been over but on the medium to long term Eastern Europe, especially central Europe, remains an attractive market with a well educated population of around 100 million people.

Emerging Markets

The emerging markets of South-East Asia, including Japan, and Latin America are finally recovering from the crisis of 1997. Especially Japan, South Korean and the majority of the countries in South-East Asia have been growing very well in 1999. The situation in Latin America is improving a little more slower but the trend is and will remain positive.

The Pacific-rim

The improvement of the Japanese economic situation is one of the main causes of the improvement of the whole South East Asian region. After years of low consumer demand the Japanese people finally start to spend more money. The economy is not anymore only dependent on export and government spending. The consumer demand is however not that strong as it could replace export.

Which brings us to the next problem. The improvements in the Japanese economy has not only positive effects. The Japanese currency, the Yen, has become more expensive because of the success. And an expensive Yen undermines the export position and finally the economic growth of Japan. The control of the currency is therefore very important to let the Japanese economy continuing to grow.

There is another problem which might undermine the recovery in Asia, minus China. The U.S. Federal Reserve will try to forego inflation in the U.S.A. by limiting the availability of money, e.g. rising interest rates. If this happens the repayment and interest payments of US dollar dominated debts will become more expensive and the availability of investment capital will become more scarce. Two developments which are highly unwelcome to a region recovering from a financial crisis.

The improved Japanese economy, the improved internal political and economical situation in the majority of South-East Asian countries and the increased demand form the west stabilised and stimulated economic growth in the region. This will be boosted by the willingness of investors to re-enter the region.

All countries in the Pacific-rim region will be part of and benefit from the recent economic recovery with the exception of North Korea, China and Indonesia. The internal problems, political, economical and social, of these countries make a recovery very unlikely. Some individual companies in China and Indonesia might do very well but they are clearly the minority. On macro-economic level there are corruption, incompetent management, bad loans, unproductive protected industries and many more problems which only can be dealt with harsh measurements which are unwanted by the ruling elites.

Indonesia might be the only one which is going to introduce the necessary changes but it remains to be seen if there are enough changes and more importantly if they are really carried out.

The other Pacific-rim countries, South Korea, Taiwan, Japan, the Philippines, Malaysia, Thailand, Singapore and with some luck Vietnam are more promising. They are on the road to recovery and will most probably not be caught in the same problem of before 1997. Short term debts, bad loans, nepotism and unproductive investments.

Direct and indirect investments in the above mentioned countries will be secure and profitable again but not as profitable as in the pre-1997 days.

The best performers in the region will continue to be Australia and New Zealand. They will profit the most from any improvement in the region as they will regain markets that were lost during the crisis. The recently acquired new markets in Europe and north America will be further developed and ofcourse Australia will benefit from the additional revenues of the Olympic Games in Sydney.

Latin America

Latin America had its share of problems with the currencies and economic performance. Countries like Brazil and Venezuela have experienced currency devaluations while the currencies of Mexico, Argentina and Chile have come under pressure. For both however it is valid that they experienced a fall back in growth as internal and external demand and investments into the region diminished rapidly. The situation in the other Latin American countries, with the exception of Colombia and Ecuador, have been depressed by currency pressures, lower demand and lacking investments. Colombia is a case on its own as the economy is nearly destroyed by the civil war. Ecuador is on the other hand in deep problems because of the bad government budget situation and the pressures of to much foreign debt.

The Latin American countries, again with the exception of Colombia and Ecuador, have experienced a slow recovery. As the international situation improved demand improved. The internal budget problems and the pressure on the currencies have been alleviated by a combination of government action and IMF support packages.

As long as there is no medium to large increase of the interest rates of the U.S.A this positive economic development will continue. The economic recovery will be slow but stable. The following countries with the largest economies in the region will develop best, the best and fastest to the slower are lined up, Chile, Argentina, Mexico, Brazil and Venezuela. The other countries, again with the exception of Colombia and Ecuador, will follow the five countries mentioned above at about the same pace as Venezuela. Where as the development of Honduras, Nicaragua and Guatamala will be the slowest as they have still not recovered from the destructions of hurricane Mitch.

In general terms Latin America is improving but slowly as the structures of the government, the companies and the economy do not allow for a fast recovery. On the medium to long term Latin America is worthwhile to get your attention and make some investments, especially indirect investments could be profitable. Direct investments into the region,with the exception of Argentina and Chile, are more insecure because of the political and legal instability in some countries. Consider the problems MCI-Wordlcom and AES are facing in Brazil after acquiring a company in that country. A treatment which a Brazilian company would not receive but because it would be more expensive to withdraw from these investments they have no other option then to accept.

October 1999

October 1999

Asia, out of the dark?

Asia, the Asian-Pacific area has been severely hit by an economic crisis in 1997. The economies collapsed, fortunes lost and unemployment started to rise. The positions of many governments became unstable as quick solutions were not available. Some could stabilise after some time and IMF support packages, even if the IMF advice was very often doubtfull. Other countries, especially in Indonesia, the crisis revived internal problems. The political and economical weakened governments came under pressure from interest-groups or more dangerous the independence movements. The government and the independence movements reacted violently to enforce there very often maximum demands, political solutions were simply impossible in this situation. And finally the crisis has been the cause that differences between some countries were intensified and became more tensed than ever before.

The main question now is: has there been, after two years, a recovery of the economic situation, could the internal political problems be solved, have the inter-state tensions diminished or has there been a deterioration of the situation? We will give a summarized review of the countries who were or are most in distress.

The northern Asian Pacific area

This region includes China, Japan, the Koreas, the Philippines and Taiwan. The Koreas have been severely hit by the economic crisis and Japan and the Philippines have been just moderately hit by the economic crisis. China and Taiwan have been able to avoid the major consequences of the economic crisis. But all, except Japan, have some political problems which could become more dangerous in the future.

The problems of the Philippines are largely internal but the problems of China vs. Taiwan and North Korea vs. South Korea have an inter-state character and are potentially more threatening and destabilising to the region.

Japan

The situation in Japan has seen an improvement over the last nine to twelve months. The negative growth situation of 1998 seems finally to be turned around in a small growth figure of 1 to 1,5 % for 1999. This improvement is reflected by the Tokio stock market as the Nikkei 225 index is approaching levels of pre-1997, or above 17.000 points. This shows an increased trust in the capabilities of the Japanese economy and an indication that the improvement will at least continue in the next half year. The Japanese economy is recovering from the recession but their remains a but. The problems in the economy and the in western eyes sometimes peculiar way of doing business in and between companies are not yet eliminated and this, together with the expensive yen and high national debt, might delay a full recovery.

Japan is experiencing a recovery after approximately a decade of very limited and negative growth. Finally things seems to improve and the whole Asian Pacific region is showing growth and improvement over 1999. As mentioned before in this report series if Japan recovers Asia will recover. But the region in question should not forget to solve and eliminate the problems and weak spots in the economies of nearly all countries in the region, including Japan.

North Korea

The economical situation in North Korea is much worser and probable the worsest of the region. This has nothing to do with the recent Asian investment, debt and currency crisis but with the political and economical system of North Korea. The entire North Korean production system, agricultural and industrial, is outdated, ineffective and essentially bankrupt. This situation was aggrevated by the recent natural disasters which delivered the final blow to the North Korean economy. The only more or less functioning parts of the North Korean production capacity have been the missile and weapons of mass destruction facilities. And ofcourse the intelligence/secret police, suppression, apperatus but this will be hardly supportive to economical well being of the country.

The North Korean population is threatened by starvation, the production is not showing any improvement and the tensions with South Korea have reached levels which can described as close to hostile and conflict. But the relations with other countries have become worser too. It seems as the internal situation deteriorates the relations with South Korea and to a lesser extent the USA are reaching new lows.

The relations with the USA got worser as there was a difference about the interpretation of an agreement between North Korea and the USA, South Korea, Japan and the European Union. In short, North Korea would stop the construction and use of two or three nuclear High Enriched Uranium power plants and would allow a number of inspections into North Korea in exchange of fuel, food and two modern Low Enriched Uranium nuclear power plants. As North Korea continued research into nuclear weapons at another site and refused inspections at some places where as at the same time a number of deliveries to North Korea were late or were simply not delivered there was an increased tension between the two sides. The disagreement about the interpretation could be more or less solved and the program seems to be on track again but the recent test firings of medium and long range ballistic missiles and the actions of North Korea in disputed waters put the North-South case back on the international political agenda.

The naval maneuvers and the sinking of some North Korean fishing boats and naval craft by the South Korean navy in the Yellow sea between China and the Koreas in a by North Korea disputed area has deteriorated the relations between the North and the South to the utmost. War would be a step to far but the end of diplomatic relations and to put the armed forces on a higher alert status has been the result.

The political bartering, sometimes better described as black mail, with the USA to receive additional funds has been more or less succesfull and improved the relations between the two but it did not limit the tensions in the region. The relations with Japan continue to be worse as Japan feels insecure after the last test fire of a long range ballistic missiles, Teapo Dong 1, which has overflown Japan. The North Korean promiss not to have any new tests, as long as the negotiations with the USA continue about the improvement of their relations, did not take away the Japanese feelings of insecurity.

Concluding, it can be stated that the Korean peninsula remains a highly unstable place. The differences between the two sides remain agressive and at times confrontational. The very bad economic situation in North Korea will most likely increase the tensions between North and South Korea. The actual problems about the implementation of the nucluar power agreement, the differences on interpretation of the demarcation line in the cease fire agreement and the essential non-issue themes of the economic problems, the brinkmanship games to receive financial and material support from South Korea and the west and the wish to create an outside enemy will keep the relations of North Korea with the rest of the world tensed and difficult. War will be a step to far and thus unlikely but continueing tensions and non-cooperation will be very likely on the short term.

South Korea

The situation in South Korea has improved over the last year. The economy is showing some improvement as the exports increased, currency stability has returned, debts been rolled over, the number of bank-rupties have stabilised and the closure of the smallest and weakest of the large conglomerates, Cheabols, and the restructuring of the large Cheabols have been implemented.

Economically South Korea has achieved a big improvement but the problems with North Korea seems to have become larger and more dangerous as the problems in North Korea have become worser. South Korea must remain alert against Northern incursions of intelligence units and mini-submarines and since recently larger operations, like the naval skirmishes in the Yellow sea, which should test the Southern’s defence capabilities and willingness and will increase the tensions between the two neighbours. This, as mentioned before in the part of North Korea, to create a foreign threat to avert the people from the internal problems and extort additional means, support, from the South and the west. The situation will probably not escalate as the Northern position is much to weak to succesfully launch and survive an assault on South Korea. Even as a option of last resort it is very unlikely, they are simply to weak militarily and economically to execute and sustain a long term operation.

Tension, bad relations and probably an increase of tensions and small scale harassments will be very likely on the short term but only with the goal to receive additional support. A war will be avoided as this would mean the end of the regime in North Korea.

The Philippines

The situation in the Philippines is more complicated. The Philipinnes had the advantage not to be a direct casualty of the 1997 Asian crisis as they were less involved in the Asian economic miracle. But the Philippines have got their own share of problems beside the negative fall out the Asian crisis which never the less had a large impact on the currency and the stock market.

The economic development of the Philippines have been slow and several times delayed by external and internal problems. The external problems have been and are a lack of trust in the Philippine economy and capabilities. The internal problems are about the changes of successive more or less weak, or better indecisive, governments, the autonomy and independence movements, the still active communist party and the inertia, lack in support, of entrepreneurship in the country.

The economy of the Philippines have shown in 1999 some improvement. Internal induced growth, better government support and policy and a slow return of foreign investment in the Philippines have been the main causes of the growth. This trend is most likely to continue in the coming years as the whole region is returning to their former strength.

China

The largest and most populous country of the region has not been hit that dramatically as the majority of the other countries in the region. The absence of large sums of short term foreign debt, the controlled currency and no large scale property speculation saved China from the economic collaps in 1997/98.

The consequences of the Asian crisis were for China in the first place indirect as the foreign investments into the region, including China, decreased and through the worsening of the Chinese market position as the other countries products became cheaper.

The medium to long term effects of the crisis are much worser. The consequences will be negative economically and politically, internal and external. Economically the lower investments into China will endanger the development plans of the Chinese government. They need at least an average annual growth of 8 % to absorb the rural population into the urban areas, to provide some kind of work and improve the industrial and financial institutional base. The lack of investments and the lower growth figures will make the inefficiencies, or better the close to bankrupt position, of the majority of the Chinese companies and the financial system of China more visible. The consequences of the close to bankrupt companies will mean an increasing number of lay offs as it will become increasingly difficult to continue financing loss making companies.

The economic problems will thus increase in the future as the foreign support will not make good the many structural deficiencies in the Chinese economy. A short and small improvement of the growth figures might be possible as the region will improve but a downturn trend will be unavoidable if another investment boom will take to long to return and if the government does not implement a total overhaul of the economy.

Politically the forecasts are also negative. Internal problems are bound to increase as the government cannot satisfy the demands of the population to at least deliver a chance for survival, with other words a job, food and living quarters. Especially in the interior provinces the economic situation is deplorable. The coastal regions offer some better circumstances with a few of the better government owned companies, the joint ventures, the foreign production facilities and the little group of small entrepreneurs but again not enough to satisfy all and certainly not the whole country. These social-economic problems will lead to unrest and consequently to an even worser economic performance.

The weakened government will be more endangered to actions of the autonomy/independence movements in Tibet and Xinjiang provinces. They will use the problems of the government to their benefit. With the use of force the Chinese government might be able to suppress the movements on the short term but they cannot afford it financially to continue it on the long term and violence and social unrest are the perfect pre-conditions to scare off foreign investors and destroy economic growth.

The external political problems will also increase as all neighbouring countries will use the Chinese weakness to improve their position in the territorial differences they might have with China. You could think about, the Paracel islands, the Spratly Island group and ofcourse Taiwan.

A good example of the weakness and the coming political problems for China are the reactions on the recent Taiwanese statements of treating the two as essentially two countries, a covered explanation that the one China idea is dead, did not lead to the more usual aggressive reactions of China. As China is at the moment and in the next 10 to 15 years economically, politically and militarily not able to force their will on Taiwan. They can use some diplomatic pressure, their seat in the security council and big statements but that is essentially all.

China is a promising country but many changes need to be implemented and ifs overcome to become prosperous. It will take at least one or two decades before China will be in the position they want to be in: superpower status. During the Asian booming years and the days of double digit growth the goal seemed to be close. Accordingly was the behaviour of China. It considered itself at least as a large power that could dominate its neighbours. The Asian crisis made the problems of China visible and the world and probably the Chinese leadership aware of its weakness.

Taiwan

Taiwan has not been particular hard hit by the Asian economic crisis. The stock market dropped but it had not any large impact on the economy. The recent earthquake will have a much larger impact on the performance of the economy.

Taiwan’s economy remains one of the better performing economies of the world and this will continue to be the fact. The earthquake will cause some short term problems as parts of the infra-structure and living areas have been severely hit but this can be solved within two to three years. The economic damage can be limited if the power supply to the all important tech-industry can be repaired as fast as possible. Taiwan’s silicon valley has received no large damage and is only hampered by the irregular power supply. Taiwan’s problems are politically.

The status of Taiwan is uncertain. As long as Taiwan considered itself as part of China and claimed the leadership, the other side was considered the usurper of power, the one China idea remained valid. China’s feelings about Taiwan are identical, Taiwan is the renegade province. This started to change as Taiwan became economic succesfull and afterwards became a democratic country. Taiwan has developed itself into a country with all necessary qualities which are usually associated with an independent state. The only missing aspect has been a declaration independency and ofcourse international recognition.

Every attempt or even intention to declare themselve independent was met by China with threats that they would use all measures available to stop it. They even stated that they would forcefully bring back Taiwan into China if this would prove to be necessary. Even other countries have been punished by China if they would allow Taiwan to open an embassy or have diplomatic relations with Taiwan.

Until the Asian crisis the Chinese threats and the uncertainty in the Taiwanese population have Taiwan refrained from declaring independency. The changed perceptions of the Taiwanese population, the economical and political problems of China and a reassessment of the Chinese military capabilties changed this attitude.

In a speech the Taiwanese president declared that it would be best to treat Taiwan and China as two seperate entities. This covered declaration of independency has been the first step to formal independency. A test balloon to see how China and the world would react. China’s reactions were relativily mild as Taiwan took the opportunity at a time were China is clearly economically and militarily inferior to Taiwan. It is a window of opportunity for Taiwan, China temporarily weakened and still far away from being a large power.

Taiwan is one of the economically better performing countries and they wil certainly benefit from the re-emergence of economic growth in the Asian area. Politically there is a problem with China. But it is now the right time for Taiwan to change the situation as they did. China could overreact and try to invade Taiwan or blockade the harbours. The first option is impossible because the Chinese armed forces simply lack the resources to execute such an operation. A naval blockade will also prove to be very difficult as the Chinese navy is not the most advanced, except the Sovremenny-class destroyer and the Kilo type 877 and type 636 submarines but with which they have some difficulties to operate, and are in essence inferior to the Taiwanese navy. And this could start a much more dangerous development, what if the Taiwanese navy would blockade Hong Kong, Shanghai and some other harbours. The Chinese economy would be very much in distress. War is at the moment no option for China and therefore very unlikely.

The Southern Asian Pacific area

The countries in the Asian South Pacific area were the most hit by the Asian economic crisis of 1997. Not only the stock markets plummeted but also the property market, the currency, the production and all other dreams about the much clamoured superior Asian way to become a developed nation.

Most of the countries, except Indonesia, could economically recover since the crisis but they are still far away from the pre-1997 days of wealth. All had their own way to recovery and in short a combination of time, prudent government policy and spending, roll over of debts and IMF support packages delivered a return to growth.

Vietnam

Vietnam did receive only limited damage from the Asian financial crisis. Vietnam possessed relatively little short term debt, no large property speculation and a small an underdeveloped stock market. The consequences of the crisis have been indirect as foreign investors lost the trust in the Asian economies.

The slack in foreign investments and probably more importantly the slow and hesitant policy of the government to initiate further reforms to stimulate the economy have suppressed economic growth. The government remains the largest obstacle to an increased development of the economy and the society in general. The fear to loose control makes the government very carefull and hesitant.

The Vietnamese economy has improved a little since the crisis but cannot use its full potential because of the suppressive and controlling regulations and the government. Until the government participates actively in the restructuring of the economy, growth and progress will not be achieved.

Thailand

The country which has been hit first by the Asian crisis was Thailand. The mismanagement and the bad sides of the Asian tiger economies became first visible in Thailand. All dreams of a quick and flawless development were destroyed within a couple of days.

The currency, the stock and property markets and the industrial production collapsed because of the financial mismanagement and the long overestimated economic capabilities of Thailand.

Saving programs, IMF packages, proper government policies and a partly restructured economy have delivered a better environment. Growth has returned to Thailand and promisses to continue in the coming years.

The worsest problems of and in Thailand are over and/or solved but a return to the days of abundance of before 1997 will take some more time. But a same kind of abundance will never return as the financial regulations have been improved and the investors will be more carefull where and when to invest.

Malaysia

Malaysia has been very hard hit by the Asian economic crisis. The currency, stock and property markets collapsed because the same ills as in the majority of other Asain tiger existed in Malaysia.

The reaction to the crisis has been however different than of the other countries. Malaysia has been the main player/backer of the superior Asian way development idea and suspected a western inspired plot behind the Asian crisis. Therefore Malaysia rejected any western or IMF conditions and advice to solve the crisis.

Malaysia introduced a controlled currency market to stabilise the currency and cut back the many very ambitious, but also very doubtfull, development programs. As the country calmed down and the region started to stabilise some growth started to return.

Malaysia is out of the worsest problems and will continue to grow in the future. Especially now the whole region is improving. The IMF has because of the Malaysian success loosened its aversion to money controls and would like to cooperate with Malaysia to stimulate further improvement and economic growth.

Singapore

Singapore is one of the most developed nations in the region. The consequences of the Asian economic crisis have been limited in Singapore. As the stock market lost much of its value and the economic growth was minimalized the currency remained stable.

The stringent Singaporean regulations and the advanced economic structure saved Singapore from the disasters occurred in large parts of Asia. Economic growth returned therefore very quickly as the region showed the first signs of recovery. Singapore will profit from every further improvement in the region. It will receive a little negative impact and some additional refugees out of Indonesia as the problems seem to get there larger by the day but the overall situation will not be damaged by it. As Indonesia is a total different ball game as it is and was not very integrated in Asian development process.

Indonesia

The country which have been hit the most by the Asian crisis, economically and politically, is Indonesia. All the problems which existed in the other Asian countries like the lack of regulations and financial controls, the ill/wrong directed investments, an underdeveloped economic structure and a culture of nepotism can be multiplied for Indonesia and add to that the political problems of aggressive autonomy/independent movements, doubtfull government policies and a centralised, militarised and ineffective government structure and you have a description of Indonesia.

Nearly everything in Indonesia collapsed because of the economic crisis. The stock market, the currency, the production, business activities and partly the government all lost their value or functionality. Despite the IMF advice and support packages the free fall of Indonesia could not be stopped. The economic downturn could be delayed because of the international support but the political problems pushed the economy further down hill. The Indonesian economy is in a depression, the country is falling apart and violence is set to increase.

The Indonesian economy is in very bad shape as large parts were political guided, overdebted and absolutely unfit to operate and compete on the world market. The economy has experienced negative growth since the Asian crisis started. The shrinking of the economy will continue for some years as a very large number of problems have to be solved, economical and political, before growth will return.

Beside the rotten economic structure there are at least two other problems which undermines the stability of the country which in turn undermines the economy of the country. The internal political structure is very weak as it depends on a small poltical elite and the military for its survival. Both are not very popular with the Indonesian and Javanese population as became clear as a law proposal to increase the power of the military resulted in agressive demonstations of students who dislike any increase of power to the ruling elites or better the military. Indonesia’s other large problem are the several movements in this island and population rich country which demand some kind of autonomy or even independence from the central government in Jakarta.

There are at least four regions in which the differences between the central government and the local people, movements, have escalated beyond the possibility of reaching a political compromise. And this could be only the beginning as more peoples on the island and people rich country get ever more dissatisfied with the government in Jakarta. If Indonesia does not get its act together and offers within the next two years an satisfactorily solution, e.g. an economic recovery and a sharing of power, to the people living outside Java the country could eventually fall apart.

The four regions which are the most active and most suppressed by the government are Aceh on northern Sumatra, east Timor, Irian Jaya and the Moluka islands. The situation in the last two, Irian Jaya and the Molukas, is relatively calm in comparison to Aceh and east Timor. The people in Irian Jaya support the independent movement OPM and they are moderately active in their actions against the Indonesian government. The differences on the Molukas between the muslim Indonesian, Javanese, immigrants and the original christian population have calmed down but the Moluka people support the autonomy/independent movements on the islands. The comprehensive suppression system, read the army, could until now keep the situation under control. Limit the actions of the OPM on Irian Jaya and refrain the peoples on the Molukas from killing eachother.

The referendum on east Timor, something the other regions would like to have too, has been a kind of cease fire agreement which kept off the independent movements from any serious actions and confrontations. The outcome of the referendum and the subsequent reaction of the Indonesian government and especially the army will however intensify the actions of the several independent movements on Irian Jaya and on the Molukas. The forced mass evacuations and suppressions after the referendum will not scare off the people but will on the contrary only increase the willingness and actions of the independent movements. As living under Indonesian government is living insecure and suppressed by the army and Javanese policy.

The situation in Aceh has been much more violent. As Aceh is economically very important to Indonesia, 30 % of Indonesia’s oil poduction comes from Aceh, they want to keep the region within Indonesia. They can not economically afford it to loose this area and they will do a lot to keep this region under control. The government is stating that they will fight till the end, if necessary, but so does the independent movement Aceh Merdaka, free Aceh.

The Aceh Merdaka is more active than ever before. Aceh Merdaka is increasing the number of assaults against Indonesian installations and security units. And the movement has received additional arms and more importantly several hundred, at least 600, fighters who returned to the region after having been trained in Libya. The quality and quantity of the Aceh Merdaka is improving and this will have an effect on the fighting against the Indonesian security forces.

As a result even the hard suppression methods and the renewed introduction of special forces of the Kopassus into the region could not turn the tide. Indonesia is having more difficulties to control the region and is set to lose more men than ever before. The Indonesian security forces are less effective in suppressing the independence movements because they have to fight more or less a fairer war than in the days of the Suharto regime. A return to the old methods of torturing and random killing would be difficult as this would meet a lot of international resistance and eventually the recognition for the people of Aceh that they should be independent.

The Indonesian government is now pursueing a twin track strategy in the Aceh region. Beside the actions of the security forces the Indonesian government in the person of general Wiranto has recently made some pacifying gestures towards the Aceh Merdaka.

The twin track strategy is in the mean time a clear sign of the willingness of the Indonesian government to compromise and a wish to end the violence. The time for compromises is however over as Aceh wants to be independent. They are much to radicalised to compromise and the Aceh Merdaka will probably consider any gesture of the government as a sign of weakness or a trick. Offering something now to suppress them some time in the future if the position and chances have improved for the security forces.

Finally east Timor, the referendum about the future of the region which promised to solve the tensions in this part of Indonesia has turned out to be a farce. The outcome of the referendum has been a disappointment to Indonesia. The population voted for independence, Indonesia accepted the result and started to withdraw but the pro-Indonesian militias started, with support of the Indonesian armed forces, to spread terror and forced the majority of the population to run for their lives. As the population dwindled and if Indonesia can keep the refugees in Indonesian controlled west Timor then the majority who voted in favor for independence will become less and less.

The arrival of the UN authorised force INTERFET, Intervention Force East Timor, under Australian command could initially only restore order in and around the capital Dili. Only after the hand over of power from the Indonesian army they can spread out over the whole region, country. As fast as possible they will try to restore order, demilitarise/disarm the pro-Indonesian militias, feed the refugees and install some kind of civilian government.

The willingness of Interfet to restore order became clear by the arrest of a leader of one of the largest and most feared pro-Indonesian militia Aittarak, who wanted to start negotiations with Interfet about the future of the region after the Indonesian withdrawal.

Aittarak and the other militias possibly want a new referendum under more favorable terms now the majority of the east Timorese population has fled to the mountains or west Timor or have died by the terror of the militias. Or if that is not possible a partition of east Timor into a pro Indonesia part and an independent part.

The threat of a guerilla war between Interfet and the pro-Indonesian militias will be unlikely and if it happens it will be short and not very succesfull. They are to small, to weak and lack the necessary internal and external support to make a large impact. And any actions of special units of the Kopassus will also be unsuccesfull and rather dangerous. If they would be apprehended by the Interfet Indonesia would be in big trouble. Indonesia is thereby hardly in the position, politically and economically, to support a guerilla war and cannot afford to many additional problems, costs and embarassments.

Indonesia will not receive any credit from the people living in east Timor, even not from the pro-Indonesian groups in the future. The Indonesian army has taken, during their withdrawal, everything they could carry with them and burned and destroyed everything they had to leave behind. East Timor, not the most developed places in Indonesia has been thrown back to the stone age. Everything, even the majority of the houses, need to be rebuilded to become a more or less civilised and urban society again.

The idea behind the combination of terror and the total deconstruction and destruction of everything valuable of a region is that it should scare off potential other regions and people in Indonesia from demanding secession from Indonesia. This policy in east Timor should be a warning sign to others but most likely the opposite will happen. The autonomy and/or independent movements will become even more determined in their struggle to secede. Everything less then independency will be unacceptable and the movements will be very attentive to every move of the Indonesian armed forces. Another campaign like the one in east Timor will receive more opposition and a agressive reaction from independent movements in Irian Jaya, Moluka islands and in Aceh. Any compromise like now desired in Aceh will be very unattractive as nobody would cooperate with somebody that unreliable, treacherous and agressive as the Indonesian military and its rather unpowerfull political masters.

The internal problems of Indonesia with a weak government, its doubtfull economic policy, the accumulation of power in Jakarta and in the hands of the military and the agressive and violent policy of Indonesia in the troubled regions will scare off foreign investors and destroy any chance on an economic improvement in Indonesia. Indonesia has a long way to go to achieve stability and economic growth and any mistake will be paid for dearly by Jakarta.

September 1999

September 1999

A note on business management

Every manager which is busy with running a company has to do his or her routine tasks and has to solve several problems and sometimes more importantly problems still to come. Managing is dealing with the present and anticipating on the future at least if you are Schumpeter’s kind of entrepreneur business man or woman.

To assist you in succesfully executing the manager’s job here some ideas and inroads which could be supportive to your company.

Contrary to common belief running a company in booming times is just as difficult, sometimes even more difficult, than in depressing times and markets. Where as in a depression the most important goal is to improve the revenues and cut costs in a booming period it will be maintaining the growth. As most people and companies experienced coming somewhere, like be number one in your sector, is relatively easy but stay up there and still improve is the difficult part of the game.

Managing success is the name of the game and it will demand all skills available to do so. All parts of the company have to be brought in line with this goal and participate to maintain and improve the numbers and products or services which are responsible for the success.

Managing success

A large number of companies, especially in the tech sector, have become very succesful. From virtually nothing they moved themselves into the top league of the business community. Large revenues, high growth and a seemingless never ending demand created companies with a lagging infra-structure which is threatening future growth and the health of the company. But not only the upstarts have this problem also the mid and large size corporations will and have experienced the same kind of problems. Namely inadequate company structures and hierarchies have and will undermine new and very often profitable operations which have been initiated to keep the holding company in the group of high performance companies.

The prime responsible for the position of the company is the management. They have to maintain the current position, seizing opportunities and avoid threats which may damage the performance of the company. A good strategy and a superior implementation of the, tactical, workplan should make it possible to achieve the goals which are stated in the business forecasts.

There are four areas which are very important and necessary to manage success. The management team has to carefully adress or bring the next four important areas in order to avoid the chaos of an inadequate business structure. The areas responsible for the growth and stability of the company are people, systems and organisation, products and services and control, finances.

You can read more about business management, productmanagement, communications and procurement in our reports from May 1998, September 1998 and November 1998.

People

The management of people have become a major issue in booming industries and the very often connected tight labor markets. Without the right people it will prove to be very difficult to maintain a given situation, not to speak about any improvement.

The value of the human resources department has become more important because the retention and the attraction of the right people has become increasingly difficult. It is not enough to offer an attractive pay package and perks but other elements like the working environment, development opportunities and the corporate culture are just as important than the bank account.

Not only the all important creative research, development and design people should be included in the people management but also the sales, production and supportive workforce should be included. The second group of workers might be a little easier to replace but a proper work environment and the corporate identity can never be established if the company is a two track enterprise.

A correct people management is the first condition to maintain and improve the position of the company. And after the good payment package, the above mentioned corporate culture, development opportunities and working environment will stimulate the people to do their utmost to protect and support the company.

Corporate culture

A good corporate culture is not only beneficial in the sales and marketing but it will bind the people, the workforce, to the company. An intimate bound has to be created between the company and its people. They all need and want to belong to belong to the company and need to be proud on their company. To be proud they have to know and be able to identify themselves with the mission, doctrine, of the company. For example we make live easier for the people and we connect the world kind of fundamental ideas.

Development opportunities

The development opportunities will keep the workforce sharp, up to date and committed to the company. The development opportunities do not only mean promotion in the hierarchy but also opportunities to increase their knowledge and skills. This can be done by learning and exchange programmes but also by sabbaticals. As better educated and open minded people will be more flexible and useable but also more willing to explore new ground and opportunities and go the extra mile if it is beneficial for the company.

Working environment

A good working environment is responsible for that the people working in a company get the feel good feeling. If they feel comfortable they will be working harder, will make lesser mistakes and will report the rare mistakes and other possible problems easier and faster so that they can be corrected. A proper working environment can be created by a work or better people friendly workplace, good relations between the people working together to stimulate cooperation and discussion and finally to recognize and reward the achievements of the people working for the company.

Systems and organisation

Systems and organisation in a company are the elements responsible for the execution and the infra-structure. All organisations need good equipment and a proper infra-structure to stay competitive and profitable. If the equipment is not attractive and uncapable the workforce will get dissatisfied as they will loose the confidence in the company and the products they develop / manufacture / sell and it will undermine the company as the current product(s) will very soon be outdated and unsaleable. If the infra-structure of a company is inflexible and rigid it will undermine the adaptablility of the company to use opportunities, for example new products or production methods, and therefore it will raise costs and limit profits on the medium to long term.

A large number of companies have been drawn into the trap of outdated systems and an outmoded infra-structure. The success a company had with a given product or service could have made the management very averse of any change as this would increase the costs and decrease the profits on the short time, change the comfortable structure they know and like and everything is, in their perception, so nice and good.

To succesfully manage a company it demands that the management is open to new ideas and stimulates change to avoid the inertia of relying to much upon a given situation. Opportunities into new products, production methods and advanced research, control and office equipment should be explored and if useful be implemented to stay ahead of the competition.

Organisation

The infra-structure should be open to change. Rigid hierarchies and large complex structures should be avoided as new products and technologies demand a different approach than the old style factories. Small modular business units should be created with their own management structure and responsibilities to stimulate development, optimise production, improve customer relations, control costs, and nurture the internal relations to avoid the ivory tower syndrome of the management.

An additional advantage of a flexible and open organisation is that new ideas will be embraced more easily and effectivily. New or modified products and production methods can be brought forward and by a simulation tested on success or applicability.

The benefits of a proper infra-structure can be summarized as that it creates a good working environment, improves the communication between the workforce and the several departments in a company, stimulates new ideas and optimises development, production and sales.

Systems

The above mentioned open and flexible organisation is a pre-condition to the use of the most advanced and cost effective sytems available. The systems are necessary to improve research, production and the sales and marketing activities. Without being consequently at the forefront of development, outdated equipment will increase costs, minimize profits, destroy opportunities which could be realised and it dispels the workforce and more importantly in the end the customers. And it will be much more difficult to make up a structural shortcoming then continue to swim in the main stream.

The advantages of an advanced systems company are that the systems, office, reseach and production equipment, are needed to keep the work force up to date, interested in the company and the products, stimulate new developments, improve the relations in a company and communication with the customers and ofcourse have advanced cost effective production facilities.

Products and services

The need to have an attractive product package, might it been an actual product or a service rendered, and an effective services department is essential for a company to beat the competition. A lapse in one of both or in both elements will have a dramatic effect on the bottom line.

Product management

The product package should be regularly evaluated, updated and renewed, if necessary into new sectors, to remain a competitive company. A system of product cycles should be introduced to forego any attempt to be sticked to certain product. The product should not outlive its useability or desireability. Improved or new products should be introduced timely to keep the customer, market, satisfied and to remain, as a company, competitive.

Customer relations

In a customer focused market it is of the utmost importance to keep the customer satisfied, the customer is king and should be treated accordingly. The after sales service should belong to the important departments of a company. The services department will be in close contact with the customers and they can find out what is wanted and expected now and in the future. This knowledge is very important to the present product package but even more important to future developments. The efficacy of the services department is responsible for the return of the customer if a new acquisition will have to be made. Consequently complaints should be dealt with immediately, or at least in the shortest possible time, as most customers rely on the products to work. If a customer is satisfied he will be more likely to return.

Conclusion

An attractive product package and an efficient services department, customer relations, are the key, at least external, to remain a succesful company. As the customer will hold those two responsible for their satisfaction and this will translate to the bottom line of the company.

Control

The last area with should be handled with great care is control, or better the financial aspects, of the company. The need to properly manage people, update systems and organisation and innovate products and services should be guided by the financial sense of every important decision. But always remember to much control, risk aversion, is as worse as to little control, a va banque game. A balanced company is using financial control as a supportive instrument not to simply killing off new developments.

A well managed company with several business units which operate semi-autonomous under their own management have the option to explore opportunities with new products and production methods. The semi-independent unit can open up new markets and achieve results beneficial to the whole group. The holding company in turn has to implement an advanced financial control system for all units operating under their aegis to exploit opportunities and avoid threats, or simpler stated to control costs and maximise profits.

The company should also implement a company wide bookkeeping, enterprise resource planning, ERP, system. The business units should have their own ERP system but this should be coupled to the main system of the holding company, also semi-integrated into the group just like the management of the business unit.

An unified financial control system does not only demand the same kind and level of hardware and software but also identical ratio’s. The ratio’s should be tailored to the specific situation of the company. Derivatives of the Net Present Value, Return on Investment, Cost-Benefit, Cost-Performance and Activity Based Costing ratio’s should be used to create a common understanding within the group. Decisions can be made afterwards based on not only on strategic policy but also on fundamental research thus easier acceptable and supportable for all concerning parties.

An unified control system will give each unit the opportunity to work with their own budget and at the same time receive financial support from the holding company. As the holding company is at all times fully aware of the activities and possible shortcomings of the business units. The holding company is also able to collect the necessary information to properly run the company and inform the public and the shareholders about the present situation.

Finally with an unified control system all can be treated equally, cost-benefits can be estimated and can be kept under control and mutual experiences can be shared. If an unit experiences some financial difficulties with a certain project it can be compared with other projects and the correct action can be undertaken.

The main function of the holding company will be financial control to assure that projects succeed and that the same standards and methods will be used. If they succeed to implement this kind of system progress and improved business results will be achieveable.

August 1999

August 1999

German defence revisited

German’s road to change

Germany has expercienced a number of difficulties in recent times. The reunification, the higher taxes, the lagging economy in Germany and in east Germany in particular and the economic crisis in Asia, Russia and to a lesser extent South America have created a set of economical problems which have not find a solution.

The CDU-CSU government of the long served Bundeskanzler dr. Helmut Kohl has, because of the economic problems, been elected out of office by the social-democratic – greens coalition of Gerhard Schroder. The economic policy and proposals of the opponents were not really different but the new elan of the social-democrats proved to be more convincing than the CDU-CSU appearance.

The policy which should bring some improvement to the economy is about stimulating the economy by an attempt to support and encourage new industries and to make the socal-economic fabric more flexible. Both are however to little and to late. And by limiting government expenses by cutting costs by several departments. The already badly hit defence budget, which have already been cut in half since the reunification, should deliver another 3 billion DM in cuts.

German’s defence posture is already undermined and hardly prepared to do its job. The question is now are further cuts possible without any change, qualitative and quantitative, of the defence forces structure? And is it possible with lesser resources to fulfil the commitments which have been accepted by the government like the contributions towards SFOR and KFOR beside the protection of Germany?

Can and/or should the German defence forces go on in the same structure with the same tasks at an even lower defence budget or are dramatic changes necessary to meet the demands of the government and the society

Security in and defence tasks of Germany

The security perception of Germany has experienced a large change to the good as the cold war had ended and a wave of democracy ran through the world. This feeling of optimism, peace and progress did not last for very long as reality returned to the heads of state and later to the people that there are still some not so pleasant people around.

The geo-strategic situation improved as the political-ideological contradiction between the east and the west disappeared. The threat out of the former Soviet Union disappeared and subsequently it became even less dangerous because of the economic problems in Russia and in most of the other new countries of the former Soviet Union.

Instead of the Soviet menace many new nationalistic-religious problems emerged which did and do not pose a same kind of threat. One large and more or less predictable danger was replaced by several small ones which are unpredictable and difficult to control but none of them is posing a direct threat to the security of Germany or for Europe for that matter. The new countries in the territory of the former Soviet Union, the Balkan, the Middle East and muslim fundamentalistic organisations can not become a dangerous threat in the coming decade. They themselves could be a threat to eachother but very unlikely outside their area. They simply will not have the abilities on the short term to become dangerous.

The threat is indirect as refugees, economic problems and an ethical component could eventually undermine European society. The defence forces of Germany and the other European, NATO, countries do not face a conventional threat to their security. The threat will be indirect with possibly some terrorist activities but even these will be less likely as most terrorist organisations will loose their state sponsors.

There will be also no direct threats to Germany. The German defence forces will however be stretched to the limit with the participation in UN peace keeping and enforcing operations and occasional relief operations.

The peace keeping and enforcing operations will be most likely limited to Europe and possibly, if the Israeli government would issue the request, a peace keeping operation on the Golan heights. All other UN operations around the world which need the support of the defence forces will not receive support from Germany and essentially from the whole of Europe. As the majority of European nations consider Africa and Asia the responsibility of the regional organisations like the OAU and ARF. There are exceptions possible in some situations but the current trend is focused on Europe.

The relief operations after for example a natural disaster will on the other hand continue to receive support from Germany, e.g. the transport capability from the defence forces.

Concluding, Europe have become, with the exception of the Balkans and especially the territory of former Yugoslavia, saver then ever before. The further integration of Europe and continued active involvement in organisations like the NATO will keep the situation stable for at least the next decade. As Europe’s situation is improving all possible opponents, for example an emerged Russia or a possible alliance of Islam fundamentalistic north African states, will in this same time span not be able to become a major threat to Europe.

A new defence structure

The German defence forces are because of the consecutive cuts in the defence budget and the increased demands to participate in UN peace keeping / enforcing operations like SFOR and KFOR stretched to the limits of their abilities. The budget cuts and the changed security environment demands a change of the forces structure. The absence of a real threat gives Germany the opportunity to change this structure.

The German political leadership, the government and the opposition, is fully aware of the problems which have hit the defence ministry. It is necessary to make some decisions but the former and current government prefer to wait and hope time will bring a solution. The Wehrstrukturkommission, defence structure committee, which have been initiated by the defence minister Rudolf Scharping is a same kind of delay mechanism. The committee should look at the current situation and put forward some new ideas, proposals, to solve the crisis like situation. The committee will use a lot of time and at the end will, most likely, come with some half hearthed proposals aimed at maintaining the status quo.

The situation demands some decisions of the government. The abilities of the defence forces will be downgraded if the current trend of cuts and increased reponsibilities continue. Even if further cuts could be avoided it would be extremely difficult to upheld the fighting power of the German armed forces at the current level as a 5 to 10 percent increase of the defence expenditures wil be necessary to maintain a modern updated armed forces.

A rethinking of the position and the structure of the armed forces in Germany is necessary. The current structure of conscription, main defence forces and crisis reaction forces will not be able to live up the expectancies and demands of the government and society. The conscription system will get unfair if the number of forces are decreased and conscripts can not be forced to serve abroad on UN missions. And the division in main and crisis reaction forces will create a two class army with state of the art equipment and motivated soldiers in the crisis reaction forces and outdated equipment and more or less dissatisfied people in the main defence forces.

It will not be enough to simply scrap some barracks, brigades, units, wings, squadrons or ships or eliminate some tasks to achieve a reduction and meet the financial targets set out by the finance ministry. This will degrade and even further overstretch the armed forces.

A new and better approach is necessary to keep the forces up to date and capable of fulfilling the tasks they are expected to do in the current defence budget or at a slightly lower budget.

An option for the defence forces

The new approach is based on an armed forces structure which is modern and capable to the defend the interests of the country and participate in several UN operations. This demands up to date equipment, enough forces, men, to do the job and additional resources, equipment and reserves, to participate on every eventuality.

The German armed forces should be based on a professional base of officers, NCO’s and soldiers on medium to long term contracts. In this structure the conscription will be abolished and replaced by a system of reserve forces and possibly a kind of militia structure.

The conscription system is a somewhat outdated idea with the goal to have a large force and in German’s case to involve the society in the armed forces. The reduction in manpower and the shortening of the time served as a conscript will make the number who actually fulfil their conscription lower and more unfair as the number who do not need to serve will get higher. Only on the medium to long term this inequality will change as the demographics lowers the number of conscription eligible to a fairer number.

The number of conscious objectors have been growing in the last decade and this made the equation between the people who have to do their service and the ones who were excluded artificially lower and more bearable and it delivered a large pool for the civil service, Zivil Dienst, who do and did their service instead of being in the armed forces supporting the Red Cross, homes for the elderly, hospitals and so on.

If the conscription would be abolished the civil service will be the most hit as the people working here will be difficult if not impossible to replace. To make up this shortfall the militia system, as we propose, could be the savour of this much needed service for the society and even maintain the so much appreciated close relations with the society.

The new armed forces would also consist of a core of full time professional military, an active reserve force and a none to little active militia force. The armed forces could remain in this structure up to date in equipment, have enough resources to do their job properly and the defence budget could remain on the current level or even accept a small cut and maintain their fighting power which is impossible in the current situation.

The professional armed forces

The military core of the armed forces would consist out of a professional force who are responsible for the protection of Germany’s interests and are the first to call for. They will be the specialists, well armed, trained and all on the same advanced level. Prepared for conventional warfare, large scale multi-national operations, emergencies and for UN operations.

Beside the normal military functions a professional armed forces would have to do, a small part of the professional forces will be spread around the country in trainingcentres to train the militia force. The courses will be held in cycles of about three months in daytime courses with a couple of exercises to educate the militia force the basics of the military trade, social values and to integrate the armed forces in the society.

You would need a professional force of around 260.000 men to fulfil the same tasks as is now being done by the Bundeswehr. Around 160.000 for the army, 70.000-72.000 for the air force and 28.000 for the navy.

With this number of personnel the armed forces could fulfil all the tasks they do now. Especially the air force and navy will benefit from this change as their capabilities will improve through the professionalisation. The reserve forces of the air force and navy will be mainly support and security units beside a small number of civilian pilots, technicians and shipcrew.

The army will need to change the most. The current structure of forces will remain more or less the same and they will be able to continue to participate in the current multi-national units /corps system. The only difference will be that one brigade of an armoured or mechanized division, except some cadre forces, and some support units will be manned by reserve forces. The airborne division will become an all professional unit. The use of reservists in combat units will have a minimal effect on the fighting capabilities of the army as an active reserve force can be brought up to standard within a month. And as the deployment of heavy army units will take longer as airborne units, naval forces and especially air force units and the warning times have increased the use of reserve forces will not degrade the army.

The reserve forces

The professional armed forces would need to be supported by an active reserve force. Where ever possible civilian skills should be used in a reserve force to even further increase the professionalability of the reserve forces. The reserve forces should support the professional forces.

The reserve forces will consist out of former professional soldiers, NCO’s and officers and well motivated and interested civilians who like to serve the country. Beside the interest of being a part time military man or woman a small financial compensation an proper insurance arrangements should be available.

The reserve forces would get an additional training, only if they have not been part of the professional forces, of about three months beside the ground skills learned in the militia training and the reservists will be educated and trained in for example 3 evenings a month, 6 saturdays a year, 4 weekends a year and one exercise of a week in a year. With this training schedule they would be trained at an acceptable level and capable to operate advanced equipment and in large scale operations in and with support of the professional forces.

As an additional attraction and to keep the reserve forces sharp they could be available for UN operations and emergencies. Every four years they could be send on a UN operation for three to six months. This would be benificial to their military development as it is an very good opportunity to train and learn operating in multi-national environment under real circumstances. And it should be possible without to much problems for their normal civilian lives.

The reserve forces should total about 90.000 men; 60.000 for the army, 25.000 for the air force and 5.000 for the navy. With this number of additional forces the armed forces are capable to fulfil all missions demanded. As there will be at least 5.600 reservist available for UN operations at all times without putting to much pressure on the reserve force. A combined force of professsionals and reservists will allow Germany the use its capabilities and resources most advantageous in general and in UN operations.

The militia

A militia force is offering the best way, even before a conscription army, in creating an armed forces close to the society. The militia is the beginning of all defence, especially in the defence of the nation, as they will form the back bone and the greatest possible nuisance to any invader. Even if the conventional value of a militia force is limited the attritional and psychological value is even larger. As nearly all able people in the society will be part of a militia army and therefore more likely to be committed to the country and more averse against an invasion.

The militia force, or kind of as the education and training course will be minimized to the absolute minimum, will also allow the possibility to save the Zivildienst, civil service. As all able young people, male and female, will join the militia after high school / college for three months there will be a very large number people of which a large number do not like to do their military service they have the alternative to join the Zivildienst.

An additional advantage of the militia system will be that there will be the need for a large number of trainingcentres. These will be spread geographically around the country so that the militia training can be a daytime course and no large barrack complexes are necessary. There only will be a need for a number of classrooms, a gunrange and a small exercise area. All states of Germany will be incooperated in this plan so a fair sharing of work is possible. Finally those small complexes will be needed by the military for 6 to 9 months of the year the remaining 3 to 6 months can be used to give additional education, business focussed, to the unemployed and young people who do not go to any further education and do not have a Lehrstelle, jobtraining place, at a company.

The education of the militia force will be done by the professional armed forces. Hereby they can remain in contact with the society and attract people to become a professional soldier or to become a member of the reserve forces.

The militia training course should be as short as possible but long enough to learn the basic skills of a soldier. Beside the formal education about the military, organisation, hierarchy, weapon handling, small unit tactics, etc. attention should be paid to citizenship, democracy, social values and mutual respect. The militia course should not be about to much drill and learning by gaming should be very important.

In about three months it should be possible to learn the above mentioned basic skills. They will not be able to operate advanced weapon systems but the most common infantry weapons, light mortars, light AT missiles and Stinger type AA missiles should be achieveable within this time span. Large scale combined arms operations will also not be possible to learn and to train but security, harassing and small unit operations and some cooperation with armoured forces are possible. The same will be true in support operations, it will not be possible to operate solely in large and multi-national groups but they will be able to support small units and in support beside other professional and reserve forces in larger commands if the situation is critical.

After the militia training people will know more about the military, the necessity of defence and the country. If they are interested they can join the reserve forces or another option would be an active militia role with weekly or monthly education / training days to improve their skills and proficiency with the equipment they have been trained with. This will be easily attainable because of the spare time left over in the militia trainingcentres.

The professional armed forces, reserve forces, active militia and militia training model will deliver Germany and its people the best of all worlds. They will get a skilled and well prepared and armed defence force within the current budget. A large, good trained and motivated reserve force which can be used when deemed necessary. A large pool of active militia members and an even larger pool of people which have had some military training which can be quickly recalled in a national emergency. And most important of all it leaves the people with choices, like it should be in a democracy. Join the militia training or support your country in the Zivildienst. Have the opportunity to learn something in the militia about the military and about a democratic country and its important values. And after the militia service or better training you are free to go on with your private live or stay somehow involved in the security of your country. And all this in three to four months which is not a long time and will certainly not have a large impact on somebody’s live. Especially because the training will be in everybody’s neighbourhood and at normal working hours so no long travelling and a long time from home. It is more, and should be, like a kind of adventure holiday where you can learn something.

July 1999

July 1999

Updates on Kosovo and Kashmire – Financial assesment

Updates on Kosovo and Kashmire

The world is still a volatile place to be. There are many internal and external problems, tensions and conflicts. Not to lessen the terrible impact on society and the individual’s life of war/conflicts but these are mostly of small scale and low intensity but a number of them have become high intensity and touching large scale levels.

Some perfect examples of these are the problems about Kosovo, the continuing struggle in Kashmire which recently received a new dimension.

Where as the Kosovo problem have reached its peak and a more normal situation is promising to return on the short term, Kashmire has become even more dangerous.

Kosovo

The regime of president Milosevic finally accepted the terms as presented by the G8 meeting in Cologne, Germany, and started to withdraw from Kosovo. It took 78 days of an ever increasing bomb campaign, the ever more likely possibility of the use of NATO ground forces and especially the increased activities of the Kosovo Liberation Army, KLA, against the Yugoslav army, VJ, and Serbian special police forces, MUP, in Kosovo, to make president Milosevic accept the demands of the international community or better NATO. Under the terms of the accord signed in Macedonia on 9 June, the Serb armed forces and security units were given 11 days to leave Kosovo.

Kosovo would be divided into 5 sectors, an US, an Italian, a British, a French and a German sector would be established under command of NATO. The name of the force would be KFOR, Kosovo Implementation Force. NATO would be in command and furnish the majority of the forces. The sector forces would be responsible for the maintenance of law and order, clear the area of mines, booby traps and unexploded munitions, restore the infra structure and support the UN civilian mission in restoring the government and the economy in Kosovo.

The withdrawal of the Yugoslav/Serbian units from Kosovo started on time and was concluded within the given timeframe. At the same time two large movements of people came to live. The Kosovo-Albanians returned to their homes or what was left over from them and a large number of the Serbians afraid for the revenge of the Albanians packed their belongings and moved into Serbia.

NATO KFOR forces moved in as fast as they could but the inadequate infrastructure and the possible existence of mines and booby traps in Kosovo slowed down their movement. A small Russian unit of paratroopers took the opportunity and moved from Bosnia through Serbia into Kosovo and occupied the airport at Pristina. The Russian could now reinforce their rightfull place in the solution of the Kosovo conflict and at least try to claim an own sector in Kosovo.

After prolonged negotiations it has been agreed with the Russians that they will send in about three battalions with support forces, about 3.600 men, into Kosovo. They will be stationed in the Italian, US and German sectors under NATO command but with a seperate command line to Moscow.

The KLA moved in reaction on the Serbian withdrawal out of the countryside into the towns and cities and they started to arrest people and occupy buildings to install their own structures. Often before the NATO KFOR forces arrived the KLA was alrady on the streets. The KLA have become a force to be reckoned with in the immediate time after the Serbian withdrawal.

NATO command and the sector commanders could persuade the KLA out of the positions they more or less had quietely occupied. After negotiations between NATO and the KLA, the latter decided to obey the NATO orders for the moment as this would be the most prudent and beneficial. The NATO and the international community have something to offer Kosovo and the Balkan region in general desparately needs, financial, material and technical support to reconstruct the region. And ofcourse the threat of the fighting power of the full deployed NATO KFOR force which is no adversary to the KLA. But as long as the NATO KFOR is not fully deployed and some civil government structures like a police force is not re-introduced violence between the two groups will continue and KFOR can only react and try to stop the most severe cases of agression, revenge.

NATO can have some kind of agreement with the KLA leadership and some of the local KLA commanders but some KLA units still do what they want and behave as they were in control. They continue to intimidate, arrest, beat and steal from Serbians, Gypsies and Albanians they suspect of collaborating with the Serbians. They feel and behave as the majority of the Albanians do, they are the victors and because of the wrong doings, atrocities, of the Serbians, they can take revenge and burn the houses of the Serbians and threat them very badly.

The problems and the hatred between the two people are very large. The economy, the infra structure and a large number of houses in Kosovo are destroyed. The Serbians who remain in Kosovo are afraid of the hostility of the Kosovo-Albanians. The Albanians in turn are angry because of the injustice, to phrase it mildly, done to them by the Serbian security forces and want retribution, revenge.

The psychological pattern of the peoples living on the Balkan, black and white-you win or loose-you are for us or against us mentality, will make revenge, ethnic cleansing and agression against opponents a normal and to expected reaction. In this particular environment, agression between the two groups will continue and will be very difficult to stop.

NATO KFOR have until now be greeted by the Albanians and be at best considered neutral by the Serbians. This could change very easily in this climate if one or both get the feeling of being treated unfair. KFOR is in danger to become a target from both sides. Any weakness will be exploited by both groups, a determined and hard but fair intervention of KFOR is necessary if they want to keep the respect of both groups and minimise the violence.

A living together will prove to be very difficult as there are to many bad feelings to eachother and the demands and expectations are very divergent. Yugoslavia and the Serbians living in Kosovo want to keep Kosovo part of Yugoslavia, which will be very difficult to achieve. And a large number of Kosovo-Albanians want to become independent and would like to eject all Serbians living in Kosovo. A small number of Kosovo-Albanians, the hardliners in the KLA, would like a greater Albania which would be unacceptable to the international community and especially to Macedonia, Montenegro and Greece with small numbers of Albanians within their borders.

The KFOR forces in Kosovo will minimise the violence in Kosovo if they can get and keep the respect of the people in Kosovo. KFOR could deliver a kind of violent free society, occassional clashes between the two people’s can not be excluded, but in general the situation will be stabile. KFOR can thus create an artificial stability which wil give the people an opportunity to rebuild their country. The real problem in Kosovo can not be solved by KFOR as the Serbians and the Albanians in Kosovo have to learn to live together if they want to have a common future in Kosovo.

The position of the Serbians will be diminished after the Belgrade government lost all its influence in the province, at least as far as they stay in Kosovo. But this will also be true for the KLA. The KLA, which is a very loose and diversified organisation, will find it increasingly difficult to rally support for their goals. In the immediate aftermat of the Kosovo conflict the KLA will find supporters but if stability has returned two things are prone to happen. First the KLA will find it very difficult to remain together as two major groupings are represented. Namely a right and left wing, the right wing are more fascist bred and the left wing communist bred. And second, the attractivity of the KLA will loose its glamour as the war will be over and the war-heroism will fade away.

Moderate policies, reconstruction and even some better relations between the two people will be the road to a better future of Kosovo. The relations question could however take another two decades.

Kashmire

The problems between India and Pakistan about the divided region of Kashmire intensified as some people occupied a number of hills in the vicinity of the town of Kargil which are overlooking the vital national highway 1A linking Srinagar to the town of Leh on the border with Tibet. The people, group, responsible for the occupation are described by India a mercenaries/terrorists commanded and supported by Pakistan, in particular the secret service SIS and commandos of the Special Service Group. And by Pakistan as Kashmiris, freedom fighters, who want to liberate Kashmire of the Indian occupation.

The size, 600 men, the equipment, assault rifles, mortars, snow scooters, heavy and specialised radio and radar equipment, special clothing, the organisation and the occasional artillery support out of Pakistan make it very unlikely that the group acts on its own. The operation is to large, to well prepared and furnished with advanced equipment, in short to complicated to be the work of the Kashmiris. The operation has the same blue print as the Pakistani operation and support of the Afghan Taliban coup. The Pakistani influence is to clear to be covered.

This essential small and low level operation, a small group occupying a small tract of land, is a good opportunity for Pakistan to pressure India and put Kashmire on the international agenda but it could have dramatic consequences between the two countries. The strategic importance of the site, the highly specialised character of the force and operation which is only possible with outside support and the more then obvious advantage for Pakistan will strain the relations between the two countries to the max. Everything seems to be possible in this situation. If India perceives its position worsened and Pakistan’s alleged involvement and advantage increased this could lead to a direct confrontation between the two countries.

The geographical conditions of the region favour defensive operations. A well trained and positioned force will be difficult to eject out of the Kargil region. Indian forces encountered several difficulties in removing the intruders. With the use of air assaults, artillery barrages and carefull pressing foreward infantry forces at night they could slowly take over positions of the intruding force. If the resistance remains the same than this operation could take a couple of months, in a worst case scenario, before all intruders have been defeated.

This time of initial combat is the most dangerous of all as India refuses to accept any diplomatic offerings of Pakistan or the international community and the intruding force on the hills is not yet eliminated. A wrong interpretation and perception of the situation could easily escalate the conflict in an all out war between India and Pakistan.

India is partly right in its refusal of mediation because this would legitimate the action of the intruding forces around Kargil. Any mediation and acceptance would lead to a strengthening of the position of the intruders, make it more difficult the remove them in the future and more importantly it would be beneficial for Pakistan.

This operation is always beneficial for Pakistan because even if nothing happens the Kashmire problem receives more international attention then before. And with some luck Pakistan could gain by the use of a small force, a reunification with or independence of Kashmire, virtually free of charge if India would accept the ploy. Something they could not achieve in war and the decade long attrition warfare in the Karakorum mountain range/Siaachen glacier. A piece of brinkmanship between nuclear states with a high reward at low cost.

Financial assesment

The world economy is not doing very badly, the developed markets continue as before and the Asian, Latin America and Russian markets show some recovery after the disasters in 1997 and1998.

The U.S. economy is doing the best of all and contrary to last year the growth is based on a larger number of sectors. This widening is a sign that the American economy as a whole is doing fine. The only disadvantages in the U.S.A. are the possible interest rates rise and the high valuation of large number of very good stocks. A rate hike will diminish the growth of the stock market as do the high valuations but these will also make other companies more interesting and worthwhile to procure. The earnings of a large number of companies from a larger number of sectors are very promising, the first announcement from the companies support this trend. This will mean a broadbased growth not only the financial and some groups of tech stocks will do good but also the basic industries as Caterpillar and Georgia-Pacific.

The Asian economies have bottomed and are now coming back although it will take some time before old levels and growth can be reached and maintained. There are still very large problems in Asia which need to be adressed. All growth is largely export induced where as internal consumer demand and financial business prudency are the most needed to create sustainable growth.

Some of the Latin America economies are also slowly showing some more growth. But there are still a rather large number of problems like the currency and fiscal problems in countries like Brazil and Venezuela. They will continue to depress earnings growth and keep the economies in the danger zone. The stocks in those countries are cheap but risky.

Colombia is in much deeper trouble. They will be forced to devaluate their currency which could have a negative effect on the other countries in the danger zone.

The more promising countries and responsible for the Latin growth are Chile and Argentina. They are more stable and will show increased economic growth. Their economies have better weathered out the Asian crisis and they have contrary to former agreements closed their markets to for example Brazilian products and circumvented product dumping and protected their own industries.

The Russian economy is still suffering from the deficiencies in government leadership, trade and financial legislation and with lagging consumer purchasing power and investments into the industries. The demand is to low to generate growth. And the whealing and dealings of criminal organisations and the peculiar way of doing business of certain, what they call in Russia, bizznismen are also not very promising as preconditions for a healthy economy. Not withstanding all these problems the Russian economy has improved somewhat as the industrial production improved. But this stems largely from the fact that Russian products have become more popular because western or eastern products for that matter are simply to expensive. The improvements in the stockmarket are more based on former weakness then on regained strength. The Russian stocks remain therefore very speculative and uncertain in their performance.

The European economy is differentiated. Some countries have a weak economy because of the high unemployment figures, large budget deficits and low demand. And some countries are doing much better in Europe. Countries like the Netherlands, Spain, Ireland and the United Kingdom have shown in recent years a steady and above average growth of their economies.

The first signs of a recovery are visible in the weaker European countries with a lower unemployment figure and higher demand. They are not over the hill as a lot of problems have to be solved but within two years the situation will see a substantial improvement and a rejuvenated Europe.

The stockmarkets

The stock markets are partly reflecting the healthy situation of some economies. As the markets are sometimes more worried about inflation and valuation than in the results of the companies. And ofcourse some reports, good and bad, have an above average impact on the price of stocks. Psychology is distorting the price of stocks.

The financial markets have been moving sideways. There have been no large rises nor droppings on the stock markets of the U.S.A. and Europe. As the better then expected earnings came out the markets were moving up but the inflation nightmare, the rising of interest rates, pushed the markets down and nothing really happened. The market indexes remained approximately on the same line with a slight upward movement.

The majority of the other stock markets, Asia, Russia and Latin America, have done better and experienced a period of growth. They have been growing on average 25 % since the beginning of the year.

July 1999 will maybe mean a break of the sideway trend of the U.S. stockmarket, this depends on the decisions taken by the U.S. Federal Reserve, the Fed, to do nothing or rise the interest rates by an unknown number of basispoints.

If, very unlikely, the Fed is neutral the markets will move up by 5-8 % as a correction to the recent downward push in the market. If the Fed, most likely, rises the rates by 25 or even 50 basispoints the market will remain the more or less same and do nothing. A rise of 25 – 50 basispoints is an expected move and the market has anticipated this development and pushed the market down. But if the Fed rises the interest rates by more than 50 basispoints or is talking and thinking of a 1994 style of three or four consecutive rises of interest rates, the market will react violently and fall by at least 5-10 %.

The other markets around the world will react on the interest rates in the U.S. because they will increase the costs of U.S. dollar denominated debts and make exports into the U.S. cheaper and more profitable.

The effects for the third world will be bad as they are not able to profit from exports into the U.S. The will have only negative consequences of the interest rates rise, namely higher debt service and more expensive imports.

The situation in Asia and Latin America is more stable and will remain the same for most cases as the higher export revenues make up the higher costs of imports and debt service. Asian and Chilean and Argentinian stock markets will probably deliver a continued growth on the second part of 1999. The growth will be lower than in the first two quarters but will remain in the double digit range.

Only the weakest of Asia and Latin America, like Indonesia and Colombia, who do not have their financial affairs in order and who’s industrial/economical activities are still not up and running will get additional problems because of the Fed’s action.

Only Europe will benefit a little from higher interest rates as the export revenues and opportunities will increase. As the Euro will loose some value to about US $ 1,015 to 1,025 vs. an Euro but this reflects the strength of the U.S. economy and the present not so strong European economies. Afterall the Fed rise is not for fun but to contain an overheating of the U.S. economy and inflation. The lower value of the Euro vs. the U.S. dollar is not dramatic or a prove that the Euro has failed as a currency, it happened not so long ago that the U.S. dollar had the value of DM 1,90-1,95 and higher. Remember the Reagan days.

The European stock markets will benefit from a possible U.S. interest rates rise and the slowly improving European economies. New highs are therefore very likely in the second part of 1999. The first decade of the next millennium could become an European decade. The European economies are recovering from a depression and it might be their turn to experience an economic boom after the Japanese eigthies and the U.S. nineties.

June 1999

June 1999

Indonesia revisited

Indonesia, a divided country

A short review

Indonesia have received more than their fair share of troubles in recent times. They were not only severely hit by the Asian economic crisis, admittedly this was largely home made, but the contradictions in the country seemed to erupt or intensify beyond everything that was thought possible.

The majority of differences, latent conflicts, which were existent in Indonesia could be pacified until the beginning of the economic crisis by the fantastic economic growth and progress and by an accepted system of more or less silent suppression. A strong government based on the much glorified Asiatic values was the best system for Indonesia at least this was the common thinking in the booming years. This semi-dictatorial system of government delivered to nearly all people some kind of economic bonus. Only a few groups of people refused to cooperate in some way or the other in the Indonesian miracle. These were in course mercilessly prosecuted and suppressed as became clear in Irian-Jaya and on Sumatra and especially in Aceh.

The booming economic development and the activities of the Indonesian security forces could create some kind of artificial security in Indonesia but this could only last that long as the regional and economic circumstances remained positive.

The economic crisis destroyed all old and vested alliances and the societal structure of Indonesia. The currency devalued, companies went bankrupt, unemployment risen to unknown levels, the traditional political and economical elites ousted and maybe the most dangerous of all old soars, contradictions, in the 100+ peoples and 1.000+ island country became active again.

Indonesia anno 1999

As the old government and the majority of the political and military leadership was removed from office an interim government under the leadership of president B.J. Habibi took over the helm. The economic crisis continued but it bottomed as the first international financial support packages arrived, things did not get any worser at least economically.

The political situation on the other hand stayed in the wild waters of uncertainty as the power position of the government was questioned and antagonists to the government Golkar party and the Indonesian federation became more active.

President Habibi managed to create some economic stability but the upcoming elections and the ethnic and independent induced movements all over the country created widespread political and social instability.

The delayed elections which are planned for the beginning of June 1999 will not bring the much needed political stability to rebuild the country. There are a number of problems of diverse nature which will prevent the much needed national support. There is first the legitimacy problem of the government. Second the large number parties which fragmentate the opposition. Third the ethnic tensions. And fourth the independence movements on a number of islands or regions. The third and fourth problem go sometimes together which makes the situation even more explosive.

The government

The government is under siege in Indonesia. The political inheritance from the Suharto regime and the performance of the Habibi government is undermining the position of the government, its institutions and its representatives.

The government of Indonesia is still linked with the wrong doings of the Suharto regime. The unfair and often wrong economic policies and the harsh suppression of any kind of opposition by the security forces has made the government disliked. This triangle of government institutions, the Golkar party and the military and security forces, ABRI, are governing the country and the majority of those people are more or less Suharto people, or are at least perceived as such. The highest leaders and the most extreme cases are removed from office but the lower echelons are still present.

President Habibi has introduced some improvements in the economic field and in the treatment of the opposition but more out of necessity than out of conviction. The changes have created some disagreement in the government between what we like to call the reformers and the traditional groups like the armed and security forces.

The reformers in the government want to modernise the country with the introduction of accountability and a western style economic policy. The traditionalists do more or less agree with this policy because it is necessary to rebuilt the country. The changes in the composition of the government structure and parliament is questioned as it diminishes the influence of the traditionalists and the all powerfull military. The security policy and especially the ideas of autonomy or even independence for some parts of Indonesia are totally unacceptable to the traditionalists. For them this is a death sin against the fundamental principles of a united Indonesia.

The inheritance of the former regime, incompetency of the current government and the rift in the government are considerably undermining the position of the government and its abilities to deal with the many problems which exist in Indonesia.

The multitude of parties

The opposition in Indonesia is very fragmented if one is considering the number of parties which want to take part in the elections. There 183 parties listed for the elections. You can view them on the internet at http://www.detik.com/analisa/199808/19980828-0950.html.

A large number of these parties do not have a lot of support and/or are limited to just one group or region. The majority are focussed on just their own particular interest. Consequently they will not make a big impact on the elections and only a couple of the larger parties will be represented in the new parliament. And a coalition of these rather different parties will form the new government.

But even the larger parties are very fragmented in Indonesia. The governing Golkar party, which has a large following with everybody who is some way connected with the government, does not have enough support in the society to keep their important position. The rift in the government is thereby undermining the position of Golkar. Golkar is further significantly undermined by allegations of the use of violence against the oppostion and they might even be not allowed to take part in the elections.

The other large parties, the Partai Demokrasi Indonesia, PDI-P, under the leadership of Megawati Sukarno-Putri, the Partai Kebangtikan Bangsa, PKB, of Abdurrahman Wahid often called as Gus Dur leader of Hahdlatul Ulama the largest muslim organisation in the country, and the PAN of Amien Rais, leader of Muhammdiya the second largest muslim organisation in the country, will have a larger impact on the elections.

They have created some kind of alliance in the time to the elections. This allaince is very opportunistic as the policy of each of them is to different to remain valid after the elections. But in the months before the elections, Indonesia did not experience the expected violence between the many parties. This is mainly the result of the close cooperation between the three large parties, PDI-P, PKB and PAN.

The elections in Indonesia are largely an affair of personalities. Megawati Sukarno-Putri, Gus Dur and Amien Rais are all strong personalities and the election campaigns are around them. This has made cooperation in the time before the elections very easy and beneficial. They have all the same goal the removal of Golkar and Habibi who are not very popular in Indonesia. If that goal is achieved the cooperation will prove to be much more complicated as the ideology of each differs and party politics will start playing an important role again.

The parties in Indonesia can be divided into two main groups, the Islamic oriented parties and the Pantjasila oriented group. The Islamic oriented parties are mostly moderate parties which want to some extent a more islamic dominated society. This should however not be mistaken with the Middle Eastern versions of Islam kind of countries.

The Pantjasila oriented parties are all based on the five values for unity in Indonesia, Believe in God, humanity, social justice, nationalism and people’s sovereignity. These principals are the foundation of the Indonesian state ideology since its existence as one nation. The goal of all these parties, including the PDI-P, is essentially a same kind of Indonesia as existed before the economic crisis except without the corruption and the Suharto style of nepotism but with more democracy.

Ethnic conflicts

Indonesia is a country consisting out of many islands and each island has one or more kind of people living on it. The majority of the people are of muslim religion but the original population of many islands are of christian or animist faith.

The Indonesian archipel have known for centuries migrations of people between the islands. The number of people migrating were mostly low and the slow. The newcomers integrated more or less in the society without creating to much friction. The newcomers were different and remained so but there was no hostility as they did not compete in the economy and had just little political influence.

The Indonesian government had thereby for many years a policy of transmigration. The transmigration had firstly the goal of eliminating the over population of the island of Java. Java is essentially the main island of Indonesia. The political and economical leadership is located on Java and all important ideas and movements originated on Java since the days of colonialism. And secondly it should improve and accelarate the development of the other islands. And thirdly it should change the composition of the population of the most important islands in favour of the Javanese.

This transmigration policy worked well in the beginning but as the numbers of Javanese on the islands began to rise dramatically and started to dominate the islands the attitude of the original population became more hostile. The Suharto regime and the economic progress could suppress the hostile attitude on the islands but some hardliners, the people and organisations who also demand autonomy or independence, on the islands and especially the economic crisis turned the situation against migrants and even violent.

The economic competition, the struggle for political power, the rise of the idea of muslim identity and the economic crisis as a multiplier made any small difference and problem in Indonesia escalate into a contradiction of national importance or even survival.

On Java the muslim majority against the Christians and the Chinese minority. On the Moluku islands between the original Christian population against the muslim migrants. On Sulawesi, Celebes, between migrants and the original Dayak population. And so on, nearly all islands with a larger migrant community are in turmoil.

Autonomy and independence

As a federation Indonesia has a large number of different people living in the country. Some of the areas and people were inherited from the colonial days, some peacefully added to the federation others however were outright conquered by Indonesia.

Until the economic crisis the federation could be kept together by the economic progress, the financial support the government good give to the areas, especially the poorer regions, and by the suppression of any opposition to the Indonesian rule.

The carrot and stick method had worked well for some areas but a number of hardliner opposition groups continued their struggle for more autonomy or even independence.

The economic crisis and the internal power crisis of the government gave a number of groups the opportunity to ventilate their thoughts about the future of Indonesia and particularly the future of their region. The majority of the islands would like to receive some kind of autonomy within Indonesia. This wish has become stronger because of the ethnically inspired violence on the islands. The peoples of the Moluka islands, Sulawesi (Celebes), Borneo and a number of other small groups demand more influence, political power, in the government of the island or region.

The situation on Sumatra is more difficult. There are some people who want more autonomy but their number is falling. As ever more people and especially the organised groups demand secession from Indonesia. The southern part of Sumatra is more autonomy minded but the more north you go it will get more independent minded. The region of Aceh is the most fanatic in their struggle for independence. Sumatra or parts of Sumatra, like Aceh, possess enough natural resources to make an independent state economically viable.

The most fanatic groups fighting for independency on Sumatra are the GPK, the GAM and Aceh Merdaka. The withdrawal and softening of the policy of the Indonesian armed forces, especially the Kopassus special forces, from and on Sumatra have not brought the independence movements to the negotiation table. On the contrary, they have used the weakness of the government to their advantage and intensified the fight for their goals.

Some of the conquered parts of the Indonesian state are also not pacified. On Irian Jaya a small organisation, OPM, Organisasi Papua Merdaka, continues to fight the Indonesian occupation. The OPM has become relativily stronger as the Indonesian forces have been weakened by the economic crisis. The OPM weak in men, arms and support has seen some opportunities by a combination of increased military pressure on the Indonesian government and diplomatic pressure to get some promises from the government about the future of Irian Jaya. Something like the autonomy/independence referendum like the one on East-Timor.

Another more violent and complex problem is on East-Timor. Indonesia conquered East-Timor after the former colonial power Portugal left East-Timor. The East-Timorese never accepted the Indonesian occupation and resisted it from the beginning. Only because of the widely and inhumane use of the security forces Indonesia could keep control of the region. The muslim Indonesian forces and migrants and the in majority Christian East-Timorese gave the conflict an additional explosive character.

After a prolonged fight between the Indonesian security forces and the Fretilin, the East-Timor organisation which is fighting for independence, the economic crisis and the subsequent changes in the government forced the government to look for an alternative policy. The Indonesian government turned their policy by180 degrees and offered East-Timor on the short term a referendum with the choice of autonomy or independence.

This was greeted by the Fretilin and others supporting the independency but they warned in the mean time for negative side effects. They demanded the disarmement of the people which were armed by the government to protect themselves against the Fretilin. Because these people would oppose the autonomy or independence as they would loose their position in the East-Timorese society. They would not hesitate to use their weapons to frighten people in the elections who support the independence and fight the results of the elections.

This offer of Indonesia could also be a way to show East-Timor and the international community that they are necessary in the region to maintain law and order. They are the factor between order and the chaos of war. But the autonomy/independence offer has been opposed by the traditionalists and the armed forces in Indonesia as they are afraid of a domino theory. All Indonesian people/islands would now demand autonomy or independence about which they are partly right. The traditionalists are however to weakened by the economic crisis to oppose the policy of the Habibi government. But Habibi has most likely received an enemy for live by this offer and has split the government into two groups.

The problems in East-Timor are far from over. The Indonesians still control the region and the future looks bleak as the pro- and anti- independence supporters are prepared and waiting to attack eachother. They are just waiting for the signal to begin.

Summarized it can be stated that Indonesia has a number of people living in regions which would like or even demand more autonomy and even some of them independence. The position, at least the power position as the majority of the regions have also been hit by the economic crisis, of the several peoples living on the islands have been improved as the government of Indonesia have become weaker and entangled in many social and economical problems which demand their fullest attention.

The many peoples country Indonesia is however dominated by the Javanese who are also in fact governing the country until now, 1999, by the triangle of the semi-allies of the Suharto-clan, the Golkar party and the armed forces, ARBRI. They are all more or less bounded to the pantjasila ideology of a united Indonesia. All those autonomy and independence sounds out of the provinces are unnatural for the government and they vehemently oppose them. All changes in the form and structure of Indonesia are forced up on to them by the economic crisis and the internal political weakness. The increased attention to the muslim religion and identity is in the meantime increasing the tensions between the several religions and the many different peoples.

Future expectations

The situation in Indonesia is not likely to improve on the short term. There are a number of social and economical problems which surfaced after the economic crisis of 1997. These problems were increased as political, ethnic and religious differences on Java but more dramatically on the many other and non-Javanese islands erupted.

Ethnic and religious inspired violence happened all over the country. This will continue until all people are living in their own homogenous area and the economy will show substantial strength.

The political structure and security organisations became under pressure and started a transformation and a cutback of functions. The government had become weaker and the demands for more autonomy and independence became louder and are uncontrollable by the government. The economic and political weaknesses had and has made the goverment unable to cope with the demands out of the regions in particular and the many social and economical problems in general.

The current government of president Habibi has and will not be able to solve the many problems of social, economical and political nature. They need to create political and social stability to have economic stability. This will prove difficult to attain as long as the economy remains weak. A vicious circle from which it will be difficult to escape without foreign support and more important substantial offers to the peoples outside Java. Which in turn would dissatisfy the Javanese.

The same is valid for the opposition as they are committed to the pantjasila ideology of a united Indonesia, as is the Habibi government, or the muslim oriented parties which want a united Indonesia with an islamic flavour. Both will alienate the many peoples living in the provinces, e.g. the many islands of the archipel.

The elections will not bring the solution to the problem as all the major opposition parties are Javanese and as mentioned before committed to an united Indonesia. Difficult choices have to be made which will meet a lot of opposition from the majority of Javanese muslims. But democracy is more than just the representation of the interest of one group it is also the protection of the minorities. And as long the PDI-P, the PKB, the PAN or for that matter Golkar do not understand and apply the idea of protection of the minorities they will not be able to keep Indonesia together.

If the main Indonesian parties and the government cannot control the muslim mob and remain ignorant of the wishes of the many peoples in Indonesia political and social stability will be impossible to accomplish. Only an Indonesia as a federation were all, Java, Sumatra, Borneo, Sulawesi (Celebes), Moluka islands and so on are fairly represented will be able to return to a strong and united Indonesia as it seemed to be before the economic crisis of 1997.

There will be a big and decisive task for the new government in Indonesia if they want to return Indonesia to the tiger countries of south-east Asia. If they fail to solve the big problems of Indonesia it will most probably mean a different and smaller Indonesia in the next milennium.

On the short term the military and the internal security services are able to subdue any movement which want to change the structure of Indonesia. None of the independence movements are something of an equal opponent to the military. But the political costs, national and international, and the economical consequences might be prohibitive high to execute a ruthless suppression of the independence movements in Indonesia. A political solution is the only opportunity for Indonesia to survive as an united nation on the long term.

May 1999

May 1999

The Kosovo conflict, history, exits and future

Kosovo a new Bosnia, were opposing ethnic groups do their utmost to make live unbearable for the other side. Including ethnic cleansing and occasional mass murders to create facts which will prove difficult to change in the future. The goal of all those operations is to exclusively reserve a part of territory for their own group.

A peace which only could be reached at the point of a gun or for that matter at the point of a cruise missile. In the Bosnia conflict peace could be reached by the use of NATO forces, IFOR and SFOR, and that peace can be maintained just by the stationing of a large contigent of forces. Does Kosovo get and even need a similar treatment.

Bosnia have been pacified and they could, with some problems and differences, start with the reconstruction of the country. If the current Kosovo problem is solved, the people in Kosovo have to do the same. But the international community is willing to help and a new Balkan wide kind of Marschall plan is being put together. This should boost the economic development and with some luck social relations in the region.

A short history

The Serbian minority of about 10% of the population of Kosovo which at their height, before the second world war, made up 30-40% of the population and the Serbians as a whole who have strong historical connections with Kosovo want to remain in control in the region.

The autonomy status granted to Kosovo by the late president Tito was changed in 1990 into a provincial status under direct control of Belgrad. The Kosovo-Albanians were satisfied with the autonomy but the remaining Serbian minority had the perception that they were treated unjust in general by the Albanian majority and particularly because of the positions they occupied. Especially the Albanians who had a position in the government apparatus. The Serbians protested loudly and violently and demanded immediate action out of Serbia, Belgrad.

The Serbian president Slobodan Milosevic first wanted to pacify the situation in the normal communist way. They were after all comrades in a communist country. Differences between peoples, especially the working classes, were impossible according the communist ideology or world view.

After the sweeping changes in Eastern Europe and Russia, Milosevic recognized the potential of the Serbian claims in Kosovo. The nationalistic card provided an opportunity the consolidate his power generally in Yugoslavia and particularly in Serbia. The take over of Kosovo rallied, as expected, the Serbians behind Milosevic and gave the Serbians in Kosovo their demanded powerfull and preferred position.

The Kosovo-Albanians reacted in the first six to seven years with a policy of peacefull resistance. They created a kind of shadow society in Kosovo out of, as mentioned before, resistance and necessity. But they were essentially forced to have a separate society because the Albanians were pushed out of all government positions and out of the larger companies in the region which were still owned and managed by the state or better Belgrad.

As the peacefull resistance was not particularly succesfull an increasing number of the Kosovo-Albanians looked for an alternative. The Ushtria Clirimatare e Kosoves – Kosovo Liberation Army, UCK-KLA, which wanted to force out the Serbians by force attracted ever more support. Especially when the UCK-KLA proved to be the only group who did something and who promised some protection against the suppression of the Serbians and the actions, sometimes even atrocities, of the Serbian security forces. The protection proved to be an illusion as the first larger scale Serbian operations against the UCK-KLA and on a smaller scale against the population started.

Methodically the Serbian security forces took over control in the border areas with Albania, here the first ethnic cleansing started, and almost simultaneously the Serbian started to force out the UCK-KLA out of the territories they claimed to control. The UCK-KLA crumbled under the first Serbian pressure and were forced to retreat into the mountains and to Albania and to a lesser extent Macedonia.

International mediation brought some temporary relieve to the UCK-KLA as some Serbian security units were withdrawn and international observers of the Organisation for Security and Cooperationin Europe, OSCE, moved in to verify the withdrawal and future operations of the Serbian security forces.

This gave the UCK-KLA an opportunity to regroup, retake some of the lost territory and to assault Serbian security units. The OSCE observers were able to limit the operations of the Serbian security forces. The increased activities of the UCK-KLA, which proved to be more resilient and stronger than anticipated by the Serbians, led to increased activities including new atrocities in Kosovo against the Kosovo-Albanians by the Serbian security forces.

The Serbian atrocities led to international, especially western, demands to end the Serbian activities, start diplomatic negotiations to solve the problem and finally to the creation of the Rambouillet agreement which the Yugoslav government found unacceptable. The Rambouillet agreement would give something to all parties. It declared autonomy for Kosovo in Yugoslavia for at least three years whereafter the future of Kosovo would be arranged by a conference, the best protection imagineable for minorities and the stationing of a NATO force, KFOR, including Russians and Ukrainians, in Kosovo to execute the agreement. Just like SFOR in Bosnia.

The stationing of an international NATO led force, KFOR, was unacceptable for Yugoslavia, Serbia. They considered it as an right to occupy the whole of Yugoslavia. This is however a falsification as the Rambouillet treaty clearly defines does and doesnots of KFOR. The name NATO, which is mentioned in the annex to the Rambouillet agreement, stands for the coalition of forces which were to be stationed in Kosovo and therefore is the same as KFOR. NATO would be the partner in the Rambouillet agreement with Yugoslavia just as NATO is the partner in the Dayton agreement with Bosnia where SFOR is the implementation force of the agreement.

The Serbians were from the beginning againt a diplomatic solution as another plan was preferred. Namely the elimination of the Kosovo problem by a combination of ethnic cleansing and subjugation of the Kosovo-Albanians. To attain thet goal the Serbians increased the number of security units in Kosovo and the scale of the operations against the Kosovo-Albanians. This led to the withdrawal of the OSCE observers and finally to the first air strikes by NATO forces. The west expected that Milosevic would accept the Rambouillet agreement after a couple of days of air strikes.

The west underestimated, just like the Serbians underestimated the UCK-KLA, the resistance of Milosevic. The Serbians did not accept the western demands and accelerated a large scale campaign to solve the problem in the old fashion. They started to ethnically clean large areas of Kosovo-Albanians. Consequently large crowds of refugees fled into neighbouring countries. The identity cards of the fleeing Kosovo-Albanians were confiscated and the population records destroyed. The existence of all refugees was essentially destroyed.

The continuing air campaign could do nothing to stop the Serbian security forces, who in the meantime received support of shady militias like the Arkan Tigers, in their operation to ethnically clean Kosovo. The human tragedy of over a half million refugees in Albania, Macedonia and Montenegro and about the same number in Kosovo is a clear proof of Serbia’s inhumane policy.

The air strikes at Yugoslavia have destroyed a large part of its command and control system, air force and defence systems, military property, military and civilian infrastructure and capabilities in oilproduction and arms and arms related industry. Yugoslav, Serbian, industrial and defence capabilities have been severely degraded by the air campaign. And first signs of weakness have become visible in the Serbian society and political leadership.

The air campaign cannot deliver short term results but if it continues it will cripple or better virtually destroy Yugoslav economy. The price for noncooperation, non adherence, to the ideas of the Rambouillet agreement will be very high.

Exit options

There are several scenarios how the conflict might be ended or what policies are available to end it. There are about four options which are possible or acceptable to happen.

The first is the acceptance of the Yugoslav government of the ideas which were presented in the Rambouillet agreement. The second option is the continuation of the current policy. Force Yugoslavia to comply to the ideas of Rambouillet. The third option is an agreement between the two sides to stop all military activities and start a new round of negotiations. And the fourth option is the use of ground forces to end the Serbian acitivities in Kosovo.

There are ofcourse more options but they are less likely or even impossible to happen.

Acceptance of agreement

The easiest and fastest way to end the conflict is the Serbian acceptance of the ideas of the Rambouillet agreement. Even if this demands some compromises from both sides. Rambouillet might be considered death but the ideas about the protection of people, the institution of civil rights to guarantee the rights of minorities and the stationing principle remain as valid as before.

The end of the air campaign would stop the disastrous effects of the air strikes at several important parts of Yugoslavia. A Rambouillet like agreement would guarantee the rights of the Serbian minority where as Kosovo would remain part of Yugoslavia. It would be the best position attainable for the Serbs. But they should be quick because the longer they wait the stronger the UCK-KLA will become. The UCK-KLA have demands and wishes of their own and the more they have to fight, the more they gain and the more Kosovo-Albanins suffer in Kosovo and abroad in refugee camps the more power and influence the UCK-KLA will get.

The diplomatic position of the Serbian side is weakening and the position of the Kosovo-Albanians will improve. An independent Kosovo will be one of the possibilities if they wait to long. The Serbian policy of creating facts and act on it could backfire. They might get a Kosovo which they can not control as the UCK-KLA with support of the NATO would beat the Serbian security forces and control ever larger tracts of land.

Continuation of policy

The second option is the continuation of the current air campaign, the limited use of the battle helicopter – artillery combination and an increase of attrition warfare of the UCK-KLA against the Serbian security forces. The weather improvements will make the air assaults and the air support of the UCK-KLA ever more effective and they will slowly but certainly destroy Serbian capabilities.

This policy will take longer but a victory of NATO will be certain as the fighting power and the logistic support of the Serbian security forces will slowly be destroyed. The UCK-KLA will be active in supporting this operation as their fighting power has increased, their logisitic support improved and military support, close air support, has dramatically been improved. The UCK-KLA has learned a lot of its two former defeats by the Serbian security forces. The organisation structure, strategy and tactics and the quality of the fighting men has been improved.

The much improved UCK-KLA is very motivated to continue the struggle against the Serbian security forces. As they fight and conquer parts of Kosovo they will get a bigger and more important say in every political solution which might be concluded.

If NATO has to force the Yugoslav – Serbian forces out of Kosovo or adhere to the conditions set in the Rambouillet treaty the Serbian position will be fundamentally undermined. In the following negotiations it can be stated with a high degree of certainty that an independent Kosovo will be one of the options. The UCK-KLA will hold after a prolonged fight/struggle considerable parts of Kosovo and they will be very unwilling, even not willing, to hand back Kosovo to an international force or allow any Serbian official or entity to stay in the area. The UCK-KLA is and has become a powerfactor of which little is known but it is or has created facts which will be difficult to circumvent. Any agreement, if you like or not, will need the consent and cooperation of the UCK-KLA.

Diplomacy

The third option, not very likely, would be the cessation of hostilities and the resumation of negotiations between the Yugoslav government, NATO and the Kosovo-Albanians.

A third country for example Russia could persuade all sides to give diplomacy another chance to solve the problem. In the negotiations, under Russian leadership or guidance, a compromise should be reached which would satisfy all sides and most important would protect the Serbian position on the Balkan. This will be however very difficult with a high level of wish thinking. The Kosovo-Albanians and NATO would have to give a lot just to satisfy Serbia and even condone the ethnic cleansing. And this would be unacceptable to NATO and the international community. The position of Russia remains important and any solution and especially the implication should be ideally with political support and military involvement of Russia. But not at all cost should Russia be accomodated, more important issues are at stake.

Russia has been calling for the cessation of hostilities from the start of the air campaign. They did so out of concern of their Serbian allies. Both, Serbs and Russian are of Slavic descent and this has created a kind of kinship. Out of tradition and the communist and nationalistic parties in Russia are favouring to support the Serbians. And in time of elections provides the Kosovo-conflict a very good opportunity to rally support in the population. By exaggeration and one side views at the happenings the Serbians are portrayed as the victims of NATO agression who are in need for support of their big Slavic brother. This picture of the situation has been modified a little to temper the feelings as their was talk of world war III and agression against western targets in Russia. But Russia remains on the side of Yugoslavia.

Russia even if economically a chaos remains a great power with a lot of nuclear weapons. The west, NATO, has to respect Russia and its sentiments about Serbia. And therefore any solution, to attain and execute, should preferably involve Russia. Russia could play an important role as a mediator to end the conflict by persuading Yugoslavia to adhere to the demands of NATO. In this position they could protect Serbian interest the best.

The use of ground forces

The fourth option, the most agressive one, is the use of ground forces to stop the human tragedy in Kosovo. Ground forces could push out the Serbian, Yugoslav, security forces out of Kosovo. They could than create a cordon around Kosovo to implement the proposals of the Rambouillet agreement and to protect it from any Serbian incursions.

The use of ground forces is possible even if there are a number of problems which have to be overcome. First, organise a force of about 80.000 personell. Second, deploy them to the region. Third, improve the infra-structure in Albania to simplify deployment and the logistic support and fourth chose a way into Kosovo.

The resistance of the Yugoslav army could be fierce but should not be overestimated. The quality and quantity of the forces are clearly below the level of NATO forces. The Yugoslav armed forces have been neglected in the preceding five years. There have been no modernisations and the training has been below standard out a lack of funds. Milosevic preferred the police and special police forces as they were politically more reliable and as good in the low level, counter insurgency, operations Milosevic preferred to wage. In all recent problems with Slovenia, Croatia and in Bosnia the Yugoslav armed forces pulled out without a fight and they did not do that out of superiority. And finally after the NATO air campaign the Yugoslav armed forces have been degraded, demoralised and logistically crippled. Impressive against unarmed civilians and usefull against a lightly armed inexperienced guerilla-like organisation like the UCK-KLA but no adversary against an all-arms NATO combat force.

There are four roads into Kosovo. Firstly, from the south through Macedonia. This would be the best way considered the connections with harbours in Greece and the relativily good developed inroads into Kosovo. The Macedonian government opposes however any offensive operations out of Macedonia because of the large group of Serbians in the country. And Greece is not particularly keen on supporting an offensive because of religious connections and traditional good relations with Serbia. Secondly, from Albania which would meet no political objections but would require extensive construction of infra-structure. The inroads into Kosovo are a little more difficult but poses no impregnable barrier. Thirdly, through Montenegro. This would be possible because of the harbour facilities in Montenegro. There are two objections to this plan, first you have to conquer the harbour and in a worst case situation you would have to fight yourself through the country. Military it would not pose to be impossible or difficult but it would be a big nuisance. Second, the mountain range between Montenegro and Kosovo are the heighest in the region which would make it more difficult to cross them. And fourthly, from the north out of Hungary. The Hungarian government has allowed NATO to use bases in Hungary. This would be the easiest entry into Yugoslavia. The geography is the most suitable as there are no mountains to limit movements. The military resistance of the Yugoslav armed forces will be the same as in Kosovo where as in Kosovo they have the advantage of defensive favourable terrain. But they should not rely on favourable terrain to beat of an offensive opponent, as Julius Caesar stated in his book the Gallic War; people in some geographic areas, like mountains, rely on the terrain for their defense but every determined force will break their defense. The Hungarian route is military feasible but it requires a larger logistic effort. The advantage of this entry are that any possible problems in the Vojvodina between the Hungarian minority and a Serbian nationalistic plan could be solved before it surfaces, all installations which could become a threat could be destroyed, any logistic support for the Serbian forces in Kosovo could be destroyed at the source and people accused of war crimes or crimes against humanity could be apprehended. The real problems with the Hungarian road are political, Russia will not be happy, more likely very angry, if this road was used. The Russians and many other states would view it as an illegal act of agression against Serbia.

All possible entry points, except probably the Montenegro road, are possible. The road which would meet the littlest problems is through Albania as there is only one big problem the missing infra-structure.

The Future of Kosovo

President Milosevic is fighting, or better sitting out, a lost battle. His calculations that he could solve the Kosovo problem by ethnic cleansing and create facts which cannot be turned back will prove to be false. The NATO air campaign will continue until the Serbian security forces and the Yugoslav army have left the region. The NATO did not get divided about the Kosovo conflict but stood firm in support of the policy decided on. And there is no country, even not Russia, who going to help him. Yugoslavia receives some political or moral support but not the much needed arms and physical back up.

However and whenever the conflict will end is up to Milosevic, if he decides to cede to the demands of withdrawal of the Serbian security forces and the Yugoslav armed forces, the implementation of self determination for the Kosovo-Albanians and the installation of an international force with a large number of NATO forces, more or less what is stated in the Rambouillet agreement, the air campaign will stop immediately. Until now, the end of April 1999, Yugoslavia still has a small chance to influence the outcome of the conflict and the future position of Kosovo. If they wait another month or so, time or reality will make the choices for them.

The other option is that the NATO will, if they do not use ground forces themselve, with increasing support of the UCK-KLA destroy the Serbian security forces and army units in Kosovo and all the important logistics, support and infra-structure in Yugoslavia. Consequently, on the medium to long term the UCK-KLA will take over Kosovo and than it will be independent. There will be no negotiations or any role for Yugoslavia left in Kosovo.

The future of Kosovo will be determined by the Kosovo-Albanians. After the Serbian forces left the region Kosovo will be a semi-independent state on the short term. After the refugees have returned to their homes the final position of Kosovo will be determined. It can be an autonomous province in Yugoslavia as proposed in the Rambouillet agreement but more likely it will be an independent state considering the atrocities committed by the Serbs and the efforts of the Kosovo-Albanians, the UCK-KLA, to return to Kosovo.

A reunion with Albania, to create a great Albania, will probably be a bridge to far. Albania has to many problems of their own to expand and get even more problems. And the international community might disagree with a great Albania because they could consider it as potential new problem which could lead to a new conflict between neighbours. The Kosovo-Albanians and the Albanians have to be carefull whay they do as they are in need of western economic support to reconstruct their countries. And a new conflict between Macedonia and Albania is the last the thing the west is willing to tolerate.

The future of the Balkan could be with a small and impoverished Yugoslavia if it makes the wrong choices. The international community, the U.S.A. and the Europan Community, are planning an economic support package for the Balkan. This mini-Marschall plan should not only support Albania, Kosovo and Macedonia in the reconstruction of their economies but is aimed at the Balkan as a whole. Roumania, Bulgaria and possibly even Yugoslavia are included in this plan. The plan should boost the economies, support and promote democracy, civil rights, trade and cultural exchanges and start a self-supporting economic growth in the region.

The creation of political, economical and social stability in the Balkan is the key to peace and progress. It will be the only way to break the negative spiral of poverty and conflict in the region. The peoples of the Balkan have to be learned to live together and solve conflicts and disagreements by diplomacy instead of resorting to nationalistic and tribal inspired violence at the first possible occasion.

April 1999

April 1999

Portfolio management in 1999

A new year with new opportunities to invest, divest or hold your portfolio. Might it be a diversified portfolio of stocks, bonds, real estate and derivatives, a mixed less risky portfolio of treasuries, bonds and some mutual funds or a secure portfolio of treasuries and assetbacked bonds. All need some management or decisions to continue the existence and profitability of the portfolio.

There are essentially two important decisions to make about a portfolio. What is the intention or goal of the portfolio and what level of risk is acceptable. To generate an income or to accumulate wealth. And so secure with a domination of bonds or more risky with stocks and derivatives. These two questions determine the composition of the portfolio. The next step is about the portfolio.

If the personal requirements are established the portfolio can be created. Again a number of decisions have to be taken. Namely active, many trades, or inactive, only the yearly allocation, management of the portfolio. Or a combination of both, active only if necessary. Another option would be to hire a financial institution to do the business for you and leave it to them.

A short history of 1998

1998 was a very volatile year for the economies and on the stock markets. It has shown the best and the worst of what can happen. The U.S. economy showed improved growth figures, Europe showed moderate growth, Asia achieved some kind of stabilisation where as Russia and South America, especially Brazil, experienced a currency devaluation and a shrinking economy.

The stock markets showed an equal volatile behaviour. The first quarter, until April, the stock markets enjoyed an unprecedented growth. After a short interruption in April the markets continued their rise and new records were achieved in July. The Russian crisis and South American currency problems sended shock waves through the world stock markets. The markets turned south and lost between 10 and 20 % of their value. In October an all time low, of the year, was reached.

But at that time the market bottomed as the economic forecasts and company figures proved to be better than anticipated. In November of 1998 a recovery started which would bring the stock markets back to their former heights. The markets closed at a record high on the last day of 1998. After all the year has been better than was expected after the retreat during the late summer and autumn.

The recovery of the stock market was based on a number of reasons. The most important condition for the rebound were the promising economic and business figures of the fourth quarter in the U.S. and to a lesser extent in Europe. This was supported by the low interest rates in the U.S., the strong consumer demand in the U.S., the improving international situation, especially in Asia, the containment of the Russian and Brazilian problems and the availability of an abundance of cash needed to be invested.

1998 ended promising for the next year even if you consider the large number of problems around which could depress the stock markets of the world. Problems like the milennium problem, lagging demand in Europe, the Middle East and Asia, the problems in Russia and South America and an overvaluation of a large number of stocks in the U.S.A. and Europe. But the existence and impact of those problems might prove to be lesser than most of us think.

Rayanalyse internet portfolio

Last year in our 1998 January II issue on our website we proposed and example portfolio. This has been an good mirror on the ups and downs of the stock market. It has shown excellent results but was also hit by the downturn in some sectors like financing and oil and oilservice industries. But even at the lowest level on the stock market indices we still attained a result close to 10 % with the exception of our Asian proposals.

The year result on the portfolio has been in line with the development of the stock markets. If however the portfolio had been managed according to the conditions of low level management the results are above the stock market indices development. Low level management is to act only if the stocks are pressured by developments like accounting irregularities or a loss of more than twenty percent. The rule of cut your losses should then be implemented.

The policy to select quality stocks, stocks of companies with a sound product collection, healthy company structure and finances and superbe management, have been very profitable in 1998. The return of the stock portfolio has been better than anticipated. The average return on our U.S. selection has been over 18 % if no changes were implemented but over 30 % if some little changes, according the above mentioned rules, were used. The European stock portfolio performed more or less the same with a return of over 32 %. The Asian portfolio showed a mixed result. The Asian, Hong Kong, Taiwanese and Singapore, stocks delivered a small positive result of barely 5 %. The Japanese stocks were the disappointing part of our example internet portfolio with a loss of over 6% over the year.

In general the allocation and the selection of stocks of our example internet portfolio has been a right decision in line with the development of economies of the world. Our research, understanding of the markets and our investment policy has proved itself with this performance.

An outlook on 1999

The general situation in the world will be very differentiated. Some parts will be stable but large parts will be very unstable. The unstability is the result from political, economical and social tensions in some countries and regions.

The unstable areas are located in geographical and economical areas which have limited effect on the economies of the leading countries in the world. Regions and countries which have to be dealt with with great care are nearly all underdeveloped and autocratic. Like large parts of Africa, the new countries in the Caucasus, Iraq, Afghanistan, Pakistan, Sri Lanka, Myanmar, Indonesia, parts of the Philippines, North Korea, Haiti, Columbia and Yugoslavia. Other countries with a higher level of risk are Russia, China, some Middle Eastern countries, middle America, Brazil, Venezuela and Cuba.

The countries belonging to the developed world, the U.S.A., Europe, Australia, South American countries like Argenitina and Chile and the Tiger economies in Asia are the most promising in the world. Especially the U.S.A., Europe and Australia will remain as stable as before where as the Tiger economies and South America will see some improvement after the recent problems they experienced.

The economies of the U.S.A., Europe and Australia will continue to show growth. The growth will be lesser than in 1998 but a growth for Europe and Australia of 2-2,5% will be feasible. The U.S. economy will remain the strongest economy in the world. Continuing strong consumer demand will keep U.S. growth at 3,5-4 % in 1999.

1999 will be a good year despite negative comments about the milennium problem, lower demand, high unemployment and an uncertain situation in Russia and Brazil. 1999 does not promise to be paradise and therefore careful stock picking remains very important. And true, some sectors like some parts of the IT industry will experience some slow down but this will pick up in the fourth quarter of 1999 or the first quarter of 2000. Or South America oriented companies will see a drop in sales but a change in markets should be able to alleviate this temporary loss in markets. And finally the market will react brutally on any negative international developments and earnings warnings which will cause a correction. But the strong economic fundamentals in the U.S. and Europe and an improving world economy will stimulate economic growth.

The negative advance/decline line, more stocks loosing value then gaining value, and the high price/earnings valuations of a number of stocks should according to some analysts have a depressing effect on the stock market. This is true for conventional stocks but the majority of the stocks with a high P/E are different from the usual, conventional, companies. These companies value is based on a knowledge based capabilities. Those companies belong to software, pharmaceuticals, insurance and particular strong franchise based operations which allow a higher P/E than used to be in traditional capital and labor intensive companies. This group of companies will continue to boost the stock markets as long as their productline remains in demand.

The negative advance/decline line is more worrisome. The growth of especially the U.S. stock market and to a lesser extent the European stock markets is based on a small group of companies. These companies are mostly knowledge intensive and aimed at the home markets. A wider spread of growth would be desireable but will only happen if the cyclicals and the export and manufacturing oriented companies, or better the world economy, improve. A full recovery will be doubtful in 1999 but the first improvements, a higher demand for manufactured goods and the slow improvement of the world economy, especially South East Asia, will become visible in the fourth quarter of 1999.

1999 will be volatile as there are to many uncertainties and depressing factors around. Growth and corrections will follow but at the end of 1999 the market indices will have reached new highs and the majority of the stock market indices will end far above the current level.

The second halve of 2000 and the first quarter of 2001 will finally bring a decisive improvement in the world economy as the crisis will diminish and demand increase.

Asset allocation in 1999

The need for a balanced portfolio based on quality stocks and bonds which are able to gain a profit in a difficult and volatile year as 1999 will be even more necessary as in 1998. Weak countries and stocks should be avoided as any change in the market will be violent and large. Losses of over halve of the value are possible in such a volatile situation as we are now experiencing.

A portfolio, with limited risk, good growth perspectives, for the medium to long term and with low level management, should be structured like this; 50% stocks, 35% bonds and treasuries,10% property and 5% in liquidities. The low inflation, shorttime opportunities like repos or gilts and the promising opportunities in the fourth quarter of 1999 makes the availability of some extra capital an attractive and profitable option.

The geographical allocation could be like this; 38% in Europe, 5% in Eastern Europe, 42 % in the U.S.A., 4% in South America, especially Argentina and Chile, 4% in Australia/New Zealand, 4% in South-East Asia and 3% in Japan and Hong Kong.

You can either invest directly into the stockmarket or into one or more of the many funds which are offered by several financial institutions. These funds offer an opportunity, with lesser capital, to invest into a larger number of companies than would otherwise be possible. These funds are related to a stock market index, an industrial sector or a geographical region. This would decrease risk, optimise your possibilities and limit the workload and the commissions.

It is certainly adviseable to invest into funds if one or more of these conditions are present; with a limited sum to spend, in emerging countries, if the government regulations are complicated and if information and accounting rules are below western standards.

The markets

As mentioned before there are several opportunities to invest. In country, region, index and industry funds and/or directly into companies which are listed on a stock market.

Investments into Eastern Europe, Hong Kong, Japan, South East Asia and South America can be best done, because of the small scale of the investments of our example portfolio in those areas, through a country, region or industry fund. With the selection of such a fund you should pay some attention to who is managing the fund, what is the track record and how is the assessment of the market and the companies which are part of the fund.

The Eastern European market looks promising in 1999. The influence of the Russian crisis will get lesser as the Eastern European countries are becoming more and more part of the Western European culture and economy. Especially Poland, the Czech republic, Hungary and Slovenia are becoming more stable and are promising the biggest growth of the group in 1999.

The Baltic countries, Slowakia, Croatia, Romania and Bulgaria are still having problems with the change to a market oriented society. High unemployment, poverty, high debts and a large uncompetitive industrial sector are causing problems and are limiting growth. These countries will not see a positive change in 1999. It will take at least another 5 years before they have reached the level of Poland, the Czech republic, Hungary and Slovenia.

Hong Kong has experienced a drop in business activities and growth in 1998. They have managed to keep the currency stable and will most probably be able to do so in 1999. The close connections with China will inhibit growth in 1999. A stabilisation of the current situation is the best what can be achieved. A participation in a fund is the best way to profit from a possible improvement in the economic situation in Asia which might start at the end of 1999. An investment in Hong Kong, China and Japan is however very risky as it might take over two years before a profit can be realised.

The situation in Japan is unlikely to improve in 1999. As long as the population does not consume more, the bad debt problem is not eliminated and the Japanese pecularities of government involvement and criminal activities in the economy are not eliminated the market will remain depressed. The national economy is in a bad shape and a large number of companies are in equal difficulties. Some Japanese companies will however be able to show some growth in earnings and profits. A participation in a Japanese fund with food, retail and export oriented companies could deliver a substantial increase in 1999.

The situation in South East Asia, with the exception of Indonesia, has stabilised. This will lead to a slow recovery in 1999. A participation in a Souh East Asian fund with interests in telecommunications, transport and export manufacturing companies will most probably show the biggest improvement in 1999.

The South American situation is more complicated. Middle America, Columbia, Paraguay, Peru, Ecuador, Bolivia, Guyana, Surinam do not promise to deliver a positive development in 1999. Venezuela and Brazil could show an improvement of the economic situation in the third or fourth quarter of 1999. The new government in Venezuela and an improved oil price could deliver some improvement of the economic situation. Brazil could in the second part of 1999 also show an improvement as the currency and debt problems are solved or brought back to manageable proportions. Only Argentina and Chili seem to be able to generate some growth. The economies of both have been hit by the Asian crisis and the Brazilian currency crisis but the impact could be minimized. A stabilisation and an improvement of the world economy will substantially improve the earnings position of the Argentinian and Chilian companies.

European markets

The international problems and the European inefficiencies in the economy have been a drag on the economic development of Europe. The introduction of the Euro, the new European currency introduced by the majority of European Union members except the U.K., Denmark, Sweden and Greece, have been a positive development to Europe. It will not create short term advantages but on the medium and long term it will strengthen Europe.

The European economy or better the collection of European economies will deliver moderate growth in 1999. An average growth of 2 to 2,5 %, we believe, especially if the world economy improves, a growth of 3-3,5%, will be attainable. There are many problems but the strong economic fundamentals, the slow economic recovery in Asia, the stabilisation in Brazil, the resistance of the majority of the other South American economies to the Brazilian crisis and the positive prospects in Eastern Europe have left the European economies in a good position to expand their growth on the short term, the second part of 1999 or at last in the second quarter of 2000.

1999 will be volatile but it will have a positive direction as the largest economies of Europe, Germany and France, are climbing out of the slow growth period of the last years. The export and consumer demand will continue to be moderate in 1999. It will improve at the end of the year at earliest or at last in the third or fourth quarter of 2000.

The economic outlook for 1999 is moderate positive. But some sectors will perform very well, like financial, pharmaceuticals and services where as capital goods and basic industries will underperform.

The United States of America

The largest economy of the world has experienced an enormous growth in the last four years. The economy expanded at an averge of four percent a year. Increased export and above all very strong consumer demand stimulated growth. It seems as the growth is slowing down somewhat in 1999. This will be lesser than anticipated. The strong fundamentals and the improving world economy will support the U.S. economy. A growth of 3,5-4% will be easily attainable in 1999.

The U.S. will remain strong and the people will profit from this situation. And even more important more savings were realised in the first quarter of 1999 as the personal income rose stronger then personal spending. The increases in personal income does not fuel inflation as the rises are within the production growth of the U.S. economy.

This economy will keep on booming as the performance of companies remains good, interest rates low anf demand high. After 2000 the growth will continue as the world economy, South-East Asia, will finally experience a substantial improvement.

The stock market will mirror this performance in 1999. But volatility with a number of corrections and afterwards recoverings remain a part of the game. The stock markets will see the growth based on a wider group of companies, a rotation from computer manufacturers to oil and oil services industries and continued strength in the pharmaceuticals, financials, retail, telecommunications and some IT companies.

Attractive listings

Nearly all stock markets have a couple of interesting companies which promise to deliver a stabile growth or even outstanding growth in the coming year. These expectations should be based on the performance and capabilities of a company and any company which growth is based on a hype or special media coverage should be avoided.

The companies we list are promising for some growth next year, are based on a good product and are masterfully managed, at least according to our research. We especially like stocks in Europe and the U.S.A. as they are the most promising and less risky.

In the U.S.A. we like AT&T, Bell South, MCI/Worldcom in the telecommunication sector. In the ICT sector we like the software-services side of the business like Computer Sciences, Computer Associates, Wind River, IBM, Lucent, Cisco Systems, and Unisys. In the more hardware side we like Hewlett Packard, Applied Material and Sun Microsystems. In the financial sector we like BancOne, American Express, Citigroup, BankAmerica, Chase, Union Planters Bank, Fleet Financial, Washington Mutual Inc., American International Group, Merrill Lynch and Charles Schwab. In the retail industry we like Walmart, Kroger, Dayton Hudson, Kmart and the GAP. We continue to like in the oil / energy industry Exxon, Texaco, BP/Amoco, Mobil, Unocal and Burlington Resources. In the oilservices industry we like Schlumberger, Diamond Offshore, Baker-Hughes and Transocean Offshore. In the pharmaceutical sector we like Bristol-Myers-Squibb, Eli Lily, Johnson&Johnson, Pfizer, Schering-Plough and Beckman Coulter. We further like General Electric, Lockeed Martin, Raytheon, Textron, General Dynamics and United Technologies in the defence sector. Home Depot, Staples and Abercrombie and Fitch in the office equipment and apparel combination. In the media sector we like Time Warner, Walt Disney and the more technology focussed companies AOL, Barnes and Noble.Com and Amazon.Com. Finally we like, which are more risky and better suited at the third or fourth quarter of 1999, Intel, Texas Instruments, Federal Express, United, Dupont and Monsanto.

In Europe we like the British, Dutch, French, Swiss, Italian and Spanish stock markets and we eye the German stock market with some care. But we continue to support some German stocks. We like DaimlerChrysler and Porsche in the automobile industry. We like Siemens, Mannesmann and MAN in the electric-engineer sector. We continue to support SAP in the IT sector. We like VEBA and VIAG in the mixed sector. In the financial sector we like Deutsche Bank, Dresdner Bank, Allianz and Muenchener Ruck. And in the pharma/chemical sector we like Bayer and Schering.

In Switzerland we like Novartis and Roche in the pharmaceutical sector. Nestle in the food sector. ABB in the engineering sector. And we like UBS and Zuerich Group in the financial sector.

In the United Kingdom we like BP/Amoco in the energy sector. We like British Telecom and Cable and Wireless in the telecommunication sector. We like Pearson and Sainsbury in the publishing and services sector. In the pharmaceutical sector we like Glaxo Wellcome and SmithKline Beecham. In the food and beverages sector we like Cadbury Schweppes, Diageo and Unilever. And in the financial sector we like HSBC, Barclays Bank and the Royal Bank of Scotland.

In France we like Carrefour, Promodes and Pinault-Printemps-Redoute in the retail sector. We like Danone, L’Oreal and Sanofi in the food and consumer products sector. In the financial sector we like Generale d’Eaux and Societe Generale. And in the energy sector we like Total.

In Italy we like Generali, Mediobanca, Banca di Roma and INA in the financial sector. We like Olivetti in the services sector. And we like Telecom Italia in the telecommunication sector.

In the Netherlands we like ABN-AMRO, ING, Aegon and Fortis Amev in the financial sector. We like Unilever, Nutreco and Numico in the food sector. We like Ahold in the retail sector. We like Getronics and Cap Gemini in the IT sector. And we like Royal Dutch Shell/Koninklijke Olie in the energy sector.

To conclude this little list we like Fortis and Tractabel in Belgium. And in Spain we like Argentaria, Banco Bilbao Vizcaya, Iberdrola, Endesa and Telefonica.

IN-SE Services

Intelligence – Security Services

Categorie archief: Reports 1999