06 December 2007

The wages of war as waged by wimps

By Eric Jansson
Published by BIRN's Balkan Insight

Name a war in which the victor, having smashed a rival, feigns neutrality at the end and chooses not to dictate terms.

The answer: Kosovo, 1999.

There has only ever been one war like this – and on December 10 we will begin to learn even more than we already know about the wages of war as waged by wimps.

The crisis everyone now sees coming was built into the original intervention as orchestrated by Bill Clinton, Tony Blair and the NATO allies.

Clinton and Blair have never lost their feelings of romance over Kosovo. It remains their “humanitarian war” – a first “victory” for a NATO alliance finally bold enough to articulate its post-Cold War raison d’être: hard power with good intentions “on the doorstep of Europe”.

Independence for Kosovo was never the objective. Instead, Clinton and Blair created favourable conditions for independence, then withheld it. How much greater their power appeared: to win a war and yet defer the spoils!

With Serbia still smoking, Slobodan Milosevic declared victory. The victors roared with laughter. Yet now, from the grave, Milosevic may get the last laugh.

We are witnessing the delayed unfolding of a truth obvious already in 1999 but denied by many: Clinton’s model of American interventionism as witnessed during and after the Kosovo war was fundamentally flawed – no less flawed than the updated model more recently introduced by George W. Bush, merely different.

With Bush’s interventions, the world feels the blowback right away. With Clinton’s, we wait.

The fundamental mistake was to ignore a basic principle of war, to claim and pretend – in a different way than Bush proposes – that there can ever be “a new kind of war”.

The basic principle ignored is that, in war, opposing sides fight to dictate terms of peace. They do not fight to negotiate terms of peace afterwards in Vienna. Failed negotiations are the precise reason that war is joined, and victory is the only reason to fight. Fight to negotiate, and war becomes absurdity and atrocity rolled into one.

After a war, the window of time in which to dictate terms of peace is limited. The victor must strike while the iron is hot, allowing beneficiaries of the terms to celebrate and vanquished survivors to regain their feet while acclimatising to a viable post-war reality.

By contrast, when conciliatory diplomacy follows military victory, and terms are deferred, both victor and vanquished are denied the privileges of resolution. At this point, any return to negotiation becomes awkward if not pointless, as has been the case for Serbia and Kosovo.

Time stands still. Principal actors leave the scene. To others they leave the only important questions: who will lose what, and is there any chance of gain? These are the questions Kosovo faces today.

Many times I have walked down Bill Clinton Boulevard, in Pristina. I always look up at the big billboard bearing the former president’s image. He smiles and waves. How horrible war is, I think, and how tragic this non-peace has been.

Victims of the non-peace, Kosovar and Serb alike, struggle to understand why this strange fate has befallen them.

“Didn’t we fight a war?”

“Didn’t we win? Where is our victory?”

“Didn’t we lose? Can we still win?”

Tension grows in the awkward silence. For eight years, the interventionists have tried to fill this silence with statements and initiatives suggesting a certain momentum toward resolution.

Indeed, the perception of momentum quickly became the new key to victory after 1999, with the interventionists habitually seizing on any and all positive change as proof that their plans for Kosovo were working.

A policy of optimism prevailed, with inconvenient obstacles to success routinely denied or ignored. It was as if, when the smoke of battle cleared, a haze of Clintonian, Blairite relativism and denial blew in behind it.

As a foreign correspondent who began covering Kosovo after the war, I quickly learned it was considered rude or even taboo to describe Kosovo as “a province still within Serbian territory under international law”, which I routinely did in my articles, citing UN Security Council Resolution 1244.

Yet, at the same time, colleagues of mine who presumed that Serbia could never stake any claim on Kosovo again complained that it was equally taboo to mention “independence”, because it forced an awkward issue.

US and European diplomats irritably dismissed Russian opposition to Kosovo’s potential independence, belittling it as a minor tactical ploy. Any questions about precedents in international law they pooh-poohed scornfully.

A gulf in perspectives opened up between European diplomats in Pristina and their colleagues in Belgrade. Privately, those in Belgrade complained that their colleagues suffered from “Pristina syndrome”. Publicly, they denied their quarrels.

All sense of reality evaporated. About two years ago, in late 2005, a senior UN diplomat told me in absolute seriousness that he no longer had any doubt that Kosovo would be independent before the end of 2006, and that Belgrade and Moscow were prepared to acquiesce. Oh, really?

Worst of all, the haze of relativism and denial obscured gross neglect of human suffering and sometimes active mismanagement by international officials whose duty it has been to live within, and embellish, the big lie that Kosovo was becoming a multicultural model in the Balkans.

This lie was exposed violently in the pogroms of March 2004, at which point panic set in amongst the interventionists. It has taken until now for policymakers to acknowledge the broader consequences.

Nothing fundamentally is solved. The primary question that led to war over Kosovo – independence or no independence – is as unanswered as it was in 1999.

Fault for the war, originally, lies with local actors on the ground. However, fault for this perverse non-peace and for much of the nonsense that has prevailed within it belongs to the international actors who waged a war without the guts to dictate clear terms afterwards.

On this point, at least, Kosovars and Serbs should be able to agree.

Wild beauty, tamed prices

By Eric Jansson
Published by Financial Times, 1 December 2007

Even among UK property markets, hyped for more than a decade, few places have benefited as much as Alnwick, in north England. Ever since the magazine Country Life dubbed the Northumberland market town “the best place to live in Britain” in 2002, it has proved irresistible to many buyers.

Understated beauty, a pastoral setting near the North Sea, strong schools and services, a negligible crime rate, affordable prices, easy commuting links to upwardly mobile Newcastle upon Tyne and a fantasy factor – Alnwick Castle doubles as “Hogwarts” in the Harry Potter films – have made once-obscure Alnwick a property hound’s paradise. And, as a result, residential property prices rose 70 per cent faster than the UK average over the past five years.

Now, though, the market is starting to level out, with some agents warning investment-minded buyers off Northumberland as a whole. But nearby there may be another Alnwick-inwaiting – the little town of Rothbury, about 15 miles south-west – which has all the same advantages as well as the promise of continued growth.

With a population of about 2,000, Rothbury is a quarter the size of its better known neighbour and well entrenched in the wild beauty of the countryside, regarding itself as the “capital” of Coquetdale, an undulating agricultural area pressed up against the Northumberland National Park and the Cheviot Hills. Traditionally it has been more expensive than Alnwick, which has deterred house-hunters. And to outsiders it can feel distinctly remote. Yet all that is about to change.

Property prices are now on a level with those in nearby markets, having climbed just 20 per cent since 2002, well under the national average and the 80 per cent increase seen in Alnwick. In each town, the best two-bedroom houses now start at about £240,000; a four-bedroom detached house in Rothbury, with rich interiors and immense hillside views, is currently on the market for just less than £400,000, about the same as a four-bedroom townhouse in Alnwick.

Peter Bolam, owner of estate agency R.G. Bolam & Son, says that the market has recently become “static” due to combination of factors, including an unprecedented supply of new housing and the national credit crunch. But he thinks the long-term outlook is strong, given the town’s traditional role as an expensive area in the region and its attractions, both new and old.

Rothbury is also less remote than many people imagine. It’s true that the 30-minute drive from Alnwick involves a road that thins and bends into staggering wilderness, with moorland vistas opening up and a final descent into a deep pine forest. Yet, when one reaches the town, at the base of a valley, a separate road offers a shorter route to Newcastle. Commuting is entirely possible and increasingly popular, locals say.

“We are now on the periphery, if not just over the edge of the periphery,” says Bolam. Since Newcastle is pushing outward, this is just where many people want to be. So Rothbury is witnessing a period of dramatic development given its small size. On a south-facing slope at the far east end of town, work crews at the largest single development, Whitton View, are finishing off the construction of 97 new houses. With designs sympathetic to those in surrounding neighbourhoods, Bowey Homes, a developer acquired mid-project by Irish-owned McInerney Homes, won support from hesitant local authorities, which have long placed high priority on aesthetic and community considerations. The homes cost from £195,000 for a three-bedroom space to £335,000 for one with five bedrooms.

Several smaller developments have also recently placed about 100 new houses and flats on the market. The latest, still under way, is a tasteful conversion of the local cottage hospital into seven flats, following its closure in 2006. Although all are two-bedroom flats, they vary in price from £240,000 for an upstairs unit to £315,000 for ones on the ground floor with high ceilings and direct garden access.

These new projects are adding to the town without altering its feel. That conservative air – slow-paced, tucked between the hills, predominantly stone-built – will remain because Rothbury would lose so much of its value if it changed. “It has taken 20 years to determine how Rothbury could grow and now, as far as planners are concerned, [Whitton View] is probably going to be the last of its kind,” Bolam says.

Walking through the penthouse flat in the cottage hospital conversion, the foreman on the project says he reckons it and others will sell “in no time”. Indeed, one of the two ground-floor units was sold well in advance of completion and it’s easy to see why. The building neatly satisfies the demands of country-bound urbanites, who want their modern conveniences and minimalist styling packaged in old-fashioned frames.

Steven Bridgett, a local councillor, says officials are meanwhile working to ensure that Rothbury’s expansion does not outpace an increase in services. In most small British towns, for example, the closure of a hospital would be a signal of doom but last year saw the opening of the larger Rothbury Community Hospital to replace its 19th­ century predecessor.

The town has also expanded public bus links to Alnwick and Newcastle to provide evening and weekend services, which “was essential, especially for young people – and young people like me really want to stay in Rothbury,” says Bridgett, who is 20. “I would not want to live anywhere else.”

Similarly important for the town’s growing population of e-commuters was the installation of broadband capability in 2004, well in advance of many rural communities in Northumberland thanks to a push from proactive locals. And big strides can be seen among leisure facilities too. Rothbury Golf Club, located where the west end of town spills out into the Coquet Valley, doubled in size this year, expanding from nine holes to 18 and opening a new clubhouse. A public swimming pool re-opened after refurbishment in 2006 and, several years ago, the local tennis and bowling clubs combined to erect a new pavilion at the foot of the hill upon which Whitton View now stands. For a community of 2,000, this is remarkable progress.

New residents are already arriving, drawn not only by the new homes and amenities but also Rothbury’s historic attractions. As a functioning market town, it’s an unlikely survivor and its impressive line-up of stand-alone businesses – two banks, multiple grocers, a butcher, baker, chemist’s, florist, ironmonger, pubs, restaurants, hotels and many others – serve villages and farms throughout Coquetdale.

True, the Tesco supermarket delivery van has begun to make regular appearances, a development regarded ominously by some local shopkeepers. But Rothbury still attracts entrepreneurs who aim to settle and work locally – not just the southern buyers of holiday homes whose investments in many Northumberland villages have rendered them half-deserted most of the year.

One newcomer is Lorraine Armstrong, an interior designer who last May moved her studio to Rothbury’s High Street from Bedlington, an ex-mining town within Newcastle’s urban ring. She’s looking to buy a home too and says she sees plenty of attractive two- and three-bedroom options in town. Meanwhile, the ample stock of brand new and un-renovated houses – many of them old stone constructions – look likely to generate plenty of business for her. “So many of the houses have so much potential. I look at them and just think: ‘Oh, I could do this there and that there’,” she says.

Perhaps more importantly, the local community has given her a warm welcome. “I noticed when I was first moving in that everybody was excited, everybody was interested,” she says.

It helps that new arrivals are not flooding in too quickly, Bridgett says. You used to recognise everyone in the queue at the Co-op grocery shop and you do not any more. But people are still familiar enough that everybody still knows everybody’s business."

16 November 2007

Getting a grip in Croatia

The rhetoric of economic freedom has entered Croatian politics in a new way, just in time for parliamentary elections - but what does it mean?

By Eric Jansson
Published by BIRN's Balkan Insight

See if you can guess which leading Croatian prime ministerial candidate made the following statements.

Is it Ivo Sanader, the incumbent whose crowning achievement has been to re-brand his Croatian Democratic Union, HDZ as an internationally-minded, market-friendly party of the European centre-right? Or is it Ljubo Jurcic, prime ministerial candidate of the Social Democratic Party, SDP, comradeship of ex-communists, party of the red rose?

On Croatia’s response to globalisation: “We need to remember, we are 12 hours from Silicon Valley, and we are 12 hours from Tokyo.”

On taxes: “We have to prepare the atmosphere for tax cuts.”

On labour policy: “Croatia should have a freer, more flexible labour market including free movement of workers… and this also means importing labour.”

On work ethic: “In Croatia now there is a cult of idleness. We cannot be better off if we do not start to work harder. The government should create an atmosphere for this. It is a psychological, sociological problem.”

On industrial policy: “Yesterday I visited a state-owned company that dries fruit. The capacity of the company is enough for all of Europe, but its amortisation is too high. It cannot cover administrative costs. I asked them if they had a business plan. No business plan. Basically, they had been lazy. In my approach there is no money for a company like this, because there is no future. It’s a sunk cost – finito.”

On how to boost long-term economic stability: “We need to create conditions for a free market, for competition. Competition is the key.”

On whom he would bring into his cabinet, if given the choice of any economist in the world: “It would be Maurice McTigue. He was minister in seven ministries in New Zealand. He is a man who reformed New Zealand from a situation like Croatia’s today, with a high external debt. He is the most acknowledged expert worldwide in this area today."

McTigue, a former businessman and pragmatic anti-socialist, became a hero of free-market economists when he entered government, made huge cuts to New Zealand’s state workforce, slashed agricultural subsidies to zero, shredded the rulebook of big government and put New Zealand to work, sending productivity and profitability heavenward.

If you guessed that these quotes come from Sanader, you were wrong.

Jurcic, the Social Democrat, made the first six statements in a lengthy sit-down interview with the Financial Times, during which he looked ahead to economic reforms he would embrace if his party prevails in closely-fought parliamentary elections on November 25. His praise of McTigue came later, in an interview with Vecernji List, the Croatian daily.

What do we make of this?

The idealist’s hope is that Jurcic means what he says – that he actually wants to rattle Croatia’s status quo by “levelling the playing field”, empowering individuals and the private sector, discarding disincentives to competitiveness and disrupting official corruption.

The cynic’s presumption is that Jurcic, like every politician, wants to be all things to all people. To anti-socialists who believe that individual liberty extends into the economic sphere, he offers soundbites like those above. To anti-HDZers, he is equally happy to challenge the status quo. Yet to others including SDP lefties and undecided voters – many of whom want jobs and stability above all – he offers contradictory ideas, promising not to rock the boat too much.

Who is right about this economist who, to so many people’s surprise, is within striking distance of becoming Croatia’s next prime minister?

One senses that the average voter is perplexed, for who in Croatia isn’t both hopeful and cynical? There is so much to gain in a country that underperforms economically as conspicuously as Croatia does. Yet there is so much to lose in a country that is, after all, growing economically and that, with Sanader’s help, has succeeded in getting itself on course for EU accession just in the nick of time.

In Zagreb, one hears people mumbling about “the lesser of two evils” and “the devil you know”. Such despair sounds unexceptional, but it is the bane of the democracy for which so many Croatians and people of other nations in central and eastern Europe risked so much within recent memory. For voters, election day of all days is not a time to feign ignorance and powerlessness.

One must make some kind of educated choice, and voters are not without reference points. They should be aware of at least two.

First, whatever one thinks of the HDZ, there is little disputing that its economic policy agenda, during its past four years in government, has been overwhelmed by the daunting task of preparing for EU accession. Grilled on economic policy, Damir Polancec, deputy prime minister under Sanader, almost unvaryingly answers back with reference to the EU.

Yes, relations with the EU are hugely important, but Croatia must heed a lesson already grasped retrospectively by the EU’s newest member states: national interest must define the way to accession, not the other way around. To do otherwise is to accept inertia.

Almost nothing could be worse for the political and economic health of a once-daring transition country such as Croatia, which has the potential to be better than “like the EU”, but which must challenge its cozy, top-heavy power structure in order to compete more effectively worldwide.

Second, whatever Jurcic might do as a prime minister in an SDP-led coalition government, what he has already accomplished as a candidate is extremely important.

He has shown sufficient intellectually agility and honesty to acknowledge that Croatia has real policy choices to make within the broad EU accession track. After all, the EU now contains not just Germanic, French, British and Nordic economic models but the comparatively radical economic models of countries like Estonia and Ireland.

Indeed, Jurcic may be too agile intellectually for his own practical political good. He does contradict himself. He criticises industries that under-perform in this unforgiving age of global competition, and yet he says that the former Yugoslavia had “quite good industry”. He aims to empower small and medium sized enterprises, yet one of his policy suggestions is the creation, by the government, of advisory “project teams” – an idea that carries a whiff of central planning, though the candidate strongly denies it.

However, there is some strength in this approach. If Jurcic is of two minds, it is because Croatia is of two minds, too. There is a strong popular sense that the country can do better, and yet the electorate has a certain aversion to risk.

Perhaps Jurcic’s embrace of this contradiction makes him appealing to voters who are likewise flummoxed. Would it make him a good prime minister? It might give him a strong starting point, from which to introduce reforms, or it might render him ineffective. If the latter is true, the most likely result would be that the SDP and its coalition partners would be overwhelmed politically, much as the HDZ has been, by the immense job of preparing for EU accession.

It would be a pity to be left wondering after November 25, as one still wonders today, what Croatia would be like if it really dared to ditch the status quo, scrapping the legacy of its half-discarded socialist economy once and for all.

12 November 2007

Private debt overshadows Goldilocks scenario

By Eric Jansson
Published by Financial Times, 12 November 2007

Working papers from the International Monetary Fund usually make dry reading. But one such paper has caused a splash in Croatia, as campaigning kicks off in advance of the country's November 25 parliamentary election.
The IMF paper titled "Vulnerabilities in Emerging South-eastern Europe - How Much Cause for Concern?" published last month, argued that south-east Europe had begun to show imbalances similar to those seen in East Asia before financial crisis struck a decade ago.
In a tone more prescriptive than accusatory, the authors refrained from criticising individual governments in the region, which has experienced some of Europe's swiftest economic growth in recent years. Nonetheless, they highlighted acute imbalances in Croatia, which has a higher debt level as a percentage of GDP, and a higher current account deficit, than the East Asian average before that region's 1997 crisis, despite achieving slower GDP growth, 4.8 per cent in 2006.
With the highest external-debt-to-GDP ratio of any non-EU country in Europe and the greatest exposure to foreign currency loans, Croatia faces a growing risk of financial hiccups, the authors wrote: "The probability of a sudden stop increased between 2000 and 2006, especially in Croatia and Serbia. The probabilities are driven by the rising degree of euro-isation and the extent to which tradable consumption is 'financed' from abroad."
Ivo Sanader, the prime minister, and his finance minister, Ivan Suker, quickly brushed the critique aside. "There is no financial crisis. Croatia is servicing its debts," Mr Sanader said.
But the paper's assertions provide fresh ammunition to Croatia's main opposition party, the Social Democratic Party (SDP), which has made similar concerns central to its election campaign. Economic mismanagement under Mr Sanader's Croatian Democratic Union (HDZ) has threatened economic stability, Social Democrats say.
Ljubo Jurcic, the SDP's prime ministerial candidate and chief economic strategist, argues that Croatia's economy has immense capacity for growth, but that it has been wrongly managed. Citizens have grown accustomed to an inflated standard of living "based on household debt", he says.
The dispute sets Croatia on course for an election focused closely on economic issues.
Mr Sanader's government has done much to bring Croatia more securely under the wing of the EU, with which the country began accession negotiations in 2005. He and his cabinet ministers describe their economic reform programme within the broad context of EU accession, emphasising a need to harmonise legislation with the acquis communautaire , the vast body of EU law. The HDZ portrays any challenge to this course as a potential risk to EU entry, which the Sanader government until recently promised could be achieved by 2009.
Yet the IMF paper warns against such approaches, asserting that the "EU halo effect" lowers perceived risk, sometimes unjustifiably.
The HDZ supports central bank measures aimed at limiting commercial credit growth. Its programme also includes paying down external debt, and the government has taken steps in this direction during the past year. Yet government claims that Croatia's external debt is shrinking exclude private-sector debt. Overall external debt rose from 30 per cent of GDP 10 years ago to 85 per cent last year. Central bankers predict it will rise to 86 per cent this year.
"External vulnerabilities have begun to appear and to create risks for stability," says Ljubinko Jankov, executive director of research and statistics at the Croatian National Bank, the central bank.
With financial markets experiencing a higher than usual degree of unpredictability amid a global "credit crunch", economists have begun focusing with new keenness on the price of borrowing, especially as Croatia has a growing share of short-term debts, which magnifies rollover risk.
"If there is a big global shock, it is for sure going to be a big problem for this whole region, including Croatia," Mr Jankov says.
Economists at Zagreb's European-owned banks continue to offer upbeat assessments, noting steady GDP growth, low inflation and the central bank's strict regulation of credit growth.
"Looking at credit default swap spreads there is no evidence of concern from investors and I, for a change, actually agree with Mr Suker that the current situation is stable," says Goran Saravanja, chief economist at Zagrebacka Banka, owned by Italy's UniCredit Group.
Mr Saravanja says both the SDP-led coalition that governed from 2000 until 2003, and the current HDZ government, pursued credible courses of economic reform after a decade of authoritarian rule.
The current government showed a willingness to tackle sensitive economic issues when it re-indexed pensions. Recent reforms won praise from the World Bank, which called Croatia the world's second best reformer for last year in its Doing Business 2008 report. Next year ministers must tackle economic restructuring at the state-owned shipyards and elsewhere.
Croatia is now entering an "interesting" phase, says Mr Saravanja. "We have to see how post-2000 Croatian economic policy stands up to a downturn in the economic cycle, and we have not seen that yet."
Beneath the debate over financial risk, other economic fundamentals may be at issue in the upcoming election. Mr Jurcic, though representing the traditionally centre-left Social Democrats, sometimes casts these in terms of "free market competition". He speaks of "preparing the atmosphere for tax cuts", including a 50 per cent cut on health care contributions.
Mr Jurcic's message that small businesses should be able to operate on terms equal to those enjoyed by the country's big companies strikes a chord with citizens who still feel cheated by Croatia's "tycoonisation", the local term for corrupt privatisation in the early post-communist period.
The HDZ is vulnerable to criticism from this angle, says Joel Anand Samy of the Adriatic Institute, a free-market thinktank. "In Croatia, crony capitalism is flourishing but not entrepreneurial capitalism, and it frustrates people," he says.
Damir Polancec, the deputy prime minister and HDZ candidate, suggests such criticism is overblown and that economic results speak for themselves, with GDP growth up to 6 per cent in the first half of this year. "A few years ago, one would become an entrepreneur because there was no alternative. Today, people are coming because of ideas, coming up with their own projects," he says.
In fact, few analysts expect significant policy changes after the elections, whoever wins. Mr Jurcic embraces some free market ideas, arguing that unproductive companies should have support withheld, and calling for a liberalised labour market. But he also praises former Yugoslav industrial performance and says that aggressive reforms are "politically impossible" in Croatia. Parts of the SDP's programme still carry a whiff of central planning, such as a plan to set up advisory "project teams" for industry.
Polls suggest voters are evenly split. Many have come to realise that with EU accession dominating the country's agenda, a new government led by either main party may struggle to leave an individualised mark on economic policy.

Crowds inflict profitable pain

By Eric Jansson
Published by Financial Times, 12 November 2007

Carrying thousands of passengers on the Adriatic Sea, the towering cruise liners approach from the south. About three miles short of Dubrovnik, they stop on open water and release tender boats, shuttles that ferry passengers to shore. The tenders motor between the coast and the forested island of Lokrum, toward the walled city's small marina.
But squeezing into the marina can be tricky. Large enough to carry 150 passengers each, the tenders must navigate through a maze of little moored boats while competing for space with glass-bottomed sightseeing vessels that use the same diminutive dock. After careful manoeuvres, the ship-to-shore tenders land and unload passengers who promptly march into the old city.
The docking procedure can be complicated even in the low-season, when no more than two cruise liners arrive at once. But at the height of summer, as many as seven liners sometimes arrive within a short space of time. Then the marina becomes a waterborne traffic jam.
Crowds form on land, too. The exquisite old city, whose international fame multiplied when shells landed on it during Croatia's 1991-1995 war, heaves with pedestrians through the high season. These foreign visitors arrive not just by boat but by aeroplane, coach and car, bound for the famous walls, the gleaming white pedestrian streets, the cafes, restaurants and souvenir shops.
"In August and September sometimes we have had 14,500 tourists in the walled city, all at once. I hate it. I lock myself in my office until the afternoon when things slow down," says Erol Olcan, general manager at the Pucic Palace, the only luxury boutique hotel inside the city walls.
Such high-season crowds are both a headache and a source of profit for Mr Olcan and for many locals. They exemplify the kind of strain being felt as Croatia scrambles to accommodate fast-growing tourist demand. What happens in Dubrovnik, the country's leading tourism boomtown, also happens elsewhere along the coast, though usually on a smaller scale.
Croatia registered 53m tourist nights in 2006, up 36 per cent from 2000. Total annual visitors will exceed 11m this year and could top 12m by 2012, says Zdenko Micic, state secretary for tourism.
As the Croatian tourism industry absorbs this surging demand - which has yet to return to pre-war levels - the country's tourism offer looks less and less like its former self. "The Mediterranean as it once was," the national tourism board's slogan, evokes unhurried tranquillity, not crowds. The slogan still rings true, but a nagging question is what will happen in the long run if growth continues at the current rate.
Mr Micic says he envisages a well-managed shift toward upscale tourism along the coast and a careful preservation of quiet environments on the islands, of which Croatia has more than 1,000.
But change may prove difficult to manage. As new investment pours in apace, some critics already ask whether tourist destinations could put existing assets to work more effectively.
Dubrovnik, in the way it handles crowds, is a glaring example. Goran Vukovic, a local architectural consultant, says the walled city's traditional dockside area - the Lazarica which was formerly used for quarantining sailors - could easily be converted to receive vessels again. A short distance outside the city walls, the Lazarica houses quiet art galleries and offices. If the tenders landed there, rather than at the marina, docking would be simpler, demand for gaudy trinket shops could be displaced, and crowds within the walls would shrink - at least marginally.
Such lateral thinking, Mr Vukovic says, can still help Dubrovnik "to handle the attack of mass tourism" and keep it from becoming "a dead city or a museum like Venice".
However planners are moving in the opposite direction. Expensively reconfiguring the quay walls at nearby Gruz Harbour, they are making room for multiple mega-liners to dock at once.
"We know what sustainability means. We do not want to overbuild our capacities," says Mr Micic.
However, locals are often more sceptical. "We are learning, quite unexpectedly, that money is far more dangerous to Dubrovnik than bombshells," quips Mr Vukovic.
In some cases, rapid growth has led to imbalances between what visitors expect, what they actually receive and what local economies are able to provide.
Sometimes asked to pay the equivalent of €95 for a 90-minute walking tour, visitors to Dubrovnik complain that prices are too high. Yet prices are just as often surprisingly low, as local businesses struggle to adjust prices for a spectrum of clientele that includes mass tourists.
"You can get a pizza and a glass of wine for €7 in the old city. You can't call that expensive," says Mr Olcan.
At the same time, some locals find themselves priced out of their own market. Real estate prices have soared to around €4,000 per sq m.
Andreas Jersabeck, general manager at the Hilton Imperial Dubrovnik, a prominent hotel just outside the city walls, says the fast-rising cost of living has led to an undersupply of cooks, waiters and housekeepers, complicated by seasonality.
"There is a huge shortage of labour in the summer, yet in October people come queuing for jobs when we do not need them," says Mr Jersabeck. Seasonal workers, cannot afford apartment rents.
All agree that the solution involves a move away from mass tourism and an upgrade of accommodation across the country. Some 80 per cent of current space is camping or private rooms, and more than 60 per cent of hotels are 3-star. "We need more 4-star and 5-star rooms," Mr Micic says.

Data conundrum prevents deeper analysis

By Eric Jansson
Published by Financial Times, 12 November 2007

When the chef at the Hilton Imperial Dubrovnik sources ingredients for his menu, especially vegetables, he looks across the Adriatic to Italy. Italian produce is "better quality at a lower price", says Andreas Jersabeck, the hotel's general manager, an Austrian.
Similarly, when new hotels spring up on the coast or old ones are refurnished, domestic furniture makers compete for contracts but rarely win. Some 90 per cent of furniture purchased by Croatian hotels and resorts is imported, according to estimates by local industry leaders at Ambienta, a furniture fair held in Zagreb last month.
Such anecdotes do not surprise local economists. Croatia imports more than twice as much as it exports - and not just food, labour and furniture.
However, anecdotal evidence of import dependency challenges the rosy picture of tourism as an important driver of production in the national economy. The more local tourism services depend on imports, the more tourism's economic rewards are exported.
Everyone agrees that tourism plays an important role in Croatia's economy. It accounted for 18 per cent of gross domestic product (GDP) in 2006, and this year has been even busier, service providers say. Visiting tourists - typically 90 per cent of them foreign - stimulate activity in other sectors, notably transport and trade but also construction and agriculture. They also bring with them a fresh supply of hard currency, restraining the growth of a current account deficit that widened last year to 7.6 per cent of GDP.
But the impact of tourism across the economy remains impossible to measure precisely, sector by sector, says Oliver Kesar, a specialist in tourism economics at the University of Zagreb. This is because local statistical resources fall short.
Analysts at the Croatian National Bank and the Institute for Tourism in Zagreb have estimated that 30 per cent of what tourists consume in Croatia is imported, "but without in-depth analysis and complete data these are very rough estimations," Mr Kesar says. By this measure, of the €50 the average tourist spends each day, €35 goes toward domestic goods and services, and €15 toward imports.
How the €35 breaks down by industry locally is guesswork. Current analysis of tourism's impact on individual industries depends on a breakdown of tourist consumption published by the Institute for Tourism in its TOMAS 2004 research project, the most recent research of its kind.
Based on a survey of tourists, this research indicated that of every €50 spent in Croatia, €15 goes toward accommodation, €13 toward food, €6.50 toward transport, €4 toward drinks, €3 toward shopping and smaller amounts on entertainment, excursions and other recreation.
But to know how each of these categories breaks down into domestic and imported goods, to tighten up analysis and forecasting, Croatian economists need to build an input-output matrix of the national economy. They have yet to do so.
"Croatia has experts for partial analyses, but we need an outside expert who has built an input-output matrix before, who can lead such a huge and delicate project," Mr Kesar says.
Such an effort would once have been futile, because a substantial volume of tourism receipts flowed into Croatia's grey economy. A significant portion still does, but a crackdown on tax evasion is gradually pushing such business into the light. Authorities conducted 28,200 inspections of tourism service providers this year, finding 4,400 irregularities along the way.
With efforts like these, data improve, economists say. The result could soon be a truer picture of how Croatian tourism works, and for whom.

Investor comes full circle

By Eric Jansson
Published by Financial Times, 12 November 2007

Matt Sertic's friends had egged him on for years. Fellow Croats had quit communist Yugoslavia to live in and work in the US, and they loved it. Gloria Kolaric, one of his friends who had gone ahead, laughingly recalls telling him, "OK, either come now or I'm giving up on you."
Mr Sertic packed up. In 1985, he quit his job as an economist at a metal works in Sisak, 50km south of Zagreb. He moved first to Arizona and then to California. He could scarcely have imagined that, 22 years later, he would return as a US investor in an independent Croatia to open a factory on the same site as the old metal works.
Applied Ceramics, the Silicon Valley-based company of which Mr Sertic today is president and primary owner and Mrs Kolaric is director of quality, serves a specialised niche in the information technology sector. It manufactures spare parts of ceramics, quartz, silicon and sapphire for clients in the global semiconductor industry, leading makers of microchips.
"It was actually the last thing in my mind that we would start doing something here. There is no market for our products in Croatia. But by coincidence I met an instructor from the technical institute in Sisak who told me they were training people to work on CNC machines, which is exactly the kind of person we are looking for in the States," Mr Sertic says.
Computer Numeric Control (CNC) machines, programmable devices used to fabricate product components, are essential to the company's manufacturing process, so Applied Ceramics spotted an opportunity. The company flew 19 trainees from Sisak to Silicon Valley, taught them more, and now employs them on a new production floor based in privatised facilities at the metal works, which Applied Ceramics purchased and converted. It has invested $12m in the effort so far.
After years of trepidation, US investors have begun to discover Croatia, just as American tourists have begun to do in greater numbers. Moreover, as Mr Sertic's return to Sisak exemplifies, Croatia's large and well-educated diaspora continues to find new ways of doing business back in the old country. Both the US and the diaspora are rich potential sources of investment.
Applied Ceramics has arrived as part of the first big wave of post-war US business investment. Entirely by chance, at the same Sisak metal works, Texas-based Commercial Metals Company has just moved in as well, with a $90m investment in a newly privatised steel pipe manufacturer. That purchase was preceded last year by the $2.5bn acquisition of Pliva, a Croatian drugs maker, by Barr Pharmaceuticals.
"We have seen three significant US investments in Croatia in the past 18 months," says Robert Bradtke, the US ambassador in Zagreb. "This is a sign of increasing interest in Croatia by American investors. After a period four or five years ago when they might have thought business here was too difficult, they now see real opportunities in Croatia."
Foreign direct investment in 2007 already looks certain to exceed last year's figure of €2.7bn, the country's biggest year ever for FDI. Yet Damir Polancec, deputy prime minister, expresses a common view when he says that Croatia's overall level of FDI is "unsatisfactory".
This eagerness for FDI does not necessarily imply a simple investment environment. Mr Sertic says Applied Ceramics' investment has been costlier than planned and more difficult than anticipated. "In the beginning it looked like we might save some money by coming here, but now it seems we will not," he says.
Incentives offered by the state can be illusory, he warns, and because the rule of law is weak, "negotiation" with officials is commonplace. "You find everything is more or less negotiable. If you yell more, you find that you may pay less. If you do not yell, you will certainly pay," Mr Sertic says.
He praises his local private partners as "very forthcoming, very eager to help". But he adds that unfamiliarity with the needs of IT companies such as his own has led to some difficulties, such as hesitancy at local banks to offer credit lines. After a time-consuming search, Applied Ceramics reached an arrangement with Austrian-owned Hypo Alpe Adria.
Applied Ceramics may be in a better position to weather unwanted surprises than some other foreign investors. Mr Sertic's Croatian background means that he has a network of trusted local friends to call upon. As for costs, even if they rise marginally above the expected level, heavy global demand for the company's specialised products provides a degree of cushion.
Despite some difficulties, Mr Sertic is evidently bullish on Croatia. In addition to the factory building where Applied Ceramics now works in Sisak, he has purchased a neighbouring tower block previously used a metallurgical institute. He plans to rent it out as workshop space for young local entrepreneurs.

Healing the wounds of war

By Eric Jansson
Published by Financial Times, 12 November 2007

When Croatia won its place last month as a non-permanent member of the United Nations Security Council, Vuk Jeremic, Serbia's foreign minister, was quick to congratulate Zagreb. Mr Jeremic hoped the appointment would "lead to a better understanding of problems related to the Western Balkans" at the UN.

Belgrade's warm reaction to its erstwhile rival's diplomatic achievement would have been hard to imagine not long ago.

But bilateral relations have thawed noticeably since Ivo Sanader, as Croatia's newly elected prime minister in 2003, visited Belgrade on a sensitive mission of reconciliation. Serbia returned the favour five months ago, when Boris Tadic, Serbia's president, visited Zagreb and apologised to Croats for war crimes committed by those "acting on behalf of my people".
In the new atmosphere quarrels are few, and prickly issues relating to the war that ended 12 years ago tend to set leaders of the two countries on diplomatic tiptoes.
Even when Mr Sanader took the unusual step of flying to New York last month to protest vigorously against the lenient verdicts against three Serbs tried at the UN's International Criminal Tribunal for the Former Yugoslavia, he treated Serbia gently. In his plea before the General Assembly, Mr Sanader had harsh words for the former Yugoslav regime of Slobodan Milosevic, the late president, and a critical message for the Tribunal. But he said "Serbia" just once, referring to Belgrade's "democratically oriented political forces".
Mr Sanader openly courts those forces in line with the European Union's hopes for harmony in the region. His repeated insistence that the status of Kosovo, Serbia's breakaway province, cannot be resolved internationally "without Belgrade" echoes standard EU rhetoric but is also a prize for Vojislav Kostunica, Serbia's prime minister, a conservative nationalist who has made retaining Kosovo his chief goal. Zagreb is cautious over recognition of Kosovo's independence over Belgrade's objection but would accept any EU-wide decisions. Mr Sanader also speaks of his desire to see Serbia included in the European Union and NATO.
Yet the official warmth between Zagreb and Belgrade is decidedly cautious. Leaders on both sides know what lurks beneath. For many citizens of Croatia and Serbia - especially those who have minimal contact in business or private life with their former Yugoslav compatriots - bitterness from the war era remains.
Contact is less common than it might be, because transport links remain poor. Regular air flights between the two countries were never reinstated after the war, meaning, for example, that Serbian citizens travel with difficulty to Croatian holiday spots on the Adriatic shore.
On the road network, Croatia seems to pretend that Serbia does not exist. Travellers heading east from Zagreb search in vain for signs pointing toward Belgrade. On the former Yugoslav-built Brotherhood and Unity motorway running between the two cities, signs over the eastbound lanes are marked for Slavonski Brod, a city inside Croatia, not even halfway to Belgrade. By contrast, Zagreb is heavily signposted on westbound routes out of the Serbian capital.
Such attitudes are not conducive to trade, which is minimal and growing only slowly. Croatia trades more than twice as much with Slovenia, its western neighbour of 2m people, as it trades with Serbia, a market of 8m not including Kosovo's 2m. Some 5 per cent of Croatian exports go to Serbia, but just 1 per cent of imports come from there.
Still, if one factor points the way out of this post-war era of cautious diplomacy and limited interaction, it is business. Companies working in both countries usually say national rivalries do not extend into this area.
A small but fast-growing example is New Technology, the Croatian daughter company of ComTrade, a Serbian-owned IT manufacturer and distributor. ComTrade robotically assembles its patented personal computers in Serbia and sends up to six truckloads per week to New Technology, along with machines from Fujitsu-Siemens, Toshiba and Acer.
Petar Pintar, New Technology's general manager, says that in its first year of operations the company has captured 1.5 per cent of Croatia's IT market. He says ComTrade's owner told him at the start to follow local laws zealously and to minimise risks of bureaucratic obstruction, and so far has been pleasantly surprised.
"I really do not have the impression that anything is hard to do. One customer, once, told me that he did not want to do business with a company working from Belgrade. But that is one out of 1,000," says Mr Pintar.
A much bigger boost to Croatian-Serbian trade could be seen if Agrokor and Delta, respectively the two countries' largest private-sector companies, follow through on their year-old agreement to merge their region-wide retail operations.
In addition, last year's updated Central European Free Trade Agreement brought Serbia into the pre-EU trade bloc, which already included Croatia, with a new customs union soon to take effect.
Along with the momentum of private sector investments, regional integration could strengthen the practical economic side of a bilateral relationship that is strategically close yet remains politically awkward.
Potential for rancour remains. Proceedings are to open six months from now in Zagreb's genocide case against Belgrade at the International Court of Justice. Some Croatian diplomats say dropping the lawsuit would help to improve bilateral relations, but any such move would risk a popular backlash.

'Telecommunism' helps power stock market growth

By Eric Jansson
Published by Financial Times, 12 November 2007

Even by the dynamic standards of central and eastern Europe, Croatia's capital markets have lately been growing at an extraordinary pace.
Nowhere has this been more evident than at the Zagreb Stock Exchange, a floorless exchange quartered in one of the capital's new glass office towers.
Within the past 18 months, the ZSE has risen out of obscurity to claim a place alongside exchanges in Warsaw and Prague as one of the few in the region to attract the attention of big fund managers worldwide. Trading in Zagreb is tiny when compared with big markets, but it is accelerating at a clip.
"At the beginning of the year, we had between 300 and 800 trades per day. Now, we have 3,000 per day, with a peak volume of 8,000," says Roberto Motusic, the ZSE's managing director.
Just a handful of big sales brought about this surge in trading, driven by both foreign and domestic demand.
The first of these was a prolonged bidding war last year for Pliva, a drugs company co-listed at the ZSE and London Stock Exchange, during which Barr Pharmaceuticals of the US outbid Actavis, an Icelandic company, to acquire Pliva for $2.5bn. Later in 2006 came an initial public offering of shares in INA, the state-owned oil company in which Hungary's MOL was already the strategic investor. Recent months brought big share offerings from Pliva, which sold its veterinary arm Veterina through the exchange, and local construction giant Ingra, among others.
By far the latest, greatest lure for local retail investment through the ZSE came one month ago, when the state privatised 32.5 per cent of T-Hrvatski Telekom (T-HT), the former state-run fixed-line and mobile operator controlled since 2001 by Deutsche Telekom.
The state targeted citizens in T-HT's sell-off, and 358,406 of them purchased shares, making this the largest initial public offering in the country's history. Such was the clamour for a slice of the company that roughly one-third of citizen buyers took out loans to buy shares, says Tomislav Vuic, deputy president of the management board at Erste Bank in Zagreb.
The telecom sale immediately became a milestone in the development of local retail stock trading, as "sophisticated investors who really understood the market" combined with first-time investors "opening their eyes" to generate a bonanza, says Mr Motusic.
Buyers purchased shares from the state at 265 kuna each and then watched as the price jumped to 419 kuna on the first day of public trading. The price soon settled closer to 380 kuna - still an overnight gain of 43 per cent.
For many who bought shares with borrowed money, payback was therefore quick and easy.
Yet here controversy creeps in. Critics of the T-HT sale quickly questioned the initial share price set by Croatia's government. "Telecommunism," squawked the Feral Tribune, a weekly newspaper, portraying the IPO as a thinly-disguised cash handout from the governing Croatian Democratic Union in advance of parliamentary elections.
Indeed, government ministers had transparently promoted the sale beforehand, as an opportunity for a "good experience" akin to the INA sell-off 11 months ago, in which citizen buyers also made a tidy overnight profit.
Yet whatever the T-HT sale's political dynamics, Mr Motusic argues against seeing it primarily in these terms. At a time when some local political leaders still mutter Marxist misgivings about private investors in stocks and shares, calling them "crooks" and "speculators", he says the current HDZ-led government is the first in Croatia's post-communist era to back the ZSE enthusiastically. "How can I say I am not happy with that?" he adds.
Capital market growth is restrained by central bank rules on commercial credit growth. Alarmed when domestic credit expanded by 24.7 per cent last year, central bankers this year require lenders to place substantial deposits with the bank, for any money lent in excess of 12 per cent growth this year.
Bankers grumble about this intervention, but Mr Motusic says it is helping to shift demand to the ZSE.
"If you have such a restrictive monetary policy and such a hunger for new projects, such a booming real estate market and other sectors, then it is just a question of time when some other type of capital will start seeking ways to invest. It can only be done through venture capital or through the capital market. This really gives a push to our development," he says.
Public share offerings are therefore increasingly common, alongside the privatisation of state-owned companies. Meanwhile, the growing base of active buyers - in contrast to the one-off buyers of INA or T-HT shares - makes the market more liquid.
"Five years ago we had 5,000 to 10,000 Croatian households actively investing in stocks. After INA, it was about 35,000. Now it could be 100,000," Mr Motusic says.

26 October 2007

The allure of the edge

By Eric Jansson
Published by Financial Times, 27/28 October 2007

yborg was not to blame. We should have brought a map. As we drove north through the last city in Russia before the Finnish border, the road signs failed us.

Midnight had come and gone. The summer sky bathed the world in a strange northern half-light. Tinted in cobalt blue, sleeping Vyborg wore a sad expression on her face, pockmarked by darkened factories, concrete blocks and grim little discos.

We trawled through vacant streets, guessing at junctions, doubling back when the way ahead looked doubtful. With no one awake to offer directions, we succumbed to the spell of the bordertown.

One is easily lost in such places, with or without a map. Truer to say, one feels a certain displacement, the dimensions of which transcend geography. The gain and forfeit history yields everywhere are magnified where nations meet to turn their backs on each other. Mutual admiration, fear and longing colour the scene.

Even the name, Vyborg, hinted at such displacement. My knowledge of the place was sketchy, but the name looked Germanic. Clearly this had not always been Russia. Indeed it was Finland once, yet the landscape surrounding us was purely post-Soviet urban provincial, with its dreary buildings, crumbling streets and crooked street lamps.

Then we found a road leaving the city and the scene suddenly altered. A bridge lifted us over smooth waters – the eastern extreme of the Gulf of Finland. Glancing over a shoulder, I briefly spied an astonishing castle rising from a small island and, dimly in the background, a row of fairy-tale façades.

The vision vanished as suddenly as it had appeared. The road bent away and soon we were passing through thick forest towards the border.

Between the pines, the night was black. But when the road emerged along the Saimaa canal – where ships cross the border – navigational lamps on the water’s surface glowed green and the natural half-light penetrated the wood, faintly revealing the shapes of Russian soldiers standing among the trees. We had stumbled upon a place that truly fit the description “neither here nor there”. Later, looking into its history, I understood this was no surprise. Vyborg and the Karelian Isthmus have long defied mastery. The spell of the frontier is strong.

I have known this since making a fleeting visit to the Iron Curtain as a boy. As we neared the end of Austria, sign after sign warned US citizens against proceeding further but we carried on towards Czechoslovakia until, across a fence, we could look with fear and wonder into another world. The border was delimited as much within ourselves as it was across those fields.

Erasing such inner borders can be difficult. The borders that more often matter to us run through ordinary places, along man-made frontiers.

They run by places like Daugavpils, Latvia, near the Belarusian border. In Soviet times, visits by outsiders to Daugavpils were rarely allowed. In today’s independent Latvia, prejudice still sets it apart. Nationalists deem this, their country’s second largest city, “not real Latvia”, sneering at its Russian-speaking majority.

Yet reality discredits bigotry. Daugavpils bears many scars but it is not the occupied wasteland its detractors describe. Wars have often wrecked it but today the city is a surprisingly pleasant riverside settlement. Vast parks vie for space with a massive fortress and architecturally jumbled streets. Concrete blocks blight many areas but, elsewhere, timber and brick constructions remain, an echo of early modern times.

The chatter in streets and shops is Russian, Latvian, Polish and Belarusian. Once prevalent, Yiddish is sadly absent, as almost everywhere in central Europe.

Love the jumble or despise it? I thought it better to admire Daugavpils and mourn it all at once. She is broken, yet she is beautiful.

The world is full of such places. Some go forgotten for a time until conflict recreates them, and then they may disappear again. Witness Brcko, Bosnia, a town sometimes cursed, sometimes blessed to exist in the crotch of borders between Croatia and Serbia – peaceful in the Yugoslav era, wild thereafter.

When I first visited Brcko, its location between the borders had made it a haven for retail pirates and smugglers of all stripes. Townsfolk I met bragged openly about their illegal exploits. Their sprawling market, nicknamed “Arizona” by US soldiers, was an infamous mecca for Balkan pirates. Crushed by conflict, the town was defaced by bullet holes and blast craters, and yet in the leafy centre square it felt remarkably cosy. Not all was ill.

Since then, Brcko has blossomed into a success story much of Bosnia would like to emulate. Arizona is cleaned up but continues to thrive. The wealth it generates gets reinvested locally. Bosnia, Serbia and Croatia may all be rivals but for the moment seem to see the surrounding borders as an asset.

Perhaps such borders, in a growing European Union, will someday vanish altogether. I shall not hold my breath, yet far stranger things have happened.

At least twice, during a period of residence in Berlin, I felt a chill of delayed recognition while walking down the Friedrichstrasse. My mind elsewhere, I had strolled blithely across the Zimmerstrasse without paying any mind. I turned around to look at an empty intersection. There within recent memory had stood Checkpoint Charlie, epicentre of a political, economic and ideological schism that gripped the globe not long ago and haunts us still.

Once diminished, can such a border reappear? Surely it depends whose memories are at stake, and whose futures.

This summer, my wife, children and I packed into the car and drove to Coldstream, Scotland, for an annual cavalcade. A handsome bordertown, Coldstream hugs the edge of the River Tweed – a fine place to spend a summer day.

From the raised riverbank, a tourist looking south sees graceful slopes leading towards the Cheviot Hills of Northumberland National Park. But local eyes see something more: one of those slopes is Branxton Hill, from which King James IV of Scotland led a suicidal charge against English troops at the Battle of Flodden in 1513, a mythic moment of desolation for the Scots. Do not imagine it is forgotten.

We followed as the cavalcade paraded through town in a hail of cheers. It crossed the river and retook the hill, where they prayed for the battle dead. Their lead man cut a piece of turf from the hilltop with a sword. He wrapped it gently in the Saltire, the Scottish flag, and they rode off.

Back in Coldstream, when the riders returned, a woman sang a riverside lament. The turf was unwrapped and placed on the ground. The act suggested Scottish blood returning to Scottish soil. Onlookers watched silently. When most had walked away, two witnesses stayed behind. They approached the turf, crouched beside it and gazed at it. One took out a digital camera. Zooming in, he captured an image.

Some borders are more easily erased than others.

20 September 2007

Golf and whiskey – pomegranates and lemons

By Eric Jansson
Published by Financial Times, 20 September 2007

Perhaps golf and whisky should not mix with business. That they frequently do is a boon to Scotland’s business tourism industry.

Business trips, many of them international, yield more than a fifth of overall tourism receipts north of the border, according to a survey commissioned collectively by Britain’s national tourist boards. The published figure for 2006 was £911m, but because business trips so often generate leisure tourism activity the real total is almost certainly higher.

Fabled courses to play, legendary distilleries to tour and “exclusive use” castles that can be rented for corporate events help keep demand high, official promoters say.

Accordingly, Scotland punches well above its weight in this area. Edinburgh last year hosted more international association meetings than any other small city in the world, according to the International Congress and Convention Association (ICCA). Such meetings are the tourism industry’s biggest money spinners, luring delegates by the thousand, typically outspending leisure tourists by more than a factor of two.

Yet in a sector that witnessed 11 per cent growth last year worldwide, Scotland conspicuously lacks capacity, and the market shows signs of strain. Higher capacity markets such as Vienna and Paris, Europe’s top destinations for association meetings, ably absorb extra volume; they registered growth of 12 per cent and 30 per cent respectively in 2006. Scotland and other British markets saw comparatively minor increases.

“A lot of markets are growing faster. We cannot afford to be complacent,” says Caroline Packman, head of the business tourism unit at the national tourist board, VisitScotland. Author of a rebranding effort under the slogan “Scotland means business”, she adds that a long-term effort to preserve and boost competitiveness is underway.

A £1bn wave of private and public investment currently underway should help. Scotland’s leading conference and exhibition centres, the city-owned Edinburgh International Conference Centre (EICC) and Scottish Exhibition and Conference Centre (SECC) in Glasgow, plan dramatic additions worth a combined £142m. Other prime venues such as Gleneagles, the Perthshire hotel and golf resort that hosted the G8 Summit in 2005, and the Old Course Hotel in St Andrews are expanding or upgrading, too.

The EICC’s plans carry a particular sense of urgency. Opened in 1995, the innovative space plugged a gap in the capital’s conferencing market, where previously “the only places to go were hotel ballrooms,” says Sandy Pearson, marketing manager. Twelve years later, after counting 1.5m delegate days – the conferencing industry’s equivalent of hotel overnights – the 1,200-seat centre sees loyal clients outgrowing its space.

Expanding in the middle of Edinburgh’s financial district has proved difficult. Plans to break ground earlier this year broke down when Cala-AWG, a construction company, suddenly backed out citing higher than expected costs. Ms Pearson says the move came “totally out of the blue”, frustrating EICC executives. Last week, they sent fresh recommendations to Edinburgh city council, requesting consent for essentially identical expansion plans.

By contrast, nearby Glasgow boasts ample capacity for big events. The facility’s five big halls and iconic 3000-seat Clyde Auditorium, known locally as “the Armadillo”, generate reliable profits. Yet with the SECC operating at 70 per cent capacity, Mr Closier sees room to grow, as demand spills over from crowded markets elsewhere.

“We get people who have tried to put on a conference in London. They come up here and say it is a breath of fresh air,” Mr Closier says.

His planned addition – with designs by architects Foster & Partners, funding and planning consent all in hand – will be Scotland’s largest arena. Due for completion by 2011, it promises to offset demand for concert space in existing SECC buildings while providing a new sporting venue for the Commonwealth Games in 2014, for which Glasgow is a candidate city.

The Commonwealth Games, though not directly impacting business tourism, could also help the industry by adding hotel rooms, Mr Closier says. For big events, scarce accommodation has sometimes caused problems, as in 2005 when 14,000 members of the European Respiratory Society descended upon Glasgow. Some participants required bussing to and from hotels in St Andrews, 82 miles away, says Mrs Packman.

Additional flexibility could be provided in the form of a high-speed rail line between Glasgow and Edinburgh. Such a link would cut travel time from the current 50 minutes to as few as 12, says Laura Gordon, director of the publicly-funded Glasgow-Edinburgh Collaboration Project.

Sceptics of collaboration include Mr Closier, who notes the contrasting natures of medieval Edinburgh and modern, “rebellious” Glasgow. He warns against “trying to make a pomegranate out of an apple and a lemon”.

But Ms Gordon argues that Scotland’s distinctive markets must embrace intercity collaboration as an internationally proven model for the industry. Successes in Copenhagen and Malmö, Germany’s Rhine-Ruhr region and other markets could show the way forward for Edinburgh and Glasgow, she says.

17 September 2007

The first post-modern bank run

There is a reason why people do not paint landscapes in a hurricane. The next gust is too likely to change the scene. Also, one gets wet. For the same reason, there is little purpose in describing in detail the ongoing run on Northern Rock, the British bank suffering most from the great credit crunch of 2007.

Know this, and you know enough: when “the Rock” – now nicknamed “the Crock” by wags in Britain’s financial press – unveiled its deal last week with the Bank of England over access to emergency funds, it effectively announced its own demise.

Will anyone catch Britain’s fifth largest mortgage lender, currently in freefall? The Rock’s share price fell by more than 30% last Friday. As of this moment on Monday morning, fewer than three hours into trading, we already see an equivalent drop.

Depositors are lining up to withdraw funds from branches across the country, just as they did on Friday and Saturday. Invisibly, holders of “Internet savings accounts” are doing the same online, and confusing queues in cyberspace force frustrating waits there, too.

A secondary question is, if no one is prepared to catch this bank in free fall, what will the mess look like later, for whom? Watch the herd. Analysts have gone from describing this last week as a potential “one-bank-collapse” to describing it today as a “systemic threat”.

Efforts by executives and policymakers to renew confidence among depositors so far seem to be falling on deaf ears. This is the nature of any bank run, but we have some novel ingredients, too.

Alistair Darling, the Chancellor, went on BBC Radio 4 this morning to reassure depositors that, because of the Bank of England’s pledge of emergency funds, the Rock really did have enough money for them, and their deposits were secure. In theory, this kind of reassurance persuades depositors that they need not withdraw.

However, in practice, the reaction has so far been the exact opposite. The Bank of England’s pledge and Darling’s reassurances, as received by depositors in a highly competitive market, imply no reason not to withdraw.

Add to this the fact that online depositors, since their relationships with the bank exist solely in the “virtual” realm of cyberspace, evidently feel no customer loyalty whatsoever.

The crisis at Northern Rock is therefore neither merely a matter of one bank’s potential fall, nor merely a source of systemic risk. It is Britain’s first post-modern bank run, with individuals showing how very little interest they have in their relationships with institutions, public and private. Institutions therefore fail utterly to speak effectively to disinterested individuals.

So while many people now say that trust in the system is breaking, it would be more accurate to say that trust was already broken, over years, in advance of this crisis. An erosion of trust created the conditions for today’s scene. The risk was foreseeable but remained invisible as long as the financial markets’ liquidity boom continued.

By anchoring its operations in the fickle wholesale credit market, the Rock showed how shallow its commitments really were. Today, by withdrawing funds so rapidly even when the risk of non-collection is zero, depositors are showing equally shallow loyalty to the bank.

It shall be interesting to see where else, in the current credit squeeze, real market values get forced downward by the glaring commitment deficit in post-modern society’s moral balance sheet.

07 September 2007

Picking bones with Bono

Gideon Rachman, the Financial Times' chief foreign affairs columnist, wonders aloud why Bono the pop singer and global aid campaigner is so maddening. He proposes that it has something to do with Bono's embrace of the "mainstream NGO view of poverty", but he finds the problem difficult to disentangle. I write back here:

Gideon, surely you are onto it with your "mainstream NGO view of poverty" point.

The view is very peculiar: it is a sort of corporatised or perhaps collectivised version of the moral argument that sacrifice is required. It says that, yes, the vice president of a London bank is the neighbour of the starving herdsman in Darfur, and that neighbours must love each other as themselves. However, as a solution to bridging the gap in power and means between such neighbours, it proposes neither the immediate lowering of the banker nor the immediate ascent of the herdsman. Instead, it proposes a systemic fix, with governments and corporations acting as proxies for the morally compromised banker. The proposed fix is paradoxical. It implies guilt on the part of the fortunate individual but mitigates the need for reaction by the individual, since reaction is ultimately worked out through taxation or adjustments in sales prices. It also implies that material/circumstantial equality (or at least similarity) is morally required of all people; in other words its content is at very least neo-Marxian even if its form is globalist and pro-market. These paradoxes grate.

However, they grate much more coming from Bono, who embodies corporate bohemianism. He has sung many songs well and communicated important messages through them. But in his political role he sells a brand of moral imperative which is paradoxical -- and yet he sells it as the real thing.

But it gets worse. Bono escapes criticism, because he is neither stupid nor naive. Pressed, I expect he would acknowledge that his branded morality is not the real thing. However, it may be the best try that existing systems of corporate and collective power can manage, in terms of effectiveness and popular marketability. His personal defense would be that politics is the art of the possible, and that terrible suffering and need in much of the world are real -- an effective defense.

All this frustrates the critic. The quarry has got away, and the problem remains unsolved. The problem is that the critic is struggling to reckon with his own failure, perhaps like Bono's, to differenciate and correspond between the mechanics of collective responsibility and the imperatives of individual morality. It is a frustrating position. But don't blame Bono for it. He only appears to be the personification of a problem we all share. Moreover, he is trying to do something about it.

That he falls short is unextraordinary.

21 August 2007

Shelter from the storm?

By Eric Jansson
on FT Alphaville, 21 August 2007

How will emerging markets respond to the evolving global crisis in financial markets? The question was posed today on Alphaville, the FT’s blog for market banter. Alphaville notes uncertainty as to whether emerging markets could become safe havens during the current storm. It also notes that local risks complicate such markets, giving as an example a spike in kidnappings in Columbia.

The question Alphaville poses is worthwhile. However, it is also indicative of the tendency among fund managers in highly developed economies to view EM as a homogeneous investment zone, whereas, in fact, EM is an extremely heterogeneous area of investment.

The temptation in the current crisis, as always, is to oversimplify in order that the response can be kept simple. Investors in EM prefer large-cap investment vehicles large-cap, that is, within the context of EM economies and they tend to analyse market behaviour accordingly, with a focus on macro trends. By contrast, the example of a spike in Columbian kidnappings implies that micro factors "on the ground" can also become driving forces. This is a fair point because a big challenge in judging EM performance is understanding the interplay between solid macro and fluid micro factors.

EM macro-micro interplay is frequently irrational. EM across the board often feel pain when risk-aversion grows in highly developed markets, despite continuing improvement of local fundamentals. Why? Because developed-market investors in EM stocks and bonds often categorise their EM holdings as "high-risk", and broadly these investors move out of high-risk investments globally when risks in their home markets increase. This phenomenon can amplify risk in EM capital markets. It also magnifies the difficulty of understanding local market volatility and reacting to it profitably. Likewise, micro to macro, when local micro problems spike under globally risk-averse circumstances, EM frequently experience a degree of foreign capital flight.

Beneath the froth of foreign capital investment, obviously, EM reactions are diverse because markets are diverse. The important question today is how important this froth is in each individual market, and how well each market can stand on its own if that froth starts to evaporate or curdle.

In smaller emerging markets, as the current credit crisis plays out, the reaction might well be small; froth is minimal in such markets because large-cap vehicles are scarce there. By contrast, some froth is likely to evaporate or curdle in larger emerging markets, yielding a measurable reaction (note the Asian and Russian reactions) yet at the same time local capacity to weather the storm can ultimately prove greater in large markets with substantial local capacity.

The only answer, at the end of the day as in the US credit market is to understand individual investments in their real context. In EM, the real context means the local context of specific EM economies, companies and industries. There will be some uniform trends, but impact will be diverse, dependent upon proportional levels of exposure. Meanwhile, for clues, look at the way individual EM stock markets have responded so far. Those least touched by big foreign funds show trends divergent (positively) from those we are witnessing in major markets worldwide. The bad news is that some such markets could be real safe havens, yet some undoubtedly are not, and data describing exposure to froth is scarce.

Such are the realities of economic interdependence in a complex world.

14 August 2007

Keepin' it real with Jesus

Sermon at St Cuthbert's Church, Norham
12 August 2007

Dear Lord, I pray that what I say now may be of true service to these my brothers and sisters in Christ. Inspire our hearts, forgive our errors and fill us with your Holy Spirit. Amen.

Perhaps you heard this past week about Pat and Sheena Wheaton. They are a couple of New Zealanders, and they have a new baby boy. There’s been a little problem over his name. Pat and Sheena thought long and hard about it. Somehow, after deliberating, they decided that they would name him “4Real”. That’s a name: “4Real” – the number 4, R, E, A L.

This might have passed unnoticed, but there was a public ruckus about it. The New Zealand government registry refused to accept “4real” Wheaton’s given name, because it had a number in it, and names – the registry said – are to be made up of letters only.

This sparked a public debate. Pat and Sheena Wheaton got upset. They said they would never give up, that no matter what the registered name might be, they would keep calling their boy “4real”. But the registry held its ground.

So they called him “Superman” instead. (No word yet on what they are calling Superman in the privacy of their own home.)

I am pretty conservative when in comes to names. Laura and I chose pretty straightforward names for our children. But still, I sort of hope that Pat and Sheena still call their boy “4real”. It is a terrible name, but it’s very hip, and it seems to give a nod to one of the ideals that looms very large in the popular consciousness nowadays. That ideal is authenticity.

The way we value authenticity can be tracked, like almost everything else, by whether or not we are willing to pay for it. And it seems, increasingly, like we are willing to pay for authenticity – or at least for appearances of authenticity. One of a thousand examples: more and more people will pay for “organic food” because it seems to them more real, more authentic – untainted. And there is even a name for this amongst people of my generation, especially people who like rap music. They say that they are “keepin’ it real”. To those of you who don’t know, a rough translation of “keepin’ it real” is “staying down to earth” and not pretending to be something that you are not. Of course, the way this plays out in an image-driven consumer society has very little to do with “keepin’ it real”, for real – it’s about projecting an image of plausible authenticity. Try to get your head around that one.

Our three readings today are not just about projecting images of plausible authenticity. They are about REAL authenticity. The stuff that lasts forever, that remains even when our final defences collapse and scatter in the wind. The scary stuff.

● First we have Isaiah. He prophecies about God’s demand that our worship be real, our prayers genuine, and our religion true. There is worrying stuff here for religious people:

“New moon and sabbath and calling of convocation –
I cannot endure solemn assemblies with iniquity.

Just to remind you, we are told this is the voice of God:
“Your new moons and your appointed festivals
My soul hates.
They have become a burden to me,
I am weary of bearing them.
When you stretch out your hands,
I will hide my eyes from you;
Even though you make many prayers,
I will not listen;
Your hands are full of blood.”

Strong words! So what does God want instead of religious graces?

“Cease to do evil,
Learn to do good.
Seek justice,
Rescue the oppressed.
Defend the orphan,
Plead for the widow.”

Isaiah says God wants us to walk the walk, not just talk the talk.

● OK, next we had St. Paul, writing to the Hebrews. Again, the message is about authenticity. Paul writes about keeping the true faith even in barren, hostile circumstances. His example is Abraham and Sarah. Paul writes that Abraham was so old he was “as good as dead”. Sarah was barren. They lived on the move, in tents – but they believed in God’s promises. They believed in a “city that has foundations, whose architect and builder is God… a heavenly country” and God gives them a start, with the birth of Isaac. Even after that, of course, Abraham’s descendants live as “strangers and foreigners on the earth – people seeking a homeland”.

In other words, they are keeping it real. They want to live in a way that does not compromise their faith and hope, despite all the troubles found in this world. Many of us might call this unrealistic, naive. But because they long for such a life, “God is not ashamed to be called their God; indeed, He has prepared a city for them.”

● Finally, our Gospel reading – Jesus, as recorded by St Luke.

Here Jesus talks about living for eternal things, but he makes crystal clear that living for eternal things means living practically – with freshness, immediacy, urgency, even fear. “Be dressed for action. Have your lamps lit!” he says. “The Son of Man is coming at an unexpected hour.”

What a great trio of readings. We are listening to total harmony here. St Paul is in harmony with Jesus. Jesus is in harmony with the prophet Isaiah.

So what!– It’s only natural these readings are in harmony with each other. They all come from the Bible! Jesus was a Jew. He agreed with the prophets of the Old Testament, no doubt. He read them as a child. As He grew up, He taught these prophecies in the synagogue, and He looked for their fulfillment. Naturally Jesus is in harmony with Isaiah. And then, St Paul: of course Paul is passing on Christ’s teaching, right? Simple. So what!

But no. Not “so what”. The harmony is much, much better than that. This is not merely the same song sung by three different singers – Isaiah, Jesus and Paul. It’s not even just variations on a theme. Each one is fulfilling the last. Think about it like this instead: Isaiah sings a song – he sings about an entirely new kind of music than the one that Jews knew at the time. Then Jesus comes: Jesus is the new music. Then, Paul. Paul is dancing to the new music. Why? At the time St Paul was writing, the whole Church was just learning to dance to the new music, and in his letter to the Hebrews, Paul is telling his fellow Jews how to do it, how it came to be and how it fulfills the ancient hopes of Abraham and Sarah.

And it does.

Perhaps it isn’t said frequently enough: Christianity isn’t really about Christ’s teachings. I am skating near thin ice here, but this is still solid: the core teaching of Christianity is not the things that Jesus said. His teachings matter a lot. They matter hugely. They are indispensable to our faith. But the core teaching of Christianity is Jesus Christ himself. Not just what he said, but what He is and who He is.

Christianity is about The Authentic Man, the divine incarnation. It is our effort to embrace the whole challenge and opportunity that the divine incarnation poses to the human race.

Our faith is about Jesus’ birth, His life among us, His murder – and then about the way in which He overcomes sin and the grave so that we can be reconciled with God, in Him. At its highest point, our faith is about the Resurrection. If you have doubts about Easter, than you should have doubts about everything we are doing here today, too, because Christianity without the Resurrection is not Christianity. So our faith is not, at root, about Christ’s teaching – it is about what God accomplishes through the real life of his Son. “Keepin’ it real.”

And Jesus, like no one else, is great at “keepin’ it real.”

The spirit of our faith is very different from what our instincts might suggest it should be. Our instincts tell us that what is good is also pretty mild. We like “nice”, because it is unthreatening. Almost instinctively, in this age anyway, when people think of “spirituality” they think of quiet spaces – they might think of meditation: dim lighting, some candles, deep thoughts and so on. I love it when people say, “He’s very spiritual.” Or “Wow, she’s so spiritual.” We mean something important when we say such things, but in some ways we are talking nonsense. We are ALL spiritual, ALL the time! ALL aspects and moments of human life are spiritual: the notion that somehow a person can flick the “spiritual” switch on and off is a fallacy of modern secularism. In a way, it’s just like the mistake we like to make about Jesus: we think Christianity is about His teachings, in isolation – no it’s about the whole Man. It’s the same way with every human being: our spirit is not found in what we say alone, or in how we behave – our spirit is wrapped up in our whole being – it has a grip on us… we cannot just think or act our way out of it.

So it matters very much. Each of us needs to ask: What’s driving me today? Is it the Holy Spirit? If it’s not, then by definition it is some spirit that is not holy.

But Jesus is the ultimate holy man. Really, the ultimate holy man. But he’s not “spiritual” in the dreamy – forgive me, in the “hippy” far out “spiritual” kind of way. In fact, He is terribly direct. He is an arresting guy. He is not “nice”. Love is far greater than “nice”. Jesus is Love, and yet sometimes He seems to be doing just about everything a man can do to wreck His reputation with the powers that be, and He does not mind. The Beatitudes are often remembered as His grand statement about the nature of the Kingdom of Heaven – it is our world upside down: the first are last and the last are first, the meek inherit the earth, the poor in spirit get blessed, and so on. Well, you might have noticed that in our Gospel reading today Jesus is at it again.

We love to call Jesus the Lamb, the Shepherd, the Son, the Lord – all true, all excellent, deeply honest and accurate ways to describe Him. But here Jesus takes an opportunity to describe Himself, and to whom does He compare Himself? Does He compare Himself to a King? A Shepherd? Does He say, “You know, I’m so gentle and sweet – I’m as gentle and sweet as a Lamb.”

No, Jesus does exactly the opposite. He says, “I’m like a thief.”

He’s going to crawl through the darkness. He’s going to break through the windows of our souls and, when we’re not expecting it, the light is going to switch on. He’s going to rob us of our clothes; today in this church we should be as spiritually naked before God as Adam and Eve were in the garden, after they first sinned. Jesus strips us of our pride – not just our pride but our very ability to feel pride in anything or anyone other than Him, in whom everything can be perfected, in whom everything can be redeemed.

Our reading from Luke ends at chapter 12 verse 40. But if you read further, you find out that Jesus is not just like a thief – He is also an arsonist of sorts. He’s going to set our old house on fire, and let our sin burn away in the inferno. “I have come to bring fire on the earth, and how I wish it were already kindled!” That’s what He says.

Christ, we should remember, comes with the refiner’s fire. This is what it means: your wretchedness, your inner pain, the horrible sins you have left behind and cannot ever imagine acknowledging in public now, the sins that are painful even to recall to yourself in private, the pride that makes you fearful, that tendency you have to grasp onto perishable things just for a moment’s comfort – ALL those things will burn away in the refiner’s fire.

And you ask yourself… can I stand it?

Evidently it’s not going to be easy, because sometimes we are too much like the people described in Isaiah’s prophecy.

There is this tendency – I mean, I have this tendency, and I know I’m not alone – to go to Church and then just go through the motions. It’s grotesque, but Christians so often succeed in making Christ seem boring, in making Him seem inauthentic. You know what that is? It’s dead religion. It’s the same thing Isaiah describes, and God abhors it. “Trample my courts no more. Bringing those offerings is futile.”

But the true practice of our faith is not futile. Christ is not boring. If you think the Son of God is a drag, then you need to be reintroduced to the Man Himself.

Our whole existence – any shred of justifiable hope that we have in this life – is justified not by ourselves, or by the goodness of Creation, but by Jesus’ self-sacrifice – the sole offering that God, by definition, will never abhor – that one offering that can never become empty or idolatrous, because it is the authentic, perfect sacrifice, accomplished in the holy humility that characterizes eternal glory.

You and I have an opportunity today, right now, to keep it real. We are going to celebrate Holy Communion together. Let’s not do this as dead religion. Let’s do this, truly, in Jesus Christ – with the acceptance of His sacrifice in the front of our minds, with urgent humility and repentance in our hearts, with the Holy Spirit defining our relationships with each other, and with acceptance of what all this will mean for us when, after the end of this service, we walk out the door. With God’s help, we can do all this, and I pray that we shall.

So let us pray:
Lord, you plead with us through your prophet Isaiah,
You confront us in the person of Jesus Christ,
You challenge us as your Church –
to keep it real,
to give up niceties and replace them with authentic grace, real and unscripted love.
Give us your grace.
Continue to teach us in the ways of your true love.
Be with us now in this service
And as we prepare to come to your table.