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When mere pessimism is an optimistic analysis

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As grim as last Friday's forecast was in Forecast for Iraq and Afghanistan: taking the pulse of the war on terror, it was the most optimistic, if such an adjective is possible under the circumstances, of a range of options. At its simplest, our present focus on Iraq has done double damage, i.e., for what it has set in motion by its missteps in the region, and for what it has allowed to drift or receive insufficient attention due to the focus on Iraq. Add to that the remarkable inefficiency and squandering of resources in the prosecution of what we have set out to do, and you have a challenge on your hands. If I can turn to it in time, I will elaborate, but for now here are citations I find pertinent to the threats at hand:

Hell to Pay
By Rod Nordland, Babak Dehghanpisheh and Michael Hirsh
Newsweek, Nov 8, 2004 issue

U.S. Hopes To Divide Insurgency
By Bradley Graham and Walter Pincus
Washington Post
October 31, 2004

Why Iraq Will End as Vietnam Did
By Martin van Creveld
Defense and the National Interest
2004

GIs Lack Armor, Radios, Bullets
60 Minutes, CBSNews
Oct. 31, 2004

Provincial Capital Near Falluja Is Rapidly Slipping Into Chaos
By EDWARD WONG
New York Times
October 28, 2004

Video Shows G.I.'s at Weapon Cache
By WILLIAM J. BROAD and DAVID E. SANGER
New York Times
October 29, 2004

Rights Group Warned U.S. of Munitions Cache
By William J. Kole
Associated Press
October 31, 2004

Munitions Issue Dwarfs the Big Picture
By Bradley Graham and Thomas E. Ricks
Washington Post
October 29, 2004

Eyewitness to a failure in Iraq
By Peter W. Galbraith
Boston Globe
October 27, 2004

Quarterly Report of the Office of the Inspector General, Coalition Provisional Authority (CPA-IG)
Stuart W. Bowen, Inspector General
Office of the Inspector General Coalition Provisional Authority
October 30, 2004
Go
here for the report, as well as acronyms, definitions, and all appendices

Mortality before and after the 2003 invasion of Iraq: cluster sample survey
Les Roberts, Riyadh Lafta, Richard Garfield, Jamal Khudhairi, Gilbert Burnham
The Lancet
Published online October 29, 2004

Iraq's Prime Minister Faults U.S. Military in Massacre
By EDWARD WONG
New York Times
October 27, 2004

Unprecedented Peril Forces Tough Calls
President Faces a Multi-Front Battle Against Threats Known, Unknown
By Barton Gellman and Dafna Linzer
Washington Post
October 26, 2004

US Hoped for Bin Laden Breakthrough: Newsweek
Reuters
Oct 31, 2004 05:50 PM ET

New Video Shows Kidnapped U.N. Workers in Afghanistan
By Keith B. Richburg
Washington Post
October 31, 2004

"Misunderestimating" Terrorism
By ALAN B. KRUEGER AND DAVID D. LAITIN
September/October 2004 issue of Foreign Affairs
October 12, 2004

China Lays Into 'Bush Doctrine' Ahead of U.S. Poll
By REUTERS
October 31, 2004
Filed at 10:07 p.m. ET

Gordon Housworth



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Nyang'oma to Chicago: expectations of largesse span eight thousand miles, two cultures and two governments

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The dry rankings of Transparency International's 2004 Corruption Perceptions Index do not do justice to the palatial scale of individual graft by the Big Man, tolerated so long as the "haves" -- the tribe, clans and families of the big man -- shared the wealth in progressively smaller measure until the "have nots" lived in squalor under the eye of the police and security forces.

No "poll of polls, reflecting the perceptions of business people and country analysts, both resident and non-resident" can have operational meaning until one understands the sway of the likes of Kenya's Daniel arap Moi and Zaire's (now Democratic Republic of Congo) Mobutu Sese Seko and their patronage systems that were seen as a duty of the governor and a right due to the governed. Those that did not fulfill their duties were soon replaced by someone who would.

I was always amused that Mobutu, born Joseph-Désiré Mobutu, would rename himself Mobutu Sese Seko Nkuku Wa Za Banga. If one is speaking of his perennial assaults on the Congolese treasury, the name would surely fit as the translation is "The all-powerful warrior who, because of his endurance and inflexible will to win, will go from conquest to conquest, leaving fire in his wake", or Mobutu Sese Seko for short.

The difficulty in rooting out this behavior was delightfully illustrated by the expectations of Kenya's Nyang'oma district on their Big Man once he gains office, none other than Barack Obama, a Democratic senatorial candidate in Illinois whose campaign has "pledged to improve education, fight for more jobs and make health care more universally available." The people of Nyang'oma would like all of those as well in addition to having their "dirt roads paved and their houses equipped with electricity and running water."

"We know he's got his constituency there in America, the people who elect him," said Said Obama, 38, the uncle. "But we're another constituency. He won't want to see us suffering."

"He is Kenyan," Ms. Onyango [Barack Obama's stepgrandmother] insisted, prompting the other relatives to nod. She showed photographs of a young Mr. Obama climbing aboard a matatu, the crowded minibuses that local people use to get around. Another photograph in her stash featured Mr. Obama hugging Ms. Onyango, and she held up one that had the baby-faced politician beaming beside his other Kenyan relatives.

It is not a free-loading attitude that people here are expressing when they speak of largess coming their way after Mr. Obama takes office. It is a feeling of extended family: those who make it help those left behind. Mr. Obama may have never lived in Nyang'oma, or elsewhere in Kenya for that matter, but he is one of them in the popular imagination and surely, relatives say, he will want to share his great success with his kin.

If Obama makes good on his intent to visit Kenya a third time after the Nov election, he "can expect thousands of people to turn out to greet him" with as I like to say, "one hand up and one hand out."

At the Nyang'oma-Kogello Secondary School, near the Obama family home, students are fairly well versed on Mr. Obama's Senate race and full of pride that a man they consider a local appears on the verge of victory... "We hope that when he wins, we all win," said Lawrence Were, 17, a student at the nearby high school. "It's not all that easy for an African to go so far. We consider him our man."

The school's definition of victory is "refurbished classrooms and a new science lab at the school," a library with textbooks and, of course, more electricity and running water.

"People say there will be great development once he wins. They say the road will be fixed and that there will be an airport so he can land right here direct from the U.S."

Just like Daniel arap Moi did for his town, Eldoret, even as he was plundering Kenya with the Goldenberg export compensation scheme and other excesses which cost Kenya the equivalent of a third of its annual GDP.

One wonders if Barack Obama, raised so very far from Kenya, knew what expectations he innocently set when he came to explore his ancestry.

Illinois Democrat Wins Kenyan Hearts, in a Landslide
By MARC LACEY
New York Times
October 25, 2004

Transparency International
Corruption Perceptions Index 2004
20 October 2004

Gordon Housworth



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As the truth changes so must the deception if the lie is to remain believable

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Part 3

An especially interesting statistic in deception is that the number of deceptions rise at the moment of attack approaches. If one becomes sensitive to a pattern of deception, it becomes much easier to field a countering move. Some political readers might say "but we know the date of the election," presuming it to be the 'attack.' I submit that the answer is far more subtle than that. Knowing that an election is forthcoming (known event in time) allows one to be especially attentive to the growing number of deceptions and ruses that will arise. Further, a presidential election is merely the culmination of a campaign comprised of many dispersed 'skirmishes' each of which has its own unique constituency and psychological context and is thus sensitive to varying deception. A stupendously effective (leave aside whether you think it accurate or fair) disinformation effort was the Swift Boat affair that put the Democratic candidate off-message and on the defensive. I believe that I heard Rove remark, if memory serves, that, 'My job is not to be fair. My job is to re-elect the President.' An appropriate response, I might add. Fairness has little to do with war. Successfully countering the deception at hand is.

Knowing that the rules of motivating an electorate have fundamentally changed and that Denial and deception (D&D) has entered the mainstream is the first step, The second it to understand what D&D seeks to do:

  • Disrupt one's ability to "observe, orient, and decide" (Boyd's OODA Loop)
  • induce inaccurate impressions about capabilities or intentions, causing the target to apply intel assets inappropriately, and fail to employ all assets to best advantage

Countering deception is hard because "those being deceived do not systematically consider alternative explanations for the evidence they observe, and incorrectly weigh the evidence they do have." "People often dismiss important evidence, prematurely prune alternative hypotheses, and jump to conclusions. These make people and organizations easy to deceive." Since deception is relatively rare, it is not surprising that people are poor at countering deception:

  • Poor anomaly detection (missing contextual cues, or prematurely dismissing as irrelevant or inconsistent with other intel)
  • Misattribution (attributing deception event to collection gaps or processing errors)
  • Failure to link deception tactics to deception hypotheses (noticing anomalies fails to recognize them as indicators of deception)
  • Inadequate support for deception hypotheses (failing to link an assessment of an adversary's deception tactics and goals to the adversary's strategic goals; i.e., failing to test denial or deception course of actions (COAs) against the available evidence)

Start with Heuer's Psychology of Intelligence Analysis, one of the great masterpieces of understanding the analytic thought processes of intelligence, of overcoming cognitive biases, and of stepping away from preconceived mind-sets and mental models. Heuer presents a protocol called Analysis of Competing Hypotheses (ACH) that I have used for both signal and sprignal (deception) analysis:

  • Identify the possible hypotheses to be considered
  • List the significant observed evidence and assumptions for and against each hypothesis
  • Prepare a matrix with hypotheses across the top and evidence down the side
  • Refine the matrix
  • Draw tentative conclusions about the relative likelihood of each hypothesis
  • Analyze sensitivity of the conclusion to a few critical items of evidence
  • Report conclusions
  • Identify milestones for future observation that may indicate events are taking a different course than expected

In what I see as a parallel of Whaley applied to Wohlstetter, Stech and Elsasser have sought to extend Heuer's ACH so as to account for cognitive factors that make people poor at detecting deception.

Their concern was that ACH can "lead one to be more susceptible to deception." In particular, Heuer's 'Draw tentative conclusions' step recommends weighing hypotheses in light of evidence, a process that already promotes reasoning errors rising from "everyday irrationality." The problem with 'weighing hypotheses in light of evidence' is that in conventional analysis, it neglects the individual base rates of both evidence and hypothesis, and in counter-deception conditions, it fails to flag an evidentiary false positive rate. In order to adapt ACH for counter-deception, Stech et al has modified ACH so that "hypothesis generation includes appropriate denial and deception COAs, and the ACH is used to elicit or estimate both" 'weighing hypotheses in light of evidence' and weighing evidence as signal, noise, or sprignal.

Suffice it to say that any major political party will have to master these techniques in countering deception, but learning is not easy. I am reminded that David Kahn's 1992 analysis of Pearl Harbor's intel failures (where we did not merge diplomatic and military data and depended on Magic decryptions to the exclusion of warnings contained in non-Sigint intel) "has taught the United States to gather more information and evaluate it better." Subsequent responses to new adversaries have not borne that out.

Psychology of Intelligence Analysis
Richards J. Heuer, Jr.
CSI, CIA 1999

Midway Revisited: Detecting Deception by Analysis of Competing Hypothesis
Frank Stech and Christopher Elsasser
Mitre, June 2004

Gordon Housworth



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Deception at its best: the opponent is quite certain, very decisive, and wrong

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Part 2

The ultimate goal of stratagem is to make the enemy quite certain, very decisive, and wrong. -- Barton Waley

Rove's most effective efforts strike me as similar to Allied deception efforts in WW II that earned them such success: "controlled the key channels of information, had superior intelligence and received feedback on their deception operations, centralized controlled over their deception planning, effectively practiced proven deception tactics, ensured deception operations were subordinate to strategic objectives, maintained stringent secrecy, and provided enough time to execute deception plans shrewdly." Democrats have much to learn.

Careful analysis of patterns within sprignals had the potential to accelerate timely warning of surprise attack. Whaley's later analysis extended to 68 cases of surprise attack in 20th century warfare, in Stratagem: Deception and Surprise in War. Harris noted:

"Whaley found a high positive correlation between the intensity of deception (counting types of channels utilized for intensity) and the likelihood of surprise attack, and a positive correlation between the intensity of deception and the intensity of surprise, using, for example, casualty ratios in war as a proxy for intensity of surprise."

Returning to Wack:

After concluding the nonaggression pact with Hitler in 1939, Stalin was so convinced the Germans would not attack as early as 1941 -- and certainly not without an ultimatum -- that he ignored 84 warnings to the contrary. According to Barton Whaley, the warnings about Operation Barbarossa included communications from Richard Sorge, a Soviet spy in the German embassy in Tokyo, and Winston Churchill; the withdrawal of German merchant shipping from Soviet ports; and evacuation of German dependents from Moscow.

Deception, be it military, diplomatic, or political, has four components:

  • Security
  • Plausibility
  • Adaptability (however elaborate, deception must adapt to the changing situation)
  • Integration (deception effort integrated at all levels and with all means)

Using these components, Every deception effort is comprised of only two basic parts: hiding the real and revealing the false. Hiding the real is called dissimulation. It is the covert part, that which is concealed from the enemy. Revealing the false is called simulation. It is the overt part, that which is falsely revealed to the enemy as truth. Dissimulation and simulation are always present together in any act of deception.

The US Army has extracted ten maxims from game theory, history, and deception writings that make a good basis for planning a deception:

  1. Reinforce his beliefs (Magruder's Principle)-It is generally easier to induce a target to maintain an existing belief than to entice him to change his beliefs.
  2. Target his mind--There are limitations to human information processing that are deceptively exploitable.
  3. Use multiple forms of surprise-- Surprise can be achieved in the following categories: size, activity, location, unit, time, equipment-(SALUTE) intent, and style.
  4. Feed all the enemy's sources (Jones' Dilemma)-- Deception becomes more difficult as the number of sources available to confirm the real increases.
  5. Create Noise only for a purpose--Too much erroneous information can obscure the deception effort.
  6. Use deception selectively--It may be wise to withhold the employment of deception capabilities until the stakes are high.
  7. Deception is continuous--Deception activities should be sequenced to portray the deception for as long as possible.
  8. Feedback is a must--An intelligence collection scheme should be employed to determined if the deception is being adopted, rejected, or countered.
  9. Focus on the enemy's action (The Monkey's Paw)- Deception efforts may produce unwanted actions from the enemy and friendly units.
  10. Don't make it easy for him--If the target's intelligence collection system has to work for the indicators, the greater the chance he'll believe them.

I have yet to make a systematic analysis of such politically manipulative actions in the current presidential election campaign, but they all seem to be present.

Part 4

Stratagem: Deception and surprise in war
Barton Whaley
MIT Center for International Studies
1969

Codeword BARBAROSSA
Barton Whaley
MIT Press, 1974

Gordon Housworth



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The value of counter-deception and early sprignal detection in political elections

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Part 1

Deception planning and deception countermeasures, sprignals included, deserves a deeper dive to highlight its omission from analyzing commercial business endeavors and parsing political spin control. It is exceedingly sad to see it relegated to diplomatic and military spheres when it can shed advance notice that saves investors' money and clarifies voters' opinions that would other wise fall prey to spoofing and disinformation.

After Shouters and charlatans was posted to a major political blog, Daily KOS, I received questions about sprignals and news analysis, and positive comments on the critical analysis of this log, the latter of which were posted back to KOS. I got the impression from their post-backs that these readers were expecting to find bias here but did not, might have assumed the worst but found the logic and sourcing sound, with some noting that they had bookmarked us. I take that as success and proceed.

In 2002, I highlighted the use of sprignals and deception in Enron & Arthur Anderson: to comply is not enough; those who generated sprignals, those who were taken in by them, and those that were powerless to halt them:

Enron Corp. mimicked this model of strategic surprise in which deliberate "signals" designed to lull or defeat warning systems were issued in ever increasing volume. These signals took a variety of forms such as "designer investment" vehicles, obscured financials, and corporate pronouncements. Enron’s auditor, Arthur Andersen, alternatively abetted the creation of these signals or validated them as genuine.

It was startling that despite their "professed independence and variations in technique," prominent sell-side analysts overwhelmingly reached the same, wrong, conclusions about Enron in 2001 up to the eve of its bankruptcy. The skeptics were independent and boutique sell-side analysts, short-sellers, and consumer/NPO groups intent on looking through Enron’s seeming achievements for fundamental financial red flags. The latter were drowned out in what is the only sprignal business application that I can find.

I see even less structural application of counter-deception to the increasingly politicized, media-message driven political sphere. I submit that counter-deception will be become mandatory for major political parties if their adherents are not to be unduly influenced or siphoned off, for whatever one thinks of Karl Rove, aspiring Democrat and Republican political managers are tracking and preparing to implement his "remarkable strategic skills, [his] understanding of the media's unstated self-limitations and a willingness to fight" with greater ruthlessness than most.

Required history:

Roberta Wohlstetter pioneered intelligence warning systems by applying Claude Shannon's telecommunication concept of signals and noise and his design of information systems to send and receive signals amid noise. Wohlstetter's Pearl Harbor concluded that the problem was "too much noise" rather than a lack of data, i.e., it was analysis that failed: "We failed to anticipate Pearl Harbor not for want of the relevant materials, but because of a plethora of irrelevant ones."

Contributing causes were invalid assumptions, faulty appraisal and dissemination of intelligence, and inadequate security measures. Behind these was a lack of war-mindedness at this Pacific base halfway around the world from areas where momentous events were happening. Adm. Husband E. Kimmel, the Pacific Fleet commander, admits to it: "We did not know that in the Atlantic a state of undeclared war existed (Admiral Kimmel's Story, p. 2, New York 1955). The War and Navy departments also shared in responsibility for the disaster, not only by withholding intelligence but by assigning low priorities to critical equipment for ships and units in the Hawaiian area.

Pierre Wack drives home this need of awareness of one's greater surroundings in his discourse on scenarios, what he calls the "gentle art of reperceiving."

In times of rapid change, [companies] effectiveness and speed in identifying and transforming information of strategic significance into strategic initiatives differ just as much [as their skill in turning research into product]. Today, however, such a capacity is critical. Unless companies are careful, novel information outside the span of managerial expectations may not penetrate the core of decision makers' minds, where possible futures are rehearsed and judgment exercised.

As Roberta Wohlstetter points out, "To discriminate significant sounds against this background of noise, one has to be listening for something or for one of several things. One needs not only an ear but a variety of hypotheses that guide observation". Indeed, the Japanese commander of the Pearl Harbor attack, Mitsuo Fuchida, surprised at having achieved surprise, asked, "Had these Americans never heard of Port Arthur?" (the event preceding the Russo-Japanese War of 1904 -- and famous in Japan -- when the Japanese navy destroyed the Russian Pacific fleet at anchor in Port Arthur in a surprise attack).

Barton Whaley used the model in his analysis of Soviet attempts to predict an impending German attack, Operation BARBAROSSA. Whaley's first analysis cited 12 cases of strategic surprise to which William Harris believed that "the Russian warning intelligence challenge in 1941 was to differentiate genuine "signals" of impending invasion from "spurious signals" from deception planners (defensive military preparations and deployments, non-hostile intent, etc.) within the context of other information "noise."" As a "minimum of 8 or 9 of these 12 warning challenges involves deliberate "signals" designed to lull or defeat warning systems," Harris suggested that Whaley "utilize a tripartite model: signals, spurious signals (sprignals), and noise."*

Part 3

*Private email, 17 March, 2001, from William R. Harris noting his derivation of sprignal building upon the work of Roberta Wohlstetter and Barton Whaley.

Pearl Harbor: Warning and Decision
Roberta Wohlstetter
Stanford Univ Press, 1962

Gordon Housworth



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A global Islamic network linked by France and close to China

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Prediction: A global Islamic network uniting Muslim nations, linked by the communications and nascent commerce channels of al-Jazeera, powered by the infrastructure tools of France, the Jackal Nation, and allied with China in diplomacy and economic power against the US.

Caught your breath yet? Rarely am I handed the elements of forecast as I was the three citations below, all published the same day by Hong Kong's Asia Times, one of those excellent but largely unread, or under-read, papers by US readers, especially when it comes to "Southwest Asian politics [that] are so thinly, slowly, and sporadically reported in the high street news of the US and Europe (bit better in Europe but not substantially better)."

In fact, Muslim nations strain noted that when "Malaysian Prime Minister Abdullah Badawi called for the creation of a global Islamic network last week, the story went uncovered in the Western media in general and the United States in particular, the nation that ultimately could be affected most by such a move." I wonder how we can persist while being so ignorant. The answer that I do not like, but which I often accord to underperforming firms, is that they live at the courtesy of their competitors.

Muslims have in recent centuries blamed exogenous forces for their plight rather than themselves, a condition which al Qaeda has exploited, but now Abdullah says that "greater cooperation between Muslim countries is the key to lifting them out of poverty and changing the image of Islamic nations,... that Western nations have no real interest in improving the lot of the world's Muslims" and of course Abdullah would like to vie for the position of "leader of an Islamic development movement."

Consider the usual claims that global trading and financial systems are "corrupt and unfair" and that Organization of Islamic Conference (OIC) is powerless in multilateral negotiations in the light of the Iraqi war and the GWOT which:

have already been perceived as anti-Muslim in many parts of the world. US foreign policy has been conducted with a callousness and ignorance of long-term ramifications that is damaging its credibility throughout the Muslim world; the failure of the current administration to understand the motivations and exigencies of Muslim nations is seen as symptomatic of the unbridgeable gap between the West and Islam.

Much of the influence of the US in the past has come from "soft power" rather than military might. Soft power is the principle that a nation's ideals, customs and government exert a certain gravitas abroad. Nations have looked to the US as a shining example of democracy, freedom and the good life. One need look no further than the Malaysian flag to see this influence; its 13 red and white stripes on a blue field are modeled on the United States' banner.

How far we have fallen and how great the success of al Qaeda despite how many of their number we kill. Abdullah's business network, incorporating Islamic business principles, is a gradual but "direct threat to the long-term interests of the United States and its status as the world's only superpower."

Whereas the League of Arab States are "all standing on tables fighting with one another," Qatari-based al-Jazeera, a marketing franchise built by conflict in Palestine and Iraq, "is one entity that everyone across the Arab world watches. They may be the only remaining base of Arab nationalism that exists. Arabs are proud of that."

While "Arab ruling elites [have] imported a development model based on economic growth, but have taken care to empty it of its progressive substance," al-Jazeera, launched in 1996, has played "a leading role" in "liberalizing Arab political culture [and] now rivals giants such as Cable News Network (CNN) and the British Broadcasting Corp, particularly in the Arab world." Think of marrying Amazon's product distribution capability with that franchise. Despite US distaste for al-Jazeera, I would do just that. If we don't the French will.

Christopher Hitchens has previously referred to Chirac as a jackal and in a Tim Russert CNBC interview on 16 Oct 2004 with Graydon Carter, referred to France as a Jackal Nation. France has continued to cultivate Arab relations in opposition to US interests, has the appropriate telecom and communication infrastructure, employs standards that are already in use across the region, and will strike more lucrative deals, personal and governmental, than will the US.

Susilo Bambang Yudhoyono, or SBY, Indonesia's first president chosen through direct elections and a devout Muslim, will be pressed by the US for an "immediate and unpopular dogmatism of the "crusade" on terror, whereas he can bask in the "long-term pragmatism and shared understanding" of a China that can offer "near-equal economic incentives" and also sees international terrorism as a lesser threat in the face of "long embedded, regionally popular secessionist groups."

We must make an about face or prepare to face the music.

Muslim nations strain at US business leash
By Keith Andrew Bettinger
Asia Times
Oct 14, 2004

Arab nationalism tunes into al-Jazeera
By Thalif Deen
Asia Times
Oct 14, 2004

SBY through Chinese eyes
By Jeffrey Robertson
Asia Times
Oct 14, 2004

Gordon Housworth



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France, with Germany in tow, seeks to use China to outflank both the EU and the US

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In France 1, EU 25: It's not your grandfather's Common Market, I mused that France would retarget its nuclear Force de Frappe at certain EU capitals as the EU's European Commission president-elect, Jose Manuel Durao Barroso, upended the cart on the six largest EU members by appointing "a record number of women and politicians from smaller European countries to high-profile posts" while relegating the "EU heavyweights," France and Germany, to "comparatively lightweight portfolios."

In noting that France will make a Realpolitik reassessment of the sea change as it revises its approach to the EU, a group whose predecessors it had helped create and who it expected to lead even as the EU expanded eastward into former Warsaw Pact nations, I now see that reassessment as being a two pronged affair of a flanking outreach to China, and a retrograde Franco-German effort to turn the EU back to their preferred direction, if not control.

French and German motivations are strongly tied to their countries' economic weaknesses while they join with China is seeking to create a multi-polar world that checks US power. China, already the EU's number two trading partner after the US, will reciprocate as it attempt to gain entry to military and commercial purchases within the EU.

Expect to see a flurry of new Sino-French initiatives such as the plan to develop joint "Linux-based platform that can be used in multiple environments, including PCs, servers and PDAs [supporting] online services and communication applications." The Chinese Ministry of Science and Technology will work with the French Atomic Energy Commission (CEA), Bull, and STMicroelectronics.

While EU ministers formerly lifted sanctions against Libya, they were "unable to reach an agreement to end the bloc's 15-year embargo on selling arms to China" even as France "had pressured heavily for lifting the embargo." While the EU says that there is "no linkage between the lifting of the arms embargo and human rights," it would like Chinese ratification of the Convention on Civil and Political Rights. "Officials in Brussels say the EU is only likely to lift the embargo once other, equivalent export control measures are in place. This is likely to occur sometime early next year."

China and France appear keen to expand their relations. To celebrate the 40th anniversary of the establishment of diplomatic ties between the two countries, France is now holding "China Year" and China is reciprocating with one for France. Proclaiming their affinity to the rest of the world, the French government invited Chinese President Hu Jintao as a state guest to Paris this past January. Moreover, just before the Taiwan presidential election in March, France and China conducted their first-ever joint naval military exercises.

For China, behind this recent diplomatic warmth is the Taiwan problem. China aims to encourage France further to lift the EU embargo on arms exports to China, which would concern the US because it might destabilize the regional strategic arrangement in North Asia and enhance China's ability to attack Taiwan.

Paris expects that close relations with Beijing would bring new business opportunities to its military-industrial complex, including Airbus Industrie, the major rival of the US aircraft maker Boeing in the world's skyliner markets. Other commercial, non-military benefits would also flow to France. Furthermore, France needs to secure strong support from China over the location of the International Thermonuclear Experimental Reactor (ITER) project, the world's first sustained nuclear fusion reactor venture.

Notice to US manufacturers and standards holders:

  1. Expect China, with or without French assistance, to create standards that are unencumbered by US patent or technology licensing fees.
  2. Expect France to support that effort wholeheartedly as it also attempts to create systems over which it has sway and that escape license or royalty payments to US firms.
  3. Expect France to push export of those systems into areas where it has diplomatic reach, such as Francophone Africa
  4. Expect France to use alliances to limit US power and strategic reach in cases where it can no longer exercise unilateral dominance.

France and China form Linux alliance
By Ingrid Marson
ZDNet (UK) October 12, 2004, 9:11 AM PT

EU: Arms Embargo On Libya Lifted, But Decision On China Delayed
By Ahto Lobjakas
Radio Free Europe/Radio Liberty
12 October 2004

Sweating bullets over new Chinese train
By Kosuke Takahashi
May 13, 2004
Asia Times

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Starter questions to begin -- just begin -- to understand country risk

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Continuing from part 3, Brief introduction to China risks:

Here is a starter list of questions for the novice to begin -- just begin -- to understand the risk in your country of interest. Or you can charge in with your risk unmeasured and unpriced. Many do.

1. Judiciary

  • Is there an independent judiciary?
  • Is there a mechanism for independent arbitration?
  • Is the country subject to bilateral treaty with the US?

The PRC does not have an independent judiciary.

2. Intrastate conflict between state, province and enterprise zones

  • Which country to the casual observer seems more risky?

You can never, ever judge this from afar. Yes, there is enormous interference from Beijing and enterprise zones, but substitute the relevant government agency, and this pertains to almost any almost-developed nation; even democracies like India, Argentina, Brazil, and Australia that to the uninformed may appear benign or less risky.

One must be specific about the risk spectrum that one expects to find in a particular country, e.g., the UK has generally been by far the riskiest for US infrastructure investors but in terms of getting your people killed, Colombia is a leader if you don't pay your tuition up front to friendly support elements in order to learn how to play by local rules.

3. Corruption

  • How endemic is corruption?

There are corruption indices available, one of the best known is Transparency International's Corruption Perceptions Index, but they are very general and relative, not absolute. TI's 2003 Corruption Perceptions Index measures perceptions of the degree of corruption ranging from 10 (highly clean) and 0 (highly corrupt). Of 133 countries rated in 2003, the cleanest was Finland (1) and the worst was Bangladesh (133). It should be noted that "seven out of ten countries score less than 5 out of a clean score of 10, while five out of ten developing countries score less than 3 out of 10."

4. Valid independent country data

  • Is there valid independent in-country data?

There is no valid data of any kind in China, be it GDP, imports, or exports. China is by no means alone in this area. You must assume that any country, with the possible exception of the EU, manipulates its data. What is available is more useful for macro data trading.

5. Foreign exchange repatriation

  • What is the level of foreign currency translation and/or liquidity?

6. Export logistics

  • What is the level of export logistic risk?

Logistics risk is very dependent upon on-the-spot conditions, specifically graft.

For those unfamiliar with the problem, your product arrives dockside where a local inspector defers clearance until either the proper payoff is made or the product is declared rotted by same inspector and denied entry (or exit). I can remember jet engine spares and other high value components moved out of sheds and into the weather in SE Asia to force the hand of those unwilling to pay the going baksheesh.

7. Diplomatic leverage

  • Do we have a strong embassy presence? If not, any strong embassy?
  • Is the country militarily, internal security dependent on the US?
  • Is the country economically dependent upon the US?

8. Political risk insurance

  • Is political risk insurance available? If yes, on what terms?

It is said that political risk insurance firms quite literally live or die by their risk assessments which, in combination with their independence, is said to make them a good barometer of the target country.

9. Physical security

  • What is the level of overt or covert, internal or external threats to personnel, plants, raw materials, finished goods, and transport?

Gordon Housworth



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Brief introduction to China risks

  #

Continuing from part 2, The merger of Inability to distill, Not invented here, and Competitive bad advice:

Before turning to a brief introduction to China risk, space limitations in the previous post required that I defer the operational component.

Operational, in-country side of the commercial client:

1. These people are close to the problem and bear the pain

They are often the wariest depending upon their corporate structure and whether true P&L responsibility resides at this operational level. A reasonable indicator of local control would be a local partnership or other tax effort that limits US asset consolidation.

2. They feel risk keenly in all aspects of the business

While this is true, situations vary as to whether it is more effective to approach the financial/risk group or the operations group -- even if on-the-ground people have contracting authority. Working with operational units can be daunting if the financial/risk group is in denial (see part 1) as any counter-corporate views quoted by local operators, and sourced back to us, complicate our ability to support the client.

It is possible that a country manager would proceed on the basis of protecting his or her operational P&L unit. A historical problem has been the deafness showered on country managers by headquarters and so deprives them of engagement authority. If the parent is genuinely international in its mindset of keeping the global supply chain flowing -- candidates such as Delphi, Intel, HP, and possibly Motorola come to mind -- then the country manager might have significant local authority to protect assets.

While we are often asked for checklists for China, I will go a bit father and generalize a starting list that can begin to identify risk, but is not enough to quantify it:

Overall take on China risks:

The People's Liberation Army (PLA) runs an extraordinarily large portion of the economy through a network of overt and covert subsidiaries -- and the overt sides openly maintain defense and commercial units open to dual-use exploitation. The PLA's ten State Owned Enterprises (SOE's) constitute the "world's biggest business empire."

The CCP (Chinese Communist Party) tries to keep it organized, but we think that it is losing the struggle, even as sustained economic growth remains the litmus test of Communist Party legitimacy and control. (It is striking to see how many suggestions that we see of China reverting to a regional warlord model.)

It is a rough and tumble world not for the faint-hearted:

  • Growth overshadows social justice (Profits with no accountability in government)
  • Labor buyer's market (Sweatshop labor for domestic and export production)
  • Right to strike removed in 1982 (Without collective bargaining, workers will rely on petitioning government, lawsuits, and violence)
  • Property rights recognized in 2004 ('Capitalists' and 'entrepreneurs' legitimized within the CCP)

The investment risks are too great to do justice in this short space but here are some of the leaders:

  • Gross fixed investment is driving economic growth
  • Current economic growth is "not sustainable"
  • Uncertainty over severity of cooling measures
  • Conventional monetary-policy tools not predictable
  • Banking system has huge overhang of bad loans and corruption

To be continued, part 4

Gordon Housworth



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The merger of Inability to distill, Not invented here, and Competitive bad advice

  #

Continuing from part 1, When clients for risk assessment/risk pricing take on a risk of their own:

The merger of Inability to distill, Not invented here, and Competitive bad advice give rise to a persistent condition we see among many that are party to risk assessment or risk pricing: Deming's "They don't know that they don't know." Furthermore, there is little time to teach them, especially without causing embarrassment to one party or another.

Under Inability to distill, I had noted that they "can't analyze what they have," and so lapse into the condition of being "better informed without the ability to act." This is the crux of the operable decision problem, i.e., they do not "see" the data in first instance, do not see context, do not see relevance, do not see pattern at any time, and do not see patterns maturing over time. They are deprived of a meaningful means of prediction.

In such cases, we offer counterintuitive data and interpretation with the means to reinforce them. This process goes so far that some of our analysis reports have a 'front half' designed to educate and teach, to bring contextual relevance, in order to make the conclusions digestible to one or more managerial or operational levels within the client's organization.

An excellent example is the presumed unpredictability of the form of violence the popular press calls ethnic strife. Too many analysts overlook it, presuming it random. I also see an element of condescension at play as this form or violence is often seen in third world areas so that there is an unspoken dismissal of "unskilled natives." While those "natives" may lack technology, they are keen observers of their environment and exercise effective political control over their patch within the technical or military means at their disposal. (Genocide does not require organized rail transportation and gas chambers. It can be easily accomplished with pangas, machetes, and gasoline.)

Properly known as "intrastate communitarian strife," ethnic strife is sufficiently regular that an Indications & Warning (I&W) function containing a formal logic of escalation can be built around it that will indicate likely next steps.

News items that once had no grounding can be viewed through a structural lens:

  • Countries dependent on the export of primary, or unprocessed, commodities such as minerals or coffee are more prone to civil wars.
  • A country where such exports account for 28 percent of GDP has four times the risk of civil war as a country with no such exports.
  • Countries that are divided between just a few ethnic groups are much more likely to have civil wars than ethically diverse countries.
  • Once a civil war has ended the chance that war will resume "goes up by a factor of six if there is a large and relatively wealthy population of natives living outside the country."
  • Intrastate communitarian strife has three stages:
    • A pattern of exclusion or dominance in the three areas of political, social and economic control.
    • Group mobilization, where mobilization is for the purpose of capturing power and not necessarily for redressing past injustices.
    • Addition of the element of strategic bargaining in which each side uses the tools available to it to bargain for the political space.
  • There are only two main pathways for its regulation:
    • Eliminating the differences (genocide, forced transfer, partition, and assimilation);
    • Managing the differences (hegemonic control, arbitration by third party, federalization, and power-sharing)."

I refer readers to the Berlin Wisdom Model as an intelligence analysis mindset and tool for its introduction to an approach to wisdom containing five broad areas without which I do not believe good analysis and prediction can occur:

  • A fund of general knowledge
  • Procedural knowledge
  • An understanding of the relativity of values
  • An understanding that meaning is contextual
  • Acceptance of change

To be continued in part 3

Gordon Housworth



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